RISK ASSESSMENT WEDNESDAY: A LESSON IN HUMILITY
If there is one guarantee I can make to you about the market, it is that it will humble you. It will do so on as consistent a basis as you allow it. Meaning that until your methodologies catch up with your ability to understand yourself fully, thoroughly and unequivocally, you will continue being humbled frequently.
I was humbled today. It was not just a humbling experience, but a mental rape as well. The mental rape comes with being 100% correctly positioned for this on Monday and being shaken out due to tightening my risk too much. And why did I tighten my risk? Like Pavlov's dog, the market conditioned me with the choppy moves of last week to be afraid of giving back my profits. It worked. I turned into a zombie when I saw my profits slipping away yet again and took profits. In fact, I talked about this very phenomenon during my weekend post.
To add insult to injury, I was obviously early on the my gold and silver bets. Needless to say, today wasn't one of my best trading days in 2011. One of the worst, in fact.
Looking forward, I have to wonder how the market is conditioning its participants currently?
There was a very strong consensus that believed in December seasonality trumping all else just last week. GONE.
There was a very strong consensus that believed that Fed action would mark a decisive turn for the market. GONE.
There was a very strong consensus that believed we would break the 200 day moving average on the S&P and move to 1300 before year end. GONE.
What we are left with, at present, is a black hole of depression from a majority of those who manage money. Some guys are wrapping up their years early, not willing to deal with this madness for another two weeks, risking whatever assets they have left. Others are attempting to deal with the volatility, mostly unsuccessfully. 99.9% of professionals are light here. Exposure is minimal for obvious reasons.
Today we got a very solid look into an area that is supposed to remain in the databases of the prime brokerage houses. There were hoards of rats abandoning ship today. And judging from the volatility in the various currency pairs and commodity markets, it seems that hedge funds were parked in everything from oil and gold all the way to copper in an attempt to extract their incentive fees in a highly challenging environment.
As these trades so often do, they all fell apart in one quick swoosh. Hedges were removed, currency exposure trimmed, commodity exposure shunned all in a matter of hours. A group of whales all trying to exit through the same door. A lot of pain.
I think we will be putting in a low either late this week or early next week at the absolute latest, followed by a move right back up to the December highs on the major averages. That's why I am comfortable holding onto those assets that I know are being dumped in a panic, like silver and gold. That's why I added to my position in EDC today. And that's why I will be looking to add more leveraged long ETF exposure on further weakness.
I sure as hell wasn't happy with my performance today. To be honest, it hurt quite a bit. Nevertheless, I have been here before and I will surely travel this path again. My only concern from this point forward is making sure I don't make mistakes that lead me down this road again.
