Welcome to the first State of the Market of 2021! Happy new year to all of you.
Let’s hope it’s a better one and at least that is a modest objective given what a misery 2020 was on and off FI!
The last couple of weeks have looked brighter at least. Today I want to focus on tactics for trading in this market – which is very different from what we are used to in previous seasons. I’ll consider both short and longer term strategy.
In recent months the market has been so volatile that setting out a “Key Strategy” for 3 months ahead would have been pretty futile, and we’re still in that sort of market.
Instead I’ve been evaluating things week to week through State of the Market. But Key Strategy still provides some useful definitions of things I refer to like what a “Core” player is, so it’s still there as a reference.
I am also going to try to get back to more reasonably sized State of the Market posts. Late in 2020 there was a lot to talk about with platform mechanics and changes that led to some mammoth posts.
In fact, I installed an app on my site that tracked the word count over the year:
This includes everything from State of the Market to Scouting to all the other articles. What’s interesting as well is the monthly breakdown. In January to September 2020 content averages out at around 47k words per month. In October to December my word count rocketed, with 113k words in November, well over double what I usually put out!
So if it’s warranted I’m very happy to put in double shifts as long as I have something useful to say, particularly when things get complicated. But I also recognise that quality is measured in how useful things are, not in word count! Less can be more and I don’t think people want to be swamped!
In that spirit, let’s get straight into it.
When we last left off before Christmas, we had a market that was in free fall. Prices were tumbling across the board and things felt very bleak.
The glimmer of hope I noted back then was that spreads were actually quite tight – something that is essential before you get any kind of recovery.
They were tightening for the wrong reasons from a holders point of view, that Blue Button price was dropping to meet the Red. But spreads were tightening and there was at least some kind of Instant Sell price for most of the top 200. At least with tight spreads, you can start to trade.
It is better for long term health to have low prices and the ability to trade than the previous scenario of artificially high prices and an inability to trade. Though it may not have felt like it at the time.
Market Movements – Last Two Weeks
The first measure we look at, out of habit mainly and because it’s so important to sentiment is the Blue Button prices. This is far from a full indicator and actually the Red Button price, and the tightness of the spread, is the better indicator of health.
But Blue Button rises and falls is still the first thing people look at and it tends to dictate the overall mood, so let’s start with that.
This looks a hell of a lot better. It’s important to bear in mind what this actually is. Blue Button prices can shift rapidly either way if just one reasonably sized holder decides they are panic selling for rock bottom or unlisting and deciding to stick.
I would suspect that much of these price “rises” are really just people calming down and reacting to the stability we have seen. They’ll be unlisting players for sale that they have previously been trying to sell too cheaply.
And some of that desire to panic and sell for rock bottom will have been met. Those traders who are sticking around or investing more are happily gobbling up the shares people leaving are desperate to sell.
So we’re seeing more shares concentrating in the hands of traders who are sticking in. And those who want to leave have been getting their wish – but for a big hit.
Eventually, we reach a point with that where we run out of people who are willing to sell for rock bottom because they’ve either changed their minds or been bought out.
When we look at what that means for the market, we see a healthier picture in recent weeks.
At the top end, we’ve got significant and sustained rises for popular players who were always likely to lead the charge in any recovery. Fernandes. Kimmich. Haaland. Sancho. Neymar. Rashford. Foden. Lewandowski. Mbappé. The gangs all here.
These sorts of players don’t even need to play particularly well to get a bounce. A lot of these rises are mainly to do with over negativity correcting itself. Gnabry for example – he’s still performing poorly but his Blue Button price has risen 25% nonetheless which reflects his status as a Bayern and Germany regular, the previous price ceiling, and the longer term confidence in him.
Imagine living in a world where you can get a 25% profit on a player as obvious as Gnabry even when he’s bang out of form? That’s the world we are in right now. In fact 25% is conservative, the Red Button bids you could get matched were closer to £1, it could be well over 25% profit on this.
