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Jeff Cooper: Are Traders Just Frogs in a Pot?


Making profits in this market is difficult even though we are near all-time highs.

We're just like a frog in a pot
The temperature's now getting hot
The newswires say
That things are OK
So why should we think that it's not?


Ineptocracy: A system of government where the least capable to lead are elected by the least capable of producing and where the members of society least likely to sustain themselves or succeed are rewarded with goods and services paid for by the confiscated wealth of a diminishing number of producers.

They say liquidity -- which Todd Harrison calls the "other side" of volatility --  is a trader's best friend.

The funny thing is, many players and investors I talk to don't care for today's market because of its high liquidity.

They see technological advances that enable big traders to move positions in second as a sign that Wall Street has sold out to those who game the technology.

Traders who are in front of the screen on a regular basis find that it's a mug's game trying to trade short-term against the robots.

So do we loosen up our grip on positions, giving them more leeway to prevent getting whipsawed, or do we further tighten the leash on our positions, subjecting ourselves to getting stopped out too easily?

I'm not sure I have the answer, but I think to a large degree, it depends upon one's perception of our place in the cycle.

A wise man once said, "Every time you find the key to this game, they change the lock."

My method is to use a blended approach of swing and day trading positions and to Scale & Trail. In other words, I scale in with pilot positions, then take partial profits and trail a protective stop on the balance.

Retail traders/investors are the frogs in the title of this article. The higher this market grinds, the more likely investors will decide it's time to book profits. Ditto money managers. The problem of course is that as they've done this on the way up, the market kept on keepin' on.

Consequently, investors have been confronted with the unenviable and uncomfortable position of having to buy back at higher prices.

We are all fighting the stigma of wanting to be first out the door and not buying the top tick.

The only way to counter those psychological impulses is to embrace the idea that the object is not to pick tops and bottoms but to profit from the middle of the move.

That said, Mr. Market's trick is making the end move the fastest part, be it the end of a decline or an advance.

If this is the middle of the move we're witnessing, I'll be shocked.

Then again, we've all been surprised by the market's ability to run without breathing since the November 2012 low.

If we're closer to the end than the beginning, then the question is whether the culmination ends in a whimper or a bang, and whether there is a graceful exit.

The market feels like it's been a ball under water, always bouncing back up for so long that we've become accustomed to this new paradigm.

The longer and higher the Dow Jones Industrial Average (INDEXDJX:.DJI)  goes without really breathing, the more likely we are to believe that we are getting used to this New Abnormal.

The following chart of the put/call ratio sent to me by a fellow trader speaks for itself:

Click to enlarge

Could sentiment go to a more extreme reading? Yes.

Moreover, the market could move higher or stay around current levels until "time is up," with the put/call ratio remaining near current levels.

As W.D. Gann said, "timing rules."

We are frogs in a pot and the heat keeps getting turned up ever so slowly, allowing us to believe that we are adapting and won't get cooked.

As the story goes, if the heat gets turned up dramatically, the frog will save itself by jumping out.

But the slow burn disabuses the frog of the danger of being cooked alive until it's too late.

The bull market is a frog -- a bullfrog, if you will. It believes it has been kissed by a princess -- the Fed -- and that eventually, given enough time, this wart of an economy will recover and turn into a handsome prince.

No matter what one's position may be on the fundamentals, we've been blinded by our never-ending search for yield.

And it seems market participants are getting used to mental contortions.

Today's act of mental contortion is the idea that there isn't the same conspicuous ebullience in the market as there was at prior peaks like 2000 and 2007.

I think that is because this advance is driven by fear rather than greed. The fear is one perpetuated by the search for yield, for return promulgated by the Fed's ZIRP.

The overriding question is one of timing.

Can the Fed outmaneuver the stars, the cycles?


We've put a line on the sand at a specific level and time frame through which my takeaway is, it leaves the market open to a summer melt-up.

June/July 2009 were pivotal for determining the trend.

In June 2009, the S&P 500 (INDEXSP:.INX) 3-Month Chart turned up.

In July, the Monthly Swing Chart on the SPX turned down for the first time since the March low. The turndown not only defined a low, but signaled higher by leaving a bullish outside up month.

June/July 2014 is 60 months from the June/July 2009 pivot.

On the Square of 9 Wheel of Time & Price, it may be significant that 60 aligns with July 4 -- especially as July 4 lines up with 1576, the previous bull market peak. The "stars" appear to be aligned this summer, seven years from the primary top in July 2007 and 14 years from the secondary top in August 2000.

7 is the basis of time.
--W. D. Gann

Click to enlarge

It will  be important to see if time turns trend in June/July 2014, 180 degrees/days opposite the early January pivot high which perpetuated the 110-point SPX sell-off into February.

Twitter: @JeffCooperLive

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Position in GDXJ, LNG, SPY, TWM

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