The Fall of Degens – 2/21/2022


The Fall of Degens – 2/21/2022

ES weekly.

Degen is a slang for degenerate gamblers. Many degens were born from the 2020-2021 bull run. In a bull market, everyone is a genius. In a bear or volatile market, only those who practice risk management survive. The new traders will find out very soon as to why very few people make it in trading long-term.

As stated in the VIX post, the market cares about two things: certainty and uncertainty. What we are seeing is nothing brand new. This same type volatility happened in 2011, 2015, and 2018. Each of those years caused a wipe out of gamblers on both sides… Well, after almost every bear got margin called on the way up. Primarily, this is a transitioning market. Why is this uncertain? Everyone is certain that rate hikes are coming. However, no one knows that the rate hike schedule looks like. As in, what will the rates look like after the first one?

What is expected and based on the Fed notes:

March 11th – The end of Federal Reserve’s bond purchasing (money printing)
March 15-16th – FOMC and the first rate hike of around 0.50%
July to September – Fed begins rolling (bonds) off the balance sheet . That government talk for reversing the money printing.
September to October – Most likely some election volatility and sector rotation before midterm elections

By end of 2022, interest rates should be at 1.25%.
By end of 2023, interest rates should be at 2.25%

Based on these expectations and notes, I deduce that the Federal Reserve’s schedule for future rate hikes should be published around June FOMC. Maybe May FOMC. That element is the unknown. If the rate at the end is 2.00 – 2.50%, that is already expected and markets would barely react to it. Above 2.50%, then we would see an even bigger bear market. Although, I won’t be surprised to see NQ be 30% below its highs. I’m seeing a weird hybrid of 2015 and 2018.

Think about why this is uncertain and scaring institutions. If there is a war, there is the defense sector. If there is a pandemic, there is biotech. What do you do when the interest rate is not confirmed and the future monetary policy is unknown? Uncertain. Judging by the reverse repo facilities, it seems that institutions would rather pay the interest expense for holding cash than to buy without certainty. Basically, there is plenty of cash at the sidelines, but no direction. It’s like having a full tank of gas, but you are lost in a desert with no map/ GPS .

Now, why is the Federal Reserve taking its sweet time? It’s because the Fed Board remember the Paul Volcker years and his several emergency meetings which caused panic. Those panic rate hikes to 15% caused the third worst recession in US history. What they want to do is to see if inflation rates would plateau or enter a downtrend first for Q1 and Q2 of 2022. Basically, I’m sitting tight and trading small until I see some sort of certainty. What I learned from 2015 and 2018 is to stay out of unpredictable markets. Predictability is profitable. I can wait.

This is why some of the best traders whom I know have a career other than trading. It helps them be patient and not go crazy from watching the screen. I tried trading full-time and it got boring pretty fast. From a psychological view, the career also helps calm me down. If I make a bad trade, I can tell myself that I’ll recover. I’m not kidding. I know a few traders who are making more than $150k per year trading and their job pays $70-100k. They kept their jobs because for the same psychological reason. They tried trading full-time and ironically got worse.