Lead-Lag Live

Mike Silva on Market Volatility Analysis, Risk Management Techniques, and Trading Strategies During Recessions

• Michael A. Gayed, CFA

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Can you predict market movements and manage risks like a pro? Join us as we chat with Mike Silva, the brains behind the popular YouTube channel "Figuring Out Money." Mike's fascinating journey from communication professional to market analyst comes with invaluable lessons on technical and intramarket analysis. Discover how recent spikes in the VIX impact trading strategies and why recognizing market conditions, like gamma levels, can make all the difference. Learn from Mike’s hands-on approach to adjusting portfolios and navigating financial landscapes.

Ever wondered how past economic events shaped today’s market volatility? We revisit major financial incidents from the 1990s to now, discussing how market reactions have shifted over decades. Mike shares strategies for risk management during high-volatility periods, emphasizing the importance of technical analysis and indicators like the five-day moving average and gamma flip line. From understanding the peculiar behavior of recent markets to adapting trading approaches based on volatility levels, this episode delivers actionable insights to optimize your trading game.

Explore the nuanced world of bond and treasury trading, and uncover the correlations between oil prices, 10-year yields, and geopolitical risks. Learn the intricacies of trading inverse ETFs and the importance of cautious position sizing. We also tackle the challenges of shorting in volatile markets during recessions and the correlations between silver and mining stocks. To wrap up, we contrast the realities of day trading and swing trading, highlighting the psychological aspects and critical elements for trading success. This episode is your ultimate guide to mastering market volatility and risk management.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

My name is Michael Guyatt, publisher of the Lead Lagrime. Joining me for the rough hour is Mr Mike Silva. Mike, I know a lot of people are fans of yours on your YouTube channel that are watching this live, but introduce yourself to those who are not familiar with you. Who are you? Which background? What have you done throughout your career? What are you doing currently? Are not familiar with you. Who are you? What's your background?

Speaker 2:

What have you done throughout your career? What are you doing currently? Yeah, Well, thanks for having me on, Mike, I appreciate it. I've been in the markets for roughly about, I'd say, around 15 years, but more specifically in the last 10 years it's been getting a little bit more serious. Prior to that, I worked in the communication space for the bulk of my adult life. I'm 36 years old now and I've been doing that since probably close to around 18, up until the last I mean just a few years ago where I decided to do this full time. Youtube is what most people know me for. I run a stock market brief show there under figuring out money, and what I like to do is I like to look at various things through the lens of technical and intramarket analysis to get a good idea as to where the market may be going, and I heavily focus not necessarily on hey, look at this, I'm trading. I focus heavily on the risk management side of things.

Speaker 1:

Which kind of mattered in the last three trading days although, as you and I both know, risk happens fast. I want to get your thoughts, your reaction to this sudden, seemingly overnight spike that happened in the VIX. How did you think through it? How did you trade through the last several days, if at all? Because that's the thing about risk management Sometimes you don't want to trade through it. Let's talk about just some of the reactions and things that you've done.

Speaker 2:

So for the last four days I've been out on vacation and there's this funny Perfect timing. Oh my goodness, that's great. There's this funny thing that's been going around in my community that whenever I go on vacation, watch out right. I don't know why it's that way and I thought it was over, but go figure. But there were things leading up to what we just recently saw. More specifically, I mean, you can probably talk about this in a little bit more intricacy and more detail than I could. When we're looking at what happened over in Japan. However, there were things that were leading up to this, that various divergences, various correlations that were breaking, and just random little tiny things here and there that make you kind of go hmm, something's a little off here. Maybe I should start to pull back.

Speaker 2:

And when it comes to getting very, very specific as far as understanding when the market conditions can potentially change, there are some tools that I like to utilize, and the tools that I like to use is gamma levels.

Speaker 2:

So there's something called the gamma flip line, and when we're above a gamma flip line, which is the conditions of the market that I prefer, I'm a swing trader, right?

Speaker 2:

So I'm holding anywhere from could be one day could be three days could be up to three months. I don't typically hold over into earnings, but what has happened in recent, before all this drama unfolded, is we went into a negative gamma regime, right, we fell under the gamma flip line, and what happens in those environments is you get selling into selling, you get buying into buying, you get a lot more volatility in the markets. You can look at the history of gamma if you probably can find a chart here, but you can see that periods of time when we're in negative gamma or under the flip line, volatility increases. It's very common to do so and when you know that, you know that by adjusting your portfolio or laying off the gas, or maybe your new positions that you go into could be smaller in size, because there's typically more whipsaws, more fakeouts, more shakeouts, stronger moves to the downside, stronger moves to the upside, et cetera.

Speaker 1:

So I like that point about divergences because I think if you are attentive enough, you can see the whites of the eyes of a regime change that could be coming right, and usually those regime changes are broadly around volatility. The issue, I think and I want to hear your thoughts on this from my perspective is that people don't seem to appreciate volatility is volatile, and what I mean by that is markets go down heavy, everyone gets ultra bearish and then a day or two afterwards it gets the exact opposite right. Then suddenly volatility gets squashed and markets rally substantially. Is it better to just step aside when you're in a higher volatility state or is it true that that old adage that traders love volatility? Because I think it's kind of a love-hate relationship.

