Wild Times

Today was one of the wilder trading sessions I can remember. When news hit last evening that the Europeans had agreed to a Greek default on 50% of their loans along with some kind of plunge protection fund for their banks (which is what it was, though called ESFS or something stupid like that), the markets went wild. I’ve been trading for 20+ years, and I’ve never seen futures react like that during the overnight session. It was truly extraordinary.

Let me be clear. I think the European news is all nonsense. They are buying themselves some time, nothing more. The Greeks are still living beyond their means, as are the Italians, the Spanish, etc. Deficits are NOT good, you do NOT cure them with more borrowing. There will be more news out of Europe in the coming years, and the boys on CNBC were only half-joking today when they said the Euro was no more, it really was the Deutschmark now. I completely agree, the problem is competitiveness and efficiency, and those issues haven’t even been on the table. However, the news is what it is, and you don’t fight the market. The market thought this was a good thing, and we have to react accordingly.

I was watching the futures when the news hit. They were barely above break even, in the U.S. and abroad. It took them some time to react. At first, several minutes after the news hit, I wasn’t even sure if they were going higher. Boy, was I in for a shock.

If you are new to trading, rest assured, it will likely be a long time before you see the S&P 500 minis move 20 handles like that before the open. They then moved another 20 during the regular session. The most awkward thing is that traders were caught completely unprepared, many short while the markets were going wildly higher in a buying frenzy. I think I speak truthfully in saying that a high number of traders either were wiped out or were put on the verge by getting margin calls. Being in front of that sort of steamroller is frightening, and there is nothing you can do about it until the markets open.

I since have learned that one of the causes of the panic buying was the fact that many hedge fund managers were caught flat-footed by the news of the Greek agreement. They were largely in cash, having liquidated their equity positions in the belief that no agreement was forthcoming. When the news hit in the middle of the night, there ensued a mad scramble to put on positions before the end of the month. So, the intensity of the move was ratcheted up by the added pressures of month-end window dressing, there being only three trading days left in the quarter (Monday is the end of the month).

What did I learn from all this?

First: it is dangerous to hold positions overnight. I have done that routinely, but I don’t think anyone could have seen that kind of firestorm developing. We might not see anything like that for another five or more years, but when it does hit, you are absolutely helpless. Whether or not you are on the right side of the news, I think everyone would agree it was scary, like watching a tidal wave take out a town while you watch from nearby.

Second: there is an incredible amount of buying pressure left in this market. We already had rallied from 1070 to 1240 in two short weeks, without consecutive down days in the last twenty trading sessions, so you might have thought there was some kind of market exhaustion or at least tiredness brewing. Nope. While I wasn’t trading back then, I’m sure this felt akin to that fabled breakout day in August 1982 when the great 1982-2000 Bull Market began. The pressures were that intense. The Russell 20oo was up 5%! You just don’t see that kind of sustained buying very often.

Third: Trying to call a market top right now is foolish until price action tells you it is there. Throughout today’s session, people kept trying to go short by buying $TZA etc. I’ve played that game myself the last two weeks, and it is a fool’s game. The market will roll over when it is time, and not before. Trying to time it is simply purposeless and will cost you money. Positioning yourself in advance for the inevitable move lower does have marginal benefits, but they are not worth the associated pain/risk. Wait for the market to roll over and play it that way then, you will save your trading account that way.

Fourth: Just ride the current trend higher for the time being. Yes, it could go the other way at any time, including before you read this. But don’t fight the trend! There is no way to beat the massive forces arrayed against you. You will only get hurt, maybe not critically, but any damage is unnecessary. Patience! There will be plenty of time to re-institute shorts.

Fifth: You can tell which way the trend is going by watching how your plays react. For the last two weeks, I have seen my short plays bounce briefly after I bought them, lulling me into a sense that I was succeeding, only to have them quickly reverse and move lower than where I bought them. When you see that, run! It means the trend is against you. If the pullbacks leave you higher than where you started, the trend is with you. It really is as simple as that.

Sixth: Use this market ramp to hone your trading strategies. Take your profits early. Do NOT hold them thinking that the 3% gain you have is going to turn into 5%, then 10% and so forth automatically. They WILL reverse and you WILL lose your gains. LEARN TO TAKE YOUR PROFITS! Then buy back after they dip. TRUST ME ON THIS! This is something with which I am having extreme difficulty and is my highest priority right now to correct.

Seventh: Scale in. Don’t buy your entire amount at once. If you intend to buy 100o shares, say, then start with 300 or 500, and add 100 here, another 100 there. If you have time and are uncertain about your exit timing, scale out the same way, selling 100 here, 100 there. Yes, the commissions are higher that way, but the results are a lot better. We don’t always pick the best spots to buy and sell, even though our analysis is good. Don’t screw yourself by risking it all at once and then getting caught when some minor fluctuation robs you of your trading profit. Build your position and tend it like you would tend a garden.

I think that is enough for now. Despite the parabolic move upwards, I think we have more upside. As I said, today’s action showed how much money is still sitting on the sidelines, or perhaps short and still needing to be convinced to go long. Play the trend for now, it is your friend.