Setting the Table
Today's the day that will seperate the men from the boys!
Good morning and welcome back to the squeezy cheese. Hoofy pitched the perfect game yesterday and as traders focused on the "why," our resident bull skipped along and showed them "how." Indeed, after the initial fade shook out the weak longs, the bulls never looked back and closed 'em on the highs. Have we begun the stiff lift everyone's been waiting for or is this the shake out before we finally break the October lows? It's freaky Friday in Minyanville, boys and girls, so suck it up and shake it off--the games are about to begin.
We've discussed the three phases of trading before but I thought it might be helpful to circle back for a refresher. Typically, substantial market moves are characterized by denial, migration and panic and knowing where we are in that cycle often helps in crafting a strategy. As it stands, the bovine will argue that we're in the denial phase a bull cycle while the bears believe we're edging towards the panic phase of the bear cycle. How do we know which critter is fibbing?
The painful truth is that we won't know, with certainty, without the benefit of hindsight. What we can do, however, is assimilate our trading metrics and implement a strategy with defined risk parameters. There's a delicate balance between using prices to your advantage and fighting the tape. Knowing where to draw that line will often differentiate success from failure. That, in a nutshell, is why I attempt to view the big picture as a series of little pictures--you never want a misstep to turn into a tumble
Yesterday's rally replanted the seeds of hope and the "buy the dip" crowd has already emerged. That's potentially bullish for our psychological metric but will exacerbate the meltage if, in fact, we turn back south. With so many traders staring into the abyss on Wednesday, the watched pot never boiled. Now, however, the performance anxiety has shifted and the fear of missing is firmly in place. Have the emotional types "reached" yet? I don't think so--but when/if they do, it'll be the final piece of the puzzle.
I'm admittedly suspect of the "sidelined cash" (mutual fund reserves low) and I've been relatively vocal about the fragility of the triple bottom. Historically, the most vicious rallies occur in the bear market and without fail, they've....well, failed. Discipline, however, always trumps conviction and the definition of an investment should never be a trade that's gone against you. As such, I've been sure to define my overnight risk via options and my daily exposure with stops.
The caveat for the bears is that the squeezage will identify a more "justified" data point. With Dubya taking a softer stance yesterday, the prospect of a unified U.N or (are you sitting down?) war avoidance has crept into the mindset of the masses. If (big if) the U.N and U.S can find the same page and the world unites over Iraq, the knee jerk reaction will likely be higher. That, more than anything, is my biggest fear for Boo.
One day at a time, Minyans, and thankfully, we've only got one more session before our requisite two day respite. Weekends are well earned these days and we surely deserve a break from the tape. Before we turn it off and tune it out, however, we've got some work to do. Let's end this bad boy on a good note and jingle our way towards the close.
Good luck today.
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 firstname.lastname@example.org.
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