Trading the Rollover Syndrome: How I Think About Shortselling
Tops are a process, but this one has clear historical analogs for a risk management framework
Having given the market action of recent years a lot of thought, I have developed two frameworks I would like to discuss. The first is the Rollover Syndrome which I have been harping on since November (if you have not read about it yet, I strongly recommend you go through the original note here and the follow-up here). The second relates to shortselling and trade expression, which is a corollary to the Rollover Syndrome.
We hear it a lot these days: “tops are a process, bottoms are an event.” Actually that’s not always true. The Nasdaq top in 2000 and the Garbage Patch top in February 2021 were specific moments in time where nearly everything speculative peaked together — the former saw a blowoff parabola in dotcom trash, while the latter was marked by short squeezes in crap like Gamestop alongside $1-2bn SPAC issuance per night for a couple of weeks (SPACs being just a backdoor IPO which continued apace like 1999-2000 until the market was satiated and the ducks had been fully fed for their slaughter).
No… when “tops are a process,” it’s a particularly difficult environment in which to manage risk, and requires a different mindset along with extreme fortitude. Think 2007 with the multiple tops in July, October, and May 2008 for equities, while in structured credit Mike Burry pulls his hair out about how his counterparty just…won’t…take…the mark down.
What’s particularly special about the Rollover Syndrome is that we have roadmaps and analogs from the Nifty Fifty period of the early 1970s, and trading/risk management strategies of 1972-73 seem to be well suited here. The parallels go beyond narrow breadth and how a few “Generals” that can be “owned at any price” have hijacked the broader indices while everything else languishes…big techs like Apple and Nvidia are today’s Polaroid and Xerox. It’s that the constituents are trading like analogs that are uncannily similar. And remember how both saw the initial backdrop of a vicious bear market (1969-70 bear → 2021-22?) which then set up the 1970-73 Nifty bull market “Echo Boom” (2022-25).
Today we are going to take a look at some of these analogs, and how this could inform our positioning and risk management. I’ll also tack on a few words on how this Growth Scare is quickly becoming a Recession view (and yet few have repositioned portfolios so far), plus energy and copper. Let’s dig in.