Don’t get me wrong, I love women, after all I married one and my Mom was one. A better title for the book would be “Ten Bozillion Reasons Not To Invest in the Stock Market”.
Last night on Twitter I made a simple tweet that went something like this, “If u can survive this market you will most likely be able to survive any market, it will get easier, hang in there.” I never received more emails from a simple comment like that. It clearly telegraphed to me that people feel that when they turn on their trading platforms in the morning it sucks them through the screen into some sort of matrix spin dryer. The rest of the day is met with spins and turns that result in bruises from head to toe. Experienced traders, as well as newbies, are taking shots to the head on a daily basis.
Let me start by saying the I have never ever seen a market like this and I have been doing this for twenty years. I’ve seen tech bubbles burst, the 87 crash (that was fun), two Mideast attacks which resulted in panic sell offs, the 2008 crash and a cute little flash crash that was thrown in for good measure. Now we see volatility constantly, all of it brought about by the fear that Europe may in fact cease to exist as we know it. Right now it’s just Europe, next week it will be Europe and the super committee. There is always a wall of worry, always.
So how do you trade it? First of all you don’t have to. “Cash” is a valid strategy. If you’re nauseous, be in cash. If your long and trapped, then take a loss if it’s making you miserable. If you must trade, use smaller size ( I use 1/3 position size in these markets and only press larger when a trend reappears). I also use tighter stops, if they get hit they get hit.
I get short often, but even in this tape that can be dangerous. I has some shorts on Monday, they looked vulnerable, when the market started to rally on Tuesday at one point I covered at small gains. Yesterday those shorts went my way, but I had much less exposure. I was more upset about closing my shorts than I was about losing some money in my longs, but I was shaken out. Everything is getting shaken out. Things change by the hour and there is no trend. Just brutal chop. Even if you have a solid opinion (I did , being short), the market will embarrass you.
The one sector that I feel good about is my short position in the financials $XLF via my long position in $FAZ. If you read this blog you know I feel the sector is still toxic and will continue to under perform. Actually, I think the sector will implode at some point and I want to be short when that happens. It’s a core position for me and it also acts as a great hedge against any longs I’m carrying.
I also like energy $XLE and I have been long the crude trade and it’s doing well. Crude rarely trades on demand and I’m not naive enough to think that that it does.. The weekly inventory numbers are silly. The global economy will be in recession soon (if it isn’t already), so there isn’t organic demand, yet it trades higher. If the problems with Iran and Israel gain traction, speculation should push price higher, maybe much higher. I also like some drillers and oil service $OIH. I don’t trade refiners, they are silly too. I have better things to do than figure out crack spreads and how they should work.
In this market you may be wrong for a few days before you are very right so you have to be able to stay tough during that period when the market makes you look foolish.
Stops are key, take them, you can always reenter later at a better price. You will be miserable if you don’t. Watch the S&P 1225 level for support. We may need to go much lower before things resolve.
Italy’s Monti will be announcing his financial plan at 7AM this morning and there is a bunch of economic data that includes: housing starts, building permits, initial jobless claims, November Philadelphia Fed, natural gas inventories and a 10 year TIPS auction.
If you are feeling lost here, trade smaller or not at all. Good luck.
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