Wednesday, January 19, 2011

Updated Position (damage control action plan)


While I had positioned myself nicely for such an accelerating momentum death-wash, I covered out of that plan too soon and without any spoils to show for it.

Looks like I picked the wrong week to stop sniffing glue.

I am not aggressively net-long, fortunately, but some of my position is capable of finding the woodshed and I'm in a bit of a spot as far as that is concerned. Here is my outline for getting out of the predicament, and go find some other bloodsport (if I end up on vacation, something will have to pay):

-Given the sizable degree of selling and increased emotion in the after-hours session Wednesday (both suggesting we'll see a reasonable gap-lower Thursday), I will be buying, not selling, the opening minute tomorrow morning (or possibly pre-market, depending). Momentarily then, I will be further net-long, in this case.

-If the open is less dramatic, or higher for some reason, I will do nothing early or else begin selling.

-If internals are deemed severe-negative (my judgment after the initial minutes of the session), I will not buy beyond whatever I have done by the open, but will quickly begin to neutralize (via mammoth hedge) and then begin bailing out the problems one by one until I'm essentially liberated. In this scenario, I become more and more net-short as my longs are further and further reduced. I would ultimately unload most or all the hedge then by late-session (earlier if there is a miracle recovery; not at all likely when we see severe-negative internals*).

-If internals are not severe-negative, I may add further long (on top of whatever buying accomplished by the open), but then I will begin reducing long-exposure on strength, accordingly. The new buys will theoretically be profitable and subsequently other improving longs will minimize net-losses on the session. My exit is especially graceful in this case.

-Ultimately then, regardless of how tomorrow plays out, I am going to scale to a smaller position; even if I get momentarily larger first. After reducing exposure (as gracefully as I can manufacture), I will let the market define itself some before re-committing with any size (whether long then or short).

This has been a great bull run and the market is perhaps at an interesting crossroads. This may be something of a normal correction within a bull market, or something more sinister. I try not to care. Nothing should surprise us anymore - not even a dull, trendless market which has you catching up on too much sleep.

One bellwether worth watching Thursday will be Salesforce.com (CRM). This name will gap lower with the FFIV woodshed party already in progress. Watch and see if CRM's action is ultimately accumulative or distributive; from its opening price onward. The name is a thermometer still and indicative of general near-term market health (some of that thermometer will heat up my ass, depending on how bad it is; I remain long here, although a multi-month winner).

Don't try any of this yourself, or at least not because of me. This post helps me focus my plan and my thoughts and I share it for information only. Thursday should be an exciting day - trade 'em well and be disciplined - your discipline.

Best luck.

* Severe-internals is when market breadth is running >8-1 negative in the opening hour and/or greater than 6-1 negative after the first hour. I generally never expect the potential for a market reversal when internals are severe-negative (or severe-positive, as the case may be).

Follow Centrifugal to fade trades in real time

Total Position: Currently 1.46-to-1 net-long, 91% invested

Currently Long (according to size): CRM (reduced today, 14.8%); OVTI (10.1%); CYMI (9.9%); MCP (reduced early today, 9%) ULTA (15.6%); PPO (reduced today, 7.9%); MIPS (reloaded today, 5%)

Currently Short: CMCSA (reloaded today, 15%); DISH (10.1%); (NDX index via long-QID, 9%)
...currently weighting QID at 1.5 x's instead of 2 x's on net-long calculation.

Futures: no current position.

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