The market is teaching many investors an important lesson today but before I tell you what that lesson is let me tell you my personal experience learning this lesson the hard way. The featured image shows oil prices from 2010-2014.In November of 2013 I became convinced that oil prices were going to crater, reason being is the United states had developed technology to access oil that was never accessible in the past and oil being supply and demand game, if you increase the supply and there is no demand to meet it, it will drive the prices down and that was my thesis.
I entered a trade to short oil at $93/barrel( as shown in the image below) that essentially means that if oil prices went down I benefit and if the price go up I lose money, and for the next 6 months as shown in the image Oil prices kept going up to $105/barrel and eventually I began to doubt myself and I exited the trade. Fast forward a couple of months, I couldn’t have been any more correct in my thesis, you see Oil went from $105/barrel when I got squeezed out of that short because I could not afford to maintain the position losing money to roughly $44/barrel over the next 2 years representing a 200% gain, but I didn’t and it doesn’t matter I was out of that trade.
So how does this correlate to today? Well a lot of investors have shorted the Nasdaq this year and to be honest their fundamental thesis is pretty well convincing. The Nasdaq is up 24% YTD which would be fine if the fundamentals aligned and warranted that move but a lot of people are questioning whether they do.
Let’s take a quick look at these fundamentals:
- The Nasdaq is trading at a price to earnings multiple of 25 times which represents a 66% premium to where the market has historically traded.
- We just got through earnings season and they reported on average negative earnings growth versus last year.
- Most people believe the economy is slowing.
- Interest rates have gone up this year.
All these are viable reasons for anyone to short the Nasdaq at any point this year, but guess what its up this week and you would be down 20% on that short position. That market simply does not care, there is a famous saying on Wall Street:” the market can remain irrational longer than you can remain solvent”.
The key lesson for investors and traders is that the market can remain irrational for longer than expected. While valid reasons may exist for shorting a particular asset, it is important to exercise caution, manage risk, and adhere to a disciplined investment strategy that considers both fundamentals and market sentiment.
