Trader Q&A: How 2023 Will Prepare Us for the Year Ahead

Some option-buying environments are better than others, so always be ready to cut losses

Managing Editor
Jan 5, 2024 at 12:16 PM
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Subscribers to Chart of the Week received this commentary on Sunday, December 31.

The past 12 months on Wall Street showed an unexpected level of resilience from stocks, with all three major benchmarks logging impressive yearly gains, even more impressive considering the choppy returns in 2022. Major indices stuck the landing as well; the Dow Jones Industrial Average (DJI), S&P 500 Index (SPX), and Nasdaq Composite (IXIC) sliced through the past week, month, and quarter with healthily gains. The majority of investors were dealt an influx of volatile variables including, but not limited to: whipsaw bond yield price action, transcendent ‘Magnificent Seven’ outperformance, Federal Open Market Committee (FOMC) pivots, artificial intelligence (AI) prevalence, continued electric vehicle (EV) emergence, and post-Covid performance by Chinese stocks.

2023 Stock Market Performance

To round out the broader-market performance into one piece of writing is certainly challenging, but we thought hearing directly from our Schaeffer’s trading department would provide insight behind the scenes of 2023. A glance into the expected trading landscape of 2024 is also addressed, as well as the individual preferences our experts will be following in the new year. Among those that provided insights are Senior V.P. of Research Todd Salamone and Senior Market Analysts Chris Prybal, Joe Hargett, and Jared Chantala.

Disclaimer: The answers below were compiled on Dec. 27, 2023, before the final trading sessions of the year.

Behind the Tape: Trader Q&A

What did you learn from the last calendar year? Any surprises? Anything you nailed?

For this question we received an overwhelming consensus, which was, even if the voice is experienced and unified, do not believe its market predictions will come anywhere near true. More specifically, even the Wall Street experts can be "dead wrong," per Salamone.

TS: Going into ’23, the consensus opinion was that China would rally as Covid restrictions loosened, but Chinese stocks declined. It was also thought that U.S. stocks would struggle amid a slowing economy or recession, as the Fed continued to raise rates. U.S. stocks rallied instead. A few themes I nailed were the strength in homebuilders and retailing stocks. The large-cap tech Magnificent Seven received all the attention, but there were huge winners in the homebuilding and retailing groups. Abercrombie & Fitch (ANF) sticks out as one name that I traded well from the call side.

CP: Human forecasts about future events/price action are no more useful than a gauge of public opinion. The technological changes we experienced in 2023 will only be ramped up in each successive year. Change is no longer inevitable, it’s instantaneous. Be skeptical of all forecasts unless you yourself have done the due diligence to verify.

JH: Trading in 2023 drove home one of my favorite market axioms: "The market can remain irrational longer than you can remain solvent." We had relatively tame readings from volatility indicators such as the Cboe Market Volatility Index (VIX) — which remained largely below average for the post-Covid era — and yet we still had many significant and unpredictable market swings. We had a chorus of calls for a recession, yet none materialized. We see signs of a significantly strong consumer, as well as signs of record consumer debt. We were told the Federal Reserve was too early, too late, too aggressive, not aggressive enough, and yet, we are all talking about a "soft landing," the likes of which has never happened in the market before.

It was a volatile/non-volatile market that pushed even John Maynard Keynes’ "irrationality" to its limits. And yet, opportunities for options traders were abundant. While I was unable to nail every opportunity, I believe I took advantage of and won the majority of those events. I learned to trust my gut and let my winners run, but I also learned to keep my trading stops tight and to cut my losses short, because there is always another opportunity just around the corner.

JC: The resilience of the market in 2023 took a lot of the investing public by surprise. With bearish sentiment reads running high throughout most of the year, the S&P 500 has climbed nearly 25% year to date (YTD) – well above the 10% average annual return – while the Nasdaq-100 Index (NDX) and Dow Jones Industrial Average rallied to claim new all-time highs. With the Federal Funds Rate peaking and flatlining at 5.33% near its peak rate of the 2006 to 2007 interest rate cycle, the market began pricing in future expectations of interest rate cuts beginning in 2024. With Consumer Price Index (CPI) and Personal Core Expenditures (PCE) numbers continuing to fall below analyst expectations, Treasury yields have pulled back significantly from their October 2023 highs – an outcome I had anticipated throughout the latter half of the year.

What are your options trading resolutions for 2024?