Speaker 2:

I mean. So I guess it depends on the individual right. A lot of people want to catch every move. I was like that. I'll admit I was looking for short positions all the time. I was looking for long positions. I was running kind of long short book. I still am to an extent, but I will say this through my experience and what I've learned Okay, so there's different ways.

Speaker 2:

You can approach the market right. You can day trade, you can swing trade, you can invest right. There's three different ways and you can be bearish and bullish on different timeframes in all of these. So when it comes to like heavier volatility, from what I've noticed, day traders typically like it right, Because you could get more intraday swings. Swing traders they like it to an extent, but you typically get a lot more whipsaws and so forth. And then if you're looking in the investing bucket where you get huge spikes in volatility and the S&P 500 could be down 10, 15, maybe even 20%, investors look at that and like, yeah, I'm going to add to this, right, because I'm in here for 30 years or whatever the case may be. So it's really your timeline, it's your approach, it's whatever bucket that you're kind of in within that, and me personally.

Speaker 2:

When it comes to like shorting, I've changed my strategy quite a bit. One two years ago I used to like trading options directionally, which I don't do that anymore. I had some great wins, I had some losses. It just feels like it didn't go anywhere for me and I know with the whole rise in zero dates and all these YOLO options, people have been going a little crazy. At least that's what it looks like from my perspective when I look out. But options are a risk management tool, so if you are utilizing them properly, it's a great tool. I personally, I just stick to what I'm good at and I like to make money from the long side and I like to take my foot off the gas and protect myself when there's downside risk.

Speaker 1:

I think is very good context, which looks at the VIX spikes and what those VIX spikes coincided with. I think this is actually well done. On the labeling end. This was very sudden. This VIX spike, I'm actually shocking to a lot of people. Not overly shocking to me, only for the standpoint that I, as you know, thought that the conditions were always there. I didn't know exactly when. Right Right, which is always the tricky thing. It's like you can have a thesis, but I go back to path matters more than predictions. So if you miss it by a few days, even though your thesis is right, it's not going to help your portfolio. But when I look at this chart, I wonder if the question is that spike over and done with, or is it just the beginning? Because we've clearly seen the VIX and volatility can go higher and we've also seen that around these kind of levels it can get squashed. So how do you think through volatility going forward here, independent of what's going on with Japan?

Speaker 2:

I wish I had a clear answer for you, but I feel like anybody with a very certain answer or is acting in any terms of certainty right here could be gravely mistaken if they don't, if they aren't willing to change and adapt when things adjust. I mean, we closed over. What did we close over? Like in the the, the over 35, right, and it's very rare to do that. I mean just looking back to, to where we were right. The VIX hasn't been around past that area. I don't think right Back in the 1987 crash. I don't think VIX was even part of the structure here. But I mean, yeah, going back to 1990, right.

Speaker 2:

I have some notes like Iraq's invasion of Kuwait. Right In the 90s, 1997, 1998, right, russian and Asian currency crisis. We had the dot-com bubble, the long-term capital management, financial crisis, qeg, all this stuff. And today, or just the other day, I mean, we're down minusculely in the S&P 500 for the most part and we just had a spike over 35. I mean even higher really, but we closed over 35. And the most recent time to that was when we were down 25%. That was coming around the bear market of 2022. So, yeah, for me personally, when I see this stuff, I, I step away. I typically, I typically back back back off. You're going on vacation, is what you're saying. I go on vacation.

Speaker 1:

Yeah, you go back on vacation. Yeah, this is, you're exactly right. I mean, no one knows, no one has the crystal ball, right? I mean, I happen to think it's probably going to continue that it's early on, because I think credit spreads are the next piece of this, what I call the main event, but I also recognize the thing could just get squashed here.

Speaker 2:

Now let's play. Can I add something on that, actually? So, with that note, if I go back through the history and I'd have to go back through the history but a lot of the times these spikes didn't correlate to the stock market bottom, so there was still more downside in the markets and even if the volatility came off and started moving down, there was still periods. It basically sparked, in some of these cases, the bear market.

Speaker 1:

Let's talk about game plans. It's always about scenario analysis, all right. So if volatility gets squashed, you do this. If volatility spikes, you do this from here. Right, how do you think through sort of what are the different ways of either trading or positioning to play upon those two outcomes?

Speaker 2:

Yeah, if volatility gets squashed? Are you saying, like how my approach is Okay, yeah, so I hear one squash.

Speaker 1:

There are two spikes further.

Speaker 2:

Yeah, okay, so there's two things that I look at very simply and that tells me when I can get a little bit more risk on. So I guess I can really talk about how I utilize technical analysis as a tool, right? So technical analysis for those that don't know, it's not here to predict price movements, it's here to forecast potential moves. And there are some basic principles of technical analysis, one of which that, to me, is the most important is the markets. They move. They alternate markets, assets, whatever the case may be. They move between ranges of expansion and contraction and at the current moment when volatility rises, you're in a period of expansion, expansion and volatility and you can go into various assets.

