Sunday, August 10, 2008

My Perfect Market Scenario

As you know I have been pretty bearish since I started this blog seven months ago. Sure I've made some long calls, some good some not, but my major theme has been being short this market. Frankly it's where I have made almost all my profits this year. I've probably out performed most of the long/short hedge funds out there as well as some "short only" funds that take 2 and 20. I used to take those fees and before I started trading my own funds I never did less than 20% in any year for my investors. In my conversations this past week with hedge fund managers, sell side guys, a couple of analysts, and reading some of the posts of some of the better bloggers out there, my conclusion is that it is becoming virtually impossible to figure out "this" market. Trends sometimes last a day or two instead of longer periods in the past. Guys I know are getting their heads ripped off because what is a breakdown, breakout today, will turn around and kill you tomorrow.

The volumes on the upside this week and during past pops, have not been the volumes that have made up the bad days. Some will argue the summer doldrums, but then why does the volume come out of the wood work on the down days? Many of the rallies are pure short covering because shorts refuse to be caught leaning on the wrong side even if it's for a day or two. Their performance or lack thereof is too precious to risk, so they are forced to follow the trend even if it is for an immediate moment in time, after all they can always do the opposite tomorrow morning. Black boxes and program trading rule the day, and models and benchmarks that we used to use, no longer seem as relevant.

So what is my perfect scenario? Well, for me to be comfortable again as a "long" player in this market, it means for us to break the July lows with a vengeance. A true textbook capitulation. When credit card and auto defaults hit the front page. Not the sector by sector "slow bleed" that we are experiencing, whereby the financials supposedly bottom followed by a down turn in commodities. Maybe I will never get it, as this "new market" does seem to have spawned a new way of doing things. I do think though, at the end of the day, some things do stay old school, and a new wave down is quite possible if not likely. I will try my best to be prepared either way. Maybe we did bottom, but in my heart of hearts we really have not.

In the meantime I will continue to "trade what I see" and not "what I think". That also means smaller positions, tighter stops, and unless I really have the wind at my back on a particular trade, just all around cautious behavior. This has not been a good swing trading market for all the reasons I have described above, except in certain random situations, so I will continue for the most part to stay on a fairly strict day trading diet. As usual if I am taking something home, I will let you know.


Mac said...

Excellent post and summary of what is going on right now. I can't remember a time with as many whipsaws as we've had recently. Perhaps when the summer is over things will get a little better and easier to swing trade.

I agree also with the lack of a gut-wrenching bottom. I really wish we would get one, but interference by outside sources (i.e. gov't) seems to be set on preventing a breakdown by any means necessary. Perhaps that is one reason things are so difficult right now as well.

Oil still is a big key in my eyes. I think it is done longer term but is very much overdue for a bounce. Perhaps a bounce here could lead to a retest of the recent lows which would allow a better bottom to be formed. We can hope, right??

upsidetrader said...

i agree with you on oil,and you are corect about the gov't--leave it to the Feds to absolutely screw up a natural capitulation

Steve said...

Stewie commented on his blog that he had a rough last week, and I believe you mentioned that Thursday was very difficult for you as well.

From what I participated in, Monday was the best day of the week from a day trade standpoint. With the commodity producers you had so many choices to short and they all ran in the morning and in the afternoon. After that with the exception of Friday afternoon, most of the action was in the opening gaps, so unless you had the correct position overnight, it was tough to make anything positive.

Traditionally the Fall has been where you see pivotal moves, so maybe that is when you get capitulation. Even though the long side has done better this month than in July, looking at credit spreads and Libor rates- credit is tight as a drum except the credit from the Feds to the large banks.

But credit for the rest of the world is contracting which means on sideways intra day like Tuesday- Thursday, the best trade is to be long US Dollars!

Good luck to all this week!

upsidetrader said...

you are right about he gaps on the ags, thats why i posted that i kind of "traded around" them but kept the AGA as a core position because of that-it is getting tougher here, much tougher, becuase much of the so called "easy" money has been made-good luck

About Me

My photo
I am a former hedge fund manager, broker and capital markets dude who now trades for his own account. I love what I do. I will try to post some stocks and an occasional chart that looks attractive for entry.I will also try to point out the idiocy of conventional wisdom and the lack of value added by the mainstream financial media. These postings should not be viewed as recommendations.