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Todd Harrison: How to Play -- or Not to Play -- the 1929 Crash Analog


Confronting our cognitive biases.

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

There has been a pretty fierce two-sided debate surrounding the analog between 1929 and the present day.

The bulls are quick to poke holes in it -- the percentage moves in the indices don't jibe, there are different scales on the X and Y axes, and perhaps most intuitive, history, while sometimes rhyming, rarely repeats.

And of course there are a host of cognitive biases, including Gambler's Fallacy, which impact how we govern the financial markets, as well as our actions and interpretations.

For my part, I wouldn't be at all surprised if the wheels fell off the wagon and we experience a downside ride that isn't kick-saved by the dip shtick. After a five-year 177% parabolic frolic that has conditioned investors to buy each and every dip, the Pavlovian response has perhaps become too easy.

Here's the thing, though -- we don't have to make that decision just yet; we can let the market show us the way.

According to the pattern discussed, the key level for this analog is S&P (INDEXSP:.INX) 1762, or roughly 3.5% below current levels. That's the level of lore that will determine if there is meat to this bone or if it's just fodder for the digital financial community.

Either way, it should be a level on your radar, if and when, as we navigate the chasm between perception and reality.

The Volatility of Volatility

Yesterday we touched on the increased volatility in single stocks this reporting season. Later in the session, we received a note from a large broker-dealer that highlighted the continued selling of upside call options.

This "compression" is a familiar concept to market veterans; in the reach for yield, investors will sell dimes in front of bulldozers in an attempt to scratch out an incremental return.

All the while, the VXO (INDEXCBOE:VXO) is back below Bar Mitzvah status. While it has some room before reaching long-term support (in and around VXO 10), we're approaching levels where it has paid to be a buyer.

Flattening, in 140 Characters or Less

About a month ago, we bought some Twitter (NYSE:TWTR) in and around $56 for the kids' long-term accounts. When the stock popped to $66 into earnings, my inclination was to take some, if not all, of the trade. After some discussion, we let it ride.

The stock got hammered to $50 following sluggish user growth metrics and I post-rationalized my decision-making process. I'm not in love with the tape, or particularly enthused with the latest round of fundamentals, but it wasn't time to panic.

Today, with the stock back at $56, I unwound the risk on behalf of the kids. While I've had $30, $40, $50 million swings in a single session -- true story -- my risk appetite for high-flyers in their accounts isn't within my comfort margin.

When in doubt, sit it out, and so we did; no harm, no foul.

Random Thoughts
  • GW Pharmaceuticals (NASDAQ:GWPH) has been an upside vehicle as I search out "real" cannabis vehicles. Unfortunately, I thought it got a bit extended and moved to the sidelines -- before it really got extended (+600% since last summer). It remains on my wish list at lower levels, if and when.
  • We've been watching the laggy action in the small caps, as evidenced by the Russell 2000 (INDEXRUSSELL:RUT). The index broke a defined channel and is now approaching the underbelly, for those in the hunt for a defined risk short-side try. See the chart below.
  • I'm a card-carrying member of A.D.D Anonymous (although I keep losing my card), but for the life of me, I can't remember a winter quite like this one. The hits just keep on coming; stay warm, stay safe.
  • Over in "Social Mood Watch," I came across Assault on Wall Street last night and almost couldn't believe my eyes. The fact that someone would even make this movie -- not to mention how the movie ends -- is mind-boggling on several levels.
  • It's been a pretty special season for my Syracuse Orange, 23-0 and ranked No. 1 in the country. My single biggest concern all season has been depth up front, and with their starting center out for good, and their No. 3 center nursing a knee sprain, tonight's game against a gritty Pitt team will be their toughest test by a mile.
  • Good luck as we take our journey one stair-step at a time.

Twitter: @todd_harrison

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