Speaker 2:

And I look at thousands of charts every week. I go through my scans, I go through all this stuff. When the markets start to contract, you'll notice volatility come in right, the length of these candles. They start to go in, they start to get a little bit smaller. And price action it equals emotion. So during larger ranges, there's typically more emotion, there's more fear or more greed. Right, it depends on which way you go. So I look for things to start to contract, to start to execute in, and there's two things that change as far as market conditions go.

Speaker 2:

That I look at specifically in the realm of swing trading. In the realm of swing trading I look at two things. One I like to look at that five-day moving average from a 15-minute timeframe and it's small, it's very micro. Five-day moving average is very small. This is something that I learned from the trader Brian Shannon from his original book and it's not necessarily if price is above it or below it, it's the direction of it. So that's one aspect, just very small aspect of it.

Speaker 2:

The second aspect of it is that gamma flip line. When we're in a negative gamma regime, what I like to look for is when we cross back above the flip line and start to break from that. So when that happens this is when you have the dealers they start to buy the dip, they start to sell the rip, liquidity typically increases, volatility comes down and that, right there is my sign that I can start really starting to get more exposure back into the markets. When we start on the flip side of that, when we're below a declining five-day moving average and when we're in negative gamma territory, that is when my foot comes off the gas a little bit and I'm totally fine, with my portfolio flatlining to coming slightly down, taking a couple of stabs here and there. I know I'm going to get chopped up. It's just part of the game.

Speaker 1:

I'm glad you mentioned that point about time frame, which I think is interesting Because you can. There's no argument to be made that whatever your look back period is, let's say, if you're in a low volatility regime you want a longer moving average, if you're in a high volatility regime, you want a shorter moving average. Are you thinking through sort of dynamically Tightening up that look back period? You mentioned 15 minute type Time phrase. I have never myself done tests on that based on VIX levels, although I think it's an interesting concept. But what's your take on that?

Speaker 2:

Yeah. So when it comes to as far as what the VIX does underneath the very certain moving averages, I think so I don't put too much weight on it specifically. I know I talk about it frequently, but it's really just a directional thing, because I'm looking at the markets of okay, is it a safe area to get in here, or what's the current trend? Because, like I said, swing trading could be short term, up to like two to three months. So I am looking very, very small.

Speaker 2:

But the main aspect in all of those things as far as the conditions of the market goes, is whether we're in that positive or negative, and we've been in the negative gamma gene now for a couple of weeks. That gave us insight. If you're thinking about like I don't know a good analogy to use, but if you're walking the plank or something like that, and you're about to jump, like the flip line is jumping off a plank into the water, I heard that analogy and I kind of like that, because you're about to enter into some rough waters and until you get out of those rough waters you can be on boat and stabilize a little bit.

Speaker 1:

There's a comment here from Techco490 on a show on the screen. I think VIX exploded because they were suppressing it for so long. 2022 should have went way higher. By the way, I agree 100% on that long. 2022 should have went way higher. By the way, I agree 100% on that. 2022 was one of the most bizarre years in the sequencing of stocks dropping alongside treasuries. Usually it's supposed to be staircase up, elevator down, and it was actually a staircase down for both treasuries rates and stocks. This is the perfect storm of events to do it. I've I've written about this. Um, on the lead lag report side, this idea that there could be another volmageddon where you get this like massive vic spike and you know we basically have that but, um, the idea of volatility suppression I I see that and hear that a lot. Um, any any thoughts on that? If that's actually like a real thing that there's there's since you mentioned gamma and dealers is there just constantly selling of vol? That just keeps it lower than it probably should be?

Speaker 2:

I mean, I I wouldn't know to the extent of certainty, but I would imagine that would be the case, because that's exactly what it felt like. And then, out of nowhere, um, I mean yesterday, looking at that, at that VIX spike, I mean I'm pretty positive, right, that was the largest one-day spike in history, maybe, or close to it. And yeah, you'd have to think that there's something bigger that happened that we probably just don't know of yet. I mean, I can understand that there's various narratives, but that felt like a straight somebody blowing up. So, yeah, I've been unwind of being short of all, I guess I, I really don't.

Speaker 1:

Okay, that's what it felt like, yeah I suspect a lot of uh, big money has blown up in this, I mean, and it's even beyond what we just saw when you had that massive small cap to large cap move that just happened. I don't know where somebody's spread trader is. You know quant uh, stat arc strategies, you know unequivocally went through like six sigma events so, and they're very leveraged. So there's some. We haven't heard about any of that stuff yet, but that's typically how it works. It's kind of it's quiet, and then you hear about a month later. There's a comment here from Titus I want to pick your brain on, which I hadn't thought of this myself but said remember that volatility lives at the money, so you have to go deep in the money or trade the underlying equity.

Speaker 2:

Talk about that idea of volatility being at the money, I don't really quite understand the question really.

Speaker 1:

Yeah, well, I think in general the options traders love volatility because it affects the fee. So maybe kind of expand on the option side. I'm sure you're tracking on the option side of things the last several days here, even though you just landed not too long ago Any kind of interesting options movement.

