Making Sense of 2023’s Bull Market

Larry’s Note: After hitting fresh highs in 2021, the markets sank anywhere from 19–36% last year. Now, in 2023, it’s a completely different story.

That’s one reason I sat down last week with Chris Lowe, an editor and financial analyst who heads up The Daily Cut e-letter and the Legacy Inner Circle advisory.

We talked about my macro views on the market, volatility, and where things are heading next. We also touched on big trends like artificial intelligence and bitcoin.

It was a great conversation, so today, I’m unlocking the transcript for my Trading With Larry Benedict readers…

[Editor’s Note: Transcript has been lightly edited for clarity and brevity.]

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Chris Lowe: For folks who don’t know you, you’ve been trading professionally since the mid-1980s. How did you get your start?

Larry Benedict: I began clerking at the Chicago Board Options Exchange in 1984. And I started trading in 1985.

I learned the ropes as a trader at a firm called Spear, Leeds & Kellogg. At the time, it was the largest specialist trading firm in the world – meaning it traded its own money. We traded almost every stock on the New York Stock Exchange.

Then from 2000 until 2013, I ran my own hedge fund. And I’ve been at Legacy Research, helping regular folks become successful traders, since 2018.

Chris: It would be remiss not to mention your appearance in the Hedge Fund Market Wizards book. You’re probably sick of people talking about this. But I first came across you when I read that book. For folks who don’t know, it’s a classic book by a trader called Jack Schwager about the world’s best moneymakers. And you were one of them.

Larry is featured in Chapter 3 of Schwager’s classic book

Tell me about the experience of sitting down with Schwager for the book.

Larry: He came to my office and sat with me for about a week. He watched me trade. He also interviewed me. He wanted to see what made me tick and how I viewed the market.

Jack also talked to employees of mine as well as other people I had traded with. And he verified my track record.

I didn’t care a lot about it at the time. But now that my kids are older, it’s nice they can read about me. It’s a kind of legacy.

Chris: I remember reading that book. Schwager talked with Ray Dalio, the manager of the world’s largest hedge fund, Bridgewater Associates. He talked to legendary traders Paul Tudor Jones, Ed Thorp, and Stan Druckenmiller. And those guys all made a ton of money.

He didn’t focus so much on the money you’ve made as a trader… but on your risk management. You were coming off a 20-year winning streak as a trader. That’s almost unheard of. Is that what brought you to Schwager’s attention, do you think?

Larry: I think so, yes. Our P&L [profit & loss] was good, and the numbers were large. When you look at Dalio or you look at Tudor Jones, their P&L was significantly higher than mine – in the billions of dollars a year. Mine was in the hundreds of millions a year.

But those guys ran large organizations. So, a large part of their P&Ls was generated by traders they’d hired. Don’t get me wrong. These guys are unbelievably good traders. But they scaled out their businesses by hiring guys like me to trade for them.

At my hedge fund, Banyan Equity Management, I placed every trade.

Then, like you said, I went 20 years without a losing year. And the drawdowns – in other words, peak-to-trough falls for my P&L – was probably less than 4%.

That’s pretty much unheard of. I think it impressed Jack to see somebody run risk in such a tight manner.

Chris: Why did you focus so much on risk? Obviously, a good trader won’t take overly large risks. But you take risk management to the extreme. Where did that come from?

Larry: When started out in the 1980s, I didn’t have it. My risk controls were poor, to say the least. And my drawdowns were too big for the capital I had.

I learned it along the way. At Spear, Leeds & Kellogg, your risk controls – what they let you lose on a trade – were so tight. It completely changed the way I traded.

What I learned from a couple of my mentors along the way was that you had to build up your P&L with a slow grind. Then once you had profits, you would use them to take bigger risks.

You choose a number – it could be $1,000 a month or $50,000 a month. When you get to that number, you can then risk half that number or more on an attractive trade. If it doesn’t work out, you’ve only lost money you already made that month. You don’t eat into your original capital.

People often ask me, “What’s your biggest P&L day?” The numbers were big. They were probably well over $10 million in a day. But my best day was when I made $1,000.

Chris: Why?

