The German DAX is down almost 3%!
Good morning and welcome back to the rockin' rodeo. The last two months have been a heavenly haven for our heroic Hoofy as he's tossed every bear that dared to care. With the frenzied crowd cheering loudly, the bodacious bovine bucked and trucked his way to impressive gains and a newfound respect. Can Boo recover and punch those doggies back down or are the ugly ursines barking up the wrong tree? Saddle up and settle in, Minyans, and let's giddy up!
We power up our systems this morning to find a (yawn!) soggy dollar and softer Europe. Before I could take a sip of my morning java, however, my screens lit up with word that Lehman upgraded Cisco (CSCO:Nasdaq). This, my friends, is the tape in a nutshell (no, THIS is the tape in a nutshell). There are macro warning signals and legitimate concerns but the fear of missing continues to prolong the game of Minxy musical chairs. When will it matter and, more importantly, how will we know? There's no easy answer but mapping out potential scenarios is the first step towards profitability.
There are three potential paths that the Minx may choose to travel. She can fail "in here" sans a discernable (new) catalyst, she may "blow off" to the upside and suck in the last bear standing (before rolling over) or she might decide to grind her way and stay to play. I've been relatively vocal in my belief that this will prove to be another painful bear market lesson, but it's always necessary to see all sides of a trade before assuming risk.
What's the case for the first scenario? The current "underpinnings" are a textbook example of the empty hope and false promises that have littered the bear market to date. As "it's different this time," money managers have rushed to catch the train and traders are buying because they act so well. Meanwhile, the greenback is slippy, valuations are rich (vs. historical bottoms), the technicals are extended and psychology is giddy. That's been a recipe for disaster in the past but, thus far, the underlying bid has tempered (prolonged?) the feisty fate.
A recent breakout by the Dow Diamonds (DIA:Amex) and the momentous momentum bode well for scenario two. If (big if) the S's can push through the November highs (940ish), we'll likely get a capitulatory rush of sorts. Granted, there's tranched resistance through S&P 950 but a breach of the first level will cause fresh dribbles from the frothing bulls. Do we need a "bang" to end this rally phase? No, as we learned during the mirror image of March, we don't. It's possible, however, and for purposes of this discussion, it warrants a mention.
The final potential path calls for a sustained rally and the emergence of a new bull market. While everything in my trading bones tells me that this isn't going to happen, discipline dictates acknowledging it as a possibility. We're all just pawns in this game and if she (or they) want to dance higher, we can't "bet the ranch" that it's not gonna happen. While I assign a marginal probability to this outcome, we must "put it out there."
Where do I stand? Somewhere between scenarios one and two. I've got a decent amount of "out month" puts on the sheets and I'll rent some intraday upside (when necessary) to hedge my deltas. Due to the meltage in volatility, I've defined my risk (both ways) and have been erring to the side of Boo. As it stands, I've got two legs in the metaphorical bear costume (50% conviction on the short side) and I'm trying to wrap my arms around the timing.
This promises to be a fun filled expiration week as earnings (CVC (CVC:NYSE), Deere & Company (DE:NYSE), Wal-Mart (WMT:NYSE), Applied Materials (AMAT:Nasdaq), Dell (DELL:Nasdaq), Kohl's (KSS:NYSE) and others), economics (packed) and conferences litter the calendar. We know that expiries tend to exacerbate volatility (both ways) so stay on your toes, put limits on your orders and stay disciplined. It's a marathon and, as such, we need to pace ourselves if we're to have enough juice to finish this rat race. Think positive and trade to win, Minyans, we'll get there.
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 email@example.com.
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