8 CHARTS THAT WILL MAKE YOU REALIZE THAT A NECKTIE IS THE CORPORATE VERSION OF A DOG LEASH
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THOUGHTS FOR THE WEEK AFTER GETTING RUFFIED BY THE MARKET
This was a confusing week for investors on multiple levels. We had confusion coming out of Europe for essentially the entire week. The G20 meeting provided its fair share of drama. Per the usual, for all the drama that was on display, very little in terms of concrete resolutions were reached. There seems to be a soap opera playing out behind the scenes, whereby global power brokers are essentially telling the leaders of the EU to stick themselves in a room and resolve their differences or they will be grounded for the next decade. The backroom dealing, bargaining and shenanigans are what is driving an attempt at a resolution. What we are fed on a daily basis is the glossed over, vanilla version of the facts. Equally confusing was my trading during this past week. It is rare that I flip-flop between being a bear and bull in a single week. If there was a week for it, I suppose this one was it. To understand the problem, you must look at where it originated from. I came into the week with an understanding that there was a good chance that the model I had been using to determine my actions over the past month had a better than even chance of breaking down. I outlined these thoughts in my investor email that I published on the site last weekend. Early on in the week the market began departing from any conceivable path that I had laid out. The departure happened to be on the downside. All of the interrelations between asset classes began to confirm the breakdown. This led me to believe that the rally was in jeopardy. Bearish bets ensued. It began to become apparent that I may be incorrect when confusion out of Europe, followed by weakness in key sectors failed to derail the markets to the point that it should have. I covered my bearish bets on Thursday with small losses across the board. Now here's the key point of this review and the setup for my trading next week: On Friday something very bullish occurred. After rinsing out the short sellers, myself included, over the past two days, the market opened down and was extremely weak during the first couple hours of trading. The bears had everything working for them, including the fact that it was Friday ahead of another weekend of uncertainty with the news wires consistently bringing in conflicting information and speculation from Europe. Bears had every single reason to be able to topple the bulls and close the Dow down 200+ plus points. S&P 500 should have been well below 1240....
MY TEACHER TOLD ME I SHOULD NEVER TELL A LIE, ESPECIALLY TO MYSELF
The targets and scenarios I share on this website serve as my yardstick. They are a measure of the accuracy of my analysis. During months, like October, when my analysis all comes together so beautifully, the trades just come together in an effortless fashion. I know that I am right by the manner in which the market confirms my targets, ranges and velocity with which I am expecting the moves to take place. When the market moves outside of the ranges I am expecting, I have found it safe to assume that I do not understand the current market conditions. When I do not understand the current market conditions I absolutely have to get out and rethink my analysis. Believe me, I have tried in the distant past to sit through markets I don't understand, hoping that in time I will gain an understanding by sitting through losses and allowing the market to morph into my "understanding field". It doesn't happen. If your analysis is off (read: you are losing money), then you do not understand the current market environment PERIOD. It really is that simple. My becoming bearish as a result of several very convincing indications of market weakness was incorrect. It doesn't matter if the market starts dropping tomorrow, the analysis was still incorrect. Why? Timing is as much a part of the picture as any other component. If I understood the market here, I would have timed it appropriately. With that said, I cleared out of all my positions today. I am back to 100% cash. I tweeted yesterday that I was expecting a move to 1250-1260 on the S&P today. I got a move up to 1250 in the morning and then the reversal that I was expecting. What made me realize that the market was deviating from my roadmap is when after mid-day it just kept rising and rising and rising.It ended the day over 1260. The 1260 level was the extreme of the upside range I was expecting. The fact that it ended over that level is one more sign that I should step back. I'm back in cash. The trades were all very small losses overall. I am certainly happy about that. As far as managing the trades goes, I couldn't have done a better job. Sometimes that's as good as it...
BACK TO 100% CASH
Exited all positions. .10 cent loss on FAZ long from this morning. Breakeven on MOO short. Time to hit the reset button. Today's move up not a part of the gameplan. No harm in reevaluating with minimal losses across the...
TRADE UPDATE – REDUCTION IN BEARISH BETS
Out of ZSL completely for a .30 cent loss. Cut MOO short in half for a breakeven trade since initiating earlier this week. Holding mid-sized position in FAZ for now. Best to lighten the load since my initial roadmap has been proven wrong. This market is volatile enough to reverse at the close. However, with the strength in the Euro, I don't think that will be the...
