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Dream Weaver


How you play is dependent on your particular time horizon and risk profile.

Many dreams come true
And some have silver linings
I live for my dream
And a pocketful of gold

(Led Zeppelin)

Welcome back to the twisty track. That tenuous tremble you feel in your heels is the drive to survive on wobbly wheels. As a herd of hedge funds digest last month's tough tape and lumber towards quarter-end, we edge into June with one eye on the flickering ticks and the other on relative performance. Indeed, in the wilds of Wall Street, the only thing worse than losing money is fessing up when others lose less. And as the second-quarter pen edges towards paper, there are a whole lotta white knuckles rapping on the realm of return.

We scribed a vibe in late April, during the parabolic metal frolic, and wondered aloud if there was blood on the streets. A few short days ago, the ECB warned anew that the interwoven financial fabric, coupled with "increasingly similar" trading strategies, posed a considerable threat to our collective health. With emerging markets at five month lows and Japan effectively closing the free ATM, we're left to wonder if the other side of the carry trade is getting carried out. And while some folks have pointed a prickly finger at Big Ben Bernanke, we can't hate the player just because he plays the game. Yes, a little honesty seems to go a long way these days, even if it's the wrong way.

Anyone who has traded through multiple cycles will tell you that betting on a "tail" is a low probability outcome. History is littered with outlier events--from the crash of '87 to LTCM and Russian Rubles to bubble tops--but the meat of performance isn't captured on the cusp, it's from having the foresight to recognize an altered state. That, in a nutshell, is the question on the lips of many a market maven these days. Has the dynamic shifted? What, pray tell, will the secular winds blow our way? And perhaps most importantly, how can we preserve our capital and proactively position ourselves to prosper?

The low level of volatility these last few years has built up a steady compression as players swapped size for speed and chased crumbs of incremental performance. What we're seeing now is the early stages of that unwind and a potential sea change in how risk is managed by a bubble of funds. While I'm not smart enough to know what's coming down the pipe, I'm seasoned enough to prepare for the spectrum of probabilities. I anticipate the "rolling volatility" in commodities and the emerging markets to continue its migration into US equities. As such, I wanna play a bit smaller with wider "scales" to effectively adapt to my style to the market. I will say it again because it's extremely important--capital preservation is the first step to prolonged profitability--and I am practicing what I preach.

I speak with a wide swatch of market participants, from big gorillas to nimble gazelles, and there still seems to be a conditioned psychology to buy dips. While stocks, as an asset class, are the best bets over time, selective exposure--or alpha bits--will seperate the makers from the fakers as we edge ahead. One of the basic tenets of my current view (energy and metals will ultimately outperform tech and financials) is that the former complex is crowded with trapped longs and looming supply. The five year performance of the once fabled horsemen--Microsoft (MSFT), Intel (INTC), Dell (DELL) and Cisco (CSCO)--tells the tale of a thousand words. There are alotta holders with a much higher cost basis, a dynamic that doesn't preclude a rally but will likely quell the durability of it.

As I wrote last week, a test of mainstay support was to be expected and we've gotten that attendant probe. Each technical tickle weakens our levels and, as we've now endured eight downside shots at the S&P 200-day, we must appreciate the potential for further slippage and a new phase of price discovery. My good friend Jeff Saut of Raymond James often opines that where you stand is a function of where you sit. Ergo, how you play is dependent on your particular time horizon and risk profile. For those looking at the big picture flicks rather than the near-term nuances, it will serve you in good stead to give your portfolio a thorough examination. Our financial destination pales in comparison to the path that we take to get there but if the purpose of the journey is the journey itself, we've gotta make sure each step is a sturdy one.

We power up this Hump Day pup to find the emerging markets lower across the board (for the third straight day), the dollar index higher by 30 bips (the greenback has been the contra-asset class tell), commodities listening to chin music anew (CRB 325 is a multiyear trendline) and a whole lotta technical levels nestled underneath (S&P 1247-60, BKX 108, XBD 203, Russell 702, DRG 323, HGX 205). I'll continue to watch the market internals for clues (breadth don't lie) and will remind myself of two basic tenets of successful trading. Opportunities are made up easier than losses and while good traders know how to make money, great traders know how to take a loss.

Good luck today.

Position in energy, metals, financials

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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