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Honest Questions


Identifying a horizon is the first step towards succesful investing.


Good morning and welcome back to the helter-skelter. The upside revival continued yesterday as Hoofy's heroes scaled the wall of worry and officially put Boo on notice. Was the recent respite a simple dimple in a much bigger lift gift? That's been the great debate on the trading slate ever since we retraced half the rally. Now, with the first defense successful and the bears backed up against that very same wall, it's gut check time in the city of critters.

If you have any doubt in your mind, let me assure you -- it's not you! This is the most difficult trading environment of our (if not any) generation and the weeding out process is in full effect. The ever-changing puzzle requires constant reassessment and continual adaptation and one slip -- one look the wrong way -- can be fatal.

In that vein, I thought it might be helpful to take a fresh look at our trading metrics to see if we can sniff out some themes. Remember, the goal is to have a quack count as high as possible when lining up our tradable ducks. When in doubt, sit it out and wait for that elusive edge.


The most bullish chatter out there right now isn't centered on what is, it's focused on what isn't. In other words, each day we sneak by without a major preannouncement, the more constructive this metric becomes.

It's not that business is good -- it's FAR from good -- but we must remember that Wall Street is a numbers game. Some estimates (expectations) have been lowered to the point that they're attainable. Outlooks, when given, will invariably be muted but that's consistent with what we've seen. The only difference now is that corporations have a "free pass" in blaming Iraq for the lack of demand. As such, the "look through" thesis has become the bastion of hope in the analyst community. We've seen this movie before -- the rolling recovery -- but hope springs eternal during difficult times.

From a broader perspective, we're a WORLD away from historical trough valuations and I believe that the excess of the bubble will likely lead to an excess on the downside. If that's the case, cookie, valuations can overshoot to single-digit multiples before it's all said and done. I'm not talking about a straight melt -- that would be too easy -- I'm talking about a slow, cancerous decline that flummoxes just about everyone.

There remains hope that the economy (market) is bound to lift, and that very consensus is inherently bearish. Once we've waded through hope, despair will set in. Once despair becomes commonplace, apathy will evolve. If the opposite of love (the bubble) is apathy, that indifference will be the precursor to THE bottom. Is that actionable on a trading basis? No. But it's something to file away in the back of your business mind.


I don't think many people doubt the eventual outcome of the war but that, in and of itself, is a psychological can of worms. Assuming the battle for Baghdad is swift (NOT a given), when will the mindset shift to the caveats of a continued American occupation of a Muslim state? Once we've "secured" Baghdad, when will investors focus on the lethargic economy? When, if ever, will SARS (or potential terror) begin to demand a risk premium? What are the financial ramifications of our government spending spree? How will China, Russia, Germany, France and the "other" countries respond if given the chance to gain a strategic, global advantage?

And do all these questions add up to a monstrous wall of worry that's massively bullish?

Granted, these are broad concerns that don't factor into our everyday thought process. Market participants are incredibly fickle and seem to focus on the latest actionable input. In the short term, the ability of the Minx to toe the line at (roughly) a 50% retracement (of the previous rally) emboldened the masses to step up and play ball.

We often discuss how perception dictates a self-fulfilling reality and, sure enough, when we held this latest sell pressure, the all-clear siren sounded. The "higher low" is more than just a technical phenomenon, it's a psychological support zone and we'll need to monitor that as we trade forward. That's all that matters in the near term but the longer term mindset continues to hope -- and if nothing else, hope isn't a viable investment vehicle.


I look at a handful of technical tools (point & figure, tick charts, levels, stochastics) and I like to assimilate them when assessing this metric. The one thing we knew during the previous rally was how insanely overbought the uber-short term readings became. The retracement (last week) alleviated that condition and brought the field position back towards a neutral reading. During Monday's negative meander and Tuesday's brave face, a few things happened in chartland.

The stochastics, which had been pointing straight down, stopped in their tracks. Yesterday's jig actually caused them to "hook" positively in some sectors but NOT from the field position we like to see when using these guides. The best I could offer is that they're in no-critters-land and trying to find their way.

