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Reality Bites


Good morning, and welcome back to the juggling jungle. With yesterday's sprint fresh in our minds, we enter today's mix with a few more data points and a lot more questions. When will those pesky alligators (read: asset allocators) clean up? Will the fundamental downticks last night start to matter? Why are the Raider cornerbacks so vulnerable to injury? Our daily check of the overseas markets finds the European bourses mixed and the tricky Nikkei slippy to the tune of 3%. We've got a lot of work to do, my friends, so let's get shakin'.

During yesterday's sickness, we discussed the structural influences of the asset allocation trade and how that's sucked fresh money into the market. The purist will say "Hey, if a three toed pygmy rallied the tape 1300 points, who cares...a rally's a rally." and you know what? They'd be right! However, in our world, we need to constantly reassess our trading metrics if we hope to peek around the corner and capture the next move. The question on our minds should be: when will these other metrics start to factor into the price action of stocks?

The fundamental news last night "should" be a boon for the bear camp, but if this past move was triggered (sustained) by asset class re-weightings, will fundies really matter? There is surely a fund manager out there who doesn't "care" if semiconductor business is ticking down. They might have two weeks ago but now they're likely more focused on the dreaded notion of underperformance. The trick for us, as traders, is to identify which ingredients matter at different junctures of the tape. You can be sure that, at a point, fundies WILL matter, psychology WILL turn and the technical backdrop WILL beg making sales. We just need mix our trading recipe such that we're in a position to capitalize when these turns come to pass.

As you know, this space was created as an educational site and there will be no advice offered here. Still, I'll often walk through my thought process (good and bad) with the hope that it sheds light into the trading process and provides value at some level. A few weeks ago, I opined that there was a "stiff" rally in the cards before year end but I felt, at the time, it had to begin from lower levels. Clearly, these past eight sessions qualify as the aforementioned lift and, with the benefit of hindsight, I was too cautious in my approach. OK, it happens and I will never brush poor judgments under the rug-that's simply not my style. This has been a market where it's paid to hit for average and baby steps have added up over the years. Prudence, dear, prudence.

I have been battling whether this is "THE" rally or "A" rally and, to be honest, I'm not sold that this was "it." I am debating where I stand in the guts of the cycle, trend, phase, nuance process. I firmly believe that we're in the early innings of a multiyear bear, so that takes care of my cycle view. I also sense that we've come too far too fast in the short term, so that takes care of my thoughts on the current nuance. The trend/phase issue is a bit more problematic for my mind's eye, as I know the most vicious of rallies occur in a bear market. I understand that, if this was in fact a trend change, it could be a powerful move that lasts months. However, I can't shake the feeling that this is a monster head fake-although I can't put my finger on why. Or, to put it another way, I seriously doubt we've seen the low for this bear market-my question is one of timing and of the magnitude of the interim trend/phase.

I am nothing if not honest and I had to purge these thoughts with the hopes it clarifies where I stand. For purposes of my style, a big picture view doesn't really factor into my decision making process. I will continue to take our fascinating journey one step at a time and focus on the path, not the destination. With a little luck and a lot of discipline, we'll find our way to the other side of this minxy mess. Together.

Good luck today.

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