This is why I’ve been at pains to highlight the tactic of loading up on these obvious sorts of players in recent weeks. It’s not exactly rocket science – but sometimes simple is best.
Others have risen as a direct result of better performances. Saka. Lautaro Martinez. Robertson. Tierney. Theo Hernandez. Zielinski. Immobile. Bertrand Traoré.
These are a little bit more hit and miss than targetting the more obvious big hitters – chiefly because you actually need them to perform well to get attention! You can’t always just rely on a natural bounce back, but that’s fine if our analysis is on point.
It isn’t all champagne and cocktails on the Blue Button though. We’re still seeing drops of 10-25% for some players particularly if they have appeared to perform poorly recently or are in ineligible leagues.
Neres. Gakpo. Both strong long term prospects, both getting hammered. Demirbay, Locatelli, both good players taking drops. Trincao similar.
Coutinho too – he picked up a long injury so this is not unusual but what is particularly apparent is the strength of the reaction to that news. He was already undervalued significantly, he’s down to 58p to 67p now which is just irrational.
This is still a nervy market that is prone to strong over reactions to short term bad news. This can hurt if you are on the receiving end. It can also be a massive opportunity.
Overall, the droppers list and the risers list on the Blue Button continues the theme I’ve been expecting – in times of stress and volatility people are clustering into the more well known players who are perceived as safer choices. But it’s also fair to say that traders collectively often have a very skewed idea of what is “safe”.
This is caused by the generally poor ability to judge real quality and value that persists. I expect the difficulties of 2020 to force the general standard of trading up over time as bad traders either get weeded out or improve – but it’s going to take a while.
That’s the picture on the Blue Button, which is very important for sentiment and morale. But most of the action goes on via bids which don’t register on the Blue Button at all. What we really want to pay attention to is the overall market health.
If we look down the top 200 it’s a healthy picture when you are focusing on spreads and liquidity. If we temporarily put to the side that we know prices used to be a lot higher – this is probably the healthiest looking market we have seen, possibly since the Matching Engine was first introduced.
Spreads are very reasonable in the vast majority of cases. 5% to 10% for popular players, perhaps up to 25% for some of the more obscure or less popular top 200 players, with most falling somewhere between 10-20%.
Ideally they would be a bit tighter but I consider this level of spread to be an acceptable cost of getting out of an unwanted trade. We can’t have it all our own way.
As it stands I can count 26 players in the top 200 with no sell price. And being brutal, these are almost always players who have no real business being in the top 200 anyway. These are generally bad choices that have resulted in a losing bet.
There are many solid reasons to be optimistic that good quality, FI relevant players will bounce back strongly but this is not going to apply to all players. Players who have no FI ability (or can’t fool enough people into thinking they have FI ability) may never recover.
Overall, this is a healthy looking market that looks extremely attractive to invest in. At least when putting aside the whole topic of the stability of FI which has been done to death in recent weeks. My view being that I am overall optimistic with my caveat about quality – I expect good players to rebound but bad players to struggle.
Crucially – it is a market you can trade in quite freely with reasonable liquidity and spreads certainly in the better known and popular players. And that’s very encouraging.
It remains galling to see prices so low for many of these quality holds. After dividends were doubled we know that this dividend structure supports much bigger prices. On a purely rational valuation a player under 25 can routinely be £4 or thereabouts. And a really high quality premium like Bruno could be £12 without breaking a sweat. Those True Values are on the Dashboard for reference.
That gives a yardstick, but it’s not reality when looking at prices today. We can however expect prices to gradually come to reflect something closer to true value provided the market continues to recover and the performance levels of those players holds up as monitored through Scouting.
Where there are still problems with liquidity and spreads is in the unpopular and less well known players. Trading here is much more difficult.
This is largely as expected. In a recovery, it was always likely that the more popular A list players would forge the path. The quality B and C listers will follow in their footsteps if the recovery continues.