The pure tick charts, however, are approaching an interesting juncture. The S&P, BKX and DJIA charts are flirting, once again, with their 200-day moving averages (886, 746, 8383). At the same time, they're attempting to follow their first "higher low" with a more substantial "higher high." That will occur around S&P 900 (down trendline is 920ish) and DJIA 8550 (down trendline is up around 8700).

Until these sectors breach the upper end of these trendlines, Boo must be given the benefit of the doubt. In techland, the down trendline comes into play around 1090ish which, by the way, is also a triple top. If, by chance, we dance through that zone, keep an eye on the Razor Burn highs from November (NDX 1125).

In point & figure land, I've always monitored the excellent work of Dorsey Wright and they recap their various internal guides every Thursday. Their latest roundup (today) paints a constructive picture for the market and, for those technically inclined, it's an interesting methodology to monitor. Technicals are the most tangible metric and regardless of your posture, we must respect the "guts" of the action.

With that said, and despite the internal mechanisms in play now (they're not bad), I'd be remiss if I didn't share my concern regarding the "triple bottom" that's formed in the DJIA and S&P since last July. Historically, these patterns are not suitable foundations for sustainable lifts and despite my best efforts, I can't pretend that they don't exist. That's not a short term "call," per se, just a broader observation that I wanted to share with my fellow Minyans.


Perhaps the most important metric right now, the asset class maneuvering is dictating the price action. One only needs to look at the correlation between crude, gold, equities and the dollar to see that stocks, as a whole, are being traded as a single vehicle. Brian Reynolds has made some astute observations regarding the allocation trade (out of fixed income into equities) and that continues to play a major role in the day to day action.

How can we game rotations that we can't see? We can't -- but we can continue to read the macro tea leaves as we find our way. The dollar, in my most humble opinion, holds the key to the whole shebang and if it rallies (fails) the equity market will likely follow. It's not just about war, mind you, and we'll need to fight the urge to base it's price action on the latest headline. Deficits DO matter -- we just need to be alert and identify when the market chooses to focus on it.


Do I believe we're in a new bull market? No shot. Can we see a bullish phase? Absolutely. The question remains whether it's already started or this is the final giggle before the wash out phase. The tape seemingly "wants" to go higher and absent an exogenous shock or a dose of reality, it very well might. Our goal is to construct a strategy that allows us to preserve capital while making hay when the sun shines.

There are enough bullish elements to justify (rationalize?) further upside and numerous reasons for the market to trade appreciably lower. I've been vocal in my big picture views and firmly believe that we remain in the earlier innings of a multiyear grizzly. As I said yesterday, however, we should never let an opinion stand in the way of making money and I've attempted to find a methodology that allows me to stay and play.

I see the historical range of the VIX and appreciate the potential for it to go lower. However, when I look at all the wildcards in the world today, I believe that long gamma trading is an intelligent strategy. As it stands, I've got a chunk of May puts on my sheets ("ats" and "outs") and I want to keep that downside exposure open overnight. During the day, however, I reserve the right to rent stocks against my book and I'll always look for individual situations (read: edges) to augment my profile.

The oldest adage on the street is that nobody makes money during bear markets -- not even the bears. If the historical form holds, every investment strategy will become obsolete by the time we limp towards the end of this cycle. That includes directional types, vol players, risk arbs, bulls, bears, rabbits, ducks -- you name it.

Discipline, patience, perspective and the removal of emotion are the common threads of consistency and the onus is on us to prove our worth. Trust me -- the Minx has the staying power and she'll find your weakness should you have one. Take a deep breath and understand that it's a marathon and not a sprint.

I understand that many of the things I've said aren't what most people want to hear. I'm also humble enough to know that I may be dead wrong in my big-picture beliefs. If that's the case and my greatest cost is opportunity, I'm willing to take that chance and preserve capital rather than build it. My job dictates that I view the big picture as a series of little pictures and I'll dance while the music plays. I simply want to make sure that I don't succomb to the sexy sirens and let the warning signs fall on deaf ears.

Good luck today, and may peace be with you.

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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

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