Dow 11,000 -- Too Much Cheering

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Dow 11,000 -- Too Much Cheering

The DJIA's marginal close above 11,000 has attracted headlines in general-interest newspapers. For example:

The Dow Jones industrial average, a closely watched measure of the financial world, closed above 11,000 points on Monday for the first time since the start of the financial crisis.

The move was the latest marker in a rally that has brought Wall Street back from the brink. It came as investors welcomed a long-awaited rescue plan for Greece and amid signs that American companies were poised to report strong first-quarter profit. By the end of trading, the Dow had risen 8.62 points, or 0.08 percent, to 11,005.97 — its highest level since September 2008.

“Nobody ever thought we’d ever get near this level this fast,” said William J. Schultz, chief investment officer for McQueen, Ball & Associates. “Lacking any negative news out of companies, the rally will likely continue.”

http://www.nytimes.com/2010/04/13/business/13markets.html?hp

If you're long, this is not a welcome development. From a contrarian standpoint, the last thing you want is media cheerleading over a rather weak move up, on the announcement of a large injection of liquidity. If this were a healthy market, the Greek bailout news should have sent it up 200 points.

One analyst I respect -- Guy Lerner -- has an article posted at Safehaven.com. He describes how all the wrong (clueless) people are short-term bullish, while all the right (insider) people are bearish.

http://www.safehaven.com/article/16386/investor-sentiment

It doesn't necessarily mean the cyclical bull market is over. But I sure wouldn't be adding on to positions now. Taking investment advice from the Mainstream Media is a proven road to ruin. When they say 'buy' -- run for your life! Or scarf up some gold, just to spite them.

 

 

 

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Re: Dow 11,000 -- Too Much Cheering

Buy or Perish!

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Re: Dow 11,000 -- Too Much Cheering

Buy, then Perish!

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Re: Dow 11,000 -- Too Much Cheering

Buy , Sell what the hey

 

Just send your money directly to Goldman or JPM and be done with it.

that way they can keep doing God's work

 

 

 

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Re: Dow 11,000 -- Too Much Cheering
SagerXX wrote:

Buy, then Perish!

Buy right, sell right.

Pay the required taxes.

Throw a party. (Get ready for Puts)

Since March 3rd, Goldman is up $20 - with a corresponding ~$17 move in the October $160 Call options. In at $9 per contract, out at $25 - 177% ROI based on the movement the market gave you. Without any concern for why it is moving - only that it moved.

Beat them at their own game.

 

MH -

Here's where Lerner and I disagree.  Market neutral people are ALWAYS right.  He indicts the short term Bulls unfairly.  If those short termers are in and know that the market is topped AND they get out while it is still rising (see my Goldman trade above), then they are 100% correct.  He also heaps too much praise on the long term Bears - they are missing excellent trading opportunities (such as the GS trade above) by being positioned (also 100% correct) for a longer term Bearish bias.

Don't take sides - take what the market gives you, up or down, and you will always be on the winning side of a trade.

Assuming of course you have the discipline to get out of a trade that backs up on you and not dig in your heels by convincing yourself you are "just a little early".

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Re: Dow 11,000 -- Too Much Cheering
Dogs_In_A_Pile wrote:

Since March 3rd, Goldman is up $20 - with a corresponding ~$17 move in the October $160 Call options. In at $9 per contract, out at $25 - 177% ROI based on the movement the market gave you. Without any concern for why it is moving - only that it moved.

Beat them at their own game.

Buying high delta options is not exactly a low risk trade.  If the market went the other way you could easy have lost 75% or more of your "investment".

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Re: Dow 11,000 -- Too Much Cheering
goes211 wrote:
Dogs_In_A_Pile wrote:

Since March 3rd, Goldman is up $20 - with a corresponding ~$17 move in the October $160 Call options. In at $9 per contract, out at $25 - 177% ROI based on the movement the market gave you. Without any concern for why it is moving - only that it moved.

