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Monday Morning Quarterback: Double Black Diamond


Active trading is for experts only


I remember the column as if it were written yesterday. It was the middle of the summer in 2001 when I scribed The Long, Hard Road. It wasn't a call to rush out and buy guns and food; it was a sobering assessment of the prolonged path we collectively faced.

Bear markets, I offered, take their own sweet time in coming to an end.

What we've witnessed in the last eight years has been nothing short of astounding. While the genesis of that particular article was the implosion of the technology bubble and the natural progression of time and price that would surely follow, a crash of another breed was right around the corner, one that would forever alter the world and shatter our innocence.

While pundits continue to discuss parameters that define bull and bear markets and debate conventional metrics of our economic status, I have a different, albeit somewhat unconventional take on where we've been and where we're going. It's old fare to ye faithful but worth repeating for those new to our community.

I'm of the view that we've been in a secular bear market since the turn of the century, one that's been masked by the lower dollar (-34% since 2002) and skewed by the spending habits of a slimming margin of society.

As the middle class steadily eroded for many years, we referred to our two-class society as the "have's" and "have not's" that grappled with inflation in things we need, and deflation in things we want. While that wasn't reflected in headline numbers or the mainstream press, it was clear, even when the Dow was probing all-time highs at the end of 2006, there was a chasm between perception and reality.

Towards the end of 2007, we observed the collision of voluntary and involuntary thrift as the point of recognition arrived like a clap of thunder and the era of conspicuous consumption morphed into an Age of Austerity.

There was, in many ways, nowhere to run and nowhere to hide. Proactive financial intelligence was no longer a luxury; it was a societal need.

We discussed many of these dynamics before they were validated by the price action in the marketplace. As time is the most precious commodity, I won't waste yours by sorting through the 25,000 articles or 100,000 plus Buzzes we've published to date. What I will do is point to two individual columns-here and here-that contain numerous links that speak to those points.

Why the walk down Memory Lane? To appreciate where we are, we must understand how we got here. It's easy to get caught up in the "that was then, this is now" mindset and push the past deep intro the rear-view mirror. The last year has been a roller coaster of emotion-one that challenged the very existence of capitalism-and you can't blame folks who want to stop the world 'cause they wanna get off.

In early March, we spoke of the Ostrich Position as investors buried their head to avoid reality. Now, following one of the most amazing rallies in the history of financial markets, we're seeing avoidance the other way, a universal acceptance that markets are cyclical and what goes around comes around; a notion that brings this conversation full circle.

We asked last week if this is Another Bubble or Deep Trouble in an attempt to see both sides of the current ride. Central to that dialog was the premise that policymakers would prefer to push our massive monetary obligations to future generations but-and this is the spooky part-that transference of risk was no longer a stateside decision.

My point is simple, albeit not something most folks want to hear. While there is indeed a scenario that includes significantly higher prices, the cost of financial freedom runs deep. There are no free lunches and there are no simple answers. There is, however, awareness, lucidity and independent thought and that, my friends, is why there is also a Minyanville.

I've shared my fare on the two sides of the coin. On one, there is the orderly destruction of debt that will ultimately pave the way to an outside-in recovery. Much like the Internet prophecy proved true-but not without a tech crash-so too will globalization, but not before debt destruction.

On the other, there is protectionism and isolationism that will slice and dice economic hardship into every corner of the world as sovereign nations take care of their own. In that scenario, societal acrimony will lead to social unrest and, lest calmer heads prevail, geopolitical strife.

I'm not smart enough to tell you which script will play out but it's paramount that we understand the stakes in play. As I offered last week, this too shall pass and that remains the single greatest silver lining.

For when this confluence of confusion finally clears, there won't just be opportunities of a lifetime; there will be a pathway to prosperity that defines generations to come.

Through a longer-term secular lens, my best guess is that we're halfway there.

Random Thoughts:

  • Optimism is human nature but when it comes to financial forecasts, the best intentions often run awry.

  • Minyans just don't see "what," they ask "why?"

  • Professor "Metro" (aka B-Rife) has been all over the China Syndrome (-5.8% overnight, 17.5% in the last 9 days), noting the double top that broke a double bottom.

  • I'll again take his vibe one step further and juxtaposed Shanghai to the NASDAQ. While it's early, it's worth a look, particularly given the confluence of resistance that intersects precisely at the 50% retracement of the entire slide from the 2007 top.

  • She's fallen and I can't get up? Maybe, maybe not, but the dandruff in Granny Goldman (GS) is worthy of a mention. A trade through $159 will seemingly trigger some downside dandruff.

  • I am, so you know, still lugging some lottery tickets $60-line puts in Research in Motion (RIMM) with one eye on the dandruff and the other on the downside gap (between $50 and $57). It's part set-up, part tape call and part edgeless. It's a legacy, sorta like Flounder, which I'll peel into any squeal.

  • Remember last week when I was adding back some Powershares (QQQQ) December puts into NDX 1625ish with hopes of "tethering out" October puts on a dip down? As the NDX probed 1600 (and filled the parabolic pre-FOMC gap), I did just that. For those keeping track at home, this is the third time that I've sold blips (into NDX 1630) and nibbled on dips (at NDX 1600) as I trade around a broader thesis.

  • Along those lines and consistent with my relative risk, I humbly slipped an arm out of my metaphorical bear costume on Friday, leaving two legs, or 50% conviction on the short-side.

  • Given my covers, I now have this trade set up for a push, at worst. Why? My predetermined stop loss level is 2% above NASDAQ 2000.

  • While it's true that I have a longstanding habit of catching cusps and cutting bait-the proverbial premature evacuation-I will offer that the bear costume appendage removal is a function of a few things:

    • The first is the set-up, which we offered last week was the most compelling of the year. As we slip away from that pivot point, the "edge" rounds on a relative basis.

    • Discipline trumps conviction. While I was "all in" for a trade (100% conviction when I initiated risk at NASDAQ 2007), three 2% scalps, as we probed the lower end of the recent trend channel, begged some "in between" respect.

    • It's all about "risk management" in these parts, with some legs alone the way. Crafting a risk-reward that gives me a "free look" at the downside is a profile I'll rarely say shy away from.

    • There's still the potential that the sideways slither between NDX 1580 and NDX 1630 is working off the overbought condition as a function of time.

  • Consistent with my stylistic approach and as a function of discipline, I "picked anew" at my short-side exposure into the opening malaise.

  • Lest there is ANY confusion, this isn't a victory lap-we don't do them when a trade is booked much less when risk is outstanding. That's asking for trouble and I get into enough of that on my own, thank you.

  • The Autumn Wind is a Pirate! I love this time of year. Why? My beloved Raiders are tied for first! Raider Nation. Just win, baby!

  • Bad seasons define good fans just like bad times define good friends.

  • In a world of economic turbulence and confusion with disaster lurking at every turn, where does one go for answers?

  • Do you believe Minyanville is using new media to affect positive change in the world? If so-and only if so-weigh on in! Ye faithful did so last year and almost fried their servers!

  • Minyan Dougie Kass and I will be Roaring for a Cure this Saturday afternoon in East Hampton. Area Minyans are encouraged to join us as we do our part to affect positive change.

  • We miss you, Blue Steel.

  • Good luck Minyans-have a great week and please remember, let's be careful out there!


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Position in rimm, s&p, ndx
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