Larry: Because that’s when I realized I could make money as a trader. It built my confidence. I never knew that I could make $1,000. So that was the hardest money to make. Once the numbers were in the millions, it was just a job.

Chris: When you say, “grind out the P&L,” you mean put on trades and take small profits. What kind of profits would you be taking?

Larry: I’d be hitting singles. If you’re looking to make $10,000 in a month, you want to aim to be making $1,000 or $2,000 a trade. If you get to, say, $7,000 profit, you can risk $3,500 on a trade and potentially make $5,000.

It’s a grind-it-up strategy. It’s hard work to build up your P&L so you can take bigger risks in return for bigger potential rewards.

What I’m most proud of is since joining Legacy in 2018–2019, none of the trading advisories I head up have had a losing year. I’m probably not going to repeat that 20-year streak I had from 1990 to 2010… But this has been very gratifying to see.

Chris: That’s a big achievement. You’re bringing your famous focus on risk management to your subscribers.

Let’s switch gears now and talk about the macro environment. We had a bearish year last year. Tech stocks and crypto were hit particularly hard.

A lot of people were bearishly positioned in 2022, and now we’ve had this really great year for the market. Did that surprise you?

Larry: I didn’t see this year’s rally coming. I maybe thought the beginning of the year would be a little bit stronger than last year. But a lot of the macro clues – especially rising interest rates – were leading me in the other direction.

A lot of this was an unwind from last year. In 2022, the tech-heavy Nasdaq finished down about 30%, the large-cap S&P 500 was down about 20%, and the Dow was down about 5–6%.

This year, the Nasdaq is up 35%. The S&P 500 is up 17%. And the Dow is up 6%. So, it was really a realignment.

A lot of this move higher this year for stocks is down to the mania over artificial intelligence (AI) that’s swept Wall Street and the so-called Magnificent Seven stocks – Apple, Google, Microsoft, Amazon, Meta, Tesla, and Nvidia.

If you don’t have those stocks, you’re not up in your portfolio. I mean, Apple is up 53% this year. Amazon is up 50% this year. These numbers are staggering. And we’re only in August. This could be the biggest year for tech in history.

For my personal account, I’m not really looking at stocks much. I’m clipping coupons on bonds – in other words, picking up the income they’re throwing off. I mean you can now collect over a 4% yield on the 10-year Treasury note. It’s been a long time since you could say that. I’m also trading opportunistically.

The macro headwinds are still around. For instance, I think interest rates are going even higher in the U.S. I don’t think the Fed is done.

You could say the stock market is defying all logic. But the stock market is the only logic that matters.

That said, I believe volatility is too low right now given the risks out there. That’s one thing that’s really hurt the big hedge funds this year. They thrive when there’s a lot of movement in stocks that they can trade. It’s also hurt my flagship Opportunistic Trader advisory. It’s down a bit this year.

We killed it last year with this service because there was so much volatility. This year, I’ve had to be less active with my trade recommendations, which I hate, because I love to be active.

Fortunately, I have more than just one trading advisory. And they each follow a different strategy that I honed during my time as a hedge fund manager.

And one of them, S&P Trader, does much better in the kind of volatility environment we’re in today. Last year, it had an up year, but it didn’t do what it’s doing this year.

As of July 28, we haven’t had a single losing week in six weeks. And our year-to-date P&L is $161.75 on a one-contract basis. That equates to a minimum gain of $16,175 in 2023 for folks who followed all of my recommended trades.

Chris: You also have a currency trading advisory called Currency Wizard. Why trade currencies in addition to stocks?

Larry: I’m very excited about the currency trading product. I’ve been pressing for it for a while. What I love about trading currency – or forex, as it’s known – is it’s the most active market in the world. It’s also highly liquid. So, it’s always easy to place trades.

Chris: And are there any trends you’re looking at in the currency markets?

Larry: Last year, the trend was for a strong dollar. It was probably one of the biggest trends we’ve seen in a long time. The dollar went from 88 cents against the euro to $1.03.

I thought that trend was intact. But the dollar is back to about 91 cents against the euro. Now, I think that trend may be busted.

And there are long-term concerns over the dollar that are underappreciated.

