The Long And Short of It

Since mid-September, I have been in favor of the continued market momentum upwards as laid out in my posts. Yes I was looking for eventual pause that I did get but for a very brief period of time. And we were back to races after that. As laid out in posts after that, I decided to honor the momentum and gave up on looking for a bigger pause at least for the time being.  While I cannot predict the daily market movements by any stretch, I have been clearly favoring the upside for the time being.

Ergo, the long and short of my current portfolio is I am more long than I am short.

The Path of Maximum Frustration

The market does in fact seem to be following a certain kind of script. Trouble is many traders are still using the old playbooks as Scott eloquently points out in his post. Long time readers know that my own consensus studies are not just based on the popcorn investor’s sentiment but also take into account the behavior of mommy’s basement trader. I will continue to provide more info on this in later posts, but in general, I get success in my trades when I am able to accurately guess and play upon the path of maximum frustration for the retail traders.

So right now, my guess on the path of maximum frustration is that the markets should continue to churn higher. It should further shake off the retail traders in the first week of October. This should be about the same time when relevant indicators drag into considerably overbought territory. When we get our pause in early October, it is quite likely that it would be viewed as a “healthy” pause. Me, I will completely scale out of most of my longs at that point to regroup and study again. So this has been my game plan and now you know it. Let’s see how this baby plays out.

Parting Thought

The macros look ugly. I fully agree with viewpoints including Dr. Fly’s about concerns on Euro trash, Yen threats and current valuation of tech stocks. I am trying to figure out what is the time frame when the negative effects from these factors come into full play. In the absence of a major catalyst or discovery of a new shoe dropping, the momentum takes priority over short term. Momentum is upwards.

StocksRider

Fuck this shit!  I have no fucking idea what the market is going to do tomorrow.  And you are probably gay to come looking on internets  for advise on how to trade tomorrow.  If you did, you deserve to lose anyway.  Guess what …I am 0% cash!  Yes you heard it right.  I am all in baby!  Made several trades today.

Longs – DLTR, FDO, MELI, WYNN, LVS, JASO, ING

Shorts – CRM, QQQQ, SPY

Please don’t try to see sense because they are all on different time fractrals.  That is right.  Everyone is fucking up their lives thinking about investing theses when they are trading and vice versa.  And everyone is going to fucking pay for their stupidity.

Moral of the story – when you have to pee, you don’t think about shitting, do you?  You may fart, but you don’t think about shitting.  Similarly when you have to trade, you don’t use fucking videos of Roubini or Schiff to justify why you are short, bitches.  Get over it.

– StocksRider

Reality – My open shorts are being royally raped today.

Reality – My long hedges have prevented me from going ape-shit drunk in depression.

Reality – Markets are overextended but they remained so for a month between March and April of this year.

Reality – Retail Traders like me still seem in denial, which gives further room to fuel this upside.

Fantasy – On the other hand with the popcorn investor sentiment riding so high (AAII and Investor sentiment surveys), no major pullback is in sight.  Really?

Fantasy – I can beat Scott Bleier.

New Trades

We had a solid rally today so far and the breadth is looking incredible.  I see that the markets are over extended.  However I cannot overlook the fact that this rally is showing some depth today.  I am not planning to be left alone.  Instead of participating in what I consider as overextended longs, I hand picked a couple of longs – JASO and ING and added them to my current longs DLTR, WYNN and LVS.  As always trades were posted in Twitter.

Strategy With Old Shorts

I sold some of my shorts with losses to raise cash for the new long trades mentioned above.  I am keeping couple shorts open though for two reasons – First, I need at least one or two good shorts, should the markets go down unannounced, which is their style by the way and which I believe they will.  Secondly, another of my short (QQQQ) is so deep under water, it is not even funny.  I will keep it open to remind myself of some lessons as they smirk at me every time I look at my portfolio.

StocksRider

As you know from prior posts, I was expecting the markets to continue with their upward momentum.  But I was also a believer of an eventual pause soon.  So over the course of last few days, I placed more longs without getting rid of my shorts.  That strategy worked out perfectly well as it provided a balance to the losses in my shorts position.

Just after the FOMC announcement, in the rising tide of the market’s initial and historically famous  “false” movement, I scaled out of my SPY and SSO long calls at 109% and 22% profits respectively.  Also scaled out of my longer term DBA call position for 73% profit as I felt it had reached overbought situation.  I tweeted my trades in real time as s0on as they were placed and had pre-announced my intentions in the c0mments section of my prior post the day before.

Where am I standing now?

