Is The Cat Out Of The Bag?
While I do not think my observations are
necessarily indicative of a new leg in a bull market, I have to admit, just
about everything I read in the press this weekend was very negative. The reality
which is setting in on Wall Street (no surprise if you have been reading my
columns or paid attention to objective and insightful analysts), and while that
may change the overall tone of the market for many months, it will perhaps offer
some reversals as the "not in the know" money begins to sell en masse.
The majority of headlines and stories I saw this weekend were the following:
"Weakening US Dollar Puts Pressure On Markets"
"Gold At Two-Year Highs"
"Rate Increase Looks Unlikely By Year End."
"Profits Recovery In Doubt."
"Consumer Debt At All-Time Highs."
I view these headlines and derive two conclusions, and I suspect that many,
let’s say "skeptical," observers like myself feel the same way. We
have been proven right for the time being and have been rewarded with positions
that reflected what is now becoming commonly accepted economic conclusions. Just
a few months ago these ideas and predictions were deemed nonsense.
Secondly, this sudden "awareness" of the fragile nature of the
market and the economy will allow people to reestablish positions based on this
in the not-to-distance future. I suspect over the coming days and weeks the
markets will revert back a bit now that the cat is out of the bag. How many
people have piled into gold stocks in the last week or so, shorted the dollar or
bought bonds?
As many of my colleagues at TradingMarkets are fond of pointing out,
always fade the crowd. Take a look at the charts below of the US
Treasury Bond and The Dollar Index.
It is only when price levels reach extremes that it becomes newsworthy. Do these
look like charts that you would short or go long? Feel free to step up to the
plate, I’ll be waiting patiently for a reentry. For now, my conclusions remains
unchanged, but when you have had a nice run and are beginning to sense a little
exhaustion in the move, lock in the profits and wait for a reentry. This will
likely occur at the same time that the money now establishing their positions
suddenly sees them going against them and realizes they really don’t know why
the position was put on in the first place. Call it herd mentality.
Fundamental analysis by itself has limitations from a trading perspective.
While your overall conclusion may be correct, you can suffer drawdowns,
resulting in being stopped out, despite being correct. Technical analysis as a
stand-alone tool, when used properly, is very effective. Over the years I have
moved from a purely technical approach to one that combines the two. I now feel
like have both bases covered, which increases my conviction on trades. Now that
the roaring bull market is behind us, a buy-and-hold strategy will not work. All
traders and investors must become far more engaged in overseeing their
investments. Yes, the workload will increase, but so will your rewards. Keep
this very simple statistic in mind:
A portfolio which grows at an average of 8% per
year, not accounting for inflation, will double in value every 9 years.
It goes back to the whole premise of trading the markets. It is not the
homeruns that make winners, it is the consistent singles and doubles that really
pay off. Given the fickle nature of the markets, the buy-and-hold strategy needs
to be set aside for the time being.
How all of this translates into HVT in
the coming week, I am not quite sure. As Lewis Borsellino stated in Friday’s
column, "the orderly liquidation continues." This is the reason
volatility, from an HVT perspective, remains
subdued. We need panic selling or frenzied short-covering to give us the moves
we long for. Until some volatility comes into the market, the game plan remains
unchanged: trade assertively on the opening and then be very picky the remainder
of the day, only taking setups that are truly low-risk trades. I will do my best
to alert you to slightly longer-term setups in TradersWire.
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| 1096 (confluence) | 1245-47 |
| 1088 | 1227-29 |
| 1076-77 | 1208 |
| 1070 | 1192 |
| 1065 | 1176-77 |
| 1060 | 1157 |
| 1044-46 | 1123 |
| 1032 |
Thought For The Week:
“It
was never my thinking that made big money for me.
It was always my sitting. Got
that? My sitting tight waiting for the
exact moment to strike!†Edwin Lefevre,
Reminiscences of a Stock Operator
As always, feel free to send me your comments and
questions. See you in TradersWire.