Sunday, September 25, 2011

Trader's Ed (Red Asphalt edition)

Let's admit, some of what we saw last week was ugly.

Unwholesome actually.

Significant cracks re-emerged in the markets and I’ve backed-off, for the moment at least, my game plan of re-loading leadership longs into the resumption of your damaged mood.

As I’m prone to becoming cheeky when inspired, at times, I have to be disciplined and adjust the playbook when action in the market surprises me. This is especially true when forces larger than me aim for my head with ribboned toothpicks.

Animal spirits are fundamentally dampened now (which is important). Yes, yes, there were excited hopes of a bounce born Friday, but that’s a standard psychological response from men of business media who had their nuts up in a noose the day before. They’re just happy breathing, if you know what I mean.

This wasn’t the higher-low downdraft my salivary ducts were counting on (not yet anyway). For that strategy to maintain a positive expectation value, your mood should be ugly, certainly true. But coincident to lower sentiment, there should be clear indications of improving strength in the markets at the same time (a market making higher-highs and higher-lows from a previous month’s shockwaves, coincident to lower-lows in the prevailing mood, for example. We had something like that building before last week).

Negative sentiment, in and of itself, is not a bullish signpost. The worst elevator drops in history appeared coincident to negative sentiment and oversold conditions (re-read that line if you think an oversold market is a positive set-up). You need to see real strength (not merely value), coincident to the brood storm. Otherwise, you need to wait for a better market.

Then there's this anecdotal religiousware I use to preserve my neck from time to time: Severe damage can only persist for so long before everything becomes vulnerable. The path of wrath (if you will), when sufficiently inspired, sinks all ships (even if some more than others).

So, while I remain an idiot still and I can’t help but keep excited over the opportunity to get long leadership stocks, this nutcracker of a week was more than my balls were bulging for. I did get short ahead of the carnage (incroyable!), but the best strategy would have been simply to cover shorts during the panic, and go buy a couple of nice sweaters. I added several leadership longs during Thursday’s tumult instead, and three out of four of these silk-knits traded up from that point Thursday (which is a feat), but failed to exhibit any power then when the pressure came off on Friday (which is frightening). Friday should have been the gravy day for leadership, but the gravy was cold. Not a good sign.

If you’re trading aggressive leadership and your portfolio is acting aces on a flat market day, the next day the general market wakes up as well (hot money is the first to move). On days when your portfolio is going nowhere, however, while uglier merchandise is bid-up, the next session or two typically marks the beginning of a downdraft. When you buy leadership, you are ahead of the curve – for better or for worse.

And that is the point taken from Friday’s sermon. Leadership, which had sustained pressure so well (again!) on Thursday’s mega-drub, did not behave like the proverbial bar of soap under water once the pressure came off (the IBD-50 actually dropped .5% Friday and losers there had significantly higher relative-volume than did winners; the sort of action which terrifies me when I’m long of the same sack).

These lovelies should have popped right back to levels ordinary people are again uncomfortable to buy. They did not.

To be sure, I’m a bit of crackpot (crackpot scientist, actually). What you may not have realized though, is that, having failed to excel in the really advanced physics and math courses, I’m also something of a logician. Here is how I see the present situation:

1). When leadership fails to advance once external pressures come off, or if it is under-performing in that advance, it is likely to move lower instead.

2). When leadership is the only building left on the block that hasn’t been sufficiently hit and severe hits keep coming - leadership is going to get hit.

There’s no rocket science to this analysis. As a matter of fact, rocket scientists are too smart for such pedestrian logic (those guys have been short since 1999!).

In a true bear market, everything gets hit eventually. The group of stocks which held-up so well during the first few shockwaves, should get salted now if subsequent waves continue to appear; even if but for a session or two.

And hey, maybe not. Maybe we rally from here and for more than just a bounce. I don’t really mind. I can catch the next train (especially if it has left the station and you’re uncomfortable to pay-up and get aboard). It’s easy to pick fruit when it’s staring you in the face and your peers are primarily running for cover. But if fruit is no longer present, well then maybe there’s something to all the fuss. Hunting for squashed dimes near tracks of trains carries a negative expectation of value.

I need quarters to behave like that.

And it’s more than this subtle characteristic of Friday’s tape that has me fearing the quality of fruit. The smartest economist, we all know, is the price of Copper, and carnage was bathed in technicolor in in that market last week. Prices managed lower-lows on Monday (nothing sensational), but then accelerated into oblivion from that point forward (Copper fell 15.7% on the week, 18% counted to the low). Energy and softs were cemented and tossed from bridges as well, while Treasuries held firm and the Dollar strengthened. These are deflationary signals - signals that are screaming in concert now (hopefully for this weekend only).

Deflation is pretty much the market's worst fear.

I didn’t mention Silver. Put the children to bed and consider that Silver dropped 22% in two days (25% counting to Friday’s low). Train wreck is too kind a word right now for silver. Commodity futures trade 10x leverage, so that’s roughly a 220% loss in two days, in laymen terms. Those are Red Asphalt returns in Silver last week.

By the way, If you can’t watch that clip without getting sickened, you should not trade commodities (you probably shouldn’t anyway, but that’s another story). There are people with similar stubs for heads this weekend, having the misfortune of a bad trading week in commodities. As that movie once said (back in Trader's Ed and long before you were born, I think), “whether he failed to see the stop signs, or simply chose to ignore them, no one will ever know - but this account is dead.

Very good, I was wrong to suggest another wave of suffering was all I needed to re-load leadership and drive these stocks up into Thanksgiving. I’m sidestepping that plan for now and keen on letting leadership have its day in court (she’s a witch!)…Before considering my same strategy of driving these names higher into Thanksgiving (!).

If (as in, IF) there will be another shockwave this upcoming week, I’ll lay money the NDX, which held up so well up to now, is going to get clown-dunked; even if for one or two sessions. We’ve seen a desperate grab for liquidity lately, over a wide and certain swath. On Friday the NDX’s number just came up.

Step up to the counter cowboy, Swedish meatballs are to die for.

[I’ll be posting a screencast regarding the subtle flaws of Friday’s leadership tape. A pseudo science explanation on why I am now, temporarily for the time being, short the NDX, and in particular, the Apple Computer.]

Follow @Centrifugal to fade trades in real time

Current Position: Equity accounts are 2.1-1 net-short, 108% invested

Currently Long (according to size): LO (9.9%); ATHN (8.7%), ULTA (7.9%), CELG (7.3%),ROST (7.2%)

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...due to relative beta vs. current longs, QID is weighted at 1.75 x's (not 2x's) in the net-short calculation.

Futures: Short Dec SP500 mini from 1134.25, 5% of accounts

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