Random Thoughts: Positioning Into the Cyprus Vote
Musings on the S&P, BlackBerry, Facebook, BofA, Apple, high-frequency trading, and more!
It's been wicked busy these last few days; March Madness, a mad dash to fill out our brackets, a sucker-punch from Old Man Winter, positioning into quarter-end. Sunday night, as I was penning Cyprus: Has the Next Phase of the Global Crisis Arrived, I had a flashback to the wild times five years ago. You remember those; it was when The Bear Scare, among other freaky situations, took our weekends away from us.
Consistent with my Sunday vibes, the Snapper attempt arrived on cue yesterday and I used the knee-jerk to reposition some risk. I fed some ducks in BlackBerry (NASDAQ:BBRY) into strength, covered some Facebook (NASDAQ:FB) into weakness and, despite my defined risk level of lore-S&P (INDEXSP:.INX) 1580-30-odd handles away, I faded (read: sold) the rally attempt and nibbled on a starter position in an S&P short. (Note: We detail each move in real-time on the Buzz. Click here for a free trial.)
That's how I'm currently positioned-long BlackBerry, short Facebook-both defined and right-sized, with some September SPY puts that I plan to trade around. While I've been patient this year on the short-side-and thankfully so-I don't foresee a winning result to the Cyprus vote. Ratify, and the rest of Europe shivers (can you imagine what Italians and Spaniards are thinking?); reject it, and the specter of default-and contagion-enters the mindset of the masses.
Seeing both sides-as we strive to do-there are two primary causes for pause in the bear camp. The first is quarter-end animal spirits (psychology and performance anxiety) and the other is the government spigot, which is like the drunken uncle at Thanksgiving who continues to fill not only his glass, but everyone's glass around the table. Nobody expects Uncle Sam to pass out, although he is sometimes known to get belligerent. My point-and sorry for the tangent-is that most everyone is conditioned for the Bernanke Call, which has unceremoniously replaced the Greenspan Put.
I will continue to post the chart below because it matters, and there are folks reading Minyanville for the first time today so they deserve to see it, too. In a perfect world, the Cyprus situation would have arrived when we were kissing that triple top-the first fade should be the easy trade-but the world is far from perfect, and watershed moments in the marketplace, if that is what this is, aren't designed to reward traders, investors, and risk-managers.
Good luck today, and remember that emotion is the enemy when trading.
- I've seen a lot in my 23 years of trading-check some of the links in this article-but taxing deposits? That's nuts, and it adds a twist to the long-standing pattern of investors getting punished at the tops and savers getting screwed at the bottom. Now savers are just getting screwed, period.
- Keep loose grips on the handlebars; the goal when trading is to use price to your advantage. That's what I mean when I talk about right-sized risk; if you're staring at a symbol each and every tick, your exposure is likely too big-or outsized.
- One thing the bulls have going from them is that a "crash" typically occurs from oversold-not overbought-levels. I had this conversation on Twitter following something I shared last Thursday while sipping a martini with Michael Gayed. I wrote: "Disclaimer: I am not currently short…but the risk of a crash likely has the highest probability (relative) in my 23-year career."
- I don't know if it was the Tito's talking but I added "relative" because by definition, crashes are "tail" (low probability) events. Tops are processes-and bottoms are points-but that's a different conversation. Either way, Cyprus, much just like MicroStrategy (NASDAQ:MSTR) and American Home Mortgage (PINK:AHMIQ) is simply a piece of an entirely more complex multi-linear puzzle.
- The financials were heavy yesterday (although Bank of America (NYSE:BAC) traded "dry" all session), high-beta was mixed (I almost bought Apple (NASDAQ:AAPL) out of the gate when it opened flat in a Red Sea (a sign of demand) but I'm waiting until $360, if and when. Breadth was 3:2 negative (not the 2:1 reading required for a tell) and both the dollar and commodities were higher (the euro put a fork into our longstanding "asset class deflation vs. dollar devaluation" thesis).
- Snaps to my Orange for beating Georgetown in their last Big East Conference run (they ran out of gas in the second half against a strong Louisville team after playing four games in four nights). March Madness is officially upon us-Aaron Brown wrote a terrific article on how to gain a betting edge in the tourney-and while Syracuse has a tough draw in the east region (Indiana, Miami), they tend to play best when expectations are low. Best sporting event in the world, full stop!
A reader called "Minayn Bruce" writes:
I read your article from a few weeks back, A Bird's-Eye View of the Stock Market, and I can relate to what you wrote about working three times as hard for half the money; very frustrating. A question, please: I sense the playing field is now almost exclusively algos; the old patterns seem to occur so infrequently that it's reduced the little option guys like me to coin toss bets on how long the algo runs...am I the only one? Is the game all algos now? Maybe I'm just barking at the wind; hope you feel well today.
Your timing is impeccable; I recently had lunch with one of the best traders/investors I've ever known (and he trades on the side; his day job is a chieftain of a multi-billion-dollar conglomerate). One of the topics of our discussion was the current market, as this fella trades size-and he trades size well.
To my surprise, he told me that he's not trading much anymore; that, while he had triple-digit returns a few years -and again, triple-digit returns on size is a lot different than triple-digit returns on a small pad-it took too much out of him. The market has changed; to borrow a phrase, "This is not our father's stock market anymore."
Now, this isn't breaking news-we've been talking about the shifting landscape for over a decade-but it speaks to your point and, for that matter, it's precisely why I've shifted to a much more surgical trading approach. There are a LOT of two-sided opportunities in today's tape but you have to be focused, disciplined and in many instances, quick.
High-frequency traders (the algos), by some accounts, represent upwards of 70% of the daily market volume. Think about that for a moment-more than two out of every three trades is computer generated (in nano-seconds, for that matter). The DNA has changed-I don't think anyone will debate-but that doesn't mean the individual trader/investor is done-it just means he or she must adapt their style to the market.
Hope this helps, and yes, I feel you.
Fare ye well into the bell!
Disclosure: Minyanville has a business relationship with BlackBerry.
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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 firstname.lastname@example.org.
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