Kenny Rogers Was Right

  • Posted by
  • on May 25th, 2013

“You’ve got to know when to hold ‘em, know when to fold ‘em” Kenny Rogers

The great 2013 equities rally took a punch this week, and may take a few days to make its way through the shock of being hit. This has been an epic rally of huge mental resistance but little price resistance, nicely revealing biases among its players.  The past 6 months don’t matter; a trader now needs to handle what lies ahead as we drain the excess.

We are both blessed and cursed to have so much information at our fingertips; it can quickly get overwhelming without a process for filtering what comes in. Just like eating, our information diet “shapes” our development and can help or hurt our efforts to profit in the game of trading.

To this day, the best description of what I seek is summed up in the classic Ritholtz post Strong Opinions, Weakly Held. Those that have put in the effort to develop a strong gameplan warrant my attention, as do those with the humility to abandon it when proven wrong. How about the opposite; weak gameplan and belligerently right? Pretty simple to distinguish between the two. A two-way market can hide a lack of flexibility, but get a run like this, and an inability to let go of an opinion becomes obvious.

It’s still not clear to me who a vocal bear is trying to convince. Data showing this extreme or that negative data point is in the public domain; a sophisticated reader already knows that stat and has chosen to use it or ignore it. A less experienced reader wouldn’t know how to incorporate the information into his/her risk management plan; why would you want to convert them to your argument? Either way, what benefit is there to repeatedly voice it other than wanting to be remembered for calling it?

I enjoy reading market stats, as long as the source is just as willing to share data when it shows the opposite. But at most, these stats are inputs to SIZING, not direction. Too many bulls is not a bearish data point, it is a “less bullish” data point indicating that maybe your idea has now pulled some of its future reward. If your sizing model has a place for it, it is perfectly logical to account for it and reduce long exposure. If not, then let it be a brick someone else’s wall of worry.

The bottom line with my reading is that I care very little what anyone thinks, but a lot about how they think. Are they consistently clear with their process? Do they have the objectivity I seek? Are they sharing, or selling? I can’t stress enough how beneficial it can be to absorb the experience of those types vs. the opposite, and hope in some way I am contributing to the good side.

As for the market, I’m agnostic. I consider this week’s selling very important, but I thought the same in late February and mid April and was forced to reassess when buying resumed. This is what I know:

1) The long term trend is up

2) The intermediate term trend is up

3) The short term trend is sideways after being straight up

4) If breadth improves I need to buy

5) If breadth weakens I need to sell

6) I can get fully long or short faster than Tepper or Tudor or Dalio

What’s great about being small is that we all share #6. The biggest funds are generally big because they’re good, but they now face the obstacle of size. They have no choice but to worry about everything; we can execute as we like, just as they did when they were smaller.

Rather than obsessing over the next great call, we as traders should spend our time figuring out how to a) make more out of our good callsb) lose less on our bad ones, c) improve our process for idea generation. Most important, use that flexibility we have…there’s no law that says the Dec 31 $SPY bull made more than the April 19 one. It’s all in how we manage our stack.

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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