RISK ASSESSMENT WEDNESDAY: INCREASING BEARISH BETS AGAINST A ULTRA-BULLISH CONSENSUS
This isn't an environment where traders are rewarded for being tepid. This also isn't an environment where you can afford the luxury of reaction. It's an anticipatory environment that requires a bold decisiveness in trading to capitalize on the madness that 2011 has been.
Sorry, but if you are waiting for confirmation of any trend then odds are that the trend is about to reverse. You have to be willing to step in front of the train. At the same time, you must remain alive to play again should your timing in stepping on the tracks happen to be off. The proverbial fine line.
I'm walking that fine line here. Anytime I increase my risk exposure as I have recently that fine line between being aggressive and reckless comes into play. I am an aggressive trader by nature. When I see that odds are stacked in my favor for a particular trade, as I believe they are here, I have to take on a position to maximize my chances of profit. At the same time, I plan an exit strategy in case of error to make sure I can fight again if I am incorrect. Finding a balance between aggression and proper risk control is more of an art than a science.
The reasons I am comfortable taking on this type of short exposure here is due to the following factors:
1. I have a clear consensus to bet against.
2. I have a catalyst at work
3. Price action and technical data confirms my bet against the consensus.
The clear consensus I speak of is the firm belief that December is the season of entitlement for the bulls. Despite the bleak fundamental headlines, this December seems to have taken on that same aura of entitlement, with popular opinion recently turning to the idea that there CAN'T be much downside from here because it's December. The thinking is that if an investor is to buy here, then the risk of loss is very little as the market always picks up the slack during this month. Short sellers are covering. Investors are getting long in anticipation of the rally only getting stronger as we get closer to Christmas and New Years. What is left below the market is a hollow expanse that is begging for one swift wind in order to make its presence felt.
The catalyst that I speak of is the ECB and European summit being held over the next couple of days. Again, a popular belief exists that the ECB and European summit will mark the conclusion or at the very least, the bottom of the European crisis. Consensus believe that this will mark a point where the politicians and central bankers who have been completely clueless about this current crisis since day 1 will finally come to the aide of the markets and save Europe. Shangri-la served with a croissant, bratwurst and cappuccino.
Again, these types of expectations out of entities that have done nothing but disappoint markets for the entirety of 2011 leads to a black hole beneath the markets as short sellers have disappeared and the buyers are all in expecting not only a December rally, but a supercharged event led by the ECB. Unfortunately, the Dow isn't below 10,000 and the German DAX below 5,000. If the markets panic enough, the ECB and Euro ministers will act decisively, once and for all. There is no panic. There is no action from Europe.
I have outlined my qualms with the price action over the past several days in several chart studies. If you haven't looked at the weekend chart study I publish every Sunday, here is the most recent one. To summarize: We are caught in a swamp of technical levels for the S&P. The Nasdaq 100, Russell and Bank Index (BKX) have it even worse than the S&P with the amount of swampland they have get through in order to see sunshine. The buying power simply isn't there to get these important averages through the darkness that they face currently.
BOTTOMLINE: I have a psychological consensus (or crutch you can call it) that says December is a risk-less period of investment for bulls. The S&P is assured a spot above 1300 before year end is a popular opinion. I have a catalyst that also plays into the psychological crutch the market is relying on. This expected catalyst will be a disappointment, in all likelihood. And I have a market that is in a swamp of resistance levels. I'm short.
