Todd Harrison: How to Play -- or Not to Play -- the 1929 Crash Analog

By Todd Harrison  FEB 12, 2014 11:44 AM

Confronting our cognitive biases.

 


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

There has been a pretty fierce two-sided debate surrounding the analog between 1929 and the present day.

The bulls are quick to poke holes in it -- the percentage moves in the indices don't jibe, there are different scales on the X and Y axes, and perhaps most intuitive, history, while sometimes rhyming, rarely repeats.

And of course there are a host of cognitive biases, including Gambler's Fallacy, which impact how we govern the financial markets, as well as our actions and interpretations.

For my part, I wouldn't be at all surprised if the wheels fell off the wagon and we experience a downside ride that isn't kick-saved by the dip shtick. After a five-year 177% parabolic frolic that has conditioned investors to buy each and every dip, the Pavlovian response has perhaps become too easy.

Here's the thing, though -- we don't have to make that decision just yet; we can let the market show us the way.

According to the pattern discussed, the key level for this analog is S&P (INDEXSP:.INX) 1762, or roughly 3.5% below current levels. That's the level of lore that will determine if there is meat to this bone or if it's just fodder for the digital financial community.

Either way, it should be a level on your radar, if and when, as we navigate the chasm between perception and reality.



The Volatility of Volatility

Yesterday we touched on the increased volatility in single stocks this reporting season. Later in the session, we received a note from a large broker-dealer that highlighted the continued selling of upside call options.

This "compression" is a familiar concept to market veterans; in the reach for yield, investors will sell dimes in front of bulldozers in an attempt to scratch out an incremental return.

All the while, the VXO (INDEXCBOE:VXO) is back below Bar Mitzvah status. While it has some room before reaching long-term support (in and around VXO 10), we're approaching levels where it has paid to be a buyer.



Flattening, in 140 Characters or Less

About a month ago, we bought some Twitter (NYSE:TWTR) in and around $56 for the kids' long-term accounts. When the stock popped to $66 into earnings, my inclination was to take some, if not all, of the trade. After some discussion, we let it ride.

The stock got hammered to $50 following sluggish user growth metrics and I post-rationalized my decision-making process. I'm not in love with the tape, or particularly enthused with the latest round of fundamentals, but it wasn't time to panic.

Today, with the stock back at $56, I unwound the risk on behalf of the kids. While I've had $30, $40, $50 million swings in a single session -- true story -- my risk appetite for high-flyers in their accounts isn't within my comfort margin.

When in doubt, sit it out, and so we did; no harm, no foul.

Random Thoughts
R.P.

Twitter: @todd_harrison

Position in SPY.

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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