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The Denial Trial


We must maintain perspective and lucidity, now more than ever, with regard to where we are and how we got here.


It's like rain on your wedding day
It's a free ride when you've already paid
And isn't it ironic…don't you think?

(Alanis Morisette)

Do you know what trading and comedy have in common? The most important element for both is...timing.

I couldn't help but smile as I sat on a plane last night watching television coverage of Terrible Tuesday. The elements of downside disconnect have long been on my radar. We discuss them often on Minyanville. I've been long gamma-and I've buried alotta puts-patiently waiting for volatility to decompress.

Yet here I am, away from my turret and the quick trigger it affords me.

You might think I'm bitter, but I'm not. I'm actually greatful for the opportunity to deliver the keynote at TD-Ameritrade's west coast soiree and psyched to spread the Minyan vibe. All we have is our name and our word and I've given both in terms of my time commitment. It could be worse and, for alotta traders this morning, it already is.

As I watched the coverage of yesterday's carnage, I was struck by a few threads. First, there seemed to be widespread rationalization as fingers pointed to system glitches, covert hedge funds and hidden agendas. Folks, let's be clear-the market sell-off has been a long time coming. The conditional elements have been in place. The fact that it hadn't happened only served to solidify the false sense of security that remains very much in place.

Indeed, if all market moves are characterized by three phases-denial, migration and panic-a case can be made that we've got some heavy lifting ahead.

The bovine will opine that the sharpest corrections occur in the context of a bull market. And they're right. But we must ask ourselves if a one day wonder is indeed cleansing. We must ascertain if a quick wash is an elixir on the heels of historic debt accumulation, poor risk management and cumulative structural imbalances. We must maintain perspective and lucidity, now more than ever, with regard to where we are and how we got here.

I don't know the answers but I know enough to ask these questions and offer some thoughts:

  • In our era of globalization, we're banking (quite literally) on China and India to fuel global growth. If one of those gorillas sneezes, the rest of the world will catch cold. The SENSEX offered a valuable clue last week with its squirrelly action and Shanghai sent similarly smart signals to start the week.

  • Knowing what to watch is the first step to navigating the ever-changing landscape. The emerging markets (EEM), financials (Goldman & Merrill), Google (as it begins to fill the technical gap), market breadth and technical levels (former support and newfound resistance) remain daily tells of navigation.

  • I've long offered that we're weighing simultaneous inflation (in things we need to educate, power and feed the world) and deflation (in things we want, such as cell phones, laptops and plasmas). That's a tough toggle to stomach, particularly as we extrapolate it to fiscal and monetary policy.

  • If you're confused, you're in good company. The central bank is equally unbalanced as they try to walk the tightrope between continued stimuli and appeasing foreign holders of dollar denominated assets. At a point, the decision making process will be wrestled from their control. Some would offer that it already has.

  • In that vein, there's been alotta debate with regard to the direction of the next FOMC rate decision. While we've been conditioned to equate a rate cut to rally in equities, we need to understand "why" the Fed will lower rates, as I believe they will. Suffice to say that it likely won't come from a position of strength.

  • The Phantom of Deflation needs the validation of lower commodities and a higher greenback. When I left for JFK yesterday afternoon, the jury remained out on the latter matter. If the dollar catches a bid, it may offer a further clue that another crimson tide is heading our way.

  • The market is a leading indicator and by the time the headlines offer validation for the price action, the reality will be baked in the tape. I say that for those who don't "see" ready reasons for the supply side of the equation. Remember, friends, the market is never wrong.

  • How you approach this juncture is a function of your time horizon and risk profile. For my part and with my money, I've got two buckets to my book-an active pad and a longer-term portfolio. I'm long financial puts in the former (trailing the stocks with tight stops) and have nibbled on some faves-including SunMicro (into $6 support) and Goldenstar (GSS)-in the latter.

  • Keep in mind that the potential for margin calls and forced selling is out there. I'm not saying it happens but it's been so long since we've seen it-and there are so many fresh faces in the marketplace-I wanted to toss it on our radar. I hate invisible catalysts as much as you do but we need to see all sides as we construct our probability spectrum.

  • The proper perspective, including humility and a positive mindset, is the DNA of successful trading. Keep your head up and your eyes open as we edge through this tricky juncture. There's real two-sided risk out there and while we all want to prosper, our goal is to preserve capital and deploy it when we discern an advantageous edge.

Good luck.


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Position in gss, sunw, financials, commodity stocks
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