Hi YXI friends,

Welcome to day 40 of the parabolic rally (who’s counting anyway).

This was the front page of Bloomberg today:

Memory chips, AI Optimism, and Sell-side Upgrades are all in the ultimate party mode. FOMO is in full swing, as anyone who hasn’t made triple digits on the Semis and memories is kicking themselves for missing such an obvious trade (and worrying about the war!).

MU vs SLV (100-day lag)

Here, I am not making an argument that MU’s parabolic rally has anything to do with silver, although there is a chance that money rotated out of Precious Metals into the Semis / Memories to push this run.

The important thing is to look at the shapes of parabolic rallies and their similarities.

Silver shot up by 160% in the November - January rally. However, because of the late-leveraged players, when it pulled back, it fell by 38% in a single day.

Now, no ML algorithm or technical indicators can really do anything about a single-day dump of that size. The indicators that called the top would likely have all exited too early in a super-bull trend and looked foolish as the rally piled on.

The single-day pullback would have blown most people’s stop (who has a stop 40% below the market?). Again, those who held on only got a modest rebound before Silver went lower again.

So - what can we do?

I think there are realistically only two ways of combating this scenario.

Firstly, one could manage position sizing so that even if they chased the rally and the market dropped immediately, their P&L wouldn’t be hurt as much. Typically, I would advocate having a downside target of less than 1% of the portfolio position. E.g. a 3% position dropping by 1/3, which is a large drop, would incur a 1% portfolio-level loss.

Secondly, if one has enjoyed the foresight of getting into the trade early and has been rewarded handsomely, they could take partial profits on the way up. In that case, if the market goes higher, they would not have the FOMO “oh I sold too early,” but if the market drops like a cliff, they would have the comfort of bringing home some bread.

DISCLAIMER: This newsletter is intended for educational purposes only. Any information or analysis in this note does not constitute an offer to sell or a solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice, nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

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