TRADE UPDATE – FAZ
Bought FAZ on the open at 39.63-39.66. Mid sized position to start.
RISK ASSESSMENT WEDNESDAY: A LESSON IN GIVING BACK
I gave back a decent amount of yesterday's gains today. There are times that demand sacrifice of short-term gains in order to be able to access the much larger gains that can come with sticking to positions for weeks instead of days. I realize that this is a difficult concept for the current generation of hyperactive, mouth-breathing trader who thinks that every swing must be caught. But before your panties melt away from underneath you from mental overload, allow me to explain myself. Those of you who have been reading this blog for more than a month by now realize that my opinions are subject to change based on what I observe. I'll cite a seasonal study one week that points to bullish results with sentiment figures to back it up. Then the next week I will turn bearish. I can be privy to the most outstanding set of conclusive data that tells me the market is heading in one direction. However, if a set of events comes along that makes me uncomfortable, I will be the first to jump ship and run in the other direction. Every investor or trader has a hierarchy of qualities that are important to them in the markets. For some a companies balance sheet may take precedence over all else. For others it is a mix of fundamental valuation figures. For others a set of squiggly lines that cross over another set of squiggly lines. There are literally a million different ways to do it. It's like Kama Sutra with a thousand penises. It took me many years to learn where I excelled and in what devices I should put my trust. For me, more than anything else, it is simple price action that determines my bias in the markets. The day to day price action tells me everything I need to know. The interrelations of various asset classes and the dance they partake in together on a daily basis is just one component of price action. Velocity, volume and trajectories are some others. Everything else is secondary in my trading universe. Sentiment. Fundamentals. Macro outlooks. What God thinks about the market. They are all secondary to what price is telling me. When I change my view from bullish to bearish, as I have this week, there are a very hard set of reasons behind the change in bias. If my change in bias proves to be incorrect, I simply move on. Like a quarterback who throws an interception and then marches onto the field for the next set of plays. I don't look back. I have seen a lot over the past...
IN THE EVENT OF A BOUNCE
It wouldn't be unusual to see the market test the bears over the next day or two. Since I don't want to turn into a daytrader, I am willing to sit through some upside volatility in an effort to capture a larger gain on my current short positions. I don't want to become the current generation of trader who thinks he or she has to capture every micro move in the market. It's a long-term losing proposition. I will be looking to initiate a short position in financials if we do bounce. Most likely in the form of FAZ. Unless mentioned otherwise, the positions I initiate (long or short) have an intended holding period of anywhere between one week to one...
WELCOME TO A DEVIOUS MARKET WITH QUESTIONABLE INTENTIONS
Nothing changed for me today. In fact, the manner with which the market is continuing to pull off one "not supposed to happen" trick after another has me firmly entrenched on the bearish side of trade. Albeit, I am not short any broad based equity indices or sectors. Instead I have chosen to remain on the periphery through a short position in MOO (agriculture ETF) and a long position in ZSL (short silver). I think it's important as an investor or trader to be in touch with your own level of comfort for any single trade. If the level of comfort does not exist to be able to ride out the inevitable volatility, then odds are that the trade will end up being a losing one. My level of comfort with respect to shorting the S&P 500 or Nasdaq just isn't there at this juncture. I wouldn't have any holding power if I was to do so. I am, however, comfortable shorting MOO and being short silver through ZSL. These positions are more or less linked to the general market and should move down in line with the S&P 500. Since the S&P 500 has now become a derivative of the Euro, then these positions are essentially short Euro positions when all is said and done. The ferocity with which the major market indices have broken down is highly abnormal. It typically marks the beginning of a new downtrend instead of a short-term spike down. What has me apprehensive about embracing this scenario wholeheartedly is the sentiment picture. While investors certainly aren't as bearish as they were last month this time, there is still quite a bit of skepticism and doubt with respect to the market. What should be noted is the tendency of markets to move down in an accelerated fashion when an abundance of bearishness meets a market that is too weak to bounce. If I had to pick between a scenario that has us moving up to recapture last weeks highs and an accelerated move down that leaves those hoping for a bounce in the dust, I would choose the latter scenario. The market did not close below highly significant support levels on both the S&P 500 and Nasdaq 100 because it wants to give those fund managers who missed out on the October rally a chance to get positioned for a November to remember. The financials didn't fail as dramatically as they did today because they want to give John Paulson the chance to load up before making him whole again by the New Year. There is something more devious at work here. A smell...