But they’ll need to show quality, or at least have a kind trend fit to do it. I don’t think it will be very difficult to see money flowing heavily to players like Odegaard, Belotti, Dybala, Depay, Goretzka, Gouiri, Trincao, Chiesa, Insigne. They aren’t too obscure – but they are just behind the A listers in the queue. For now.
And then after that you’ll see others coming through, perhaps some promising ineligible league players.
Key Trading Strategy
Key Takeaway 1: Prioritising “Core” player types – high quality, popular players at low prices well under their “True Value” has been the right move lately, and will likely continue to be for weeks to come.
We’re still at a stage with that where even for players who have risen some, we’re still getting value. So even for Fernandes who has gone from around £6 to £7.60 in recent weeks, I still believe he is significantly under his True Value which is probably closer to £12. So if I wanted him, there is no issue there.
Someone like Kimmich… it’s more borderline. He’s a solid pick but as he is performance only with limited media his price ceiling is much lower than it would be for Bruno. Even in a market that was reflecting True Value more accurately a £6.50 Kimmich is probably more fair value than great value. So that would put me off. Players are competing for our cash and we want it in the areas that work hardest for us.
What we’re really targetting here is reliable players that fit that “Core” definition from Key Strategy that are well under their True Value. So I’d be very inclined to pick up a Gnabry, Dybala or Insigne or Ousmané Dembelé when considering these sorts. Relatively well known, good quality, not going anywhere. Rock bottom price that could easily rise without them having to do a great deal out of the ordinary.
With this sort of player, because they are very likely to be consistent winners and retain long term value we don’t need to be particularly twitchy on them as long as Scouting assessments remain favourable.
They are suitable for holds of at least months, and if we prefer that style and don’t particularly want to mess around constantly refreshing players these are good to stick with provided their prospects are holding up as covered over in Scouting.
Key Takeaway 2: With “Core” players who score and assist a lot we may want to look for opportunities to refresh IPD windows.
The classic example is Lewandowski, or perhaps Immobile, Lukaku or Morata. They can win performance, but a lot of their value is in IPD.
It’s often relatively easy to sell and rebuy for an acceptable price at the moment, particularly in advance of a soft fixture where IPD buyers who follow fixture calendars closely will target them.
This is well worth doing if we have time – IPDs are too strong at the moment due to the doubling of dividends and the accident of a congested fixture calendar putting 8-10 games in a single month.
Key Takeaway 3: When we spot currently unpopular players in Scouting performing strongly at cheap prices, particularly where they have a strong long term trend fit, we shouldn’t be afraid to go for it. We can challenge overly negative traders – if they want to sell good players too cheaply – oblige them.
Scouting is full of players right now who are performing well yet are at rock bottom prices, often because of over pessmism due to historic problems, or because they just aren’t considered popular for whatever reason.
When we identify players at extreme value prices that are actually performing well (Martinez and Zielinski has been extremely profitable examples this week) we should have the courage to go for them. This is opening up opportunities to double money in some cases.
Many people find it mentally tough to do something which seems like striking out on our own. But picking up players like that isn’t even really that brave at all. We’ve got reassurance from good match data, and time is on the side of these players. We’re often going for players with 5-8+ years of their career left to run.
If we don’t hit our big win straight away – we’re buying good players on extremely cheap bids and they will probably come back into fashion eventually. These supposedly “brave” moves are actually relatively low risk bets. The irony is that chasing that rising player might feel more reassuring but is often higher risk in reality.
If we’re buying an unpopular player at rock bottom we can probably offload for a similar price if our trade doesn’t work out without too much damage. If a popular player hits bad luck – lots of people will want to sell – and cheaply.
We likely want to trade these more unpopular players or occasional winners differently to the “Core” selections we see as long term selections however.
The incentives in this market right now encourage people to flip players – which is why we’ve seen lots of players who get a high score rise sharply on the day only to crash back down the next with people selling for very cheap bids. This is what I spoke about in the last SOTM under the heading “It’s too good to be bad”.