Speaker 2:

That Okay, yeah, so let me tell you how I use options, because I don't personally trade options. I trade the equities, but I use options and I use implied vol in a huge, huge aspect of what it is that I do. If you look at the options chain, if you go at the money, you can add both the ask of whatever the money put and call is to give you an idea of what a potential expected move could be, and these are things that I pull all the time. So you want me to share my my screen. I could share with you what I do every single day and let me show you how how absolutely crazy it's been these few days.

Speaker 2:

And it's, it's great, it's absolutely great. So let me, I'll, uh, let me go like this and I'll uh, and we'll try to narrate through those that are listing uh, okay, yeah, so this, this right here, was sent out just yesterday.

Speaker 2:

This is going into today's trading session. Can everyone see this? Right, it's the expected news, okay, cool. So this right here is the expected news, just for the trading day, and this is something that I look at every day and I can go into detail with it as far as, like I mean, I could go back because I have a history of all of this and let me just show, like this right here is a daily expected move. This is plus or minus, right, plus or minus $10 and 20 cents. Yeah, I get my upper level, my lower level, and I even include two sigmas, because if you think of this in terms of a distribution curve, right, one standard deviation, it's going to be 68% of the time it's going to finish within the upper level and lower level, 95% of the time it's going to finish within the two sigma levels. And this is something that I'll look at a daily basis and even a weekly. I even bring it out to monthly and quarterly just to get a good idea. I could even show you kind of what that actually looks like, but yeah, so if I look at the SPY, this is mind-boggling level. We're talking almost $100 expected move for the SPX, which is crazy. Now, iwm now has daily contracts or daily expirations. That's a $5 expected move for the IWM. These are wild, wild daily moves because most of the times, weekly expected moves aren't even this big.

Speaker 2:

So, yeah, this is what I like to use and I can give you more specifically. In last night's brief this was okay. So this is the S&P 500. This is the SPY, and today, this is today's trading day. Right, this is the range for today and you can look at the VIX right, that's the volatility index for the S&P 500 to get a roughly expected move. And or you can do what I just did there. So this would be the daily expected move that has a 68% range going out. This far is the expected move for the VIX, which is a simple calculation. I posted it on Twitter if people want to see it, but you can see.

Speaker 2:

Is the market acting funky today? And the answer would be no. It's doing exactly what the market anticipated to do, going into the close of yesterday, because 68% of the time, one standard deviation is going to close within this range and, knowing this, it allows you to have an idea of hey, if I do go long, where would be an ideal place to potentially take some off, take partial profits? Or if we start seeing massive move to the downside, where can that potentially be? So this is the two standard deviation range right here. So coming up here you'd start hearing like two sigma type moves. A lot of people were calling for that face ripping rally and I'm using today's example specifically because it's such a big big day but people have been calling for this face ripping rally. Moving within one standard deviation is not a face ripping rally. Going to two standard deviation plus, that is a face-ripping rally. So hopefully that gives a little bit more insight to kind of how I use the yeah, options.

Speaker 1:

There's a good. So we talked about options. There's a good comment here which I think is worth thinking there, because I know you do a lot of intermarket work as well. Thoughts on bonds catching fire if the media cycle starts spouting the great unwinds and defense positions. Now you've tracked me also for a while on this. I've talked about this. This has been one of those narratives that drove me crazy this idea that bonds are no longer a safe haven. It's like people don't understand there's a difference between duration risk and credit risk. We have went through a duration bear market. We have not seen how treasuries behave in a credit crisis, but just the last several days, clearly treasuries have been the safe haven. I mean, we're getting back to that risk on risk off cycle, which I candidly need for my own punch in life. But what are your thoughts on looking at bonds, looking at treasuries also from a signaling perspective, because it's not really sexy to trade bonds unless you're trading very long duration treasuries.

Speaker 2:

So, as a signaling perspective, I would say look into your work and actually read your white papers to understand how you can actually use that as a signaling process. For me personally, if I'm just looking at the technicals, they look prime to make a move and, honestly, it felt like the bond market knew who was coming ahead of time with all this stuff taking place in the first part. And you know I'll, I'll go back to um, I can go back to sharing the screen and kind of show you just a a quick chart of. I mean, I'll, just, I'll use the TLT for, for example, um, but here I'll, yeah, I'll pull that up really quick. So here's the TLT, right, what? What from? Just from a technical charting perspective, let me clear this drawing set.

Speaker 2:

Just from a technical charting perspective, what did you notice taking place early on? Well, you started to see price action put in a series of higher lows. You see the lower highs. This is just what I said. One of the basic principles of technical analysis is that markets, they alternate between range contraction and range expansion. So you started to see things get very, very, very coiled up. And on top of that, if you're looking at trend analysis too, and you're just looking at the moving averages starting to converge and stack on one another. That's the 2050-200, it looked like we were primed for a move. Whether that was to the upside or downside is kind of hard to tell, but if you understand the signals and looking to Michael's work, there was a probability that this stuff was all going to be caught in, understanding that we could have a breakout in bonds.

