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The Texas Two-Step


Remember, emotion remains the enemy when making financial decisions


Good morning and welcome back to the Lone Star debate. They say that everything is bigger in Texas so I suppose that yesterday's outsized rally was par for the critters' most recent course. When the critters left Minyanville for Texas on Friday, the Minx was meandering lower in search of Michigan's confidence. By the time the Menagerie returned home, however, the dip looked smaller than Jason's Kidd. With the bulls riding roughshod over the beleaguered bears and punching them like a bunch of bitter doggies, the obvious question is begged: How big IS big and how long can Hoofy continue to Spur this rally along?

We've learned many things over the years and none is more important than the issue of respect. As the bubble inflated to obscene proportions, smart money managers -- proven money managers -- got carried out by the withering heights. The non-stop ascent to Giddyville was relentless and, by the time it reached an apex, most everyone had boarded the new paradigm express. After the pin pricked, the averages slid down the slippery slope and fortunes, careers, market values and reputations were all wasted on the way. The bipolar beast was vicious and the collective temptation led to a state of maximum frustration.

So here we are, on the heels of the most alluring rebound in recent memory and eyeballing the quarter's end. Portfolio managers, who've been whipped more than a horse's ass, once again find themselves in the position of justification. For years, they had to explain why their relative performance lagged the insane gains. Then, as the bubble deflated, they tried to "lose less" than the broader tape in a period of relativity. As the vicious full circle comes 'round, they're once again forced to play ketchup as the mood swings back to a manic mania.

There are a few ways to view this juncture and both sides have their fair share of risk. With a scant ten days left until the letters are penned (and four more sessions until expiration), you can bet that there are more than a few fingers on the proverbial trigger. The path of least resistance is higher but we've also learned that past performance is no guarantee of future returns. What we must weigh is the need for exposure (performance anxiety) vs. the discipline of waiting for an advantageous risk/reward profile.

A quick peek of our trading metrics reveals a mixed bag. The technical landscape is chock full of breakouts but the tape remains extended and overbought. The fundamentals have seemingly steadied, but business is far from gangbusters. Psychology is giddy, which can self-perpetuate (especially into quarter-end) but it is at historically ominous (and potentially disasterous) levels. Structurally, the administration seems to be on a mission to reflate the markets and, after being bullied by the bear for the last few years, the Fed is fighting back with a vengeance.

Active traders should monitor S&P 975 (950) and NDX 1175 (1150) as support and levels that, if breached, will offer the first true signal of danger. On the upside, a breach of last Friday's reversal highs (S&P 1007, NDX 1265) are technically bullish and while the S's got there yesterday, the N's have a bit more work to do. With expiration looming, negative gamma abounds and traders will get shorter as the market rallies (and be forced to buy higher) and longer if the market spills (and be forced to sell lower). That, coupled with the high anxiety, will likely exacerbate volatility as we trade ahead.

For my part, and despite the hairs on the back of my neck, I've been eyeballing S&P 1010 as a stop level for the most recent lone bear appendage. While there remains a decent chance of a "turnaround Tuesday" and, bigger picture, I've got a high level of conviction that this once again will turn ugly, I must adhere to the discipline that served me in such good stead through the years. I plan on taking a fresh look at ten (once the noise settles) and, if above my level, will ask Boo to take the fur to the cleaners.

Finally, I would like to send out a Minyan shout out to Steve Kerr and the San Antonio Spurs on winning the 2003 NBA championship. They powered through a strong western conference and handled the Nets with relative ease. For that, they deserve all the snaps they've received and then some. Now Steve, if you could only teach Joe and Livy how to shoot the "J," they'd better represent Texas in the "over the hill" hoops department!

Good luck today and hit 'em hard.
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