Hopefully, FI change the incentives as I’ve discussed to curb this as it is this lack of trust in price rises that is in the end preventing the sustainable price rises across a wider selection of players outside the top picks. Every type of trader wants to see this, it’s not about long term traders vs short as I often see discussed.
But this unwelcome trend exists. And we shouldn’t ignore it.
Where we have a player like Brozovic, or Zielinski or Hofmann, Amiri, Pellegrini, Neto, Tierney, Lautaro Martinez, Veretout we probably want to cash out if there is a price spike due to a strong performance.
Likely, we won’t even want to wait for the dividend so that we can lock in a price rise, preventing a) a late big score beating our man anyway, as happened to Zielinski and b) getting out before any late comers can dump on us.
These are occasional winners – players people won’t expect to be winning again next week. So it’s probably safe to cash in, perhaps even buying back the next morning as those “on the goal” buyers become desperate to sell.
There are huge profits available in this area – it’s important to remember that our pick ups do not have to be Golden Boy or Ballon d’Or contenders. These relatively unsexy but effective players are fantastic if we can get them at value.
It’s important to be realistic about our own time and commitment level, mind. We can only really make the best of this with active trading, so if we know we aren’t actually going to be watching the games and reacting to what’s going on we may be better off playing a more long term, Core Player focused strategy as per Key Takeaway 1.
Key Takeaway 4: Look out for traders overreacting to any negative short term events. If the player has long term value and can recover in the next 3-6 months or so consider signing them up whilst people are most desperate to sell.
Finally, as I’ve covered in Scouting, there are plenty of players hitting short term negative news or events and crashing in price. Gnabry would be an example recently. Coutinho. Dybala. Depay. Werner. Havertz.
All very high quality players that can bounce back relatively easily, especially when starting from such a rock bottom price. Many of these are young and not going anywhere. We should not be afraid to take this on and challenge these traders who are willing to sell too cheaply.
Sell to Buy
One of the hardest practical difficulties that will be holding us back from the moves we want to make is that lack of liquidity in unpopular players.
We’ll have players we want to get rid of but they’ll still be at god awful prices that seem way too cheap to sell for.
These are tough decisions but I recommend being quite decisive with this.
The first thing to do is work out whether you really need to sell a player at all.
Let’s make sure match data through Scouting and our knowledge of trends and what events are coming up in future are our guide. If we only really want to sell because the price is currently low and the player feels unpopular? Probably not a great reason to sell.
If I have a reason I think the player will bounce back in the next few months, such as strong Scouting reviews based on the match data, or a good transfer on the horizon, a good CL/Europa match up or perhaps Euro 2020 (or ideally a good number of these combined) then I’ll probably be fine to ignore the current low price and bide my time.
For others, it may be a case of waiting for the right phase of the market recovery. Ineligible league players are taking a bruising right now. They are the area people go to often when the value in more mainstream picks is exhausted. Some may come back into contention very fast with a January move (or in the build up to Summer).
Provided the player retains good prospects, there is a strong chance that even if we have to wait 3-6 months, we might well see a doubling of that players current value when starting from a very low base in the 50p and under range.
These sorts of players give us the biggest headaches. if we’re satisfied they have longer term value and have a good chance of bouncing back inside 6 months – we then have to answer the second question:
Can we do better elsewhere?
It may be that said ineligible league player can only be sold for 30p and you bought him for 90p. You think you’ll probably have to wait 6 months to get anything like 90p. Is it worth just cashing out for 30p and sticking that into something that might rise much more easily like a Sabitzer who could well win next match day?
It may well be. And these are important things to think about – I can’t give advice on trading every possible combination of players! But as long as we have gone through this thought process rather than ignored it we’ll likely have improved our portfolios.
The second thing to do here is less of a headache but still mentally tough.
When we really don’t see a reason for a player to bounce back in any kind of acceptable time frame – we are likely to be best served by biting that bullet. We may be selling very cheaply – but we are probably also buying something we are confident in very cheaply too.
Final Thoughts on Strategy
Overall I think the most effective strategy right now is a mix of all 4 of these Key Takeaways.
