Tactical Adjustments

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  • on March 16th, 2011

Whether one is a bull or bear, it is obvious the market has changed.  Some of these changes are personal(selection and bias), but some are universal to all of us.  I’ll save selection for later but the following actions can be noted by all:

1) Position Size- Daily Range is higher, we must make new positions smaller AND trim the old positions to account for increasing volatility.

2) Timeframe- wider ranges bring more opportunities. However, if we mismatch timeframe our opportunities may be great for only an hour instead of a day or week or quarter depending on our specialty.  Gotta factor this in, the most demoralizing outcomes for me are the big early winners that fail to follow through and I take a scratch.  Not only do we have to enter well, but now we’re forced to exit well…no sloppiness goes unpunished.

3) Tactics- we’ve obviously switched from a “buy doubt/sell fear of missing out” market to a “buy panic/sell relief” market.  Or if you’ve decided to stick to shorts, it’s “short relief/cover panic” mode.  This is a major change and easy to forget when game speed has increased.

We’re now watching these events around the clock; not a great idea for most of us.  There is an increase in emotions, and a limited capacity to handle new info if watching too closely.  Last night, $ES_F was up 10 and down 10 at various points, and we opened unchanged.  Unless we’re trading the overnight session, we can only wear ourselves out by watching.  Remember that these country ETFs are real-time; we can’t base today’s trades on what happened last night in Japan.  See $EWJ lower this AM despite the huge Nikkei gain; that gain was more than built into the price by 4PM yesterday.

As I said in my last post, I have mixed feelings toward this market.  The all-important intermediate time frame that many of us operate in has clearly shifted to down.  At Tuesday’s open, the other(longer) timeframe made a stand but the battle still rages on.  Looking beyond today is just not wise(and not necessary given larger intraday ranges), no matter our thoughts about the eventual outcome.  A downtrending market is vicious to trade for even the hardiest of bears…the retracements are wicked and very believable as they occur.

The evidence has me leaning short.  The gloomy news environment has me leaning opportunistically long.  My solution is to remember the concepts above, wait for moments of bad news and panic, and take tiny long positions when they happen.  My holding period is WAY shorter than normal, and I suspect will remain that way for a number of weeks.  Just in the time I wrote this, the $XLE Apr 73 calls I was happy to buy this morning at 3.10 jumped to 3.60 and are back where I bought them.  This is such a recipe for frustration; my job as a risk manager is to seek opportunity but keep the losses minor emotional ones and not large financial ones.

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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