Speaker 2:

Now, is this going to lead to the next bull market? That would be the next question. Should I buy right here? That would be the next question. But what do I do as a trader? I don't really buy into the expansion. What I look for is price to calm down, price to start to contract again, maybe flag out, maybe for the averages to start to catch back up and at that point I can execute a trade, understanding where the risk levels might be. For example, if I went long over here, I'd have a stop here or a stop here and I would approach it like so. Now, when it comes to bonds for a risk-off move, people were saying they're no longer a safety trade. I don't believe that at all.

Speaker 1:

We just saw a huge flight to safety in a very short period of time you put out this really good correlation post around oil and the 10-year which I want to show on the screen, and I think it's actually instructive of sort of the idea that oftentimes it's all largely the same trade just under different tickers. So this chart looks at oil versus the 10-year. Yields tend to track oil, which makes sense, because oil is a driver of cost-push inflation. Yields are about inflation expectations being priced in. What's your take on the oil side here? Because I know again, I know you've been on vacation, but I'm sure you're seeing that oil looks confused as far as which direction it wants to go, especially given ongoing saber rattling between Iran and Israel and other geopolitical risks.

Speaker 2:

Yeah, oil. It does feel confusing and, like I said, with absolute certainty, I couldn't come with a direct answer. But from what I've noticed, especially looking at this specific chart, is you can see oil somewhat leading the 10-year In most cases. You saw oil, for example, in April, start to fall off. Shortly thereafter the 10-year yield fell. Then there in June, we start to see oil rise. Then shortly thereafter, guess what happened? It's up until recently. It changed slightly, where the 10-year yield fell in July and oil fell there shortly thereafter.

Speaker 2:

What I can say from the aspect of oil is you pull up a very long-term chart. I don't have that chart in front of me right now, but if you look at the rate of change, you can go back through history and any huge move in the rate of change of oil has led to problems in the US economy and around the world, for the most part dating back to the embargo and even recently, with the huge spike in oil going back. I think it was 2021 or 2022, I can't remember the exact timeframe, but we did go into that 2022 bear market.

Speaker 1:

Have you ever traded the inverse ETFs, or do you just stay away from those?

Speaker 2:

I do. Yeah, I'll trade them every every once in a while. But, uh, so to understand kind of how I approach that, um, it's very important to understand that my position sizing when I go short is significantly different from my position sizing when I go long, and I typically so. When I post like some trades and stuff like that, I almost never post short positions. I'll share my most recent short position. I will do that. I have a chart to show kind of where that came from, and I did use an inverse ETF. But I want to be very clear here. If I take up to a 10% position in an equity, from a long perspective, my short positions are like 5%. That would be the max, you see. So it's going to be cut in half and it'd probably be even short because a lot of these inverse ETFs are like 3X. So it'll have a little capital in.

Speaker 1:

Yeah, and I ask that because there's a good comment from a role here I want to show is asking the question why don't you guys just hold SQQQ if we haven't hit a bottom yet? And this is what's missed by a lot of people that trade these inverse funds. Aside from the sizing aspect, I get it it's hard for people to conceptualize how the path factors into the leveraging on an inverse side. Plenty of examples where markets end up being lower but the inverse funds end up losing money because the volatility in between the buy and the sell is so high that it just throws off the compounding effect.

Speaker 2:

Yeah, if you're holding these long-term, you got to really understand what it is that you're actually buying. I use those as like a trading vehicle, but those aren't like long-term hold sort of ordeals because you have to deal with. You have to really understand what the product is and what they're doing. You know behind it. I remember in 2021, when the whole all this stuff was going on, everyone's like you could have just held it TQQQ and all this stuff and it's like, well, yeah, for a period of time, but you got to understand what happens when things start to turn around. What's the decay look like, and so forth. But yeah, I'm okay with the inverse funds or the leverage funds, but I look at them through the lens of a trader and a shorter term trader.

Speaker 1:

So I give you a lot of credit because you're not originally from the industry. You're self-educated. You've got a lot of people that are looking to you as a trader and looking for ideas. When people are watching your videos and your content, what's sort of your primary objective from an educational perspective? Is it that you're trying to give ideas or insights into things that you're observing, or is it more that you're trying to teach somebody how to fish, so to speak?

Speaker 2:

The main thing that I do is I try to teach people how to fish. So a lot of the, a lot of the problems that I get are run into with various uh, you can call them trolls, you can just try them. Call them whatever you want. Um, the common thing is oh, so it can go up or down? And the answer is, yeah, it can go up or down, but understanding, like I said just the other day, people are saying they're calling for a face-ripping rally. I'm like, okay, but what if you're wrong? So you need to understand okay, where can it go, what if you're wrong, and so forth.

Speaker 2:

So I always focus on the risk aspect of things, even in the Discord and everything. It's the same thing. I'll post a trade idea, but it's just something that I'm looking at. It's not an alert, it's nothing like that. You got to learn how to manage risk and you need to learn what works for you. Everyone's different right, and that's the most important part to understand is you can go find somebody that got nine out of 10 trades correct. So the next trade that they post you'd be like I'm going all in because this guy hits them all and you leverage it up too much or it's too big of a position and it takes one trade to wax you out, whereas I'm kind of in the boat where I just need four trades to work out of 10. And if I get six out of 10, I'm looking really good.

