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...
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...
PORTFOLIO UPDATE
I announced the initiation of a short position in MOO at 50.95 during the first half hour of trading. Later in the trading day I posted on Twitter that I added to the position making it a large short position within the portfolio. MOO is a play on a weak commodities sector that I went over in the chart review this weekend. The fact that the Euro is weakening again does not help this already struggling sector. I also announced the initiation of ZSL in the morning. I am keeping this a small position until I see silver fall further. Today was a good first...
PORTFOLIO UPDATE
I updated on Twitter late in the trading day Friday that I did take a roughly 2 point profit on the QQQ long I initiated on October 20th. This puts the portfolio back into 100% cash. I'm keeping my eye on a couple different short opportunities in commodity related issues. I don't see any new long opportunities on the horizon until late in the week or possibly next week. As usual, I'll update once positions are...
THE FUTURE OF RISK
Today was the day. It was the point in time when investors decided to shed the negative myopia that has been with us since August. It has been replaced with a reluctant acceptance that perhaps equities can go up for more than a few days at a time. An opinion that early October may have indeed been a solid enough point to see us rally through the end of the year. An admission by fund managers that in an effort to avoid risk completely for fear of driving a taxi for a paycheck, perhaps the abundance of cash in the portfolio was a bit excessive. All of these realizations were caused by the massive gap up we saw in the morning that never was retraced as most seemed to expect. Furthermore, it was the last straw for those who were holding out bearish hope of an opportunity to buy lower. You could see the market forcing the hand of both frightened buyers and short-sellers on this day. What is astounding to me about professionals in this business is that during points at which your risk is extremely well-defined and simple to quantify they are the most fearful. However, at points when the risk becomes extremely difficult to quantify and is more or less open ended, the buying begins. Often time it is driven by group think. The comfort of having a posse of investors hold your hand serves to dull the fear. The well-defined and simple to quantify point to buy was early October. This is my article from October 3rd http://www.zenpenny.com/?p=2636, one day before the bottom. It's an important read because it goes into the mentality you need to have at important turning points. It is true that at points where the vast majority of investors are most fearful are often times the best points to initiate positions. The risk/reward becomes very easy to quantify because you can set in stone EXACTLY what the market should do from that point on. Now take a look at where we are now. If you are the poor fund manager who needs to initiate exposure here, how do you quantify your risk? How do you know when you are wrong? The truth is....you don't. You are so far away from a favorable point to buy that any normal pullback within such a rapid ascent will seem like the end of the world. The end result: You get rinsed at or near the bottom. The moves the market can make from here are open ended. The risk profile has changed dramatically. With that said, I moved to a 60% invested position all...
PORTFOLIO UPDATE
Holding full position - 60% of portfolio - in QQQ. No plans of selling that. Currently 60% QQQ and 40% cash.
PORTFOLIO CHANGES
During the last hour yesterday, I doubled the portfolio position in QQQ. The Nasdaq 100 now represents 60% of the portfolio. I also doubled the position in FAS. Making it 20% of the portfolio. Since FAS is a triple leveraged ETF it brings total portfolio exposure to 120% long. The portfolio consists of QQQ and FAS. Clean, simple and concentrated. The last hour surge was fund managers realizing that this rally is for real and wanting to participate. There is a lot more underallocation out there that needs to be resolved if guys with a lot of hair gel want to keep their jobs. We have quite a bit of upside remaining through...
GOOD HOUSEKEEPING AND BOTTOMLINE FACTS
There are times when a trade is taken that goes absurdly wrong before you even get a chance to cherish the poor judgement that went into the decision to make the buy. It's at those times that I have found it better to cut and run than sit with the anxiety of knowing that your entry was so far off. EDC was a poorly planned trade that I misjudged. After one day of pain, I decided to press the reset button and look elsewhere for my risk exposure. Not to mention the fact that copper made a move down today that was last on my expectation list. In fact, it qualifies as a definite "should not be happening" move that I will be watching in the days to come. Emerging markets and copper are highly correlated. One more reason I decided to drop EDC. I believe we may have another week of sideways, rangebound movement ahead of us. I plan to slowly accumulate throughout, with an eye on S&P 1200 as the point I want to be buying. Today I added large amount of QQQ at 56.45. 30% of the portfolio went into the Nasdaq 100. On my shopping list for future longs is TNA and more FAS. I did take profits on ZSL today. It was a roughly 10% gain on the position in a week. I am keying off gold for the ZSL trade. Gold held the exact technical point that it should have today. A bounce in gold will result in a bounce in silver. I may hit silver again if the decline in ZSL takes it back into the $13 range. Generally speaking, it looks to me like all the major averages are resting near the highs of the range that started in August in preparation of a breakout to the upside. All the meanwhile, a vast majority of investors are piling into either cash or shorts expecting that we begin falling again. It's classic behavior when a market is at a major turning point, as I believe the early October bottom was. It is at points when investors cannot fathom the upside that the greatest potential for gains is possible. Wrapping minds around the bullish case has become an impossible proposition here. It is reflected in the angst we observe all around us in the form of an overall mood of depression when it comes to anything related to the economy or business. I'm not sure if the seeds have been planted fundamentally to give us a new bull market rivaling anything we saw in the 80's or 90's. But the environment is ripe...
RISK ASSESSMENT WEDNESDAY
On October 12th I moved to a 100% cash position after liquidating the longs I purchased on October 4th. I moved to cash because of the following realization that I spoke about in the blog posting from October 12th: "Bottomline: The best case scenario for the markets over the next 5-7 trading days is a sideways trading range that consolidates between 1190 and 1230. The worst case scenario for the markets over the next 5-7 trading days is a move down to 1150." Since that time the high on the S&P 500 has been 1233 and the low has been 1190. It has worked perfectly into the range that I expected. Today was the 5th trading day since moving into cash. Being that the markets are working out their overbought condition right near the highs of the range you have to assume a very bullish scenario going forward. For that reason and out of respect for my research, I bought back into the position in FAS and EDC that I liquidated on October 12th. Unfortunately, I had to pay a premium for them over what I sold them at and my timing in initiating the positions today was off. FAS was initiated at 12.90 in the pre-market. EDC was initiated at 17.35 in the first couple hours of trading. Both closed lower than where I bought them. I wasn't expecting to nail the bottom tick. I'll sleep off my disappointment tonight...don't worry. That leaves me with a roughly 50% invested position. The breakdown is as follows: 30% ZSL 10% FAS 10% EDC It has become apparent that many investors are now requesting a wax with the brain washing that they have received at the hands of the market and the manic-depressive spin cycle of information that drives their actions. A continued move up in the markets is not only possible, but in fact highly likely. The list of factors that can drive the market to S&P 1300 by late-November are numerous: 1. Seasonality - Allow me to indulge your appetite with the following facts - S&P 500 during the 4th quarter has averaged a 2.4% gain since 1928. The past 20 years the gain has been 4.6%. The gains during the 4th quarter are twice as strong as the next closest quarter. - When the market has fallen by more than 10% during the 3rd quarter, a rally in the 4th quarter has not failed since 1957. The last seven instances were: September of 1974 September of 1975 September of 1981 September of 1990 September of 1998 September of 2001 September of 2002 - The 4th quarter following a...