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The Other Side of the Trade: Bear Trap!

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Time and Price. There is no substitute.

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"Can you tell a green field from a cold steel rail? A smile from a veil? Do you think you can tell?"
--Pink Floyd


One of our favorite adages in Minyanville is to sell hope and buy despair, but the question is begged whether we've seen enough fear this year.

Last Wednesday, as the wheels wobbled on the financial wagon, we offered that the 2008 trading low was likely established the prior week when the S&P ticked at 840 and the DJIA traded at 7880.

Following the fragile Friday retest, the market enjoyed a spirited sprint that added 150 S&P handles and 1400 Dow points in a matter of days. As psychology shifts and investors twist, we're left to wonder if the worst is behind us.

There is a massive distinction between a trading low and market bottom. All else being equal, it remains my view that either the dollar must devalue or equities will decline-perhaps next year-as debt destruction manifests across the financial continuum.

As traders, the destination we arrive at pales in comparison to the path that we take to get there. Therein lies the opportunity for those living in the nuts and guts trading the flickering ticks. The volatility is wicked but disciplined risk managers are feasting on the emotional famine.

There are two sides in each trade and risk to every reward. As such, I wanted to explore five reasons why we could see lower prices still by the time we welcome 2009.

World, Hold On!

Seeds of isolationism continue to sow as the going gets tough and the tough tend to their own interests. Derivatives may be financial weapons of mass destruction but liquidity is the neutron bomb-pull the pin and it'll suck the life out of the global economy.


Recently nationalized global central banks are being polarized as the Dot.Gov bubble bursts. Australia ruled out deposit guarantees for foreign banks, the Royal Bank of Scotland (RBS) canceled its credit line to the National Petroleum Company of Venezuela and Nicolas Sarkozy proposed that each country launch sovereign wealth funds and take stakes in key industries to stop them from falling into foreign hands.

As countries fend for themselves, the risk of geopolitical turmoil is elevated. My single greatest concern is the potential for "something serious" to occur in the Middle East while the current administration is still in office..

Rampart!

As a derivatives trader for seventeen years, I understand the depth and complexity of our current conundrum. Stocks are the world's biggest thermometers but credit is the backbone and you can't walk without your vertebrae.

Classic capitulatory signs were present two weeks ago but the credit cancer is bigger than the economic patient. There are upwards of $500 trillion notional in outstanding derivative contracts and the nationalization of financial institutions transfers-but doesn't erase-that risk.

False Hope

Much has been written about the uptick in the credit markets being a precursor to an equity rally. While we've seen improvement in credit symptoms ranging from LIBOR to TED spreads, we've got a ways to go before conditions normalize.

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Position in S&P

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 todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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