When I first started trading one of the biggest fallacies I got caught up in was having a ‘hard stop’. Invariably, those hard stops would get taken out time after time. And they always seemed to get taken out right about the time when maximum panic was setting in (if long) or maximum euphoria was setting in (if short). What a load of bullshit.
I caught the video below on Barry Ritholtz’s blog today but as a sort of human interest post. Let me tell you for the record, it should have been tagged as a TRADING POST! This UK WWII propaganda is such a core piece of my trading philosophy now that I have already ordered my mug from Amazon and can’t believe I haven’t had one sitting on my desk for the last several years. Seriously, do yourself a favor – watch this and internalize its message from a trading perspective. It will help you in a meaningful way:
Well, the Mayan prophesy has struck in the ES! It actually looks like it hit limit down – NUTS! Its already bounced back hard but ES is still -19.25 from the close. More as I dig into this….
UPDATE: Here’s what it looks like (hit a low of 1391.25. Needless to say, I have to get long here and am long (even though I’m Mr. Short Seller). Long @ 1422 even, have some orders in below the crash level just in case the Mayans strike again!
UPDATE II: Closed this out for a small loss as there’s been no follow through. I have no idea what’s going to happen tomorrow so I’d rather come into tomorrow with a clean deck.
es covering that is (you guys are sick). So annoying! I have been nice and short the ES the last couple days but stupid Boehner had to speak Thursday so I covered up lest he say something like, “I’ve solved America’s debt problem” which would have rocketed the market. Alas, that was stupid as there isn’t and can never be a solution to America’s debt problem (duh).
Anyway, I’m short again overnight in the new March ’13 ES contract (ESH13 – symbol will depend on your futures platform). I’ll keep you posted on performance, but I have an inclinaton to just keep this on until the end of Q1 next year. I don’t typically swing trade like that, but I just don’t see the upside fundamentals here other than, of course, everyone’s belief in the Fed being able to print our way to prosperity!
UPDATE: Covered it before the open. Nice gap fill, thinking of fading this…
…if you’re following along, I’d hate to leave you hanging. If things get messy I’ll jump back in. Oh, and also going to flip over to the March contract. I hate roll day as it splits the volume, but better to roll early since I’m flat.
I’ve worked for some great companies over the years. One of those was Intel. When you go to work at Intel they send you through a HazMat (Hazardous Materials) training class. At the time, the instructor led you through a little exercise at the start of the class that went something like this.
Instructor: What’s more deadly, water or cyanide?
Instructor: Maybe. How about this scenario – you have to swallow a micro-gram of cyanide or drink a gallon of water – which is more deadly?
Students: (confused disagreement)
Instructor: Neither, you would survive both.
Instructor: What about drinking 2 gallons of water within a few minutes or taking 1mg of cyanide?
Students: (tentative majority) Cyanide?
Instructor: No, you’d survive both.
Instructor: Now, what about 100mg of cyanide or drinking 4 gallons of water?
Students: (majority) Cyanide.
Instructor: The water would kill you not the cyanide.
The Lesson – In a given amount of time, and the right dose, ANYTHING can kill you.
Which is the point of this post and why I’m worried. Mainly about the markets but also the United States in general. We simply have too much debt. The Federal Reserve is printing too much money. The government continues to spend like there will never be consequences to their actions. We can argue about timing but not the eventual outcome – the US is being destroyed by its political system. Today’s QE4 is just another straw on the back of a once great, capitalist system.
Right now the S&P 500 is sitting just below its highs for the year, up 16% YTD (including dividends, 13.6% on a pure price basis). But corporate earnings and revenue growth sucked in Q3. Europe is in a recession and is kicking the fiscal can down the road furiously, in the process solving nothing. Japan is, as John Mauldin pounds the table on, a ‘bug in search of a windshield’. Corruption seems to be at an all time high in every country. The US political system is so broken it turns off the vast majority of Americans who don’t bother to vote anymore. And if you think those are big issues, it turns out we’re pretty lucky that the rest of the world is focused on Europe and, to a lesser extent, Japan because if they collectively decided to focus on the US then the reality that the US is actually quite broke might finally start to sink in.
What I really think is happening is everyone already knows its too late and the whole financial system the world is built on is going to blow sky high. If that’s the case, then you delay the inevitable as long as possible. It actually makes sense from a political perspective. If you know you’re going to crash the plane and there’s no arguing about the outcome, its just human nature to delay the crash as long as you can.
At some point, something is going to ‘die’ from printing / creating all this money (e.g. debt) from thin air. Either the USD will die, the market will die, the economy will die (in the form of massive inflation) or, and this is worst of all, confidence in the entire system that has been engineered by the unholy trinity of big government, big finance and the Federal Reserve, will collapse. People will stop spending on discretionary shit they don’t need. They will save more, likely a lot more. And since 70% of US GDP is consumer spending it will be game over until the giant ‘flush’ cleans out the current system and we reinvent things again.
