First off, I'm disgusted with myself. I'm one of the many chumps who missed this entire rally since the bottom in early Oct. Prior to it I was noting that sentiment was showing extreme pessimism and although bulls had not gained any upside traction at the time it was just a matter of short time before they did. I know I said I would rather wait to see the dust settle and be a buyer early in the new uptrend (should it arise) and that would cause me to miss the bottom, but this was a ST trading opportunity that I missed and should have made a bet on....not a large one (because I have a strict rule of not committing large on top or bottom picking no matter how tempting) but a bet nontheless....something like a bull call spread. Given how oversold we were and the sentiment, I knew the risk of a V shaped bottom was high whether it was a snap back dead cat bounce or the start of a new sustainable move up. Although I respected the possibility of a September 2008 type waterfall decline whereby oversold and pessimistic conditions were ignored, market conditions this time around were not nearly as bad as they were in late Sept 08 when earnings and credit conditions were in serious deterioration and the financial system was literally imploding. I realize a lot of this looks to be hindsight bias and perhaps it is but I think a lack of balls to get out my comfort zone explains my mishap best.
Come December, it will be 3 years since I started trading full time (I have been trading "part time" for 9 prior to it). I've done pretty good so far and my success was almost all due to buying and holding individual stocks for months at time. No short term trading, no counter trend trading, no bottom/top picking. When I was unsure or ST/IT bearish I would go to cash. I'm a large believer in playing the bigger trends and avoiding ST trading but there's usually an exception to a rule. I was too inflexible and not bold enough to get out of my comfort zone. It cost me a missed opportunity in this recent rally and also with TLT calls I was thinking about buying in early July right before the explosive bond rally. And it's not like I was going to risk a lot of money on these trades either....but even despite that I still didn't pull the trigger. Why? I think it's because I'm trying to protect my self confidence from taking a hit should I end up losing on these trades.My thinking was this - I was up pretty good on the year so why risk losing any of that with a non-standard trade? I was playing not to lose instead of playing to win and that's a no no. Playing the market is a great way to learn about yourself, in particular, your weaknesses. Sooner or later they will be exposed.Back in March is said this
One thing the market will do is expose your weaknesses. If you are ignorant and make decisions based upon data the market doesn't care about or useless indicators, you will get punished. If you don't believe enough in yourself or your convictions you will get punished by not making nearly as much money as you should have or getting shaken out near the end of a dip/correction. If you believe too much in yourself and your convictions the market will eventually humble you for being greedy, stubbornly dogmatic or arrogant. If you're bitter/biased you will not see the market for what it is and you will get punished. If you are disorganized and reckless (don't have guidelines/rules, don't plan your trades) you will get punished. If you are emotional and make snap decisions you will get punished.
My weakness has tended to be that I'm overly cautious and not confident enough in myself when I should be and it showed again. When I look back at my mistakes, in trading and in life, they have primarily been things I didn't do as opposed to things that I did do. Since I started trading full time, my losing trades have been few and when I did lose I lost small. Although that appears to be a good thing it's not neccessarily so because in my case, it reflects that I'm playing too tight i.e. folding too many hands as I did with the TLT calls for example. So, despite that I've been doing well, I could have been doing even better..... significantly better if I had more confidence in myself and pulled the trigger more often.
I look at all the tremendously successfull people in the world and they had success by being bold. I need to be more bold - not reckless mind you...but bold...there's a fine line between the two.
Enough about me what about the market. Well, I'll leave it up to the experts and dogmatists to analyze in detail the big news out of the Europe regarding the increase to the EFSF and the 50% Greek haircut. I'll chime in quickly by saying "what about the rest of the PIGs?" I realize this criticism isn't original but it's just painfully obvious to me given what the bond markets are pricing in, the rest of the PIGs will have to be given haircuts. I mentioned months ago that China would need to step in and help and they are willing. That's good but what about the dark clowns brewing over China itself? And now we have oil back to the mid 90's which is going to make it difficult for rate cuts from the BRICs which I think is necessary. It's because of these issues I don't think we aren't quite out of the woods even if this relief rally ends up having legs.
Sentiment wise, only AAII is showing somewhat of excessive bullishness. NAAIM exposure has gone up to 40% equity exposure which is neutral sentiment wise indicating more room for the rally to carry on higher or for the market to at least stay afloat for a while. There was minuscule participation from retail via fund inflows and that's bullish and suggests the rally isn't in immanent danger of collapsing (however that could change quickly if we see a spike in inflows this week).
One thing that has stood out is the asinine put buying that has been going on for the past 2 months and even to this day. Despite the fact that the market has rallied 17% the put/call ratio never showed anything resembling mild optimism on any single day. It has been well above 1 most of the days and the lowest it ever got was the high 80's and low 90's a few days. This stubborn and reckless bearishness that the put/call ratio reflects, has been the culprit of this rally in my opinion. The trading community shorted the rally repeatedly and as result have been clown raped for this group think. This is not the first time I have seen this behavior in the past 2 years. Even the technical types who trade mechanically have been getting murdered. The so called "death cross" that was triggered in early August has resulted in death alright....for those who followed that signal and went short. The exact same whipsaw happened last summer as well. Carl who runs the charting service I use decisionpoint.com, issued a bear market signal after the death cross was triggered and is now calling it a bull market again but only after the surge on Thursday. He got chopped up to bits with his mechanical methods. Let's just say I'm a not a fan of using such methods and end it at that.
So what to do now? Trick or treat? With the market as ST overbought as it is, a pullback/consolidation appears quite likely. How people react to it will be key. If weak types buy the dip then look out below for the market will give a trick. If instead they stay on the sidelines and the asinine put buying continues the market will give a treat and we will probably see this make a run back to the highs of the year. It's going to be difficult to see major downside traction if so many have their guard up. Ultimately, whether it's this year or next, I think there will be a major retracement of this rally. I'm in the process of hammering out a game plan given my outlook which could involve my typical small cap long plays using a market hedge. However, I feel I need to approach the market with fresh eyes and a clear head and I'm not quite at that point yet. I can call it a year here and walk away with a 22% gain for the year. That's not too shabby considering what's happened this year but I have to learn from recent mistake of playing not to lose instead of playing to win.
Happy Halloween everyone!
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