Speaker 1:

Okay. So that statement right there tells me you are a pro in reality and not a BS artist, because that's so missed by a lot of people. They think you have to get every trade right and I always go back to this idea that four out of 10 is phenomenal, actually, as long as they're home run type of trades right. It's like too often people confuse frequency with magnitude. It's okay to be wrong a lot, as long as when you're right you crush it.

Speaker 2:

Absolutely. I mean I would take 19 small losses and one monster win and hold on to that winner and I would take that any day of the week, because I know for a fact, if I just chopped it, like, look at the Tesla trade, the Tesla trade in recent move was just like that thing. That was probably the most obvious looking trade of a big move to come. And the reason why I say that is because, yeah, if I were to pull that up, tesla's been down all year and no, I didn't say on the first bounce or the second bounce up off the news, it was earnings, it was up. Then there was some other news it came up. No, it was beyond that.

Speaker 2:

Once it started going sideways and really starting to get tight, it was right under that year-to-date anchored volume weighted average price, which is a pretty big psychological level for the most part. And the moment we started crossing through that, the risk was so small. So if I was wrong, okay I get stopped out. Big deal, right, tiny little loss. But the move exploded to the upside and it's like, okay, am I going to sit here and be like honk horn and be like, yeah, I got that right, it is such a big move? No, because you can take, like I could have taken like 12 cuts, like 12 small losses, and that thing would have just made up for it and something.

Speaker 1:

I'm glad you mentioned stops. I think that's also an interesting area to focus on, because stops are also a function of volatility, so when volatility explodes, it becomes really problematic. Do you do stops and just put them actually in the market, or is it more just levels that you're just saying wait, I have to sell at this point?

Speaker 2:

Yeah, yeah, no, I'll use stops. I like to use stops, especially if I'm not going to be around the computer. If I'm around the computer, I'm okay with just having the mental stop if it's really coming down into that area. But I have typically around a 6% to 8% rule and that typically could be up to a 6% to 10% size position. So it's not like it's crazy huge. I'd be paying a lot more attention if I had a lot more exposure in the markets.

Speaker 2:

But when I put something on it's it's not to the point where I'm like biting my fingernails out of the gate Like I'm okay, right If it. If it actually fell 8% when I put it on like this, which it kind of did in this volatility, um, yeah, it'd be. I'd just get out right away and just wait for to see how it shapes up the next day. And if it starts to see strength, we start to see what I like to personally look for right, various things on breakouts then we'll go for it. But I already know to back off a little bit when we're in this like negative game regime, when we're in a trending down environment.

Speaker 1:

Okay. So again, let's expand on that, because we talked briefly about, you know, game plans with higher volatility, game plans with lower volatility. What about game plans with recessions? So there's a comment here from JJJ triple J, not double J, jeff Jarrett from wrestling In the case that we do slip into recession and the consumer's defaults with buy now, pay later, by the way, I that we do slip into recession and the consumer's defaults with buy now, pay later. By the way, I've been talking about that actually as a risk. I'm glad you mentioned that.

Speaker 1:

Would you short banks or fintech, specifically fintech ETFs? So I think we haven't seen in a while, a in quotes, traditional recession. Right, I mean realistically right. It's always been almost more panicky event-driven. It's always been almost more panicky event driven. It's momentary. They fill the system with a lot of money and then it's right back to the races, which means a lot of traders don't really know what it's like to go through a prolonged contraction. So let's talk about that. Let's say we actually do hit a recession. The unemployment rate is rising and it's not going to be a recession. That's, like you know, short.

Speaker 2:

It would be more of a longer, lasting nine, 12 months. What do you do in that situation as a trader? Yeah, so I approach the markets just kind of how I've been saying. Right, I understand that in recessions it can bring on more volatility and I'll know if the volatility is going to be there, because I'm looking specifically at the gamma levels and the gamma flip line. When we're below that or for below declining five-day moving average and during this period, recessions or bear markets more specifically, because you can see huge moves to the upside. That's very common to see. Just look at the decay right how that thing just fell down super hard, like a historic three-day move basically, and it goes up 8%, which is just an inside trading day, 10% whatever, and people are like everything's fixed During recessions. I'm just going to share, I'll share the chart. People are saying my screen froze, but I don't know if that's true or not.

Speaker 1:

But yeah, when you share the screen you're hyper focused or it freezes. But yeah, exactly, You're fine, we can hear it.

Speaker 2:

Okay, I'll share this window here and I'll show you what I mean by. Like bear markets or, you know, recessions, right? So, for example, like here is 2000,. This is thecom bus, this is the financial crisis. Uh, this is the 2022 bear market. This, right here, is just a one day rate of change, and it's very simple. So what? What is the rate of change? It tells us for one day. It tells us um, you know where did we close for the day? We all minus. You know, down below the zero line is a negative day, above it as a positive. And what do you notice here? In times of higher volatility or recessionary times, what you'll notice here is you get much more significant moves, the downside, followed by significant moves to the upside.