Beat them at their own game.

Buying high delta options is not exactly a low risk trade.  If the market went the other way you could easy have lost 75% or more of your "investment".

Joel -

If the market had gone the other way I would have closed the position with a relatively small loss and moved on.

It wasn't an "investment", it was a "trade".  There is a huge difference.  I "trade" to generate revenue to pay off debt, donate to charity and buy gold and silver.  Investing is a completely different ball game than trading and too many people view them as one and the same (incorrectly IMO). 

The fact that there was a large spread (delta) on the Bid/Ask has no bearing on whether or not a trade is risky.  A large spread generally means price volatility and movement and that is what I am looking for.

The only thing that makes a trade risky is the action (or inaction) of the person hitting the "Enter" button.  When I get into a "trade" I expect it to go my way almost immediately.  Depending on the time interval of the chart(s) I used to enter the trade, I may give it a day or two to move my way.  If it doesn't start going my way almost immediately I will close it.  My expectation for GS back on 3 March was to the upsde so I bought Call options.  It began moving my way immediately and I began looking for an excuse to get out.  15 days later on 18 March I was happy with a 177% ROI so I sold the contracts and closed the position.

You eliminate all risk from a trade by developing the discipline to trade correctly.  Trading correctly does not necessarily mean that the trade is always profitable.  If you get into a trade that backs up on you, the correct and disciplined thing to do is to close the trade.  You may lose a little money, but you DID the trade correctly - you closed it.  By focusing on "trading correctly" you reduce the size of your losses and that is how you maximize profits in the long run.

I honestly don't think trading options isn't any more risky than other trading approaches, you just have to be aware of the time element and expiration date and trade them appropriately and correctly.

Just my approach......

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Re: Dow 11,000 -- Too Much Cheering
Dogs_In_A_Pile wrote:
goes211 wrote:
Dogs_In_A_Pile wrote:

Since March 3rd, Goldman is up $20 - with a corresponding ~$17 move in the October $160 Call options. In at $9 per contract, out at $25 - 177% ROI based on the movement the market gave you. Without any concern for why it is moving - only that it moved.

Beat them at their own game.

Buying high delta options is not exactly a low risk trade.  If the market went the other way you could easy have lost 75% or more of your "investment".

Joel -

If the market had gone the other way I would have closed the position with a relatively small loss and moved on.

It wasn't an "investment", it was a "trade".  There is a huge difference.  I "trade" to generate revenue to pay off debt, donate to charity and buy gold and silver.  Investing is a completely different ball game than trading and too many people view them as one and the same (incorrectly IMO). 

The fact that there was a large spread (delta) on the Bid/Ask has no bearing on whether or not a trade is risky.  A large spread generally means price volatility and movement and that is what I am looking for.

....

I honestly don't think trading options isn't any more risky than other trading approaches, you just have to be aware of the time element and expiration date and trade them appropriately and correctly.

Just my approach......

Dogs,

I am certainly aware that this was a speculative trade which is why I refered to it as a "investment" Laughing.  I have worked for options market makers for most of my adult life and would certainly not want to discourage retail investors from trading options.  I am just pointing out that your %177 ROI in a little over a month was hardly a riskless investment.  You had an opinion on market direction and took a leverage bet.  You won this time but may not be so lucky in the long run.

BTW the delta I was refering to was not the bid/ask spread but the option greek called delta.  There are 5 common option greeks and several others that are less common:

  • delta refers to change in option value vs. change in underlying (derivative of price with respects to underlying)
  • gamma refers to change in option delta vs. change in underlying (second derivative of price with respects to underlying)
  • vega refers to change in option price vs. change in option volatility (derivative of price with respects to volatility)
  • theta refers to change in option price vs. change in time (derivative of price with respects to time)
  • rho refers to change in option price vs. change in interest rates (derivative of price with respects to interest rates)

From the price move you describe $20 stock move vs. $17 option move I can back of the envelope assume that the average delta of this option over your move is somewhere around 85 and probably significantly higher by the time you sold it.  I am guessing it was "in the money" (above 50 delta) when you bought it.

