Friday, August 26, 2011

Dinosaur Brag Post (something re psychology)

The older I get the less I know - and I am ancient by now.

While I was largely on holiday this summer (the major reason I couldn't participate in the better short-minded sessions), I was confounded to hear so much conviction. More and more it seemed opinions flew, each time I tuned in, even as the dynamic became more and more...dynamic.

There is something about the human brain which demands knowing. Whether misguided or not is apparently secondary, answers are what the mind craves during times of tumult.

Since trading/investing is such a simple game, let's reduce the situation to some simple basics: The future is uncertain (contrary to what we'd prefer); the past will tend to repeat; the crowd will be nearly unanimous when standing on the wrong side of the ship; fear will drive markets up as well as down.

I'm no genius (the machine is the genius), but I'm good at measuring pressure vs. emotion. Yesterday, and again this morning it was clear that the pressure of standing against the bear-tide was not as severe as the emotion coming out of collective mouths; Wall Street's media mouths especially, but a glance at recent put-to-call ratios, moods of traders on Twitter, etc., said more than plenty.

If you are shorting a bear market and the crowd is in agreement with that action, you need lower-lows to be on the right side of that trade - period. There is nothing easier in a sick market than lower-lows, and since the launch upward from a reversal near lows can be severe, you need the confirmation of new lows.

Lack of lower-lows, coincident to increased pressure + deteriorated sentiment = potential imminent launch higher.

I will never short with the crowd when the market is not managing lower-lows (I will always cover if measurable pressure fails to violate previous lows). This doesn't mean I have to be long, but I've seen enough dramatic pivots to know that I should be thinking long when nothing but warnings and negative statements ooze from media sources, clients, traders, long-only pros, widowed orphans, little green men in tin foil hats, etc.

And it's an easy trade, since benching losses at nearby new-low levels affords a favorable risk vs. reward (the market stands to gain much more than the distance to new-lows and the market has a history of rising more than falling, even if more slowly; math is my strong suit ;).

AAPL, for example, could not manage anything close to lower-lows on the Steve Jobs news, opened at its lows and was down less than the NDX by mid-session (an index which showed clear resilience in holding off lower-lows, vs. the other major indices).

Yes, I could have gone on about this publicly yesterday, but I'm not trying to publish my bets in order to look good later. I'd rather keep objective and unselfconscious (which means I hardly post at all here anymore; since it requires getting subjective and conscious in order to let everyone know how smart I think I am).

So while the machines render me more and more useless, psychology remains a factor in markets and I still have something going for me in that department. It may require waiting longer and longer periods for gains like today, but psychology and its relationship to simple supply-demand dynamics will likely not cease in this lifetime.

Anyway, back in my cave for now. I'm booking a trip to Coney Island.

Follow @Centrifugal to fade trades in real time

Wednesday, August 03, 2011

Stuck Stuck Stuck (but not like a pig)

Unfortunately for me, drama waits for no one.

I finally got caught and with a third of fingertips on the stove-top. My real mistake was not selling Monday's open, as per the general plan; something of a blunder.

Aside from that I have no complaints. No one likes to lose money, but in this business when you do lose, you need the guy next to you losing much more. My year remains successful.

As for the market, there are more dedicated views than mine just now, but I'm not particularly bearish (and certainly not bullish). There are numerous broken heroes and subsequent industry groups (always a recipe for caution). And yet, damage to the indices, relative to the drama, has not been especially devastating. We’re flushing now, which can mark a short-term low, and while there is a flurry of lower- lows (certainly compared to June-lows), new 52-week lows are far from significant. In other words, the broad market might be less unhealthy than the surface and certainly vs. the current emotion and sentiment.

The environment is still tricky and being aggressive here (long or short) is perhaps ambitious. I’ll continue with a low profile, but if I can see a tradable bounce (perhaps off of today’s lows) I might push aggressively for a day or three and then back-off again. Otherwise I'm just looking at stopping out of positions (late-session if without severe volume + downside). The current portfolio is damaged, but less so compared to the market; I’ve just had too much of it for this week, and without any hedge since last week.

Take what the market gives you and be patient when action is tricky. There was plenty of short-side opportunity lately, but that requires serious attention and I've been in summer mode. You are young and can last all year, so you’ve been able to take advantage of the volatility; you got me there ;)


That's my thoughts, in rambling fashion; for the record if nothing else.

Follow @Centrifugal to fade trades in real time

Total Position: Currently 100% net-long, 34% invested

Currently Long (according to size): JNJ (9.4%), BMY (8.2%), VRX (6%), ACTG (5.9%), RBN (4.8%)