TS: Stick to the basics and understand that some option-buying environments are better than others. When things aren’t working, do your best to cut losses. And when things are working, let those profits ride. There will be poor periods that can be extremely frustrating. But if you do the right things, the good periods will take care of the poor periods and more times than not, bottom-line to profits over the longer haul. Do not try to change set ups that you prefer, but diversify your main setups as momentum or rotation can happen at any time. Diversify your time frame too, because sometimes shorter time periods are better than longer periods, and vice versa.

CP: Continue the strict rules-based path that I am on. Continue to learn and read outside of "comfort zone." Stay hungry and do more each day. Continue to develop SQL skills for analysis/idea creation.

JH: My trading resolution for 2024 is best summed up by TLC: "Don’t go chasing waterfalls…"

Now, this doesn’t mean don’t chase trading opportunities. It means that if the set-up seems too good to be true, maybe think about it before diving straight in. In other words, you can convince yourself that a trade is much better than it is, or that right now is the best time to enter a trade. It’s important to remember that you can be completely right on the direction of the underlying stock, but completely wrong in your trade entry and trade timing. It’s sometimes better to miss those potential opportunities and save capital for other opportunities, than it is chase those "waterfalls" and have heavy losses.

JC: With the new year upon us, it’s a great time to assess your investment performance over the past year and reevaluate your current option trading goals and strategies for 2024. If you’re newer to options trading and feel you did well over the past year, you might consider increasing portfolio exposure to shorter-term option trades. On the other hand, if you feel you took on more losses than you had anticipated, you might consider implementing more disciplined loss controls, for example, as you look to improve shorter-term options returns over the next year.

What sectors/areas are you monitoring that you think could have a big (or rough) year?

TS: Watching China names. The same group that was positive on this group last year has given up on China – is this market now set up to rally? EV names are intriguing – there’s a lot of negative sentiment on this group at year end in 2023… just in time for a rally?

CP: I’m looking towards a seasonal acceptance of energy stocks as we begin the new year. Energy is one of the only sectors "out of favor" currently. I’ll be looking to add to this space in the new year. Financials have been out of favor as well and with a return to normal interest rates this area could outperform.

As for a laggard I think you will see the Bitcoin (BTC) space selloff after the U.S. government allows publicly traded vehicles to market. At the end of the day, it’s all about earnings and I don’t see this industry generating any excess returns unless you mean "irrational euphoria" hyped returns -- which are inherently unstable.

JH: I’m expecting AI, semiconductors, and energy to have a big year in 2024. Artificial intelligence is finally moving past the fad investing stage, and next year will see the winners and losers of the sector emerge. Since AI needs both software and hardware, semiconductors will also get a boost. For leaders, I’m looking at Microsoft (MSFT) and Nvidia (NVDA), the two obvious choices, but also companies like Advanced Micro Devices (AMD), which is right on Nvidia’s heels, and Palantir (PLTR), which uses AI for cybersecurity.

As for energy, I’m expecting a rise in oil prices due to demand being higher than expected, which will once again push alternative energy stocks to the forefront. Meanwhile, we should see a pickup in oil sector consolidation as the group prepares for major competition and global government emissions regulations.

On the downside, I’m expecting housing and travel/leisure to finally take a hit. Housing stocks, such as Lennar (LEN) and Toll Brothers (TOL), will finally get pressure due to high mortgage rates and interest rates. While inflation is subsiding, consumers are still stretch.

JC: With interest rates expected to decline beginning in 2024 through the longer run, smaller cap, growth and more speculative stocks that underperformed during 2023 are on my radar for being great picks over the course of 2024. With the majority of major U.S. indexes trading near or at new all-time highs, the Russell 2000 Index (RUT) is still trading at a 16% discount relative to its November 2021 peak. If the Russell can continue to breakout beyond 2022 and 2023 highs, there is potentially significant upside for smaller-cap stocks in the coming year.

So What Does This Mean?

Essentially, from our end of Wall Street, we’ll have our focus on several sectors: energy, AI, China stocks, EV names, and more. While we also expect interest rates to begin their anticipated fall, it’ll can be extremely profitable to diversify your portfolio during times of volatility and uncertainty, especially with short-term picks, which can surprise by yielding noteworthy returns. And while most of our traders will be sticking to the "basics" within their options toolbelt, learned to move outside the confines of your trading "comfort zone" will come in handy during periods of unexpected upside and downside momentum.


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