My apologies for the late update…my verbose employer/boss was describing a laundry list of new projects that we are going to be starting in the coming weeks and I wasn’t able to get this in before the market opened.  As I ponder this information, while watching the market break to new all-time highs (on several indicies) and also witness real estate values in this once tepid region of the country accelerate, I have to think: “our economy might actually be doing pretty well”.

Yesterday marked day 42, which meant I was to “rebalance” assets based on my market ETF relative strength algo (using 21 days as my trigger, i.e., one month).

Thus, I sold MDY at 200.69 (from 199.01) and used the proceeds to buy the current top ranked ETF, IWM at 91.12.  I am still over 50% cash and have recouped a decent amount of the losses I had incurred since 2/20.

Now that the markets are breaking to new highs, I’m going to look to deploy some of that cash into my favorite volume pocket candidates.  Here is how the portfolio looks after yesterday:

-EM

I am in the process of sorting out my life on the internet…in the meantime, I will continue to post portfolio updates here with the usual screen captures of performance metrics, current holdings and any buys/sells that happen.

-EM

I started a position in MDP here on this pullback at 42.28.  Looking for a quick run to 45.

-EM

Greetings internetland, lets speak for a moment about the state of the market as a whole.

Last night, I spoke of how a chart is a visual representation of the behavior of market participants.  Since the start of the year, the tenor has been one of euphoria.  Down days were scarce and volatility had completely dried up.  Clearly, in the past week, the market has taken on a different character.

If you follow these posts, you will recognize that I had difficulty with going in big when the market was in “levitate” mode.  Now that a tsp. of chaos has been thrown into the mixture, why should I have conviction to add to existing positions and/or buy new stocks?

From an intermediate term perspective, now seems like a perfect time to play defense, protect gains, and wait this out.  I have exposure to the market via my ~30% position in MDY, and a handful of other reasonably defensive positions so it’s not like I will miss out completely should we resume our ascent.

On the other hand, as you may know, I recently rediscovered my stash of insidious crack rock (via the options market) and have been trying my hand at a few short-term trades.  In true addict fashion, I closed my VXX Weekly 24 put position yesterday at various points, and ended up with an 83% return overall on that trade.

Heh, nothing like a big winner right out of the blocks to inflate my confidence, right?

I thought about buying puts on SLW or SLV, but instead opted to buy some weekly calls (460) in AAPL later in the day after the post-meeting sell off.  So far, that trade has been a dud.

I will be watching for signs of the market starting to roll over when we reach the top of this new range that has formed since mid February.  Right now I think the most productive scenario is a slow grind sideways around between 1515 and 1530 on the S&P.  With my market indicator still showing “green” it will be difficult for me to go short the market here, but I am starting to look in underperforming sectors for individual candidates to short if it looks like we are going to roll over.

Interestingly, I just ran a screen on the sector ETF’s (XL_) utilizing the same metrics I use for my market ETF ranking, and the top 3 sectors (1-3) are: XLU (utilities), XLV (healthcare) and XLP (staples).  Humm…that is a very interesting development, considering running the same metrics one month back placed these three at the bottom of the pile.

Outperformance by those aforementioned sectors typically coincides with market corrections more so than bull runs.  Maybe this is just “noise”, but this is also something worth monitoring.  This is really a spur-of-the-moment observation seeing that I just ran this screen to try and determine which sectors would house the best shorting candidates (turns out that XLB – materials and XLK – tech are currently the worst).

This strengthens my view that we are in the beginning stages of a correction here, so my desire to lighten up and play defense with my intermediate term account (as reflected in these portfolio updates) is warranted.

As for that portfolio, here are some notes:

• It looks like CBI beat on earnings and met revenues and the stock is up over a buck PM.  This has been a nice stock to trade and I am happy holding the remaining shares that I have.
• I made an error yesterday stating that I would be making a decision on MDY at the close today, then I remembered that my backtesting with this strategy used 21 trading days (i.e., one month) as a rebalancing timeframe.  Today (2/28) marks day 40, so the rebalance may/will come on Monday.
• PCL broke higher yesterday, but I feel like this move is dubious and I will be on the lookout for a headfake.
• RWT is making what could best be described as a “diamond” pattern on the daily.  I’m not very familiar with this type of action, nor am I particularly enthused by it, so I will be watching closely for a breakdown as a sign that it’s time to move on.

-EM

I don’t know if I have the mental complexion of an addict or if I am just spotting an opportunity and placing my bets.

