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 few days that have led me to believe there is a substantial possibility of a violent move down occurring this month. It often takes only a couple days of observing the market to realize its intentions. This market moves way too fast to sit there for two weeks, meticulously dissecting the price action for signs of analytical perfection.
If I believe in my analysis, then I have no reason to even think about taking off my short positions at this juncture. If anything, I am looking to add with an eye towards FAZ. As Europe falls, so will the financial names. The failure in the financials has been pronounced this week. It is very real and tells of further downside for the entire market.
The same goes for the manner with which US Treasuries are soaring. The manner in which the Euro is falling. And the ferocity with which the major European equity indices have given back their gains.
This isn't a market that is going to take its time to give back the gains of October. It's simply not in its current character to do so. The moves will continue to be sudden and exhausting. Managing risk is a must. Having conviction in your analysis is essential.
With all of this said, risk assessment Wednesday was simply a lesson in giving back so that I can profit in the coming weeks.
Current positions:
Long ZSL
Short MOO
As I have said, I am looking to add FAZ to the mix here if given the opportunity tomorrow or Friday.
