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Random Thoughts: Despite Linsanity, It's Time to Manage Risk


Now's the time to manage risk, not chase reward.

Is it safe?
-- Christian Szell, Marathon Man

We return to our turrets after an eventful weekend to find the world putting on a brave face.

There's a lot we can touch on this morning-the tragic death of Whitney Houston, the Linsanity surrounding the New York Knicks, the fact that 43 of the Greek ministers who voted against the austerity measures were immediately relieved of their posts-but as we're all about the forward path in these parts, I'll scribe my vibe in kind.

Last week, I mapped a plan surrounding the near-term "solution" to the Greek debt dilemma and proactively positioned risk. When the Greeks pushed back against German demands for deeper cuts-an unforeseen curveball in the marketplace-the tape took it on the chin and I used the decline on Friday to cut my short exposure in half, as discussed in real-time on the Buzz & Banter.

That wasn't my trade catalyst, regardless of the positive P&L, and I had to adapt (but not conform) to the price action.

It's a good thing I did; we walked in this morning to find global markets marching higher, seemingly smitten that the gun-to-the-head approach worked overseas, at least for the time being. The markets have yet to cast an eye toward the next chapter, be it Portugal, Spain, Italy, social unrest, geopolitical strife or any other of a litany of unintended consequences. But alas, I'm getting ahead of myself.

Successful trading requires that we "see all sides" of the probability spectrum and adjust our risk accordingly. I've heard a slew of analogs bandied about the trading universe, with 2003 and 1987 being the most popular scripts. If you put a gun to my head, I might say "1987, sir!" before catching myself. If we demonstrate a disciplined approach to risk management, the rest will take care of itself.

I had a long discussion with Matt Miller on Bloomberg Rewind last week about the state of the unions, both stateside and abroad. We talked about the "Silly Sandwich" of vernacular surrounding the "voluntary" debt haircuts and the growing discord and income inequality manifesting through social mood and spending decisions. Take me at my word, it's not your fault; these are tricky enough times to earn a living, much less make a judgment on the aggregate.

Consistent with the plan mapped last week, albeit a bit early, I enter today's fray with a short bias (25%) and will look to fade (read: add short exposure into) the gap higher in both the N's (NASDAQ) and S's (S&P) with defined risk parameters (above S&P 1360). Potential vehicles will include the indices themselves, and a potential stab in Apple (AAPL) as it ticks toward $500 (note: I love Apple as a company; I'm simply looking to make some hay as we find our way).

Of course, I may be wrong and the liquidity-fueled, performance-anxiety-driven momentum may carry us to unimaginable heights-which is precisely why I'm managing risk rather than chasing reward. As it stands, however, I'm gonna stick to the knitting above and see if we shake a few shekels from the tree in front of Turnaround Tuesday.

Random Thoughts:
  • I've been following sports my entire life and I'm not sure I've ever heard a story as profoundly unique as Jeremy Lin's. Amazing.
  • Through a pure technical lens, the four-letter freaks "should" retrace back to NDX 2400, from where they broke out. See the chart below.

Twitter: @todd_harrison

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Position in SPX, NDX
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