How To Separate Yourself From The Dabblers
After the close
yesterday, I sent out the following email to the subscribers of my
trading room:
base with you regarding trading lately. No, I have not lost my mind, gone
into severe lazy mode, no, not at all. It is simply a reflection of
summertime trading. And yes, after trading through 10 summers, I have learned
to be, shall we say, somewhat uninterested. Sure, opportunities arise, but
not enough to warrant staying glued to the screen all day.
down the expectations and focus mostly on the opening, the afternoons are
challenging and simply not worth the effort. Please avoid reading charts
after the fact and thinking "If only", it was not that clear at the time.
Enjoy the summer, the
Fall should prove to be interesting giving all the uncertainty still hanging
over the market.
Dave
Let’s face it, when the market is quiet,
short-term traders do not have too many outlets, or much to discuss. Over the
years I have slowly been drawn to macro analysis for longer-term
trades/investments; for me it is an opportunity to expand my horizons and engage
in what is surely the most fascinating puzzle of all – the direction of the
markets. As Richard Russell commented in his piece last night,
"But it’s the old story — the market always does
what it’s supposed to, but NEVER WHEN."
That is truly the level of understanding one
needs in order to protect one’s capital. I can remember when I first started
really delving into the macro stuff. If the argument/analysis made sense, act
upon it. Well, that was certainly painful. The analysis could be spot on, but
the market may simply care less. This has certainly been the case over the last
three years; larger problems are often ignored. This is OK if you continue to
adjust or re-evaluate your analysis day-by-day, week-by-week, and wait for
things to set up just so, technicals, internals, sentiment etc. Frankly, it is
the constant observation of the markets, and usually the subtle things that tip
you off as to whether or not your analysis is correct or not.
I had the good fortune to meet with a pretty
influential analyst and hedge fund manager on my recent trip to Seattle.
Anytime you meet with peers, (although in this case I was certainly the one who
was the pupil) you garner some insights. The one thing that I noticed was that
each had their own distinct viewpoints, all well thought out and researched.
Nonetheless, each was continuously turning over stones so to speak to see if
anything had changed. One guy was simply talking to contacts in the industry
practically the whole time we were meeting. "What are you hearing?" "Does
their design process really offer an edge, if not, why do they command a
premium?" And, while enjoying a nice glass of wine watching the sun set over
Puget Sound with the other guy he remarked, "I have been spot on in my analysis
for 15 months, I am concerned that I am leaving something out, what is the wild
card in all of this, where is my risk?" "What are your thoughts on gold?"
So while technical analysis played a part in
their overall approach, it was the "feel" they had acquired over the years, and
their grasp of the underlying fundamentals that seems to separate them from the
dabblers of the profession. I truly believe that a good solid understanding of
macros provides you a story, with which your level of conviction can be based.
Perhaps it is the way I am wired, or maybe it is true for most, but if the
"story" jibes with the chart, my conviction is pretty strong. There is simply
comfort in a story. It is that conviction that allows you to endure the
inevitable noise that accompanies longer-term trades.
I think it is fair to say that up until the last
few days I have been anticipating that the break of this trading range would be
to the downside. Naturally I had no reason to bet the farm on this, but when
the S&Ps closed below 970 last week, I dipped my toe in the water. Naturally it
appears that the analysis is proving wrong at this time, or at the very least,
premature. Nonetheless, Summer trading needs to be factored in. Even factoring
that in however, the market as well as the statistical evidence is beginning to
demonstrate that it is time to cut the loss. With the Fed determined to keep
rates low, on the short end at least, and economic statistics backing up the
recovery argument (at this point I still feel it will only be for a few
quarters) and the major indices worldwide not having any significant pull-backs,
it is beginning to look like the upside of the range is about to be tested.
Based on this I may simply flip the position, I will see how today plays out,
but the market is starting to speak.
A long-time ago a colleague turned me on to On
Balance Volume (OBV). I have found it to be a valuable tool for longer-term
as well as intra-day analysis. I was going through my charts last night and I
noticed one other item that adds to my reasoning to pull the plug on this short
and go long. OBV is making new highs, ahead
of new highs in price. Naturally, this alone is not enough reason to make a
trade, but for me it simply represents more evidence that my timing/analysis
might be wrong.
But wait, what about the ultimate wild card right
now, bonds? Ah, good point. While rates have spiked up, they are still low
historically, but any further sustained rise will certainly throw one more piece
into the puzzle. The chart below, using simply OBV
as the guide, indicates that the 10-year Treasury may in fact go lower (TLT’s
are the iShares for the Lehman Brothers 10-Bond Index), driving up yields. A
colleague who does "spec" trading in treasuries for a large firm in Boston says
that the yield on the 10-year needs to stay below 4.5%, it closed yesterday at
4.40%, again, one person’s thoughts.
Lastly, the dollar seems to be getting some
footing after its recent bout with gravity. While the trend is still clearly
down, any bounce will be a positive for the markets. A stronger dollar will
also allow the Yen to appreciate, something I am currently long but looking for
a break of 115 in order for sizable gains to be made.
So, is my short-term pain leading my analysis, or
am I being objective? Tough call, however, the markets reluctance to go lower
despite a bond market rout and no real negative economic news does require some
deal of respect. Whatever the outcome, I will once again walk away with some
lessons as well as continue to search for clues to market direction.
| Support/Resistance Numbers for S&P and Nasdaq Futures |
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As always, feel free to send me your comments and
questions.