We just ran a promotion for Currency Wizard. It was about the BRICS emerging nations – Brazil, Russia, India, China, and South Africa – getting together to launch a reserve currency to rival the dollar.

This new currency is referred to as R5 because the currencies of these five nations are the real, the ruble, the rupee, the renminbi, and the rand. They’ll use it to trade with each other instead of using the dollar, like they do now.

So that’s the interesting wild card. And there’s an important BRICS meeting coming up on August 22 to discuss this new reserve currency. I’d say 99.9% of Americans are unaware of what’s going on. Or they think it’s meaningless. I’m not of that ilk.

I don’t expect representatives of the BRICS to come out of that meeting with a new reserve currency. But it makes sense for them to push forward with a currency that’s not the U.S. dollar.

There’s going to be a lot of uncertainty over the future of the dollar as a result. And I think that’s going to create some great currency trading opportunities.

Chris: Let’s move on to crypto. Again, we had a terrible year for bitcoin last year. It plunged as much as 64%. But it’s up again this year by about 75%. What did you make of that reversal?

Larry: I’m still kicking myself because back in… I think it was in 2016 or 2017… a guy come to my office. And he told me, “You got to buy this cryptocurrency called bitcoin.”

I wanted to buy it because I was having a decent year with my trading. So I had a little bit of capital to speculate with. But I couldn’t understand how to buy it.

He said, “Well, you got to buy it and put it on this Zip drive.” I’m old school. So, I told him, “I’m not putting money on this Zip drive.” And I never bought it.

It was trading at about $1,000 at the time. I watched it run as high as $67,000. Sometimes that happens.

I don’t believe bitcoin will ever fully replace fiat currencies. But I do think that it has sticking power as a tradable asset. Bitcoin has gone from being worth nothing when it launched in 2008 to having a peak valuation of close to $1 trillion.

I respect that. I believe that it’s going to be here for the future.

I view bitcoin as a risk-on, risk-off asset class. It goes up when investors are bullish in general. And it goes down when they’re bearish in general. That’s interesting because I think the plan was that it would be the opposite of that.

It would be, “Hey, when the market is crapping out and the world is coming to an end, you want crypto because you don’t want to be in the U.S. dollar.” But I haven’t seen it play out that way.

Last year, with all the uncertainty in the markets, you would have thought investors would go to crypto. But the opposite happened – it tanked along with more speculative assets.

On the other hand, when speculators are alive with capital, it does well. That’s where we are now.

Chris: Let’s wrap up and talk a little bit about AI. As you mentioned earlier, it’s been the big stock market story this year.

What’s your take on that? Is there a trading angle here? Is it something that you think traders are going to be using? Are you worried that AI is going to eventually be better at trading than you?

Larry: That’s actually awesome. AI has been around a lot longer than people think. But it’s caught fire in the market this year. So, I’ve been following it. I’ve also been trading AI stocks a bit.

I’m hoping to trade this trend more in the next few months. So, watch this space.

Chris: Are AI stocks in bubble?

Larry: I would call it a mini-bubble. It’s like the mini-bubble we had in biotech stocks during the pandemic or cannabis stocks in 2018. We also had several mini-bubbles in crypto.

I think it might play out like it did with crypto. We’ll have multiple small bubbles followed by small busts.

Will AI replace me as a trader? I don’t think so anytime soon. ChatGPT isn’t really that good. My kids have asked ChatGPT about me. And almost everything it says is wrong.

And if it makes a mistake as a trader, it’s going to be very, very costly.

My view is a lot of the AI stocks are fully valued right now. That will make the rest of the year interesting to watch. At some point, there’s going to be an opportunity to short – or bet against – hot AI stocks.

Not right now because the market’s too bullish. But once we see the bullish trend break, there will be a major opportunity there for traders.

Don’t get me wrong. AI is here to stay. I’m hoping I got another good 10 years in my seat. But if I’m going to have to sit next to an AI robot, I’m good with that.

Chris: I think we’ll leave it there, Larry. That was a great conversation. We covered a lot of ground. So, thanks for your time. I really appreciate it.

Larry: Thank you so much. I enjoyed our conversation. I hope to speak to you again soon.