Bulls waisted a lot of energy today

A weak rally attempt fizzled today while bond yields climbed and the VIX collapsed....tisk tisk bulls, you wasted tons of energy and got nowhere.

The collapse in the VIX to normalized levels was something I predicted but did not fully capitalize on...to say the least. I sold my VIX calls weeks ago for a 25% gain when I could have made a 300% gain had I just stuck with my guns! I am such a donkey. This is my biggest weakness by far....pulling the trigger too soon. My other weakness is that I tend to under trade because I wait for everything to be near perfect before pulling the trigger. Most traders have the opposite problem...overtrading and overconfidence.

The trader's own worst enemy is himself and it's a battle I face all the time. To fight off impulsive instincts can be quite difficult for me sometimes. I feel like I have 2 personalities inside me...one is brutally unbiased and objective and fully taps into his instincts and intuition buried deep down inside which more often than not turn out to be correct. The other character I have inside me is like George Castanza...neurotic, impulsive and emotional. This blog helps me to bring out the former character, but once I have a trade on I often have to fight off the Castanza in me.

Thus, I have realized that I need to be more disciplined by having a pre determined game plan. However, I strongly believe that even with such a game plan there are times you must abort it early due to changing circumstance in the market...this is where George C gets in the way, because once I have a trade on my objectivity can become significantly diminished. I also think that constantly watching the tape intraday when a trade is meant to be for a multi-day hold does damage.... similar to how myopic loss aversion hurt investors. In my case it tends to be myopic gain aversion.

I need to also start taking partial positions instead of waiting for everything to be line up perfectly.... things rarely do. I'm getting better at this though but still nowhere near ideal.

Anyhow...back to the markets. After today's failed move it leaves the market vulnerable. I believe morning weakness will occur again tomorrow and if a good opportunity presents itself I will try and take advantage. I know I just said that I can be overcautious but it has actually been better to be this way during the past several months because the market has tended to whipsaw everyone due to the gap and run type moves that seem to be a lot more common than normal.

If we now assume that the VIX is behaving like it did in "normal" conditions then we should be looking for a move to the mid-low 20s to signal a top in the market. But, these are anything but normal times...however, credit conditions are definitely normalizing…yes, the economy is weak but it's always weak near a market bottom.

On the sentiment perspective, more people are embracing the notion that this could be a bull market after all and it’s no longer as embarrassing to say it. This is of course the goal of every bear market rally….it has to convince a great deal of people that it’s the real deal…not everyone…because there will always be skeptics even if the SPX were to go to 1600 by the end of the year. And there’s still a ton of skeptics out who can be converted to believers thus fueling the market even higher. If this is a bonafied bull market the market should rip to 1050 by the end of June. It should not give convenient entry points such as move back to 800-850 before ripping to new highs like a lot of bulls and even bears are calling for.

I think what could ultimately cause another run for the lows is after when credit conditions are fully normalized and the stimulus induced jolt in the economy wares off and we actually see a decent positive quarter of GDP. At that point economists and analysts would start taking out their “recovery” playbooks and revise expectations higher. That might be the point where investors would start getting disappointed again as they realize that the economy is a shadow of it’s former self and can no longer rely on high degrees of leverage for growth….just a thought here and as always subject to change.