I have my shorts in QQQQ and CRM still open.   Couple of longs such as WYNN and DLTR are  still open.  I still believe the market is due for a breather and the time seems ripe now.  I am going to study today and tomorrow to find out if the drop is huge or if it is just a pause before continued upward momentum that some of the IBC bloggers are claiming it to be.  If it is the latter, I will scale out of my shorts at a smaller gain than I had hoped for in the next couple of days.  Either ways, I find it hard to believe for the markets to continue full steam ahead without a break.  I am going to let the markets do the talking while I do the listening.

Good luck.

StocksRider

As expected in recent posts, the markets churned a methodical, momentum driven slow grind to the upside this week.

However, the real frustrating part in anticipating the next move will come next week in my opinion.

Where am I standing?

I believe the market will take the path of maximum frustration – Continue higher for couple more days next week, possibly a big head fake move up. And then when finally all the momentum drags key indicators to extreme overbought, drop!  Drop could be small or it could be big.  I will take some time to study if it is going to be a mean reversion mode drop or a surprisingly mild pause ushering in a new intermediate uptrend like what we had between Feb and April of this year.

Currently I still have my prior mentioned shorts opened and will close them in the next drop I am anticipating, no matter how mild it is, even if that means I have to take losses.  Luckily, the portfolio did not suffer much due to a very strong showing by the long stocks in my portfolio – DBA and DLTR.  Also, surprisingly to my relief, one of my shorts CRM did not participate much in this week’s rally.

Oh and if you were following me on Twitter, you may have noted I opened a new long position in WYNN today. It’s a short term bet and planning to close it by next week upon due appreciation.

A Few Tells

Here are some of the relevant technical indicators in the current market and what are they hinting towards:

• CBOE Equity P/C Ratio – Trending below 0.6 area. But could still go lower due to upward momentum in the market.
• AAII sentiment touching 50% bullish. AAII hasn’t reached this high level of bullish reading in the entire year of 2010. Not even during the Feb through April uptrend of this year. On a side note – many retail traders are expecting a big drop starting Monday. Hence my theory on path of maximum frustration mentioned above.
• McClellan Oscillator is hovering around the area where you cannot be comfortable intermediate long but at the same time, it does not negate further short term upside due to momentum
• VIX:VXV ratio is pretty low but still has room to go lower, indicating a bit more fuel to the upside but not much perhaps
• NYSE 52 week highs/lows reached “overbought” levels and is now slowly trending down
• Lunar cycles are generally in flat to down period

Good weekend, ye all!

As predicted, the momentum is keeping the market afloat while it zigzags. My shorts are suffering small losses, albeit the fall is clearly buffered by my longs in DLTR and DBA that are surging higher with the market.

While I will continue to hold on to my longer term shorts, I couldn’t help but notice that the mommy’s basement trader crowd betting on downfall in SPX is increasing exponentially today. While the popcorn investor is still bullish, you can’t ignore the basement trader sentiment. What if this turns out to be a March 09 or July 09 situation? Can you continue to operate with your overriding thesis that the markets will go down next week, but still protect yourself and even profit from a totally unpredictable move to the upside?

Introducing The Unicorn Trade

So I said to myself why not have a trade just like a black swan but for the exact opposite reason?

In other words, how about trading cheap and deep out of the money options but on the long side using fraction of your portfolio capital?  A fraction that you can afford to lose without causing a severe dent to your portfolio.  I am going to call it the “Unicorn” trade.  So far no one has seen one just like the Black Swan but you cannot overrule the probability of its appearance.  And unlike the black swan, this would be a harbinger of blow out rallies.

Okay lets play the two scenarios:

1) If the market goes down, then the overriding thesis and predominant shorts in my portfolio will win. I will have a very small loss on my Unicorn trade when they expire worthless. Big deal, as the overall portfolio should be in green.

2) If the market defies gravity and frustrates the heck out of retail traders, I have a Unicorn protection in my portfolio that could rise far more exponentially due to its current status and price. I may not be able to recoup all my losses in shorts but for the current trading window, I will easily break even between my current long positions and the Unicorn trade.

Looking at the current conditions, if the market breaks the 1126/1130 in a convincing manner, the next stop would be much higher. Most of the traders are not expecting this to happen with conviction and are expecting battle lines to be drawn right around the current levels. Clearly there is lot of technical resistance to support their beliefs. In fact I have been one of them and continue to be so. But I don’t want to be caught unaware if the market takes the path of maximum pain, which it mostly does.

So I searched for cheap and deep out of the money SPY call options. I found some and placed my Unicorn trade as posted on Twitter.

I am not implying the markets will go higher and in fact still looking for them to go down by early next week.  I am implying though that if it does go higher in a sustained manner, it would be much higher than anyone is expecting.  And I am positioned to gain a bit should that event happen.

Also I understand what a true black swan is.  I understand I am using that concept in a milder context.  So all you Taleb fans don’t get all sensitive on me.

This is going to be a fun ride. Try the Unicorn. You may like it.

StocksRider