Yesterday I dipped my toe back into the murky, shark infested pool of option trading.  These trades were transacted in what is better known as my “degenerate account”, therefore they will not be reflected in my portfolio.

Nevertheless, since this blog acts as my trading ‘diary’ of sorts, I figured that I needed to discuss my rationale to try and understand why I would go back to the well, and what this means going forward.  As I touched upon yesterday, I feel like my trading improves dramatically when the market starts to behave in a more chaotic manner, moving from one extreme to another in a short amount of time.

I mentioned yesterday on Twitter that Monday’s range of prices on SPY was equivalent to the entirety of the move up from January 23 – February 19.  This one day range highlights how incredibly frustrating it can be to try and profit from the market.  All the work that was done over the course of what essentially equates to a month is erased in 7.5 hours.

People always echo the sentiment that you need to “let your winners run”.  Ok, that’s great.  Then your “running winners” are reduced to a break even (or worse) over the course of 24 hours.  That can be incredibly demoralizing.  Additionally, this also highlights why taking partial profits is rarely a bad decision.  You get to lock in some gains, but you also are able to reduce exposure in the event that all of the previous month’s work is evaporated in the course of a single session.

Back to the topic at hand: my self-described ‘addiction’ to trading options.  My best options trades have taken place in the midst of market turmoil.  These types of markets make more sense to me…I realize that is a little counter-intuitive.

When the market goes up every single day, I am always leery of a February 25^th lurking right around the corner.  It may be easy for some to board the POMO gravy train and ride it to 5+% months, but my simian brain just cannot compute the behavior of market participants in that environment.

I prefer when things get stretched to extremes.  Here I can perceive an exhaustion of buying and selling.  The window for maximum potential in trading opportunity does not stay open very long.

Thus when I see volatility spike 25% in a day, I feel like that may be a bit overdone, so I made it a point to go short (volatility).  I could have purchased XIV, but I am a low-life, no good degenerate; therefore the only prescription for what ails me was to load up on VXX weekly puts.

I have traded VXX to the long side before, with very predictable results (I was destroyed).  I have traded VXX puts before, with reasonable success.  Basically my trade is for volatility to “come in” by the end of the week, through the purchase of Weekly 24’s.

Additionally, I noticed abnormally high call volume in both the ATM and the first OTM strike in KORS and LIFE.  I like the pattern both stocks have etched out on this pullback, so I purchased March 60 calls in both names in the 1.50’s.  Those are certainly more “well reasoned” trades than the short VXX trade, which is more along the lines of what could be considered a “riverboat gamble”.

As for the market as a whole, with these trades I am positioned for a relief rally back to the recent highs.  I will be very interested to see what transpires should that take place.  There is no doubt that the waters are far more ‘turbulent’ than they were only 2 weeks ago.

Maybe the market just needed a hint of uncertainty to it…lord knows the “powers that be” won’t stand for the primary barometer of economic health to falter here…or anywhere.

“What is that you say dear sir, the stock exchange has declined for more than two days in a row?  Do not bother yourself with suchness, for we have a simple solution: open the spigot on the “free money” hose a bit more, and that should do the trick in no time flat.  Great, look at that, the stock exchange is back to new highs again!! ”

Now I am starting to sound like Scott.

As for this here portfolio, some notes:

• I was stopped out of the remainder of my ALJ position yesterday at 18.50 (from 20.50), locking in a most cordial loss.
• CBI is scheduled to report earnings today (2/27), but I have sold out of the vast majority of my position already, so I am all set for whatever fun stuff is set to take place.
• Right now, MDY is scheduled to be liquidated at the close on Thursday with the proceeds being rolled over into IWM.  This is subject to change between now and then, but this appears to be the likely scenario.
• Low beta stocks MRH, PCL, and RWT are trading in a rather subdued fashion, so I am going to keep them around for the time being.  I have drawn my lines in the sand with these names, and will let them ride until further notice.

Back in the black for the year and 53% cash…how long that lasts is anyone’s guess.

-EM

Since 2009, my performance has been quite interesting.  It seems that, for the most part, I struggle trying to trade what appear to be the “easiest” markets.

I had trouble with the QE2 rally in late 2010.  I watched in disbelief as stocks levitated in the early parts of 2012, unable to enter positions due to a lack of time and an inability to properly pick my spots.  Since the start of 2013, my performance has been on display for the entire world to see, and I have come up light once again.