Speaker 1:

You can literally see it kind of growing out like so right, so which, by the way, by the way, just not to interrupt it that's exactly why I believe, and I keep saying, shorting is so tricky, because that's the volatility clustering extreme downs and it'd be followed by extreme ups.

Speaker 2:

I think shorting is probably the hardest thing you can do in the markets. And that's the thing is because, most typically, when it comes to shorting, people start talking about on their first down move and it's already aggressive, right, because the markets take their stairs up when volatility is compressed and then it takes an elevator down. And yeah, I get it. People have been saying it's been taking the elevator up. Well, now, that's actually quite not the case. We just saw these last three days where we had a rate of change of minus 3% and we haven't seen that since the original bear market. So to see a 2% up day in the near future with, you know, the VIX at 38, which would equal an implied move of roughly 2.4%, that would be very common, right, very common to see that type of stuff. So in recessionary times Richard mentioned a recession I'm not going to. I don't want to hold a short position through a 6% move to the upside or 10% swing to the upside and try to like catch it. I'd rather just, I'd rather just be on a beach chilling with my portfolio going sideways. I feel a lot more calm, a lot more comfortable and if I find a very, very extended move that makes sense to fade for a very short period of time. I'll approach it and, like I said, I can share with you. Sorry, let me. Let me go back to. I said I can share with you, sorry, let me go back to the screen. I can share with you the exact short that I did from a correlated standpoint, from an intermarket standpoint, and how I approached that and it was, you know it played out in my favor, but it was, in a way, lucky. If you want me to share, I can, okay. So people would ask about the inverse of funds and so forth. So the let me see if. Where is that? Okay, yeah, there it is the short position that I took and this is probably the only one that I shared all year, and it's not even that big of one, to be quite honest. It was a somewhat of a short, small position, but per usual.

Speaker 2:

So this right here is a chart of silver and a chart of the miners, and I kid you, not everyone's tied. Everybody was bullish miners not too long ago, right, and they probably still are. Things were looking really good. I mean, you get these consolidations, a massive breakout. But understanding correlations is pretty interesting business, right? So what I've noticed is silver correlates incredibly well, very positive, right. If we're looking at 20-day correlation to the GDX. So that's just miners right, and from a historic standpoint you can look like man. We're literally in positive correlation pretty much all the time and there's various times that you can see that silver was actually putting in lower highs but the miners kind of kept going, probably because it's an equity, right. It's not like silver, which is more of a commodity and so forth. But seeing this, I was like, wow, miners are really cranking right here and silver is actually kind of coming off. It didn't make a new high and right in this area, with a very pretty strong positive correlation actually at the time it was like 0.75. And right in this area with a very pretty strong positive correlation actually at the time it was like 0.75.

Speaker 2:

This right here was insight to me. I was like, yeah, this seems like something that I would potentially put a fade trade on. That would be obviously correctly positioned. And I use DUST, which is a 3X, just inverse miners or whatever. And we saw a little move up. I held into it. We had our first initial reaction to the downside right about here, where I exited about 50% of the position and then I tried to close it early morning on this day just on this last volatility, another 50% but I couldn't get into my brokerage account. There's a lot of problems and I closed a little bit mid-hire, so I still have a little bit on, but that's a 24% gain in a very short period of time. Mind you, it's 24%. It sounds like a lot, but my position sizing was smaller, given it was a short and 3X. But that is one of the short trades as a fade into an expansionary move that I looked at.

Speaker 1:

Got a fan of yours who's asking a question. Hey, Mike, have you moved away from very short-term day trading in favor of swing multi-day trading?

Speaker 2:

I'm still. My main priority is swing trading. I will go into day trading on a case-by-case basis, but it's not my favorite. I think that there's a lot of opportunity there. I think there's a lot of opportunity there if you have the discipline to walk away when you actually make a trade, or if you have very strict process and rules in place, and if you can manage that, all the better. There's very specific tools that I use for when I am. I want to make sure the video is still up here. I'm getting some errors, but my main priority is swing trading.

Speaker 1:

Do you find that? Because I still see this on X quite a bit. Does everyone talk about day trading? I looked at the studies around this. I've done back tests. I don't think there really is such a thing as a truly successful day trader. I mean, yeah, you can maybe scalp here and there, but the reality is it's not really where most of the returns come from. I mean, where does that misconception come from that day trading is the way to generate returns? I mean, all the evidence says it's largely the exact opposite.

Speaker 2:

I mean, it's probably the same feeling people get that if they think that they enter into the World Series of Poker, they have a chance of winning first place. Right, You're not going to win first place. It's incredibly difficult. You need some luck and you need to be incredibly patient and intelligent. Right, there are going to be. If you look at it as a distribution curve, there'll be deviations. However, you do have day traders that are incredibly successful at what they do professionally, at a professional level.

Speaker 2:

Where it's they don't, I doubt that they even call themselves day traders. I call them. They probably call themselves just like money managers or risk managers at that point. And they, you know, yeah, yeah. They say what's the stat? 95% of people fail. And what's even more interesting, from a book that I read, they have to post and they say, yeah, 80, 90% of the people here fail, but most of them have more winning trades than losing trades. So even the biggest losers that are like, yeah, they win a bunch of times, which gives them that ego boost, but typically what happens is they'll win a little bit, they'll win a little bit, they'll try to go a little bit bigger, a little bit too fast, and it takes one trade going against them and they just don't know how to adapt and walk away. So yeah, day trading. It is an incredibly difficult task and I would recommend going into swing trading and or even investing at that point if you're just getting sloshed around.

