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Right and Wrong

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Hello from my snowy base of operations (well, not particularly, but it will be once the storm blows in tonight) at Northstar.

During the long drive up here, I was talking with Mrs. Bear about how this blog has put me into a constant state of self-examination with respect to my trading. I think that's healthy, and here are some of the takeaways for me from the prior trading week:

Right Moves

  • Being Hedged – I don't have a hedge fund (although I occasionally toy with the idea), but from what I understand, the vast majority of "hedge" funds aren't that at all – – in other words, instead of being long and short, most funds are simply long, which is why their performance stinks just as bad (or worse) than the market in general. I have a wide variety of carefully-chosen longs and shorts (although good longs are pretty sparse these days). The upswing earlier in the week wasn't nearly as bad as if I was entirely short.
  • Not Quitting on a Symbol – in this case, our old friend FAZ. I had been hurt by FAZ earlier in the week, and late Wednesday night, I swore off it for a while. But after examining the financial stocks, and seeing how they were basically completely hosed, I figured FAZ was my best way to profit. A 40%+ gain in just two trading sessions proved it was right to be forgiving.
  • Recognizing the Strength was Unsustainable – Wednesday evening was a very important period of examination for me, because I really wanted to see, on a bottom-to-top basis, what the market was doing. I was convinced that there was no real basis for all the strength we had been seeing besides the printing-money-from-thin-air lunacy that is eventually going to ruin this nation. I was able to be boldly bearish the rest of the week, which believe me, took some fortitude.

Wrong Moves

  • Overweighting – My portfolio allocation model, if you can call it that, can be written on the back of a business card with a crayon. I typically buy $5,000 of an option, $10,000 of an individual equity, $100,000 of an ETF, and anywhere from 10 to 20 /ES contracts. I got way too enthusiastsic with some of my shorts, and that was a big mistake. General Electric, for instance, was something I felt was really going to tumble, so I shorted hundreds of thousands of dollars of it. When it (briefly) pushed higher, I got stopped out with really ugly losses (and, just to add salt to the wound, GE has indeed resumed its weakness). No matter how great a chart looks, there is no reason to go insane with the size of the position. I still think GE is heading to $4.xx before this bear market is completely finished, but an overly-large position (and an overly-tight stop to protect that position) was a deadly combination.
  • Letting Fear Lead to Overly Tight Stops – This really only applies to the /ES, since I was pretty disciplined about my stops, but after the Wednesday nastiness, I was too antsy about my /ES trading, which left a pretty decent amount of profits on the table. In retrospect, shorting the market on either Thursday or Friday mornings was pretty much a technical no-brainer, but I only enjoyed a portion of the potential profits from such a trade.

My main conclusion about the market these days is this – – – the mere fact that I am able to find 10 great short setups for every 1 long setup tells me this market needs to soften up some more before it really rallies. I am having a devil of a time finding any good longs, and I think the reason is that we don't have a base. Those are five really important words, so I'll type them again: We. Don't. Have. A. Base. Look at what the S&P did in 2002. That, my friends, is a base. You have repeated attempts to crack lower, each failing, and you have an important higher low. There is truly a floor from which stocks were able to leap higher.

Now take a look at the recent activity on the S&P and tell me, with a straight face, we have a base.

All we've got is a steady plunge down from 800 and a steady fight right back to the same level. The most "comfortable" outcome for me is continued weakness to somewhere at or just above the 666 low and then a move higher. Hopefully once we're down in the devil's territory again, we can find some stocks worth buying. As it is now, I've got shorts up the yin-yang, and I think next week is going to be really good for the bears.