All of the above sounds so negative, and it is going to be painful. But long term I’m still fundamentally an optimist. The technology humans create will most likely save us from ourselves, and I’m still betting it will. I just hope we can get through whats to come quickly so we can get to better times.
Meanwhile, here’s my equity curve headed into the final stretch (up 14.2% purely shorting the ES at opportune times throughout the year):
I remain short overnight. Until next time, trade safe.
I told you so.
I remain short although there is the ever present risk that the fiscal cliff will be ‘solved’ with more taxes and less spending cuts. Or something like that. If that happens I will go from a nice profitable position to a big fat loss, but its the game we play here and without taking risks you should be a roto rooter man instead of a trader.
I expect the red to continue.
Tomorrow is Fed day. It starts @ 12:30pm ET with the policy announcement, followed by the Fed’s forecast sometime between that and (drum roll please), Uncle Ben’s press conference around 2pm ET. Until the fun starts I doubt anything will move much. We are for sure in ‘Santa rally mode’ and today was a great example of it. It wasn’t that the point move was all that large, it was just the way the market moved up with no ratcheting back until the roll-over all the way back to the opening range. I was up .5% on the day by shorting that vertical ramp of the morning. I also got short again into the close on the big bounce up to and then past VWAP (all ES).
I’m feeling like the perfect way to disappoint the most people right now would be to finally get a pull back. In normal times I would have played this with higher exposure but I’m aware that the Fed / Gov must be quite concerned about having as much green showing in the market as possible to help out the holiday shopping season. So, as usual, risk is high for a run up to the 1440 – 1450 range. Like it or not though, I’m going to play this going into tomorrow short and, if I have to, working my way out of the position if the Fed goes ‘all in’ (AGAIN). Welcome to trading central planning, political innuendo, gov press conferences and headline reading algos for the preceding .
My final advice, if you can, trade small until the fireworks get fully underway and you can trade it.
I know voting is happening but I’ve been here a grand total of a week so I’m not expecting (or worried) about getting many (any?) votes. Yes, over time I will convert my primary way of making a living over to trading, but for now this is about sharing what I’ve learned and learning from others here. That will be enough until things open up again.
This week I’ve managed to continue building on returns vs. the S&P 500 Index. Right now I’m up 13.8% for the year while the Index is up 12.06% on a cash basis and 14.44% including dividends. I am fairly confident I’ll beat the index by the end of the year and here’s why.
The market reminds me of a fatally wounded animal that was just hit by a truck. It is trying to stand up and run but it falls right back down on its face. It doesn’t know its dead yet, but the manic nature of the swings suggests to me that its about to figure it out. That doesn’t mean there might not be a spike up for the MD trade – “Maximus Disapointia” – e.g. first the market will wipe out every last short, before then reversing and disappointing every single long. This actually might have already occurred Sunday night when the ES ran up to 1424 in the overnight session and by not holding 1420, it might be done now. Always keep the MD trade in the back of your mind, this is a core learning if there ever was one in trading – expect the market to inflict the maximum pain on everyone and you won’t be disappointed. That is, if you can avoid it!
Futures are down around 1404.50 as I write this so I think we could see a definitive break below 1400 tomorrow and the bus may not turn around like it did today. But that was one impressive intraday swing wasn’t it? I warned you to watch out for that yesterday.
Until next time, trade safe.
Below is a chart that shows the premium between the S&P 500 index and the near month ES contract.
I watch this spread religiously and there was a huge amount of strange things going on this morning. If you were trading it, I’m sure you noticed the manic swings this morning. What does it mean? It means that there isn’t just a little disagreement on direction, it means there is TITANIC disagreement and traders, algos, HFTs, et al, are pushing (in both directions) with all they have with enough firepower (e.g. $$’s ) to dislocate the premium spread for short periods of time. Very interesting to trade this today.
Be careful, we could see an explosive move in either direction. I know, I wish I could pass along the direction. But knowing we could run hard in one direction you can be better positioned with stops, reversal setups, etc.
I trade primarily futures and primarily from the short side. Here’s the equity curve YTD:
YTD the above represents a 13.4% cash return (backing out all commissions, data charges, etc.). The S&P 500 is up 12.6% on a cash basis and 14.9% including dividends so I’m hanging right in there with the index which, while nice, isn’t what I’m shooting for (obviously).
Couple Things I’ve Learned
- To trade successfully you have to develop some way to extract $’s from the market. Everyone does this differently and no one will really share things that are working until they don’t work consistently anymore. So, you are largely on your own. There are some books that can help a bit, but making money is up to you and the ideas you can bring to the table. Make your rules and stick to them, they will save you from yourself.
- You can’t give up, otherwise you’ll never get profitable. But, you have to know when to stop and get out of a losing trade otherwise you’ll destroy yourself (mentally, physically and financially). Its the ultimate irony – you have to have the ‘never give up’ personality type to actually win the game, but you have to learn to ‘give up’, change horses, ‘sell the loser’, or change course when you have to, otherwise you end up with – literally – nothing. Trading is mostly about mastering yourself and in that, I think, there are some very interesting life lessons for everyone.