Anatomy of a Fade Trade
Walking through a real-time financial thought process.
I awoke this morning to a blanket of white on the East Coast; we’re told this is the last major storm of the season, but predicting weather is akin to calling the stock market. Few can do it well, and we’ll only know with the benefit of hindsight if real-time observations withstand the test of time.
With that said, it’s been a busy day over on our real-time Buzz & Banter, and rather than recreate the wheel, so to speak, I thought it might be of benefit to share a few of the posts from this morning. Remember, we don’t “do” advice in Minyanville—we feel that is disingenuous without knowing the time horizon or risk profile of our audience. We talk about what we’re doing, how we’re doing it, and most importantly, why.
My first Buzz this morning was titled, "Short Santa for a Trade"; I have nothing against Kris Kringle, mind you; I just like to have some fun with words in a business typically devoid of any semblance of creativity. I’ve included it below; the timestamp on the Buzz was 9:41 a.m. EST:
An old adage is that markets bottom on bad news and top on good news; today's NFP was great news (if you believe the numbers), and that adds an element of doubt to the upside rout.
Please note Goldman (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Google (NASDAQ:GOOG), and Amazon (NASDAQ:AMZN) trading lower out of the gate. We know that THE line in the upside sand for the S&P (INDEXSP:.INX) is up at 1580 but I couldn't help but fade (read: short) the opening gap for a quick fade trade.
As the market began to come in (read: retreat from the highs of the gap opening), I realized that just yesterday, in A Bird’s-Eye View of the Stock Market, I wrote about “my desire to play more alpha (individual stocks) and less market (which is crowded), at least until such time that an advantageous risk-reward emerges (S&P 1580 comes to mind).” That triggered the following Buzz, "Anatomy of a Fade Trade," the timestamp at 10:41 a.m. EST:
There are a few elements to this answer; the first was touched on earlier, but may not prove true: Rallies tend to end on good news, while sell-offs often end on bad news (or, in more familiar parlance, the news is always best at a top and worst at a bottom). I am NOT trying to call a top here, I'm just trading; so it's important that I don't "retro-fit" an axiom and fall prey to one of our 12 Cognitive Biases That Endanger Investors.
The simpler answer is that the tape is extended, gapped higher on the NFP, and the first thing my eyes spied were several large cap banks taking a five-finger sally across the cheek. Indeed as I write, Bank America (NYSE:BAC), Goldman Sachs, JPMorgan, Morgan Stanley, and American Express (NYSE:AXP) are down more than 1%. As go the piggies, so goes the poke? In some way, shape, or form, yes.
Here's the rub; S&P 1580 (or there about) is the level to lean against if you wanna make a meaningful stand, so laying out short-side exposure at S&P 1551 doesn't exactly provide nice and tight defined risk. While I can set my stop on this particular effort on the other side of today's high (near my entry), we're still in "no-man's-land" from a technical standpoint. But alas, there's more.
Technical Analysis 101 dictates that the time to buy a breakout is when it retests the level from which it broke out, or in current parlance, S&P 1525 and/or NDX (INDEXNASDAQ:NDX) 2750. As my chosen vehicle was the S&P, I've included a short-term chart below to demonstrate this logic. I'm not saying it gets there, mind you -- despite the lethargy in the financials, market internals remain 9:5 positive -- but if it does, that would be the level to cover up this trade.
Yes -- the short side remains the cute side above those price parameters (technical analysis is a better context than catalyst), but that's entirely OK; you can do anything as long as you're disciplined.
The trade remains open -- we’re updating it in real-time on the Buzz -- but that’s the thought process from someone who makes his living in the nuts and guts of the financial strut. Sometimes right, sometimes wrong, but always honest as we’re apt to say, so we’ll see how this puppy plays out through the rest of the session -- and whether or not I opt to carry home any risk, rather than take the time to enjoy my family, who I haven’t seen since last Sunday!
Good luck, and have a great weekend!
Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.
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 email@example.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.