Monday, August 20, 2012

Trading Strategy: If You Don’t Attend the Wedding, Don’t Go to the Funeral

I've been reminded of this old racetrack saying during the first two weeks of January 2011. This horse bettor's reference basically says that if you miss betting a high odds 20-1 long shot who pays off big with a win, do not chase it the next time out when it is the 3-1 favorite.

Several big-time trader friends I respect cashed in the majority of their long positions at the end of 2010, believing 1250 on the S&P would be a natural technical resistance point and expecting something of a significant market pullback. This was based on their reading of oversold indicators, the % move and duration of the rally since August, and what they perceived as a lot of historical "market memory/overhang" from September 2008. On September 15, 2008, coincident with the Lehman bankruptcy, the SPX opened at 1251 and closed at 1193, down 4.7%.

I have been taking some futile small probing shots at shorting the market since the beginning of the year, missing much of this latest move up. Fortunately, given decent intraday entry points near the daily highs and using hedged option spreads, I haven't really lost money, but have missed a lot of the upside day-trading opportunity in the first two weeks.

However, nothing, but nothing, seems able to take this market down, or even put it into a sideways consolidation. Just to check my sanity, I took a look again through the past two weeks of TSP's "Flash Headline Alerts" and there have certainly been plenty of news-based opportunities for the bears to put a dent in the market and at least produce one serious trend down day.

Friday was a great case in point, as I entered the day with a small short position on, the DOW futures trading down 50 points in the premarket, and some U.S. economic data which was at best mixed to negative on balance, in addition to China's tightening move and a downgrade of Greece (and this against a backdrop of two recent very disappointing employment data points). But after some initial waffling, the market jumped bullishly on JPMorgan's (JPM) earnings report as well as some positive tech sector fallout from Intel's prior day report indicating heavy capital spending, despite selling off (as usual) Intel (INTC) itself.

Little noticed in all of Friday's news, except by institutional traders, were comments by FED Presidents Rosengren and Lacker, that there would likely be little short-term changes to "current monetary and fiscal accommodations." Lacker also threw in a somewhat bullish GDP 2011 forecast of 3.5-4.0%.

Also very under reported were statements emanating from the American Bankers Association's major survey of bank economists, which downplayed current risks to the economy and indicated the belief that interest rate hikes may come later than the 12 months out (late 2011/early 2012) "the market" is currently pricing in. I thought it was pretty interesting that the mid-day release of this report synched up nicely with the market's climb Friday afternoon.

So, where do we go from here? Wish I knew. The S&P is up for the seventh consecutive week. The last time the index rose for eight or more weeks was a nine-week stretch between November 2003 and January 2004 (and interesting to note that was also a period coming off of a steep and broad market decline in the 1-2 years prior).

My "Fibonacci friends" have very important resistance at 1296-97 on the S&P futures (ES), which also lines up pretty nicely with the closing high of the SPX at 1305 back in August 2008, that summer's highs (of course, the "fib traders" can be wrong or miss the timing, but the good ones are quick to bail if the script they see does not follow through). These levels go again to the theory of "market memory" and "overhang/supply pricing"...at what point will market participants, both institutional and retail, want to "sell-out" at a point where they feel they have recouped a substantial portion of losses during the crash and recession? Or do the very optimistic consensus growth and equity forecasts totally overshadow any such technically-based action?

Personally, I am having a real problem pulling the trigger on any significant new long positions here, but will try and take better advantage of long day-trading opportunities as they present themselves. But, in terms of substantial risk on long positions at this point, I certainly am being ultra-cautious and do not want to end up "missing the wedding and going to the funeral".

(Sidebar note: Two things almost made me physically ill over the last couple weeks, both pertaining to CITI (C). First was a televised interview with Board Chairman Richard Parsons, who called the "ending" of the government's CITI involvement a "win/win" situation for everyone. The second was on Friday, where CEO Vikram Pandit was pictured "all smiles" going into this week's earnings, as it is projected he might actually show his first quarterly profit in two years. Does either one care in the slightest that the company lost $29.3 billion in 24 months and hung shareholders out to dry on a run down from $55 to less than $2? Sure, it was a great buy at $2 for some savvy investors as C has finally broken $5, but that is little consolation to long-term shareholders.)

Disclosure: No position

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