Lets assume you are a disciplined speculator, and will get out rapidly if the trade starts to move against you.  If GS stock moves from $160 at time of option purchase, to $159 and you decide to cut your losses, (assuming a 55 delta 160 Call) your option is now only worth around $8.50 for a loss of $.50 or 5.5% of your investment.  Clearly a one dollar move against you can happen quite quickly, much quicker than a $20 move in your favor.  Another consideration is that you will lose on the wide bid/ask spread twice, but firms like the one I work at, will be more than happy to oblige if you so choose.

All I am trying to point out is that OPTIONS are LEVERAGE and not for the faint of heart.

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Re: Dow 11,000 -- Too Much Cheering
goes211 wrote:

Dogs,

I am certainly aware that this was a speculative trade which is why I refered to it as a "investment" Laughing.  I have worked for options market makers for most of my adult life and would certainly not want to discourage retail investors from trading options.  I am just pointing out that your %177 ROI in a little over a month was hardly a riskless investment.  You had an opinion on market direction and took a leverage bet.  You won this time but may not be so lucky in the long run.

BTW the delta I was refering to was not the bid/ask spread but the option greek called delta.  There are 5 common option greeks and several others that are less common:

  • delta refers to change in option value vs. change in underlying (derivative of price with respects to underlying)
  • gamma refers to change in option delta vs. change in underlying (second derivative of price with respects to underlying)
  • vega refers to change in option price vs. change in option volatility (derivative of price with respects to volatility)
  • theta refers to change in option price vs. change in time (derivative of price with respects to time)
  • rho refers to change in option price vs. change in interest rates (derivative of price with respects to interest rates)

From the price move you describe $20 stock move vs. $17 option move I can back of the envelope assume that the average delta of this option over your move is somewhere around 85 and probably significantly higher by the time you sold it.  I am guessing it was "in the money" (above 50 delta) when you bought it.

Lets assume you are a disciplined speculator, and will get out rapidly if the trade starts to move against you.  If GS stock moves from $160 at time of option purchase, to $159 and you decide to cut your losses, (assuming a 55 delta 160 Call) your option is now only worth around $8.50 for a loss of $.50 or 5.5% of your investment.  Clearly a one dollar move against you can happen quite quickly, much quicker than a $20 move in your favor.  Another consideration is that you will lose on the wide bid/ask spread twice, but firms like the one I work at, will be more than happy to oblige if you so choose.

All I am trying to point out is that OPTIONS are LEVERAGE and not for the faint of heart.

Joel -

I understand your perspective better now.

I can tell you though, that in the approach Cat and I have developed with our trading this was not an "opinion".  I knew with certainty that GS was going to move up.  That speaks to the discipline I was talking about.  Why would I ever get into a trade position based on an "opinion"?  I understand the distinction you are making, but it wasn't an opinion or a "leveraged bet".  GS had only one direction to go once I got in - otherwise I was out.  I won because I expected to win and I traded correctly - there is no potential for a long term big loss unless I break discipline.

I don't concern myself with beta, delta, or any other "metric".  The only thing I look at is upcoming events (earnings, dividend payment dates, splits, etc - events that have the potential to move the price of the underlying equity), a handful of technical indicators with an awareness of where in the trading year I am.  As far as I'm concerned, all of that other stuff is noise and I have yet to find a useful application.  Remember, what I am primarily looking for is a stock price that moves.

