Overestimate the Downside to Stay in the Game

When risks mount, being a contrarian in a historically expensive market offers a poor risk-reward opportunity

Mar 09, 2025

Market Recap: Fast Moves, Bigger Opportunities

Volatility wasn’t a surprise—but the speed of last week’s decline was. While we had positioned for downside risk, the abrupt selloff underscored just how fragile market sentiment remains. Still, we ended the week flat, setting up an even stronger risk-reward profile for the months ahead.

We don’t like to post much on P&L—it won’t go up forever. But we want to proof a point about the importance of positioning and recognizing risks. Some trades demand conviction, even when they carry 50% drawdown potential. With no quarterly performance to report to clients, we have the flexibility to play the long game.

Selling Rallies, Adding Protection

For months, we’ve been defensive, primarily selling straddles near 6,000. Last week’s bounce gave us an ideal window to hedge further, picking up cheap upside wings to cap risk. If markets rip to all-time highs, we’ll be making a great profit too—but we see that as a low-probability scenario. The odds of a 15% rally this year look increasingly slim.

That doesn’t mean there won’t be sharp reversals, fueled by headline-driven optimism. But investors or even traders should think beyond the next 4% bounce.

Our strategy remains clear: sell strength, and add downside protection. We initiated new straddles at 5,850, with the potential of opening up new straddles to 5,500 or 5,000. If data justifies it, we’ll add puts. Our primary concern isn’t upside risk—it’s liquidity deterioration and fragile bid-ask spreads. We’re willing to sacrifice short-term gains to stay positioned for a deeper shakeout. This 6% down from the recent peak feels worse than the 2020 30% drawdown is telling us something important.

The recent drop may seem like a correction, but was the market priced right to begin with? A $5 Coke isn’t cheap at $4.50. That said, positioning is still key. If you’ve been sitting in cash, buying now is better than chasing three weeks ago. Risk is relative. We’re not outright recession believers yet—there’s too much noise in the data. Loading up on China and German stocks while the US is on the way to recession rarely makes sense, for example. But that’s is what’s happening.

Macro Headwinds: A Risk-On Reversal Needs More Than Hope

The broader outlook remains challenging. Weakening corporate fundamentals, policy uncertainty, and a looming $7 trillion refinancing cliff in 2025 demand more than just a Fed pivot to restore risk appetite. If the Fed is forced to cut aggressively, it’ll be because conditions have deteriorated—not exactly a bullish backdrop.

Stock prices often see a “kitchen sink” moment when new leadership takes over—an opportunity to reset expectations by frontloading bad news. The current administration appears to be in its own version of this. Treasury Secretary Scott Bessent’s recent remarks point to a rare “detox period,” a window for making tough policy moves before political pressures intensify ahead of the midterms.

Tariffs Are a Distraction—Focus on What Matters

Blaming the selloff on tariff headlines misses the point. The worst-hit sectors—crypto, tech names like Meta and Palantir, etc—have little exposure to trade policy. Instead, markets are beginning to price in a tougher reality than they did three months ago.

One emerging theory: the administration may be deliberately pressuring markets to ease ballooning interest payments, now at 13% of federal spending—larger than the defense budget. We flagged this risk earlier in the year, and every day, it looks more plausible.

reducing interest payments—now 13% of federal spending—becomes an attractive target.

If you haven’t watched Treasury Secretary Bessent’s latest interview, it’s worth a listen. His warning was blunt: “There’s going to be a detox period.”

Politics & Markets: No Easy Answers

We try to avoid politics, but in today’s headline-driven market, it’s unavoidable. We’re not fans of either party. These days, if one side says the sky is blue, the other will argue otherwise. The blame game doesn’t solve real economic issues.

Bottom Line

The biggest risk now? Underestimating the downside. We won’t always be right, but we’re positioned to adapt—whether that means a deeper decline or a V-shaped squeeze to new highs.

Earnings This Week

For the week of Mar 10, 2025, notable earnings releases for companies with a market cap above $2 billion include:

2025-03-10: AM ORCL 0.00%↑ FNV 0.00%↑ BNTX 0.00%↑ TBBB 0.00%↑

2025-03-10: PM SARO 0.00%↑ MTN 0.00%↑ ASAN 0.00%↑ PAY 0.00%↑

2025-03-11: AM FERG 0.00%↑ VIK 0.00%↑ DKS 0.00%↑ CIEN 0.00%↑ BZ 0.00%↑

2025-03-11: PM CASY 0.00%↑

2025-03-12: AM WSM 0.00%↑ DLTR 0.00%↑ BMA 0.00%↑ ABM 0.00%↑ ZIM 0.00%↑

2025-03-12: PM ADBE 0.00%↑ CCI 0.00%↑ PATH 0.00%↑ S 0.00%↑ AEO 0.00%↑

2025-03-13: AM WPM 0.00%↑ DG 0.00%↑ FUTU 0.00%↑ KT 0.00%↑ WB 0.00%↑

2025-03-13: PM ULTA 0.00%↑ DOCU 0.00%↑ RBRK 0.00%↑ TTAN 0.00%↑ SMTC 0.00%↑

2025-03-14: AM RLX 0.00%↑

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