How are you positioning for the eventual Market top?

I would have to agree with that Bloomberg assessment. I’m still doing well with longs with tight stops (because of the low market volume). For example I added NUE today to longs on a good pop. But it has not had much follow through with other trades so my stops will be tight.

For this market to turn it will probably have to be a big catalyst. It may come from some earnings this quarter. But I am not betting on it. With the dollar up I’m curious how this will affect the profits of multi-nationals like Coke and McDonanlds?

 

Rabbit ...

You need at least a bit of substance to make it a post worth reading.

 

For once I agree with you completely. It is difficult to communicate with your posts that begin with …. arrogant ….. imbecile. From the time I see these words I no longer take your posts as having any “substance”. So instead I include my own brand of “substance” – those are many famous quotes from the movies and television that others have written. They seemed appropriate when you began to characterize me personally with unflattering subjective terms.

In my 40+ years of trading in these markets I have never heard anyone call a market state like this as the “general condition of business”. These are “extenuating conditions or circumstances of conducting business” These are not times where business is conducted as normal using general or generally accepted business practices. Businesses have had to take on extraordinary business measures during theses times to keep from being down sized, acquired or going bankrupt.

Then there is the heart of these discussions. Two general rules of economics (Econ 101) appear to be at the heart of what we discussing:

1. When government prints money it will flow through the economy then end up in the markets.
2. When governments prints money with great excess for extended periods it creates bubbles.

The first question we are all debating is rule number 1. Is it working as the text books say it should? Are all of the vast sums of money that are being printed propping up or rigging the markets? There are several reports (I have not relocated them) that each time the fed bought 10s of billions of mortgages that the stock markets rallied with in a day or two on a number of occasions (which was reflected in the ES). These reports have flooded the internet saying the markets are rigged. With pullbacks in the markets less than 10% since last March 2009 it has fanned the flames of this argument.

The second aspect of economics is that if a bubble occurs from the government’s printing money with great excess for extended periods, “What will happen?” With this second aspect of money printing is “Where is the bubble?” Many others have stated markets are acting normally and these dollars will instead end up as hyper inflation and the collapse of the dollar.


On a curernt note now that the feds huge by mortgage buy back program has ended. Speculation is growing the markets will have a major set back. Like this article from Morgan Stanley:
http://pragcap.com/morgan-stanley-stocks-are-set-to-decline-in-2010


So the question still is “How do you position your self for the eventual Market Top?” regardless of what starts the markets top.

 

Then there is Jesse Livermore and his general conditions. Here are some of his quotes:

Reminiscences of a Stock Operator

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! Wait until you see or if you prefer, until you think you see the turn of the market; the beginning of a reversal of general conditions. You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent. (Chapter V pg 55)

Well, that man can't sell at will. …As a rule he will have been waiting for it. He has to sell when he can, not when he wants to. To learn the time, he has to watch and test. It is no trick to tell when the market can take what you give it. But in starting a movement it is unwise to take on your full line unless you are convinced that conditions are exactly right. Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don't make a second unless the first shows you a profit. Wait and watch. That is where your tape reading conies in to enable you to decide as to the proper time for beginning. Much depends upon beginning at exactly the right time. It took me years to realize the importance of this. It also cost me some hundreds of thousands of dollars…..…. (Chapter VII pg 71-72)

From reading these Livermore words again he is talking about general conditions as though it were the technical analysis of that day. It implies that with snippets such as “a reverse of general conditions...” or “ conditions are right to buy and sell…” This is not the same as the “general business conditions” that we are saying is influencing the markets.

 

Read:
Reminiscences of a Stock Operator
~ Edwin Lefèvre (Author), Roger Lowenstein (Foreword)

There is substantial attention given to how one trades at market turns. And a substantial effort to explain and illustrate the importance of General Conditions.

It is a classic ... or more accurately the classic.

Bull Markets and Bull Runs almost always end with stocks "rolling over" individually as opposed to en masse. If you have sufficient capital you put on shorts as each rolls and fails to get back to its former high but instead starts back down following its rally.

At a point you find yourself short a handful of names with some profit in each. Then you wait. And you frequently wait much longer than you imagined possible. At some point they start on their next leg down and you notice that they are followed down by some pretty well regarded names and everyone is saying they are a bargain. And then you wait again.

