Not Time to "Prevent" Opportunity

  • Posted by
  • on December 23rd, 2010

This week, in particular, it feels like that last 30 seconds before halftime of a football game.  One team(the bulls, in this case) has established momentum and imposed their will on the other team.  A focused team may still spread the defense a little, but knows the dangers of 30 seconds on cruise control.  They may even call time outs to give themselves a chance to block or return a punt.

I plan to be that strong-willed team.  I’m told this is the time to pack it in for the year, and for longer timeframe ideas that is essentially the case.  Tax loss harvesting has been done, every asset class has now had a rally, and it’s “closing transactions only” on that portion of client accounts.  Jason at SentimenTrader is showing a Smart Money/Dumb Money ratio of 29%/79%, the highest I recall seeing in my years of subscribing…doesn’t matter until it does, but that’s a pretty broad measure of sentiment at odds with a pretty long and strong trend.

But I’m preparing for shorter-term opportunities for a number of reasons.  First, I expect to be mostly away from the longer timeframe for a little while…75% of stocks are in an uptrend but the risk:rewards have lost their appeal for now.  By the time we resume normal trading in January, we’ll be only a week away from earnings season…at that point, calculated speculation borders on gambling on hit or miss events.

The second reason I’ll keep it short-term is because forces change when the calendar rolls to a new year.  Performance anxiety lessens across Wall Street…it’s like Opening Day, and everyone is excited for a fresh chance to outperform.  At that point, the rally may continue on fundamental(POMO?) grounds but it will have lost the persistent bid of managers desperate to keep up with their benchmark.

Between now and then, everyone expects quiet trading.  But in a thin environment, it only takes a little spark to create some dynamic intraday movement.  No manager wants to give up any alpha as the clock runs out on 2010, so the potential for fear-driven moves, particularly in smaller names, runs abnormally high.  I actually prefer this period to the days just after the break, when pros come in with a definitive plan and execute methodically as the year opens.

So I see the known combo of low volume and low(expected) volatility as the very thing that could cause outsized moves in the final week of the year.  It might be silly to go about normal planning when we all know nothing can happen, but ask a Giants fan what can happen when we take our eye off of the next 6 seconds and look ahead to the resetting of the clock(sorry, but I’m a Bills fan…I have license to call anyone out for pathetic endings).  Anyone think Belichick would take next week off?

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.

blog comments powered by Disqus
Derek Hernquest Blog