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Three Card Monty


Be careful of overtrading on this morning's economic numbers.


Good morning and welcome to Freaky Friday in Minyanville. It seems like yesteryear when we were probing for a duct tape low and spending our days with the U.N Security Counsel. The S&P was eyeing the abyss, Europe made fresh lows daily and investors were reticent to assume any risk. While there wasn't widespread despair, there was certainly anxiety and a growing concern for capital preservation.

Fast forward... one month.

Coalition troops are now firmly entrenched in Baghdad, the dollar has found sponsorship and the sentiment pendulum has swung hard to the right. Can it be that the equity market, after three brutal years, has finally turned the upside corner? Or is this infusion of hope a typical and necessary element of another horrible head fake? The answer to that question -- and how you choose to approach it -- will go a long way in determining your performance.

I view the equity table via its four trading legs: fundamentals, technicals, psychology and structural. While both the bulls and bears can make an argument for each of these support structures, our individual interpretation will drive our financial results. For instance, the fundamentals are horrible -- but the news is always worst at the bottom. The internal Minxy mechanism is showing constructive signs -- but we remain firmly entrenched in a negative trend. Performance anxiety creates self-fulfilling demand --but optimism is historically bearish. And the allocation rotation into equities will drive prices higher -- until it doesn't.

As we approach this morning's economic numbers and next week's earnings barrage, we'll be faced with many difficult and delicate decisions. The script, and our ultimate outcome, continues to be dynamically written with each passing day and every flickering tick. What we must decide -- and this will be unique for each of us -- is how much we're willing to risk to obtain a potential reward. This proposition is independent of any given posture, it's simply a function of time horizon and risk profile. You must decide for your self what those parameters are.

As a big-picture bear, I'm admittedly suspect of the upside but I'm also cognizant that, at this point, the short side is no longer novel. That puts me -- and us -- in a conundrum of sorts as we search for the variant view. At the end of the day and when push comes to shove, I'll typically give Boo the benefit of the doubt and place the burden of proof on Hoofy's broad shoulders. Still, if I'm to focus on the journey rather than the destination, I strive to remain open-minded in my approach.

The reality is that I'm either being too cautious or completely prudent and we won't know, for sure, without the benefit of hindsight. I can accept being wrong -- it happens to the best of us -- but I'll have a difficult time rationalizing losses on the long side if it's inconsistent with my beliefs. I'm conscious that my bottom line doesn't care how I make money but, as an extension of my view, I'm more likely to dance with Hoofy only if there are compelling technical or fundamental reasons for doing so. As it stands, that's not the case.

On the flip side, I've got enough ducks quacking that I can justify my furry appendage. The fundies suck, the technical downtrend is firmly in place, there hasn't been this much hope since the end of November (Razor Burn), volatilities are cheap enough to devise an advatageous (and defined) risk/reward profile and I've got plenty of dry powder if I'm wrong. That's my current strategy and while I reserve the right to adapt to the market, it's what I'll be running out on the field with today.

Whatever happens, Minyans, please just do me the favor or thinking -- really thinking -- about what your investment goals are and the best way to reach them. The mechnanics of your swing may be spot on but if your swinging too hard (or not hard enough), you're not gonna connect with your strategy. And in the end, our goal is to let our strategy work for us so we can focus our energies on the important stuff.

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