Thursday, December 13, 2012

Confusion Compounded

The markets moved as expected and yet the confirmations of the roll-over are eluding us.

For e.g. I need SPX to close below 1410 to short it. The futures touched 1410 after close of the cash market and did not break it and are now creeping higher. I was looking for NDX to close below 2640 and here also it was close but not close enough to give the confirmation.

Same story with oil and silver.  I was looking for silver to close below $ 32.50 and despite intra-day below that level, silver did not close below that line in the sand. Oil did not close below $ 86 which would have made me comfortable to short it again. The US Dollar index stayed in flat line around 80.

All in all, it was kind of teasing frustrating day. Fingers itching to short and yet system tells you to hold on. Mind plays tricks that gosh, we are going to miss out and discipline holds back. I keep reminding myself it is not about winning the battle; it’s about winning the war.

Now, things may change overnight. /ES (SPX Futures) may test its high of yesterday and rollover and I would be happy to go along. But as of now, my belief and trading are not in sync and it would be foolish to risk capital based on belief and hope without confirmation. Giving up part of the profit while waiting for confirmation is more worthwhile than losing capital.

Let us keep in mind, time is running out for any meaningful short trade and that applies to all asset classes. We have max till end of the year for the cycles to bottom. While the downturn can be violent and severe in the next few days, it can also move sideways and create lots of whipsaws. That why confirmation is so important to me at this point of time.

For those of you who read ZH and have been brainwashed in believing that the end of the world is close, you may have read something idiotic like : "The Fed's QE half life is now down to 30 minutes of effectiveness."  This is far from truth and the system does not work like that. The best analysis of these kinds of stupid comments has come from Josh Brown of “TRB”:

First, the Fed is not a daytrader. They certainly don't make an announcement about hundreds of billions of asset purchases with the intention to "mark the close" on the day they announce.  Rather, what they are attempting to do is provide more time for housing to get off the mat and to push investors into riskier assets to improve credit conditions, balance sheet flexibility, and, indirectly, consumer confidence.

I'm sorry to inform those who are perpetually rooting for the next cataclysmic shoe to drop, but so far they're accomplishing these goals (even if not their greater, overarching goal - improving employment).  The housing market recovery is no longer up for discussion and one needs look no further than the inflows into high yield debt of all sorts to check off the "riskier assets" box on their scorecards.  As for consumer confidence, I am not a believer that the stock market is very important for the wealth effect (impact from housing is 10x that of the Dow Jones) but a glance at the market-leading consumer discretionary sector should tell you all you need to know about that.
But to pronounce a trillion-dollar program like this "DOA" after only a few hours' worth of trading is moronic. Please tune out the Twitter-addled, short-term myopics  who do so. They're living in a different world, one in which every headline is "playable" and every jerk in market has some kind of meaning.

It doesn't.

The Fed will continue to make cash intermediate-term inhospitable and bonds asymmetrically risky.

Act accordingly.

Very nicely said.

And it was one of the reason that I closed my short trades yesterday even when I continue to believe that risk assets have some more to correct.

Yes, the Fed will eventually blow things up but we do not want to be too early in the game, waste our capital and then miss the opportunity. May be that is what the doom and gloom gang want us to do.

If I have to pick up a mascot for my trading / investment style, I would choose “Leopard” . Silent like a shadow, fearless yet risk averse, when faced with a bigger or tougher opponent, it will leave its kill to retreat to fight another day and hunt another pray. Above all, opportunistic and patient.

Lets learn our hunting technique from this predator.