Using your example, I am not concerned with a 5.5% "loss" because I get to keep 94.5% of my principal.  Trust me, when you add up a handful of 5.5% "losses" against 40-60% (typically - granted 177% is not typical, but at the same time, it is not unexpected with GS this time of the year) ROI trades, the scales tip heavily in my favor.  The Bid/Ask spread is also not a concern for the same reason.  I look at the spread as the cost of doing business.  When GS took off in this trade, I made up the spread in less than a day.  I bought at the money (or within a dollar of in the money IIRC) - again, as volatile as GS is, and by buying the October contracts, I bought plenty of time and insulation against price time decay.

I hear what you are saying about losing twice on the spread, but trust me, firms like yours have paid me far more money on "good trades" than they have taken from me via the spread when I closed a trade that wasn't going the direction I expected.  Cool  Remember, I define a good trade as a trade done correctly, not necessarily a profitable trade.

Your last sentence is on target - although I don't view options as leveraged trades because I am not leveraging against anything.  I have never exercised the options and I rarely hold the underlying equity for this type of trade.  I just buy and sell the options.  What you call "faint of heart" I call a developed, disciplined and practiced trading approach - an approach that took almost 6 years of study and practice to develop.

Great discussion BTW, thanks.

Now, back to the rock pile................

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Re: Dow 11,000 -- Too Much Cheering

Goes211 wrote:

BTW the delta I was refering to was not the bid/ask spread but the option greek called delta.  There are 5 common option greeks and several others that are less common:

  • delta refers to change in option value vs. change in underlying (derivative of price with respects to underlying)
  • gamma refers to change in option delta vs. change in underlying (second derivative of price with respects to underlying)
  • vega refers to change in option price vs. change in option volatility (derivative of price with respects to volatility)
  • theta refers to change in option price vs. change in time (derivative of price with respects to time)
rho refers to change in option price vs. change in interest rates (derivative of price with respects to interest rates)

Interesting stuff, thanks for the explain. Wondering if this grouping of Greek values is woven together in some form of indicator that might be used in timing buys or sells in the sector or market in general?

 

 

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Re: Dow 11,000 -- Too Much Cheering
Dogs_In_A_Pile wrote:

Buy right, sell right.

As I recall, you and Cats took a seminar (or series of them?) with some fella who educated you in the Tao of Market-Neutral.  Who was it?  My wife & I (after the New Paltz weekend) are thinking about doing this as a sideline.

Viva -- Sager

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Re: Dow 11,000 -- Too Much Cheering

I certainly hope the market is not going to retrench back toward its March 2009 levels. I have a defined contribution pension and so I am now living from a pool of money where I am making the investment decisions. I can't withdraw for tax reasons so I am somewhat restricted. I feel fortunate that I have recovered all my losses from the 2008/2009 market meltdown. Right now I have 45% in fixed income/money market, 14% in gold and silver stocks, 12% in high dividend utillities & pipellines, 10% in emerging markets, and the rest in indexes tracking sectors of the Canadian market.

I'm thinking of really reducing the fixed income/cash component and going into stocks that have commodity holdings. Currently I have no US holdings. Any comments or suggestions will be seriously considered.

 

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Re: Dow 11,000 -- Too Much Cheering
John99 wrote:

BTW the delta I was refering to was not the bid/ask spread but the option greek called delta.  There are 5 common option greeks and several others that are less common:

  • delta refers to change in option value vs. change in underlying (derivative of price with respects to underlying)
  • gamma refers to change in option delta vs. change in underlying (second derivative of price with respects to underlying)
  • vega refers to change in option price vs. change in option volatility (derivative of price with respects to volatility)
  • theta refers to change in option price vs. change in time (derivative of price with respects to time)
rho refers to change in option price vs. change in interest rates (derivative of price with respects to interest rates)

Interesting stuff, thanks for the explain. Wondering if this grouping of Greek values is woven together in some form of indicator that might be used in timing buys or sells in the sector or market in general?

