Changing Conditions

Discussion in 'Trading' started by MarketOwl, Jan 9, 2010.

  1. One of the keys to being a successful trader is to quickly identify changing conditions and adjust. That is what makes trading interesting. The markets are always changing.

    I am guilty like many others of not adjusting quickly to the changing market environment. In many ways, I am still in 2008 – 2009 bear market mode, expecting sharp selloffs coming frequently and unexpectedly. Volatility was high so I had high volatility expectations. That got seered into my brain. But the stock market has made a dramatic transformation. It is now a dull, low vol market that just goes up slowly and steadily.

    Part of the problem is that we¡¯re all still transfixed on the bad economy. That colors our thinking about the current stock market. We are afraid to go long for fear of a sharp drop. Yes, eventually the stock market has to reflect the economic value of the companies in it. But in the short term, the economy can be horrible and the stock market can keep going up. And odds are that the economy will get better, just because it got so bad. There is mean reversion for economies as well. The economy is cyclical. The economy bottomed in 2009, its unlikely that it will form a top in 2010.

    Many are still focused on where we¡¯ve come from in 2009, not where we are in the big picture. Sure, we¡¯ve rallied over 70% off the March bottom, but if you look at 2009¡¯s performance, it was 24%, not 70%. On December 31 2008, S&P was at 903. On December 31, 2009, it was at 1115. And if you want to go back 2 years, we were at 1468 on December 31, 2007. So you can say we¡¯re still down 22% from the beginning of 2008.

    How am I going to adjust to these changing conditions? I should have followed my 2010 view ( ) more closely, but I am stubborn like many traders. Starting from now, I will wait for extreme overbought conditions and other supporting factors to short. Not just overly bullish sentiment. And I will start to go long more often on dips. I will temper my profit expectations due to the lower volatility. Until the majority get much more positive on the economy (NOT the stock market), I think we¡¯ll continue to grind higher with only brief dips.
  2. The overnight market is up again, traders are ramping up the futures, especially the commodities along with the weaker dollar. Feels like the 2nd half of 2009 again.

    I haven't calculated the statistics, but it seems like every Monday has had a gap up for the last 10 weeks! And not just small gap ups, some of them were quite sizeable. Anyone short this tape? And why?
  3. snp500


    I'm not short, but am watching and waiting for an opportunity.

    Looks like Oil wants to break above its recent highs which could potentially shove the equity markets higher.

    I would caution against buying the immediate EuroCurrency breakout as I suspect it will fall back into its range. If it does, then that would mean support for the dollar and a potential correction in equities.
  4. We are close to the 1150 target that many had set for the S&P 500. It should at least be a temporary lid on the momentum of this market. Also, oil and gold looks overextended on 60 minute time frames. But after chopping near these levels, we should move higher again. Earnings will beat expectations ad advertised.