Trading the Tape, Warts and All
Viewing the market through my mind's eye.
I returned from an 8:30 a.m. downtown meld—which lasted longer than expected, and that's a good thing—to find all sorts of objects in motion.
There's the now-famous Greg Smith op-ed in the New York Times—and some worthy responses from around the Street.
There's the Groundhog Day action in Apple (AAPL), which is either the blow-off phase for the stock or a lit fuse for the broader market.
And there's this email from an old-school Minyan. And I quote:
Through the years, your mantras have kept my head straight quite often. Please don’t take this as salt in the wound or anything of the sort. I'm simply trying to return the favor that you have provided to me over the years.
- Discipline over conviction.
- The ability not to trade is as valuable as trading ability.
- The tape can remain irrational longer than anyone can stay solvent.
Not advice, just trying to be part of a caring community. We can all get blind to our biases. It certainly happens to all of us. The easy thing to do would be silent -- the hard thing about caring is saying the difficult things when it may hurt. I hope you aren’t setting yourself up for failure.
For those of you who missed my late afternoon Buzz, I'll share it again in the interest of context:
I may look back at this moment in time as the definition of "lost discipline" but I'm going home short for three reasons:
1.The first move (after the FOMC decision) is typically the false move.
2. Look at what they're doing to Gold; this is a flat-out breakdown.
3. This has the distinct feeling of a blow-off rally to me... with the VXO at 14 and change.
This is NOT advice; I am trading in a manner consistent with my individual risk parameters, which isn't to say that it's correct. However, given we're a community based on "truth" and "trust," I would be remiss if I didn't communicate into the closing bell. Expiration is likely playing a hand here but that sword (obviously) swings both ways.
Now, if you'll excuse me, I've got a ten month old daughter at home and I, for one, could sure use an unconditional smile! May peace be with you.
Fast-Forward to Right Now...
I strapped into my turret to around 11:15 a.m. to find the S&P flattish (down a deuce), the Nasdaq winking green (on the heels of Apple) and gold getting jack-hammered anew, down another $50 (down almost 9% since the end of February).
That begs a critical question: Is Gold Giving Stocks a Warning, as it did on March 1, prior to a quick and nifty 2.5% three-day correction in equities, or is this simply a rotation away from the "fear trade," which is seemingly confirmed by the level in the VXO (15 and change)?
The answer to that question will define our forward path. The bears are quick to offer that the relatively constructive tenor of the Fed's message yesterday (not to mention the dissenting opinion of Federal Reserve Bank of Richmond President Jeffrey Lacker) is a precursor to them pulling away the punch bowl (read: No QE3) and commodity volatility is typically a precursor to equity movement.
Through that lens, the first move (higher) will indeed be the false move.
The bulls? They want the bears to maintain that train of thought as it provides the building blocks for a steep wall of worry that they continue to climb. The banks act great, breadth is stellar and volume returned yesterday with a vengeance as John Q Public bought a ticket to climb aboard the Matador Express.
To Minyan BP's email above—which I most certainly appreciate—I would like to clarify a few points.
First, one should only trade—and I only trade—with money that I can afford to lose. That's not post-rationalization—yesterday was my worst P&L in 2012 by a factor of three—but it's all relative. At the risk of mushing myself, I've still got a healthy double-digit P&L year-to-date.
Second, did I lose my discipline? In a manner of speaking yes, as nice and tight defined risk parameters were one of my catalysts for entering the trade in the first place. While I traded around my positions intraday—as I do most every day—I opted not to reach into the euphoria to cover the lion's share of my remaining risk (which was sized right from the get go and therefore digestible). And when the tape viciously ramped higher into the close, I made a conscious decision to add—rather than subtract—downside exposure.
What am I seeing now? The same pattern we identified in December—the "reverse dandruff" that "worked" from S&P 1250 to S&P 1360 (and then some) is again in play, as evidenced in the chart below.
This particular pattern "works" to S&P 1410, give or take, and my intention is to trade around my short bias as that plays out. I’m not talking about piling into risk and closing my eyes—there are opportunities to make incremental hay each day—but there is risk definition, as well as a conscious assumption or the incremental exposure.
This may prove to be the wrong stylistic approach, but I've been wrong before and I'll be wrong again. I can't focus on what was, I must attempt to discount to what will be.
To add spice to the mix, I'm scheduled to travel to Palo Alto next week for several high-level meetings with some very social folks that must be factored into my equation as blind risk is bad risk.
One step at a time—particularly during an expiration week—as we together find our way, and I hope that sharing my thought process—the good, bad, and ugly—will add value to yours even if, in some regards, those lessons painted in the crimson hue of my P&L.
As always, I hope this finds you well.
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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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