Tread Lightly
Let me begin by expressing my condolences
to friends and family of all involved in the tragic situation which took place
in America on Tuesday. It is unconscionable to think that such an event could
take place on American soil. I suspect that this event will galvanize all
Americans as well as all citizens of democratic nations to ensure that it never
does again. Our country is strong and will prevail. We will not be held hostage
by maniacal individuals. The opening of our financial markets demonstrates this.
I have been involved and traded the markets during previous tumultuous
events and can assure you that it is different than anything else a trader has
ever experienced. The typical approach you may use will probably be ineffective
as fundamental news and emotion are the drivers of price action. Experience in
these situations allows one to navigate with a fair degree of certainty. I
caution less experienced traders to tread lightly as price action can be
unpredictable and unforgiving.
Eddie Kwong’s article did a fine job of illustrating how the equity markets
have reacted under previous catastrophic events. While the equity markets always
gained ground over the day and weeks after, last Tuesday’s attack may prove to
be a bit more troublesome for the market. I base this on the following:
1. This time the markets have no absolute assessment of damage both
economically and emotionally. The fact that we were on the verge of recession
before only heightens the possibility that we will be in one shortly.
2. To the best of our knowledge we do not know for certain who the
perpetrators were in the attack. While action will be swift, finality on this
event will take many months if not years and may cast doubt over financial
markets.
3. The financial hub of the world has been severely damaged. Additionally,
some of the best and brightest market participants have fallen victim to last
Tuesday’s attacks. The largest participant in the government bond market, Cantor
Fitzgerald, which provided not only guidance from superior analytics
as well as unrivaled liquidity is now facing the loss of a large percentage of
their work force. How can such talent and intellect be replaced in the short
run?
4. The bombing of Pearl Harbor, marked the end (within six months) of the
then current downturn in the equity market. However, at that time, the market
capitalization was 20% of GDP, not 135% like it is today. The historical average
is 53.82.*
5. Contrary to what many are saying, a 10% drop on the opening will still not
dramatically bring valuations back in line with historical norms.
I say these things not as a dire prediction, but as a reminder that there are
many variables involved here, conventional or historical perspective may not
apply this time. The opening of the markets today will be the first time most of
us have experienced anything quite like this.
The fact remains, however, that the market will go on. It is our job to
decide how we allocate our capital, and under the circumstances, trader/investor
capital will need to be re-allocated. The following are my observations for the
intermediate- to long-term. These ideas do not represent intraday trading
ideas. I have provided my input on that later in the column.
- The Japanese yen has experienced a sharp increase in value since Tuesday.
While this may seem logical on the surface, it is a rather absurd move. The
dollar will continue to be the world’s reserve currency. Additionally,
Japan’s decade-long economic mess cannot afford a stronger yen due to their
heavy reliance on exports. I plan to short the yen as a result.  - The US will certainly no longer depend on the Middle East as a source of
oil. Despite OPEC’s assurances to keep the “tap running”, and we
have no reason not to trust this, the events of last Tuesday have cast a
permanent shadow over any sense of normalcy in the Middle East. Supply
disruptions are now a very real threat going forward. While nothing will
change in the immediate future, America will undoubtedly look inward for
its’ future energy needs. As a result, expect more domestic oil exploration
and a greater reliance on nuclear power. Oil drillers and drilling equipment
stocks will be the beneficiaries. BJ Services
(
BJS |
Quote |
Chart |
News |
PowerRating), Global
Marine
(
GLM |
Quote |
Chart |
News |
PowerRating), Precision Drilling
(
PDS |
Quote |
Chart |
News |
PowerRating), Seitel
(
SEI |
Quote |
Chart |
News |
PowerRating),
Smith International
(
SII |
Quote |
Chart |
News |
PowerRating). - Retailers. If this does not inflict the final blow to some of these
obscenely priced stocks,
(
COH |
Quote |
Chart |
News |
PowerRating),
(
BBY |
Quote |
Chart |
News |
PowerRating),
(
LOW |
Quote |
Chart |
News |
PowerRating), I do not know what
will. - Re-insurer Swiss Re
(
SWCEY |
Quote |
Chart |
News |
PowerRating), will undoubtedly take a massive
hit on the opening, but may very well be the worst level it sees. Their risk
at present time is quantifiable and the opening price should reflect that.
As a result, it may represent a good purchase.
Looking at intraday trading, there is not much to say in absolute terms.
Sure, the obvious things like stops and reducing position size are practical
approaches, but the fact remains that this session and for foreseeable sessions,
experience and “feel” are the required tools. The Dow Industrials,
however, may find support at 8436. This would represent a 12.5% drop. The
S&P 500 (cash index) may find support at 972. Key Technical Numbers
will reappear tomorrow, as today’s calculation of KTNs are not in the ballpark
of the anticipated trading range.
I will do my best to participate in TradersWire today, but may be
unable to do so due to obvious circumstances.
* Statistics were derived from Bianco Research LLC
P.S. I’m looking
forward to sharing the nuts and bolts of how I trade at TM2001 in early October. You’ll learn the two big keys to my trading: 1) How to
define a powerful intraday trend; and 2) The precise
parameters that tell you where to enter your trade in the midst of that
trend. I will also explain to you the “feel and rhythm”
that enables me to trade like a “machine.” This is one element of my
trading that I could never convey on paper through a set of rules or a
formula. You’ll just have to meet me in Las Vegas, and you’ll know what I mean!