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The Single Most Important Stock Market Metric


Exploring the system formerly known as capitalism.

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

Stay classy, San Diego!
-- Ron Burgundy, Anchorman

Following last week's upside breakout, the bulls, with some help from high above, put the technical Danger Zone behind them, right in time for the meat of earnings season.

A quick check of our four primary metrics finds:

1. The technical landscape, while overbought and extended, has support below (former resistance).

2. Fundamentals are coming out hot and heavy (earnings have thus far met or beat on the aggregate).

3. The structural construct got a shot in the arm last week with Ben's helpful hand (insofar as he is able to control the system formerly known as capitalism).

4. Psychology is fluid, ever-changing, and in part, a function of social mood.

While conventional wisdom dictates the first three metrics are large and in charge, I would argue psychology remains the single most important metric. As Viktor Frankl famously wrote in Man's Search for Meaning, "You can never cage free will." While central bankers have thrown the kitchen sink at global financial markets in an effort to thwart deflation, they cannot make people hire more or buy homes.

We've seen some improvement on those fronts; we've also seen a slew of societal acrimony, social unrest, and geopolitical conflict. For all the money, vernacular, and artificial stimuli, there is another side to the current policy and it's manifesting all around us.

On a trading basis, I got stopped out of my short SPY (NYSEARCA:SPY) last week due in large part to the chart below; while I was trying to keep "loose grips" with regard to my approach, it failed and I took a loss.

In a free market, that setup would have likely paid off in spades, but we must trade the tape we have, not the tape we want. In my view, we are witnessing a shameful and historic stretch for the US financial markets, but price remains the ultimate arbiter of variant financial views.

Friday morning, I wrote the following post on our real-time Buzz & Banter:

I got stopped out of my December SPY puts. The technical construct was breached and discipline dictated moving to the sidelines. I write about "discipline over conviction" all the time and I'm obligated to practice what I preach. It's one thing to trade; it's another to do so in real time.

I wrote yesterday about Big Ben's God Complex. Emotion is the enemy when trading-we know this-and while the trading dynamic has seemingly shifted, the gambler in me wants to toss a few shekels on the snake eyes to the downside. Call it sunk money or a Texas hedge; it's written off as far as I'm concerned.

I'm pledging a fixed sum of money (defined risk) to December SPY puts; it's not prudent, it's not in the "Commandments" and it's probably a silly thing to do. But as I disclose my trading in this forum, I'm sharing this because it's true. Right or wrong, I think they'll make money between here and year-end.

When my grandfather Ruby taught me how to play craps (there were a lot of lessons; this was one of our 'things'), the first lesson he taught me-one I didn't always pay attention to but eventually learned he was right about-was "the hard way is a sucker's bet" (this is when you bet on a pair of 2s, 3s, 4s, or 5s); he said the same for boxcars (two 6s) and snake eyes (two 1s), which only won if you called them "coming out." If they hit, they paid off handsomely, but they rarely hit.

I've had a streaky year on a trading basis; I came out of the gate hard, notching the best performance on a percentage basis of my career, took it on the chin and gave back a chunk (stay humble or the market will do it for you), found my groove anew and pushed toward my high-water mark last month, and after that stellar stretch, when I covered everything right near S&P (INDEXSP:.INX) 1560, I laid some shorts back out; it felt right, almost textbook as we re-tested the underbelly of the S&P uptrend, but Big Ben had other ideas.

I won't tell you that the above is smart and unemotional or that it's not good money after bad, and I have no catalyst to point to. Furthermore, I'll be out next week-I'm filming an eSignal commercial this Friday before taking my wife Jamie and daughter Ruby to San Diego Saturday for Sea World, Legoland, and the Zoo and flying back to film another commercial Thursday. It's been a tough year health-wise (between my heart and hip) and to be honest, we need a respite; if a three-day faux honeymoon with our two-year-old is it, we'll embrace it.

With so many catalysts coming down the pipe, my plan is to trade 'em when I spy advantageous risk-reward and keep a tight leash on my time horizon.

We'll share those vibes in real time as we always do over on the Buzz & Banter.

Good luck this week.


Twitter: @todd_harrison

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Position in SPY.
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