Speaker 1:

Yeah, I mean certainly a lot less random and noisy, which I think is key.

Speaker 2:

And I'll add to that too. So a lot of times how it's positioned to us, how day trade is positioned. Man on beach, man with Lamborghini, man, man, man, oh my gosh, look at me, alpha. Right, I'm going to tell you what my day trade looks like. Right, I'm not taking crazy swings when I day trade. I'm looking to make, like, grocery money, right, I'm like if I make a few hundred bucks here, a few hundred bucks there, or I could pay my mortgage in a month, or whatever the case may be, I'm not trying to have a $20,000 hit day. If it happens, cool dude, awesome. But that's not the case here. It's literally just I'm trying to pick up some change. If I day trade and just have a little bit of extra cash, go on a vacation, buy something, actually take the money out, make sure it's real.

Speaker 1:

Final question, then we'll wrap up here. This is a good chart. You showed S&P 500 election year seasonality. Seasonality is always interesting to me. I mean, there's a lot of evidence that suggests that it doesn't work, I mean more often than not. But I wonder from a from a trading perspective are you, are you paying attention to seasonality at all? Does it make you think differently about position sizing, anything like that?

Speaker 2:

no-transcript. Yeah, you typically see a bump up, which we saw one day bump up, but then it got faded really hard. So, yeah, I'll look at potential areas for pivots on main seasonal points, but it'll be in the back of my head but I don't actually structure a trade specifically from that.

Speaker 1:

What would you say is the most important rudimentary law or rule of law or rule in general that traders have to abide by? That it's a non-negotiable thing if you're going to be a trader.

Speaker 2:

Control what you, is it? But people are like, well, what is it that you can control? There's four things, right? So there's four things that you have complete control of. I won't show the deck, but okay. So the four things that you could potentially buy, or the four things that you can control. I want you to pay close attention because, outside of this, you're going to realize there's probably something that you're paying most attention to which you have no control of. So that's what you buy, okay, specifically, like what asset into what market, whatever the case may be.

Speaker 2:

So what you buy, how much of it? You buy it, right? So if you're thinking position sizing okay, that you can control when you buy it, timing, what tools can you use? Right. So if you're thinking position sizing okay, that you can control when you buy it, timing, what tools can you use? Right, that you can control when you buy it, not when you sit down at the computer and like I got to buy, I got to buy, right. No, you got to be patient, right, and make sure it's the right setup. And then, when you sell it. So, when you sell, the product is incredibly important, right?

Speaker 2:

It's the second trade, every trade that you make, there's going to be a second trade, so you might as well control what that second trade is going to look like, whether that's going to be from profit taking, from stopping out, whatever the case may be. So, once again, what to buy, how much to buy, when to buy it and then when to sell it. Notice that what you can't control is your win rate. You can't control that. You can only control your losses. That's it right. You don't know how high something's going to go. You don't got that control right.

Speaker 2:

So, from what I've noticed throughout history and what I typically see here, when you see the 95% losing traders and you see that they're typically win more than they lose and they're still losing traders what you'll notice here is and you can go back through your history of if you're day trading or swing trading and if you're struggling, if you just take out your five worst trades for the year five worst or three worst what is your P&L going to look like If it goes from hey, I was minus 20%, but if I took out my three worst trades and I'm positive 10%, you know what the problem is. Your problem is having to reduce whatever those losses right, controlling that.

Speaker 1:

Mike, for those who want to track more of your work. I know you're primarily focused on the YouTube channel, but talk about subscribing to that and anywhere else that people can find it.

Speaker 2:

Yeah, so I'm on X for Mike P Silva. You can follow me on Twitter. I have the YouTube. It's Figuring Out Money. You can just Google that or go to the channel and then, if you want some more exclusive content, I do have a Patreon. I don't charge arm and a leg, it's nine bucks a month but I do give a lot of stuff in there. Um, I have a premium bot service through tradie text there with the query channel. Uh, it's not an alert service. Don't come in there thinking that it's an alert service. It's a tight knit community. Uh, try to better ourselves and do what we can do there.

Speaker 1:

The good thing about this conversation is that Mike was very eloquent and we're both named Mike, of course, everybody. Please make sure you follow Mike Silva. I'm going to do another one of these live interviews literally in 10 minutes with Lynn Alton, so stay tuned for that.

Speaker 2:

Hey, by the way, thanks for putting me before her. Okay, in 10 minutes with Lynn Alden, so stay tuned for that. Hey, by the way, thanks for putting me before her. Okay, she's a rock star, you're both rock stars.

Speaker 1:

You know, as long as you're a hard worker, you're a rock star. There we go, appreciate those that watch this live and hopefully I'll see you on the next episode of Lead Lag Live. Thanks, mike, thank you.

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Michael A. Gayed, CFA

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