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Once Bitten, Twice Shy


I know that, in the truest definition of bear markets, nobody makes coin--not even the bears.

Many have I loved
Many times been bitten
Many times I've gazed
Along the open road

(Led Zeppelin)

It's hard to put on a brave face these days, eh? With geopolitical turmoil stealing the spotlight, structural imbalances coming to bear and the consumer fading with the once proud middle-class, we've got a full plate in front of us as we gaze along the open road. I was traveling on business yesterday and returned last night to chew through the daily dance of high finance. I was struck by the harsh reality of the headlines---particularly in the context of green screens--and wondered aloud if the collective sentiment had once again edged off-sides.

In the sixteen years I've been trading, I've been very right and I've been very wrong. It is the combination of those two experiences--the rewards of proactive positioning and the humility of lessons learned--that forms our person and shapes our perspective. I've come to understand that the market truth typically lies between the two extremes of popular opinion and therein lies the path of profitability. The tape, as a discounting mechanism, has the benefit of foresight built into the price action. In real-time, we're left to assess the four primary metrics--technicals, structural, fundamentals and psychology--and ascertain an advantageous risk/reward.

There are certain views that I'm comfortable with. I don't believe that asset classes can significantly appreciate without an attendant devaluation of the U.S dollar. I believe certain sectors--energy and metals--have secular winds at their back while others--tech and financials--have steeper and deeper earning curves ahead. There is inflation in things we need (energy, education, healthcare) and deflation in things we want (as the internet removes pricing power across all industries). Risk adverse behavior will continue to manifest as the difference between legitimate economic expansion and debt-induced largesse comes home to roost. And margin contraction, as we're beginning to see, will be the fatal flaw of fundamental analysis.

That, to me, is the easy part. Application and execution are entirely more elusive as we try to morph our mindset to a black bottom line. I often opine that big picture views are dangerous weapons in the hands of active traders as they tend to cloud objective eyes. Ergo, the noise and nuances of flickering ticks shouldn't shape the view of longer-term investors. There are different strokes for different folks; making that distinction--and making certain that our time horizon and risk-profiles are in sync--is a subtle yet critical element to any successful market path.

I view the markets through four distinct lenses---cycles, phases, trends, and nuances--and that allows for a contextual framework with which to assess risk. While a steady chorus of secular bears have emerged as we slide down the slippery slope, I will offer that we're simply paying an inevitable bar tab after the debt-laden consumption binge. Business cycles exist as a self-cleansing mechanism and we've been artificially stimulated through fiscal and monetary policy since the back of the bubble. I've been consistent with this view through green screens and back, unpopular as it has been in the chase for the bigger, better thing.

While the popular press is quick to point a finger to the growing chorus of international conflicts as the root cause of the recent malaise, I think they've got it backwards. I believe that the uptick in societal acrimony, from small towns to industrialized nations, is a manifestation of an increasingly frayed socioeconomic landscape. We're at a very fragile juncture in our interwoven, finance-based, dollar-backed global economy and tensions are high. And while we know that the sharpest rallies occur in the context of a bear market, we must remain conscious of our big picture conundrum when they inevitably arrive.

For my part and with my money, I've choked up on my risk bat and shortened the horizon on my bets. I know that, in the truest definition of bear markets, nobody makes coin--not even the bears. As part of this mindset, I often remind myself that the ability not to trade is sometimes as important as trading ability and opportunities are made up easier than losses. I understand that I'm going to miss moves both ways but when my chips are on the table, I want to make certain that I've got an exit strategy or defined risk. It's not sexy and far from fun but nobody ever said bear markets are.

As we edge through this latest process of price discovery, my eyes are cast to the June lows in the S&P and Russell as a near-term technical framework. I will also by eyeing the reaction to news--rather than the news itself--for clues regarding the underlying supply/demand. With Mr. Bernanke stepping on stage, doves may act as as a possible psychological catalyst in a somewhat oversold environment. While my sense is that vernacular is only as powerful as the credibility assigned to it, the stakes are high and agendas are deep. I will simply ask that you see both sides of the coming ride and remember that hope rarely qualifies as an actionable catalyst.

Good luck today.

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Position in financials, metals
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