Tuesday, February 28, 2012

Updated Confusion

When we last looked over the macro picture, I presented bonds at the bottom of a descending channel. Let us get a quick update on the bond situation:

As hoped, bonds have bounced and are now testing the top of the descending channel. Despite this upwards push, the market has continued to fair well, with dips being very, very shallow and aggressively bought so far. We have since pushed from SPX 1330s to 1370, a level that many are watching, and one that is proving to be quite stubborn.

While a selloff in the bnods would be bullish for equities and allow us to push through the bother of SPX 1370, the US Dollar is telling a slightly different story, via the UUP.

The UUP is resting on the 200 SMA on the daily, and the 50 SMA on the weekly. While the correlation between the dollar and the market has loosened recently, this kind of support may cause the USD to rip enough to make a difference.

If the DX, and correspondingly, the UUP, lose these levels, then I think we should strap in for a trip to the 1400s. For now, however, I continue long. And although I am scared, I'm leaving it to my stops tell me when I'm wrong.

Tuesday, February 14, 2012

Aliens and Your Brokerage Account

As human beings, we are absolutely terrible at imaging things that don’t resemble us. Consider even the most imaginative monsters in our movies: they are symmetrical, usually have a head, torso with attached limbs, and even have eyes and mouths on their heads.

Is this the best we can do? Seriously?

Frankly, I find myself continually disappointed by sci-fi movies. Not only are the monsters, at best, banal re-maginings of ourselves, another common theme is that humanity is usually saved by... our humanity. These little stories we like to tell ourselves are predictable: we encounter a threat from a distorted reflection of ourselves, and after a struggle, relying on a pure, ideal version of “human,” we usually prevail.

Sometimes, we even find other advanced, allied races -- for some reason, these usually look like elves, and are even more “ideal” than our current state -- telling us that our humanity is what makes us interesting, what makes us unique, what makes us special...

Oh, please. These are stories layered with hubris so thick that our inability to see it is ironic.

I’d like to see a movie with something truly alien. Something with motives that are outside our comprehension, something with perceptions that are not our own, something with reactions that cannot be explained by our pathetic little causality- and narrative-addicted brains. Something that instinctively relies on probability, doesn’t blind itself with narrative, and embraces cost-benefit analysis.

I don’t, however, expect Hollywood to give us a glimpse of what that’d be like. There isn’t a reason to look that far. No, if you want to fight ruthless, focused aliens, go no further than your brokerage account.

When we trade today, we are up against countless algorithms. One way or another, all these algos do is find a setup that has a good risk/reward return, and then... they trade it. They don’t worry about “Who’s buying up here?” They don’t get gun-shy, and they don’t get trigger-happy.

 Spock won't be by to tell us how our special humanity will save us, either.

Unburdened by the layers and layers of narrative filters they put between themselves and reality, they execute as designed. They put up a trade, with a defined stop, and then take the profit -- or stop -- when they get it.

In this arena, it is do-or-die, and we’re up against things that aren’t blinded by causality, by narrative, or by silly superstition. Their instinct is to place the trade, and execute the plan. Discipline is their very nature, their DNA.

So here I sit, long and scared. And there they are, waiting for me to flinch, so they can take my money. The difference is, they don’t get scared. Or flinch. They can’t. They don’t know how.

Sometimes, it’s good to remember that.

Sunday, February 12, 2012

Bonds and Dips

I loved the headlines on Friday: "Market logs worst day in 2012..." What was this carnage? Dow down 89 points, S&P 500 down 9.3 points. Yeah, it's been a very bullish start to the year.

Since Jan 1st, we've moved up from 1260 to 1350 with almost no major selloffs. That's almost a hundred points in a month. I traded the rally on the bull side, and have handily beaten the averages. As such, I continue to be bullish -- long until wrong, as they say.

However, I am currently extremely light. In fact, I hold only one open position. As I currently have cash I am looking to put to work, I would like to take a minute and go over a few possibilities.

First, let us review the largest reservoir of cash, the long bond. Here is the situation as I see it.

While bonds are showing some short-term strength on the expected bounce off the volume pocket directly below, I believe the TLT is headed lower. It may bounce -- ideally to the top of the descending channel -- but should it crack the volume pocket below, we prices should drop rapidly. This will mean that a very large amount of liquidity will pour into the markets, and is definitely something to watch for. Ideally, while loaded to the gills with calls on high-beta stocks.

Speaking of high-beta stocks, let us consider equities. An interseting study is IWM, with an overlay from this time last year.

Here, we see about a month of choppy, difficult trading slowly grinding downwards for about a month. For swing traders, this is incredibly frustrating.

Most of the down opens are met with buying, however. And even though the market did trend lower, buying the dips continued to work -- albeit with shorter timeframes. Having muddled through this market before, we have the tools to deal with it, and will grin and bear it should we see it.

Next, consider what I personally consider an ideal situation: The quick, sharp pullback. Erik Swarts demonstrates this best in his latest missive, Seat Belts.

The percentages Erik's study shows would call for a very rapid pullback putting us close the levels we saw at the beginning of the year. While I would not put that past the realm of possibility, that does mean that we get some quick bloodletting, which will put us back around the 1250 - 1270 mark.

...in which case, we still buy the dip.

So, we have three scenarios:

  • Should we grind higher, we continue to buy the dip.
  • Should we grind, we buy the dip.
  • Should we drop quickly, we buy the dip.

As I write this, Athens is burning. People are being massacred in Syria. The Iran/Israel situation is deteriorating by the minute. Honestly, as through 2011, this continues to be the most depressing news cycle I can remember.

However, from a market perspective, it is clear that there is a strong bid. Call it manipulation, cry foul or cry uncle, every dip has been shallow, and has been aggressively bought. The casual study I have outlined above shows that staying long seems to be the way to go for now.

In the end, trading well is... about trading, about executing where the rubber meets the road. The price action I have seen since January has given me no reason to go short. Until it does, I will continue my long bias, buying the dips and trusting my stops to tell me when I'm wrong.

As I said earlier, long until wrong.