It's not about committing most of your capital early. It is about committing a small piece of it to short stocks already in decline and then observing the next batch as they roll over. Catching the early part of the move with most of your capital is a very high risk way to play it. Make small plays and then stop. Be sure you have a decent profit in the majority (at least three out of four) of your early shorts. If some of those early plays come back through the upside and start costing you, close it all out and accept you were too early.

Rinse and repeat with a view toward not letting the small setback cause you to miss the real move.

If capital is limited you will obviously want to use ES, NQ and/or TF.
Be very, careful not to be early. It is OH SO EASY to be too early when you think general conditions will rule. They will but not on your schedule.

And be very careful not to use much leverage early on. It always looks safer when the market is insanely high but in fact it IS SAFER when those highs are history. View the running bull as a beast. Let others with bigger caliber weapons bring it down. Once it is mortally wounded it is time to be brave and join the battle

I can think of nothing as useless as thinking of large liquid markets as rigged. It is actually even worse than useless it is dangerous. It obscures reality. No one has rigged the markets they have used trillions of dollars to TEMPORARILY change conditions. But, and this is the key ... they have changed the conditions for now. It is not an illusion. It is real. I believe your underlying premise is that these conditions are not sustainable ... and that is certainly an opinion that can be acted upon when the time is right.

It is really not about catching the top. It is about recognizing -- through observation -- when the damage has been sufficient to eliminate most of the risk of the market mounting one more explosive rally. That last rally can rip your balls off just as effectively as a rally that has more staying power. The market does not have to stay up to disembowel the shorts it just has to go up.

Being a bit late to the party does not mean you don't get to take the blond home who has had one too many. All it means you don't have to listen to her slurred nonsense as long as you would if you had arrived on time.

You position yourself by being sure you have the cash to profit from the real move ... not by speculating on the froth and noise.

 

Finally, an anecdote to which we all can relate.

 

Here come intraday highs on the indexes.

 

I agree 100% with you and what Jesse Livermore said about “Trading” general market conditions (and your fine quote below). I have read this work several times. Many of these fine sentiments are also part of my trading plan. I believe no one to this day has described better than he has how to define the probable trend and take advantage of that trend.

We seem to be at odds with the terminology and use of the word rigged. So let us scrap that word since it seems to be at odds with classical writings and draws out such deep held feelings about how these markets operate. There are other ways to express what has happened.

For all of accolades and honors I would bestow on Livermore he has IMO failed in one area that is critical to understanding how markets are influenced. By this I mean he did not to any great degree stipulate a set of rules of thumb for the trader in dealing with the influence of government on their trading.

To get a better prospective on the role government has played for centuries in destroying commerce (and trading) it is better documented IMO in Extraordinary Popular delusions and the Madness of Crowds. For example the south sea bubble it was stated:

“….In a prophetic spirit he added, that if the plan succeeded, the directors would become masters of the government, form a new and absolute aristocracy in the kingdom, and control the resolutions of the legislature. If it failed, which he was convinced it would, the result would bring general discontent and ruin upon the country. Such would be the delusion, that when the evil day came, as come it would, the people would start up, as from a dream, and ask themselves if these things could have been true. …”

This bubble of cheap housing was no different than the government madness of the Mississippi and south sea bubble: the Florida and Las Vegas boom of 2009 sounds no different to me than Florida boom of the 1920s. They are all bubbles that break.

Our government in recent times has created undue direct or indirect influence on how businesses and markets may function (which can facilitate bubbles.) This was also the case in the Livermore era. The trader can no longer sit back and trade with blinders on and ignore the role of government in their trading. This undue government influence is costing us the tax payers trillions and slowly redefining how we all trade.

So the question is: where is all of the printing of government money by the truck loads going to settle? Is it going to evaporate on its own or create a new bubble? Is it finding its way in to our stock market and buoying (notice I did not say rigged) prices?” Or will it “Go into the hands of consumers to create spending, then hyper inflation and the collapse of the dollar?

If inflation takes off I want to be prepared with trading strategies that will handle these markets especially if they become volatile. If money continues in to flow in to these current stock markets than I may trade them like I did from 2004 to 2007. But the bottom line is I as trader can no longer sit idle and ignore the economic affects that government is pushing at the markets. I must be proactive in deciding how this will influence the trading strategies I select. If we are not prepared for government actions we may be crushed by them on the trading floor.

 

^^ Get a life ^^

 

Financials yet again pushing new highs, markets nearing green already, the upside manipulation continues. A brief pullback followed by a slow rise to about even and then the breakout.