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The only difference between mistakes and lessons is your ability to learn from them.


Good morning and welcome back to the financial thriller. The Minxy modern day mystery classic continues today as investors anxiously thumb the pages in search of a tradable clue. The plot has been a twisting, turning, tiresome adventure through the depths of emotion, and this new chapter promises to be fitting continuation. Can Hoofy shake the Ursine espionage and safely deliver the goods or will a sinister Boo successfully undermine the bovine operation and keep the bulls in the dark? This is your mission, Minyans (should you choose to accept it) so step out from the shadows and let's get to work!

The spy games have become commonplace in the equity markets and the stakes have never been higher. The conspiracy theorists are still whispering that there was "divine intervention" a few weeks ago, while the bulls argue that the bears are simply choking on sour grapes. All the while, the tape continues to travel the path of maximum frustration and traders are straddling the fence looking for the quick kill. With the world continually changing and the options so distinctly different, how are we supposed to know which side is the right side?

The reality is -- and please don't shoot the messenger -- there's no way to know, for certain, until we're able to look back at this point. What we can do now, however, is assimilate the potential outcomes, assign probability to that risk and craft a strategy that's an extension of our view. Regardless of your current posture, it's important to understand that we're in unique times and lessons from the past likely will not apply. So we must force ourselves to remain open-minded when looking forward, and make financial decisions that allow for a margin of error.

Where will the Minx be in five years? In ten years? We could find ourselves in a new bull market where productivity led innovation paves the way for another new paradigm. In this hypothetical Utopia, the world would be peacefull, businesses would prosper and we'd look back at this juncture and lament about not being more aggressive with our investments. "It was obvious," we'd say, "when the President fielded questions regarding the use of nuclear weapons, the wall of worry was firmly in place."

On the other end of the spectrum, we may be mired in the depths of a depression that redefines the boundaries of despair. If excess truly breeds excess, who's to say that the manic dot-com days aren't the mirror image of a depressive deflationary spiral? It could happen: The double-D thesis (debt and derivatives) surely makes that possible (if not probable). I know it's easier to ignore this option and pretend it doesn't exist, but we must make the distinction between hope and faith when assessing financial risk.

What we've gotta decide -- and the answer could be different for each Minyan -- is how much conviction we have in either of the above extremes or any step in between. More importantly, what type of discipline will we employ as we wade our way through the muck in search of the elusive answer? There's a tendency among traders to be unhappy no matter what they decide, but we need to make some conscious choices and accept the ramifications. If you adopt a conservative approach, you'll likely miss some of the gains if the market rallies. If you choose to aggressively play with Hoofy, you're tying your fortunes (figuratively and literally) on the potential of a bovine revival.

I'm admittedly wary that so many pundits are on the same upside page, because I feel the "can't-get-any-worse" argument is a dangerous assertion. This isn't a trading call as much as it is an acknowledgement of concern. I am acutely aware that bullish phases are a natural part of any larger cycle and, as we currently retest S&P 850-855, there is "rally risk" to this tape. There remains a constructive psychology, and while that's ironically bearish, it works until it doesn't. As a risk manager who harbors legitimate concerns in the big picture, however, my predication is to remove performance anxiety and err to the side of caution. If that costs me relative upside while protecting me from substantial (and absolute) downside, that's a trade I'm willing to make.

I understand that many Minyans aren't afforded the opportunity to actively managing their funds, and my goal isn't to project my methodology. I simply want to point out the potential risks (both ways) so you understand them. If you're conservative and adopt a more careful approach, there is an opportunity cost associated with your posture. For my part, I'm alright with that because I believe opportunities are made up easier than losses. That's easy to digest when the averages are down, but it'll be a humbling lesson if blue skies await. And that's a decision each of us must make for ourselves.

Good luck today.

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