With this approach, we’re building a strong portfolio of high quality, popular players that are well under their True Value. The drop in confidence means that great assets are available cheaply and simple as it is, it seems foolish not to take advantage of that.
For me, as someone who tends to trade over 1-3 month time frames rather than days or hours, I’d probably be putting 75% of my money into this area.
That still leaves me with 25% in those Key Takeaway 3 “occasional winner” types like Martinez and Zielinski – hoping to sell them when they put up a big score on a match day. I’d also have some IPD players I am rotating here like Lewandowski, Lukaku or Morata.
The exact balance of this i.e how much we put in core and into occasional winners or IPDs is really personal preference. As a guide I would say the vast majority of people are going to be wanting at least 50% of their portfolios in Core picks for the months ahead as they are just most likely to benefit from any recovery.
Right now a very active trading style is very viable for those confident too. You could entirely work around IPD and selling into price rises if you wanted to, including with Core players. This is quite advanced stuff but done well the chances of short term profits are high.
A trader can blow themslves up doing this. And may find that prices for key players they want longer term could run away from them which is why I recommend having at least some long term holds that you really want.
Many assume that more activity = more profit but this is often not the case, it can be the opposite. But there haven’t been many better times than now to work with a very active strategy.
If you prefer a longer term style, you could totally ignore occasional winners and IPD and just target 30-40 of the very best Core picks, and monitor them as you go on at least a weekly basis. We’ve got to make sure our Core picks remain core picks! Scouting is our guide on that.
This longer term style is perfectly acceptable – and I think it is better to be honest with ourselves and if we don’t have the time for short term trading or aren’t comfortable with it well.. it’s better to do long term trading well than short term trading badly.
But for optimal results right now this is a season where more active trading is definitely paying off and I am keen to take advantage of the IPD’s and the big value spikes when unpopular players perform on match days.
Through Scouting, I can often predict who is going to pull that off and that puts me in a powerful position to abuse those who are chasing that rise.
Will The Recovery Continue?
I’m not sure it is really possible to predict the weekly behaviour of this group of traders.
As we know, a players price can be crashed by just one reasonably sized trader who decides he’s had enough (or is trying to game the market).
And likewise, a price can appear to soar instantly just because a trader decides he’s regained confidence and stops selling his player too cheaply.
We’ve still got structural problems on the platform, nothing has changed there.
– Perverse incentives like over mighty IPD and late dividend deadlines,
– Poor quality information like the farcical “Average Offer Prices” plus Blue Button prices that can be changed on a whim by any reasonably sized trader.
As long as these things exist we can expect volatility which can go both ways. I hope FI bring forward some fixes for this and over the years FI do end up around about the right answer, even if it takes them a while. But I can’t control that.
Nor can we do much about it if a trading group decide they are going to crash or pump the market. Could happen and that could send prices either way.
In the absence of any shenanigans like that, my expectation would be that after a period of calm like we have seen, people will slowly regain confidence. I trust people to have short memories and be greedy. Prices are low and dividends are high. People want that. The longer prices remain stable (and we reached a point where many could barely go much lower!) then the more confident people will get.
My prediction overall would be for a strong recovery over the next 6 months but probably with some big spikes in both directions along the way due to the market mechanics which encourage that kind of volatility.
As I say, some players will recover and many won’t. And we can expect A list players to recover first, but the B and C listers should follow in time.
I try to avoid stressing too much over the weekly mood, that comes and goes.
I think the best thing we can do to get through the uncertainty is stick reasonably close to True Value.
When you’ve got players that are actually worth money by way of credible dividend returns, you’ve got good reasons to believe that the Blue Button price will eventually start resembling their true value.
When we’re punting too hard on highly speculative players as many have done in the past then if that price collapses there is no rational reason to expect to come back from that. It’s just a lost bet.
There will be many hard lessons learned from all of this and when the market is rebuilt I think it will look and feel a lot different – more mature – with a greater focus on actual quality.