A CONTINUED LACK OF VOLATILITY WILL DEMAND A CHANGE IN STRATEGY
Volatility is a bear's best friend. A lack of volatility can become a bear's worst enemy. It slowly grinds your positions into fine powder one agonizing minute after another.
I bring up the subject of volatility (or a lack thereof) because of the fact that there has been a remarkable change in the characteristics of the market over the past few weeks. This low volume grind that we are experiencing is reminiscent of all the prior low volume, grinding bull markets (dare I say it?) of the past. They grind up through negative economic data, adverse macro events and right up through ultra-bullish sentiment. It's not something that you can afford to fight if you are a stubborn short.
I am not sure if I qualify as a stubborn short as of yet. I initiated my short exposure on December 23rd. I haven't been adding into strength, choosing to simply wait things out. Now it has gotten to a point where I am being forced to fold my hand both as a means of controlling risk and as a means of refreshing things. I have no problems with holding my crude oil short. The equity shorts (FAZ & TZA) will be closed on opening strength tomorrow morning. By all indications, futures are pointing towards a strong opening currently.
If we are indeed entering another prolonged period of low volatility, short-term trading strategies will be turned to mush. What will work is intermediate to long-term equity strategies. I will be making my short-term strategy a smaller portion of the portfolio and allocating a majority towards intermediate to long-term equity positions as I did during all of 2010 and the first half of 2011.
I am putting together some research on a small-cap name that I will be presenting here by the end of the week. It possesses all the attributes I look for in a long-term investment: positive cash flow, restructuring angle, highly incentivized management, a solid prior history and it's greatly ignored/undiscovered.
That'll do it for tonight.
