Let me first start off by saying that my belief that a run to the summer lows by the end of the first quarter will most likely turn out to be wrong. If you recall how the market behaved a month after the September lows this feels a lot like that - the slow but relentless grind higher with low volatility which is the hall mark of bull market action. And now, just like then, the permabear trading community got caught shorting the rally trying to pick top after failed top. Let's face it, everyone's on the look out for a top including you and me. And seemingly out of nowhere, we have a market that's only about 50 points away from making a new bull market high!
Everyone's harping about how bullish sentiment is. I've warned many times here about he limitation of sentiment surveys. Although extreme bullish sentiment often pinpoints IT tops, you can also see it happen during the first rally out of a major bottom which paradoxically is a LT buy signal! That's what happened in October of 2010 when bullish sentiment hit extreme levels. I also remember this happening in the summer of 2003 when the market was early in a new bull market. Sentiment was off the charts extreme....like 5:1 bulls vs bears and that got all the permabears really excited... yet that hardly marked the end of the bull run and those permabears got ran over big time. But OK, yes, I know that only in hindsight will we be able to know if this surge in sentiment signals a new bull market or an important top....my point here is that don't just automatically assume it's the latter like 95% of the trading community is. And again, I must stress this....what are people actually doing with their money? That counts more in my book. AMG shows yet again only a modest inflow into equities this week. Active managers as per NAAIM show only a modest rise in equity exposure to a 53% net long allocation. That's still neutral and nowhere near extreme. So, people are only gingerly tip toeing back into the market. That's not worthy for me to make a contrarian bet on the downside
Shorter term, the market does appear overheated and ripe for at least some sideways action or modest downside but again any downside should be modest. Because I still have doubts, I intend to eventually initiate a LT, OTM put hedge to augment my long positions which to be honest, is still a pathetically small part of my overall account. I'll initiate the hedge when my exposure is high enough and when I think the market is ripe for downside greater than 3%. Despite the recent bull market behavior, I still don't have a strong enough conviction that the worst is over and there won't be at least one more scare in the market as per the reasons I mentioned a few weeks ago. That makes me somewhat of weak long if I was to add significant more exposure. But with a hedge I'll be able to be a strong holder of longs focusing my attention to company specifics and less on fixation about the fucking market. Yes, I'm frustrated because a couple of stocks I had orders for didn't get filled and they ended up having big moves. Typically, I will use a market order especially when I'm bullish about the general market. I know from experience not to haggle over nickels and dimes when buying a stock because if you do that, the stock can end up running away for hundreds without you on board....and that's what happened to me. I broke this rule because I was unsure about the market so I used limit orders instead at prices slightly below market levels which didn't get filled. And of course, I got punished once again for trades that I didn't make as opposed to ones that I do make.
I feel rattled because of this. Remember people, don't make trades when you're emotionally unstable. And know yourself. How are you going to behave if a position moves against you by a certain amount? If deep down your conviction level is weak or if you're too stubborn to admit defeat when it's likely you're defeated, Mr. Market is going to expose you. Given enough time Mr. Market WILL without any shred of doubt, expose your weaknesses and do so over and over. I see a lot of traders out there who are caught short holding the bag in agony and frozen like a deer in the headlines. I see them say "the pain is so great but if I give up now I just know the market is going to tank". Please don't ever be in this situation. First of all, don't be in a situation where the pain is great such that you're taking a big hit and you're hoping to break even. Second of all, don't have this "if I sell now it will go the other way" attitude. That's a psychological trap known as "fear of regret" and typically exhibited by amateur traders who still haven't learned to set aside their ego.
This market has been very tough I know, but DON'T go on tilt folks....he'll get you if you do. If you have to, step away from the game for a while.
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