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Random Thoughts: The Other Side of Discipline


Follow your process through good times and bad.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Yesterday, following an out-of-office medical check-up, I raced home to cover my SPY (NYSEARCA:SPY) short. The S&P (INDEXSP:.INX) was trading below my predetermined stop level at the time - I had set it above S&P 1645 - but it ticked there in my absence and I was in no mood to post-rationalize risk.

Following a stick May stretch that required me to 'trade around' some sloppiness in my process - I got squeezed, rode it out, and covered up at S&P 1600 only to redeploy short-side exposure above S&P 1630 - I was resolute to get back on the discipline over conviction track rather than call an audible, which some might argue would have been warranted given the price action late yesterday.

We awoke this morning to find a world awash in worry; there were more jitters in Japan, tensions in Turkey, and Judgment Day approaches in Germany. Regarding the latter matter, I will share some solid insights from my good friend Jeff Saut, the Chief Investment Officer of Raymond James:

"The German Constitutional Court will hold hearings tomorrow on the legality of the European Central Bank's 'outright monetary transactions' (OMT) program. The OMT is a program designed to give the European Central Bank (ECB) the ability to purchase government bonds as a 'backstop' against higher interest rates. Surprisingly, the ECB has yet to actually engage in OMT. Despite that, it is none other than the ECB's President, Mario Draghi, who states, 'OMT has brought stability, not only to the markets in Europe, but also to the markets worldwide.'
"Still, while our markets are currently not paying much attention to the eurozone, I think there should be concern over what damage said hearings might do. Indeed, in past missives I have targeted June 11/12 as a potential 'pivot point' for some downside action that I thought would be contained leading to higher highs into the end of the quarter. Accordingly, this week shapes up as an important week to see if we will extend higher into the first part of July, or if we will 'fail' into quarter's end leading to this year's first meaningful decline. As of yesterday, the jury remains 'out.'"

To wit, we should see a Snapper attempt higher this morning - it is Turnaround Tuesday - at which point a truer tenor for the tape will emerge after the first half-hour noise dissipates. That should give traders an opportunity to position, if that is what one wishes to do.

One virtue of successful trading is to not chase missed opportunities, while another is not to be stubborn surrounding an optimal entry. Defined risk allows you to dance between those elephants, if that is what you choose to do; sometimes the ability not to trade proves as valuable as trading ability.

For my part, I punted my Facebook Inc (NASDAQ:FB) position yesterday into the 5% pop - better lucky than smart - in tandem with my S&P cover (I reminded myself that good traders know how to make money; great traders know how to take a loss).

That leaves me with minimal risk and a lot of dry powder as we fire up the second session of our five-session set. I'll see YOU over on the Buzz & Banter, where we'll figure this out - or attempt to - in real-time. (Click here for a free two-week trial).

Random Thoughts
  • S&P 1600-1650 is the risk range, per the chart below.
  • The bears may have some unfinished business - perhaps down to S&P 1500 - so please see both sides as we edge into the summer.
  • I'm watching gold ($1325 is THE level to watch), the financials (Goldman Sachs Group, Inc. (NYSE:GS), Barclays PLC (NYSE:BCS), and Deutsche Bank AG (NYSE:DB) are heavy), the tech arena (Apple Inc. (NASDAQ:AAPL) is again weak; $360 is where I perk up), market breadth (as one-sided as we've seen it this year), and our levels, through the lens of stair-step risk.
  • Do you think that maybe the cicadas won't show? I'm a card-carrying entomophobiac and I'm not afraid to admit it!
  • Good luck today and think positive; profitability begins within.


Twitter: @todd_harrison

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