Accepting Market Changes

  • Posted by
  • on December 15th, 2010

I see 6 higher opens and higher closes, and my default reaction is that it makes no sense and it needs to be faded.  Does that make me smart, or a rational but flawed human being?  We all know the reasons it HAS to pull back…high call buying, high bullish sentiment, emerging markets weakness, high unemployment, strapped consumer, blah, blah, blah.  It doesn’t take guts to sell this market, it takes common sense.

In general, we’re at the same levels we touched in April 2010(pre-Flash Crash) or March 2008(Bear Stearns) or late 2005 or mid 2001 or early 1999, or whatever you want to pick as a starting point.  Instead of anchoring on how far we’ve traveled from some low point(or high point, for that matter), why not focus on the direction and power of the move?  As I said after the Flash Crash, the only real boundaries are the 2007 highs and 2009 lows…the rest is just wandering in a range.  Sometimes it’s more forceful, and sometimes passive.  But to limit our thinking to a 10-20% range is dangerous.

Enough about the obvious, what about the not-so-obvious?  Like, which stocks have the potential to lead us up or down from here?  My only prediction is this…it won’t be the crop of stocks that got us from 1050 to 1250.  We have all kinds of bullish patterns emerging in industrial names like $IR and $SHW and $TYC and $DOW and $FLR.  This robust and consistent theme runs counter to the random shorts I’ve taken in recent months…fleeting episodes of weakness primarily in financials like $JPM and $COF, in which I’ve been stopped out of every name I’ve tried.

We have to prepare for tomorrow’s battle, not yesterday’s…momentum names had explosive moves, but those moves are over for now.  Not only are they no longer demonstrating leadership, some have been pummeled in recent sessions with 15% corrections while the market makes new highs.  We watched in awe as $NFLX probed unthinkable levels like $185 and $LVS raced through $45…yet I’d bet more people have bought them on the way down than participated in the safer move up.

I’m no different…I sit here hoping for a chance to buy stocks near $SPX 1200, after failing to buy aggressively into the initial break above that level.  Why?  Because I can now mentally accept 1200 as value, while the first time I doubted its legitimacy.  I didn’t fight it, just didn’t get aggressive for fear of the unknown.

This is the flaw most of us bring to this endeavor, and why I substitute fact for opinion in my operations.  It’s 100% natural to doubt new price levels, as Dr.Phil reminds us in his excellent work on the mean reversion heuristic.  This denial of new information and acceptance of old info, I believe, has been the cause of virtually all trading failures.

I’m doing my best to operate in a world where U.S. industrials and heaven forbid, financials, are emerging as the new leaders at the expense of emerging markets and high-priced technology and consumer favorites.  As Lord Keynes is famous for saying “When the facts change, I change my mind.  What do you do, sir?” Bash his economic theories all you want(and I do), THAT line is pure wisdom.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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