Yesterday’s egregious losses have reduced my portfolio to essentially break-even for the year.  I was legging into positions in anticipation of an extended bull run in stocks.  Now, I am not going off the deep end and proclaiming an end to this euphoria we have witnessed so far in 2013, but suffice it to say that I have played it wrong so far.

My mistake has been/is being overly patient and risk-conscious in my position sizing.  When EVERYTHING is going up, I need to have the confidence to step on the gas and pour everything I have into every trade.

We have seen this happen time and time again in the QE era.  Stocks go up for weeks on end and every single time I am sitting there wondering how the hell I missed out on the fun.  Unless you are placing money in stocks and looking to collect yield and reinvest over many many years, there is little room for patience in this market.

Most of my carefully constructed positions have been reduced to nothing (i.e., break even), do I sack up and reload here in the face of heightened volatility?  It’s one thing to get burned while pushing the limits and have the market reject your ideas.  In those situations I feel like I get what I deserve.  It is another matter entirely when exhibiting patience and proper position sizing only to have them thrown back in my face with just as much prejudice.  The upside doesn’t outweigh the down…and that is problematic.

The one comfort that I can take away from these recent developments is that my trading and decision making somehow improves dramatically when volatility spikes. May-August 2010, August-September 2011, and June-July 2012 were, by FAR, my most productive periods of trading in the QE era.  I am by no means a “bear-shitter”, but I welcome a little black smoke and shards of metal in the air.

One final note, you may have noticed that my volume-pocket analysis has diminished in recent days.  I am still continually updating my list of stocks, but no matter what your method of analysis is, nothing can trump the behavior of the general market.  There is no “holy grail” of analysis.  We all have our preferred methodologies, but the market is going to do what it wants to do, and the vast majority of stocks are going to follow that pattern.

Now that I have built a small audience of readers, I feel it is a bit disingenuous to continually present intermediate-term trade ideas to you in the face of heightened volatility.  Instead of looking for volume-pocket trades, I am looking to get ultra-defensive, raise cash and wait for the market to show it’s hand.

If this is a brief respite on the march to S&P 2000, we will see things firm up and break out to new highs in the coming weeks, and we will be prepared for that.  If this is the start of a more extended correction, we will be prepared for that as well.

As for my portfolio, I made the following transactions immediately before the close yesterday:

• Sold half of my ALJ position at 19.03 (from 20.55).
• Sold a little more than half of my remaining CBI position at 52.04 (from 50.85).
• Sold all of my remaining shares of ESV at 58.64 (from 63.64).

All in all, quite the sucky day:

-EM

After facing the first hint of adversity in 2013, I was thinking this weekend about how we as traders, deal with turmoil.

I got into investing/trading in 1998, and if there is one thing that I can take away from this experience, with absolutely certainty, is that long-term success in this biz is crafted from the realized loss of capital and the depths of despair.

I love when I read traders who just started flinging their feces at the walls starting in 2009, “swinging their dicks around” with tales of market winship.  Traders who boast of nothing but wins are, in my opinion, a joke.

You want to know why?  Because NO ONE wins all the time, every single person who has ever traded in the market has had a losing streak and will experience draw downs.

That is what I care about.  How do traders deal with adversity and “lossship”.  How do they deal with the humbling experience of have a thesis, throwing real money at that idea and having the market reject that idea, sometimes with extreme prejudice?

From a personal standpoint, my approach to this matter is (and will be) a constant work in progress…as I still do not handle it very well.  Few things suck worse than busting your tail to hammer out a few percentage points, only to watch them evaporate in a couple of sessions.

Nevertheless, as long as the market continues to trade, there will always be opportunities to learn.  Figuring out how to deal (emotionally) with the inevitable fact that your account will not reach new highs every single day is among the most important lessons to learn.

Being able to survive draw downs within the constraints of your strategy will build self-confidence.  Have a sense of awareness that losses are part of the game.  Even some of your best conceived ideas will not result in winning trades, and that is ok.  Those experiences can be some of the most frustrating, but also realize that confidence is built through having control over your strategy and recognizing that even great ideas don’t always pan out.

I believe that self-confidence does not materialize out of winning all the time (though, keep in mind, that doesn’t hurt); rather it is forged from how we deal with losing.  There is exponentially more gratification gained from staring down a grave scenario and figuring out a plan to turn things around, than from jumping in and being successful right away (which, I believe is an unsustainable approach to trading).

Here is the latest portfolio update, which had a nice rebound on Friday.

-EM