Weird. Just weird. Today's rally puts us in 100% cash. There was no pressing at all (via no confirmation), and in fact no new positions taken and old positions lifted. This action feels very unnatural: * Why would markets push so hard on more b.s. from Europe, even after the U.S. earnings situation deteriorated so quickly? * Why would so much strength materialize out of nowhere, when chart patterns were previously broadcasting clear weakness (and confused positioning)? * Is a Europe based "all clear" really that much more of a firm possibility now? Something smells fishy, or at the very minimum doesn't make a lot of sense. The one scenario I gravitate toward for a close this strong, against such a decidedly weak-and-weakening backdrop, is some kind of coordinated push behind the scenes -- the kind that comes at seemingly the oddest times, because it's deliberately meant to counter rapidly building danger signs and head off an implosion. We are happy to ride legitimate trends and just as happy to ride false trends, when we understand the drivers. But when things get weird we neither fight nor complain, but step aside. Spidey sense says this move is still false, and that it will merely fuel opportunity for more aggressive shorts (which confirm w/ follow through) in the next few sessions. We shall see...
I was going to ask you yesterday morning if you were prepared to play the long side if the action confirmed. (Not that I would even pretend to know in advance which way it would play out.) Your subsequent post answered my question. And so, I have another question for you. You may or may not recall that we've had an exchange about fundamental biases as input variables in trade decisions. I recall you said that you think fundamentals together with price confirmation make for the best trade decisions. It is hard to argue with the logic of it. However, I'm curious to know if you had ever taken the time to review the markets you trade but from a purely price action standpoint, and determined what your trades might have been, based on the same technical criteria you would have used had your fundamentals fallen in line, except to the exclusion of all fundamental considerations. Stated differently, I'm wondering if you ever tried to establish something of a TA baseline from which to determine the tangible added value of your fundamental biases.
In this particular instance, there was no desire to play the long side because the underlying technicals were bad, the rationale for the rip was bad, and the key driver turbo-charging the ramp -- an additional statement from Merkel / Hollande that the euro would be saved no matter what -- was unanticipated. While the sheer force of Friday's "risk on" move was impressive, ranging across bonds, commodities and currencies as well as stocks, something still smells funny here. Either the math doesn't quite add up right -- all this on more hot air, with the Bundesbank wasting no time opposing? Too fishy -- or we could be looking at an inverted fear move, where long-side managers -- who fear the career risk of being caught flat-footed in an upside ramp more than they fear losing capital, as long as their colleagues lose alongside them -- felt compelled to plunge in lest the market leave them behind. It's hard to answer this question because we wouldn't know how to answer the plight of the pure TA trader: Which instruments do you trade in the first place? CTA trend followers restrict themselves to a defined universe of futures contracts. E-mini traders and various day traders also restrict themselves either to one instrument or a handful of stocks they follow. But when you are willing and able to trade everything -- stocks, bonds, commodities, currencies etc -- the notion of using TA alone becomes highly impractical, unless you are willing to build some pretty complex software to sort through hundreds of price interaction variables. TA furthermore doesn't tell you when to vary position size, a key element in our trading... how to adjust horizontal and vertical exposure, another key element... or most importantly when to swing from the heels, one of the most important elements of all. Price action is a vital aspect, but from this perspective, trying to trade with "just" TA would be like taking a 3-dimensional process and making it 2-dimensional.
Heading into this week we will be looking for shorts on the individual equity side. One virtue of Friday's big ramp is the revealing nature of "the dog that didn't bark," i.e. which names did not get taken higher along with the risk-on flood. A desire to seek out shorts is partly just good swing trading practice - after a ramp like Friday's, most of the stuff that was poised to move higher in the short term should have already done so. If you have a long setup heading into Monday morning where the name did not already respond on Friday, then there may be something wrong with it. Meanwhile, the converse applies to potential shorts. As the old saying goes, in a windstorm even turkeys will fly. Any turkey (bearishly poised vehicle) that did not fly on Friday is heavy indeed. From a bigger picture perspective, we are emotionally, strategically and tactically neutral here. This latest move looks and smells like hope jag b.s., but if it develops into some kind sustained trend rationale that's fine. We take no issue with riding a false trend as long as 1) the drivers, even if they are stupid, have at least some semblance of near term sustainability, and 2) we can find a tactically attractive spot to hop on. In the absence of 2, no biggie. Our ability to dial up or dial down exposure quickly is such that we can go from 0% net exposure to 150% net long or short (just to pick a number) in a matter of days or even hours, given the right inflection point, which further means annual P&L is by no means constrained or threatened by a period of kicking back in cash with our feet up on the desk. The market can and will do what it wants, and from time to time what Mr. Market wants to do is act like an ass, in part because of the perverted incentives of many large market participants (long only money managers, congenitally incapable of using risk points, who fear lagging their benchmarks more than they fear a loss of capital, thus 'beta chasing' at the wrong time and later blowing out positions to the downside when the macro gives them a frying pan to the face). Maybe we are 'gifted' a bigger roster of shorts next week than expected. Or maybe it's chillin' like a villain with no triggers. Either way is fine, we'll see.
John Hussman is clearly getting frustrated: http://www.hussmanfunds.com/wmc/wmc120730.htm The enthusiasm of investors about central-bank interventions has reached a pitch that is already well-reflected in market prices, and a level of confidence that with little doubt, investors will ultimately regret. In the face of this enthusiasm, one almost wonders why nations across the world and throughout recorded history have ever had to deal with economic recessions or fluctuations in the financial markets. The current, widely-embraced message is that there is no such thing as an economic problem, and no such thing as risk. Bernanke, Draghi and other central bankers have finally figured it out, and now, as a result, economic recessions and market downturns never have to happen again. They just won't allow it, printing more money will solve everything, and that's all that any of us need to understand. And if it doesn't solve everything, they can just keep doing more until it works, because there is no consequence to doing so, and all historical evidence to the contrary can finally, thankfully, be ignored. How could anyone ever have believed, at any point in history, that economics was any more complicated than that?
Second-hand lambo indicator confirms Hong Kong slowing (and thus China) http://www.bloomberg.com/news/2012-07-29/used-lamborghinis-linger-on-h-k-lots-amid-china-lull.html
How Microsoft lost its mojo - Vanity Fair full piece (previously firewalled): http://www.vanityfair.com/business/2012/08/microsoft-lost-mojo-steve-ballmer Is there anyone out there who actually thinks Monkeyboy Ballmer is doing a good job?
Debating on ET <iframe width="420" height="315" src="http://www.youtube.com/embed/javSZpWtodk" frameborder="0" allowfullscreen></iframe> Don't bring a knife to a folding chair fight