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Simon Sez

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Setting stops removes emotion

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Well I sang it once and I sang it twice
I'm going to sing it three times more
Going to stay 'til your resistance
Is overcome


(Paul Simon)


Good morning and welcome back to the Turnaround Shack. After a Monday that saw more motion than movement, Hoofy will seek some Tuesday improvement. The '06 themes are becoming all too familiar by now--strength in the energy and metals, constant toggling in rotation station and wicked volatility in select issues (including smeltage in a spate of once proud market generals). Indeed, after a January that followed an oft-maligned historical script, February is shaping up as anything but conventional.

We've mapped out our technical landscape, including support at S&P 1260, initial resistance at NDX 1670, piggies poking at the January lows (BKX 101.5) and important support in pharma (DRG 320) and the homies (HGX 260). We've weighed the disconnect between perception and reality (compression in vols vs. geopolitical risk) and drilled down into the intraday tea leaves (breadth, beta, financials, semis, small cap). And we've watched the flow for signs of sentiment and clues of a collective offsides during lopsided leans. It's a far cry from the sexy hex of periods past but we know, above all, that the onus is on us to adapt to the tape.

I've been trading for fifteen years (and writing for five of those) and in that time, I've seen my fair share of changes. When I opined in 2000 that we were in for a long, hard road (and that the opposite of love isn't hate, it's apathy) the dynamic seemed intuitive and somewhat daunting. I'm not sure where we are on that curve but what's clear is that the obvious opportunities are fewer and farther between. To wit, I've been a big bull on energy and metals (and remain so for the long-term) but even those secular winners got a bit too perky for my near-term liking. As such, I've attempted to practice proactive patience and look for situations (make hay when the sun shines) while protecting my hard earned capital.

I struggle at times to scribe vibe that is both pertinent and productive although I remain committed to such. There are surely opportunities, domestically and abroad, but I try not to force ideas much the way I won't force trades. The beauty of our business is that a new script is written each day and, ironically, this could very well be the most interesting and important juncture in the history of financial markets. But it is fraught with two-sided risk, a caveat that belies the collective sentiment and low levels of implied volatilities. I suppose my message this morning is this: Boredom and frustration are not actionable catalysts and the ability not to trade is as important as our trading ability.

Alas, a new day is set to begin and we power up to find the world pretty in pink. With S&P 1260 directly underfoot, Hoofy will attempt to lean against that level and catch the bears leaning the wrong way. As discussed, my risk profile is loaded with gamma although, as a function of a slew of puts in select financials, I'll coin more in Red Dye than Matador City. As the BKX is off 3% since the end of January), I've set some stops near my cost basis and will play 'em that way. Discipline is the constant thread of any sustainable trading strategy and removes emotion in a tape that begs otherwise.

Good luck today.


R.P.
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