Sir, This is a Casino - Mar. 2, 2025
My Journal
In our last piece, “When Should I Panic?”, we had a couple of calls I wanted to review so that we can learn from them, right or wrong. I aptly named the article that way because I got a sense of panic setting in between messages, trader chat rooms, and X - just too many participants on one side of the boat and that creates opportunity. So, I wanted to bring back some sense of reason to myself and anyone that cares to listen to me. Also, this is one giant casino and we want to be on the side of high probability setups or at least avoid losing on low probability setups, like shorting the hole, more on this later.
In that piece I said:
“Bender is showing early signs of stability”
“[From Bender] We get early warnings of contagion or heavy sell offs. At the moment I just don’t see it. It doesn’t mean we won’t sell, I just can’t ascribe a high probability to it”
Friday, Feb. 28
Then on Friday morning in the chat I updated:
“Bender says some weakness still this morning but stabilizing (not pushing up or down by a lot). My preference is to stay out today.” - There was no new signal from our machine, so, if there is no signal one should generally be fine to be long or at very least you don’t short!
“I don't have an edge - so it's best I stay out” - I don’t like catching falling knives.
“recall we are approaching an area of higher probability bounce/support not an area you start shorting in the hole based on GEX” - again, don’t short!
So, while a large majority was preparing for armageddon I liquidated more hedges and sat on my hands. Actually, I went to bed - my newfound source of alpha to prevent overtrading. I didn’t make any money, well except all the existing longs recovering a bit, but didn’t lose shorting like others did - what a face ripping rally at the end of the day Friday!
Takeways:
Don’t trade unless you have an have an edge or high probability setup. It’s ok to sit out until higher probability opportunities surface. I like swings and high(er) conviction plays. I don’t day trade unless there is high probability setup, but even then I’d prefer to capture a larger move.
Ask myself: Is Bender stabilizing? Don’t short. Is GEX at an extreme low level that typically precedes bounces? Don’t short.
More on Seasonality
I use a multi-time frame view to find periods of large high or low returns - I focus on the extremes though. Why? Because I know that if I am in the weakest quarter, month, and semi-month period, I want to be careful about being long as there is a lot of historical evidence to suggest that this particular period has been poor performing and being max long could be painful.
But before we get to seasonality, what helped lead to my decision to “full port short” on this casino on February 14? Well Bender collapsed that day for one - our ‘tsunami’ indicator. You will begin to see I get nervous when Bender (blue line) falls.
***Should I write up what Bender is? Let me know in the comments please or DM.***
GEX was also showing unusual divergence which was a red flag to me. I posted the chart below on Feb. 21.
Now how did seasonality help us? Let’s see.
Quarterly Return SPX
Look at Q1 in the year following an election year below. Would you max long that quarter? It doesn’t mean there isn’t opportunity to be long but compared to other quarters, it’s not typically that strong. It’s also not a quarter where we just collapse with no bid either. As such I take it as a weak or range bound quarter as the returns in positive years cancel out in other years. It’s not a period where I have high conviction on longs or shorts really - this is the period where the casino has the advantage (market makers) selling loads of options to traders thinking we rip non-stop or those incessantly buying puts for a crash that never materializes.
So when do we seasonally start seeing stronger returns? Well, Q2 in post election year seems to be a higher probability period of that happening.
Monthly Return SPX
Looking more granularly, review the average February return below. Not horrible but not great. I’ve been saying a few times now that a terrible February at least sets us up for a higher probability of strong(er) March - key word is probability. Lastly, look at the two rectangles. They help me identify which months I have the highest likelihood of strong and weak returns. I want to make sure I am positioned accordingly in those times when I play the casino - that’s where I can have a higher edge.
Semi-Monthly Return on SPX
Let’s look more granularly at semi-monthly returns. We already know second half of February (Feb H2) was rough, that’s not interesting anymore, but it did help our decision to short at the time - see the boxes again of ‘extreme’ returns. Just by pure coincidence we shorted on Valentine’s day which starts the end half of the month. More interesting is that first half of March is mediocre in returns but second half looks a bit better. Still, April H2 is a stronger where there might be more edge in the casino. I’m in no rush at the moment.
Charts
We’ve fallen about 250 handles since the “full port short” update and from the chart below we can see we reached an inflection area. We’ve seen bounces in this area, hence we didn’t want to short further. In hindsight I should have attempted for a bounce but I wanted to wait for February to be behind us. Ah well!
Takeways
Bender stabilized on Thursday/Friday
GEX reached extreme oversold
We are in Q1 of post election year with mediocre returns but not overly negative
Markets just experienced a rough February and Feb H2 (like seasonality told us happens) - sometimes, just sometimes seasonality can work
March is (a bit) kinder to longs but we should be careful about longs until Q2
I liquidated more hedges and stopped shorting early Friday for reasons above
Careful shorting in the casino unless a confluence of factors support your decision
What’s Next
Keep reading with a 7-day free trial
Subscribe to Machina Quanta to keep reading this post and get 7 days of free access to the full post archives.