Tuesday, November 02, 2010

Updated Position (and my strategy ahead of the Fed)

Many think markets move higher when a majority are buying - and trade lower when most people are selling.

Not only is this not accurate, it's the kind of characterization which costs the herd time and time again. (For reference, I wrote about this last September, when former-leader STEC first blew-up on major volume. People were buying that name en masse, early into the decline, and yet action in the stock was straight-down in the face of such participation. As it turns out, STEC would trade pretty much lower-only for brutal 3 months).

For whatever reason, consensus and logic remain over-rated in the markets.

By last week then, it was clear to me that if the market is going to frustrate the most people (as it so often does), then one or more of the following would play true; heading into the post-election and FOMC QE2 announcement; both arriving now tomorrow:

1. The market refuses to sell-on-the-news.
2. The rally would be substantial prior to the news, before commencing such a convenient pullback.
3. The pullback, if so convenient, should not be bought (if the market allows this majority group the opportunity to finally get aggressively exposed to the market, as people are suggesting how they will respond to a pullback, I should give them my shares as well; let them make the money).

I don't have time to make a thesis about this now, but it works like this time and time again; when the future is predicted so consistently by so many who appear to be reading from the same script. Selling off now, on-the-news, in order for folks to buy ahead of a year-end rally, just seems too logical, too easy and too damn convenient.

These points may not surprise you, but it is the third possibility that you might want to make a special note of - that if the market let's these careful, logical players get aggressive with their favorite stocks - you may dodge considerable pain then in letting them have those year-end profits without you. Seasonality has played tricks on us many times since the March '09 bottom. There is no guarantee whatsoever that stocks are going to rise into the year end.

Not unless they are rising into the year end :)

Note on the position below: I'm up to 5.8-to-1 net-long exposure today (in centrifugal, pyramiding fashion;). I will be reducing exposure into the close, however, reducing the number of names long (now 13). This, because I need to be a little more flexible for the Fed-announcement tomorrow (too many kids in the intersection is a bad idea once rush-hour hits), but also because leadership has been a little sloppy lately, relative to the indices. If the market continues strong through Friday's employment report and for several hours into the Friday session, I will re-assert exposure aggressively. In the meantime, after the shift later today, I will keep firmly net-long, though smaller; at least until I see the market can begin selling-off.

Follow Centrifugal to fade trades in real time

Total Position: Currently 2.8-to-1 net-long, 108% invested (will reduce to ~100% or less by close)

Currently Long (according to size):
EWZ-Brazil (7.2%); VALE (7.1%); DAL (7.1%); CRM (7%); ULTA (6.9%); COH (6.7%); OVTI (6.7%); PPO (6.4%); LTD (6.1%); LULU (5%); MCP (reloaded today, 5%); DECK (4.9%); JBLU (4.3%)

Currently Short: CVS (6.9%); ZMH (6.8%)

Futures: Long 10% Dec SP500 (from 1175.50 entry yesterday); relevant accounts only

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