Random Thoughts: Social Unrest and Risk Rotation

By Todd Harrison  SEP 27, 2012 10:30 AM

Volatility is a trader's best friend -- but be careful!



Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

So many times, it happens too fast; you trade your passion for glory.  Don't lose your grip on the dreams of the past, you must fight just to keep them alive.
-- Survivor

There’s been a lot of motion in the global stock market—and the world itself, for that matter. 

Indeed, the single most important article you read this week may well be this missive by Ambrose Evans-Pritchard regarding social unrest in Spain and how protestors "will have to respond with all rigors to the grave accusation of high treason under the jurisdiction of military tribunals."

Talk about a tricky trifecta of societal acrimony, social unrest, and geopolitical strife! 

We’ve been talking about this continuum for years—the “other side” of the stateside policy framework—and it’s unfortunately proving true with each passing day.  As social mood dictates financial markets—with or without infinite stimuli—we would be wise to pay attention.

How do you trade that? Carefully.  

How do you prepare for what’s to come? Stay SAFE, smile plenty, hug your kids, and teach them empathy and understanding.  Regardless of which side of the aisle you’re on heading into the election, we can all agree that our children will bear the brunt of the policy decisions we continue to witness.

We owe it to them to make smarter decisions.

Trading the Tape!

Please see the snapshot of the 30-day NDX daily chart below.  We are currently trading "in and around" levels last seen prior to when QE-Finity! was announced by the Federal Reserve.

Click to enlarge

Whether this is a healthy retracement—Technical Analysis 101 dictates that the time to buy a breakout is upon retest of the breakout level—or a reversal of fortune through the eyes of social mood and by extension the stock market (the world's biggest thermometer) will write the tale of our forward trail. Ditto the S&P retesting the breaking of four-year highs, per the chart below.

Click to enlarge

"Textbook!" say the bulls. "Only if we rally!" replies Boo, our suddenly brazen bear. He's still bruised, but he seems revived. He may have even showered. In the innards of his intuition, he knows the global pressures are cumulative. (He's never been known for his timing.)

I couldn't resist adding a 15-year chart of the NDX for schnitz and giggles. (I remember every harrowing step; each box on that bottom axis encapsulates a year full of life and experience—and those were some years!)

Click to enlarge

The most important takeaway of the above chart? The importance of syncing your time horizon and your risk profile. Somewhere, nestled in that timeframe, is a bloody fortune in Fannie Mae $70 puts that I left on the table. If you see it, lemme know.

In terms of my book, I booted my QQQ November $70 puts yesterday morning (time-stamped on the Buzz at QQQ $68; it was a LOT of work for little gain, but I will not complain).  My YTD performance took a beat-down since I mentioned it on Twitter (big mistake) and there was a deep breath when I unwound that risk (which may also mean my short bet was too big). 

(I will also note that I'm notorious for fighting cusps, catching cusps, and then taking bets off early as the tide turns in full—remember Oil of Oy Vey!?)

After a few breathing exercises, I bought some Facebook (NASDAQ:FB) at $20 (I've been waiting for a pullback and the stock has taken one in the kisser of late).  Could it go lower?  Sure—they all could, big--but with a stop set below recent lows, it's a decent risk-reward in my (usually early) view.  Against that, into the late-day lift, I bought some December QQQ “underneath” puts dollar-neutral (read: I’m long Facebook with the same amount of money in downside exposure).

Finally, I nibbled ever so gently on some Google (NASDAQ:GOOG) November puts this morning with the stock up $7 as a pure spec after the larger-than-life run-up we’ve witnessed (the stock is up 35% since July). This, and all my short-term risk, is in the context of a pure trade; if we take care of the minutes, the hours will take care of themselves and I'm looking to squirrel some shekels in the process.

Good luck today.


Twitter: @todd_harrison

Position in FB, QQQ, GOOG.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

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