Remain Calm

It’s easy to go 100% long and buy up everything in site in moments like this. Even if dow is going to 16k, it won’t do so in a straight line. Do not force the issue, you grind away and you do not try to make a killing with a single trade, in a single day but you continue to grind. Sure you can have a portion of capital used for swinging for the fences, I certainly do, but don’t make it your core strategy.

There is a saying… “If you weren’t at the wedding, don’t show up for the funeral” If you didn’t see this long-shot rally coming, what makes you think you seeing the market shooting to infinity in one fell swoop will also be correct? I am not saying I’m not bullish right now. It is taking a tremendous amount of discipline to void getting excessively long. Everyone is piling in.

Everyone wants to believe that gold will go higher… but it already has shot straight up. Here’s a question… Will QE3 cause more buyers? Is the reaction to this move and current price something that has not priced in QE3 already? How much higher until it is priced in? I do not know the answer to that, but it’s a much more intelligent way to think about it then to assume because there is QE, gold will always go higher just for the sake of doing so.

You gotta have enough guidelines to stick to a system habitually, rather than throwing caution in the wind impulsively at all time highs during the moments where everyone is euphoric over free money. This certainly may not end just yet, and there may be more free money to come, but it certainly has the risk of ending badly. Everyone could visibly see all the risks in 2008 and 2009 and 2010. Few could see the rewards to come. Now everyone is claiming the fed is a built in put for the market. Perhaps, but what about the risks of things that remain unaccounted for, the things no one expects to happen, the crash no one will be ready for? Cash is necessary, even if you fear it will inflate into oblivion… Even during great bull markets there are volatile times, the volatility appears to get more and more “smoothed” out as the market rockets higher by 3 times the amount of move as the downswing, but I assure you, the people felt it. I am not saying hyperinflation is coming, but that volatility even in the best case scenario for those long, will still be felt. The difficulty of the trading environment may not be seen yet, but I assure you it is still there. No one likes a boy crying wolf at a party and suggesting things may not be great, but do not think that just because it hasn’t happened yet means that it can’t.

I did something unconventional… I put in a low put order after getting long several names and I was long others but had a portion of cash on the sidelines that I put to work, The low bid on the gold put filled, I really didn’t think it would unless gold was much closer to 1800, but some sucker panic sold the put and he feared that he would have an unhedged position forced into being short gold as it shot to the moon. I did not expect the trade to have worked so well… so far anyways… I was expecting the position to kind of get run over for awhile, but protect me in case everyone started selling the news of QE soon. We are getting into the time when the “sell in may” crowd will be coming back in just a couple months. But there is an election around the corner and the market is sky high. We have not witnessed the turbulence that we saw in 2008 or 2000 yet and perhaps we won’t… but using this market euphoria to take some profits and wait for a pullback to get back in certainly seems more “normal” What would you do in this situation if you knew of no news? What is the tape telling you? Do not be distracted by news to the point where you ignore signals. The bullish percentage index in NYSE is not quite overbought and is still rising, which favors a bull market. The momentum is currently upward, but overbought signals exist.

Everything that has happened today is no doubt bullish, but if that has largely been priced in by the run up, can the market sustain itself beyond the rate that the fed is attempting to support it? I have my doubts. After all, last time RSI was this overbought was around April before a 7 point gradual correction. The time before was 2011. We did go higher for a few months but then crashed over 15% from the initial overbought signal. Before that? 2010 before the Flash Crash. However, the momentum turning also occurred before the majority of these declines which has not happened yet. We still may have our pre-election crash after all, or it may be delayed just long enough… we shall see. Think about this… Once Ben’s job is secure for 4 more years, is he still going to continue pulling out these stops? What will support the market then? Will the hope that he will do anything to keep markets going up still be there? At what point do investors realize this and start reducing positions to price in the “built in put” expiring? Whatever premium Bernanke’s desire to keep his job and keep 0bama in office by keeping stock market strong, that premium will decline, much like a regular put as expiration date approaches… That is my concern going forward. And if the market crashes, 0bama is unlikely to win, so if a decline happens, people will be fearful of Romney eliminating the one guy that kept markets propped up at this level. Not that Romney is bearish for markets long term, but it certainly screws with people’s preconceived notion that because markets are high, Obama, will win, and if Obama wins, the market remains at these levels, there is no garden variety correction and shift of capital into different areas and out of others, and no rotation… Perhaps Obama is extremely likely to win based on strong correlation of the stock market, but if the stock market starts to decline a little, by that same metric a Romney victory becomes less out of the question which means there may need to be a shift in allocation of capital, that realization in itself may be enough to get others to start to concern themselves over their positions and they may want to hedge in the event of Romney Victory and uncertainty over who will win which may mean more cash, which in turn may bring more people concerned over it. Then the high frequency tradetards come in, and the technicals start turning momentum, the concerns over the “bernanke put” reaching expiration date becomes an increasingly apparent issue. If no one expects a crash or at least only a very silent minority, the conditions are more vulnerable to it based on a few small changes and shifts that pick up speed like an avalanche.

There is plenty of trickery left in the bag, but the contingency plans have to be in place.Once that correction takes place and the premium is taken out, then we can build support and continue rallying strong again but I certainly expect some turbulence at some point! Perhaps right around October and into November. As much as Bernanke has intentions to bolster market, the market has pricing mechanism to take that into consideration. Of course, the price is generally the most recent transaction and if the majority is only willing to buy much lower, but has already sold and unwilling to short, the market will continue higher, running on the fumes of a select few until those few run out.

Nevertheless, it is entirely possible to over-think things. Keep track of your indicators, continue trading your plan, and don’t let anything else distract you from what the market is telling you. , this post is to come up with a theoretical condition for a crash just to make you check your assumptions of stock market to infinity at the door. Stick to your indicators and realize that even if macro and headline data is right, it can still be wrong if it has been priced in…. And you can do the work trying to determine if it’s priced in yourself, or you can watch your signals and technicals and rely on others that perhaps do, and begin to act accordingly before everyone else follows.