As an individual investor you are probably better to get advice like that from Dogs than myself.  There is certainly no easy money to be made in the industry or it would quickly be arbitraged out of the market by firms such as the one I work for.  Options are very powerful because they are effectively leveraged bets but strangely enough, dispite nearly 20 years in the industry, I really don't trade options very much for my personal account because I consider them to be too risky.  I might also be biased against them personally because so much of my income is already tied to the financial industry, I really feel no need to double down and risk my savings there also.  However, they are great when you want to trade with a high risk to reward ratio. 

One word of advice I would have for a beginner would be to only be a BUYER of options and to NEVER SELL uncovered options.  By selling uncovered options, the most you can make is the options premium, but you potential loses are nearly unlimited.

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Re: Dow 11,000 -- Too Much Cheering

Joel -

Why do you keep talking about risk with respect to trading options?  Risk is only incurred when you lack the discipline to close the trade that is going against you.  IMO of course.

For those who have educated themselves on how to trade options and have developed a disciplined approach to trading options, there is no more risk than buying and selling stock.  The key is the education and discipline - not doubling down and betting.  Most brokers and advisor don't have a clue how to trade options - so they dismiss them offhand as being "too risky".

I assume you mean selling Naked options by "uncovered".  Again, IT IS NOT RISKY IF YOU HAVE THE REQUISITE DISCIPLINE.  Most brokers won't let you sell Naked unless you have a cash balance of at least half of the value of the exposed position.

Selling Naked is a very viable trading strategy - once you have studied and practiced.  And as you have pointed out, is not something for the novice trader.

All it takes is a little education, a lot pf practice and a knife edge discipline.

It's clear we have vastly different approaches to trading the market - mine works for me, yours works for you.  And that's why Baskin-Robbins has 31 flavors.  Laughing

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Re: Dow 11,000 -- Too Much Cheering
Dogs_In_A_Pile wrote:

Why do you keep talking about risk with respect to trading options?  Risk is only incurred when you lack the discipline to close the trade that is going against you.  IMO of course.

For those who have educated themselves on how to trade options and have developed a disciplined approach to trading options, there is no more risk than buying and selling stock.  The key is the education and discipline - not doubling down and betting.

The reason I talk about risk is because of the options leverage.   In your example you buy an at the money option (GS Oct 160 Call) for $9.  To do this you pay $900 ($9 x 100 contract size) to effectively get control of 100 shares of GS stock which are nominally worth $16,000 ($160 x 100).  That is higher leverage (17:1) than you would get with a future.  If you want even higher effective leverage, you can trade some lower delta out of the money options.  Even if you have resting stop orders there is still a risk that the market will gap and you won't get out of your position at the level you want.

I certainly don't want to discourage your trading strategy because it seems to work for you and I think it works for me also, but if you don't think there is much risk trading the way that you do, you may have a future in a major financial institutions risk management department. Wink

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Re: Dow 11,000 -- Too Much Cheering
Quote:

The reason I talk about risk is because of the options leverage.   In your example you buy an at the money option (GS Oct 160 Call) for $9.  To do this you pay $900 ($9 x 100 contract size) to effectively get control of 100 shares of GS stock which are nominally worth $16,000 ($160 x 100).  That is higher leverage (17:1) than you would get with a future.  If you want even higher effective leverage, you can trade some lower delta out of the money options.  Even if you have resting stop orders there is still a risk that the market will gap and you won't get out of your position at the level you want.

Click.  Now you see why I pay no attention to delta and/or leverage.  Unless the underlying equity is a screamer I NEVER buy more than one strike out of the money.  I might buy an $85 call if the stock is trading above $83 if it's moving - otherwise I'll buy the $80s.  Volatility cuts both ways and being two or three strikes out means that much more required movement in order for the option price to start moving.  Even though you can buy "control" of more shares, you need a lot more price movement in the underlying equity before the option price moves.  We used to trade Google and just for fun I would track out of the money option prices just to see how sensitive they were to stock price movement.  I have seen $40 moves in the stock price with no change in the option price for an option only three strike prices out.  The corresponding move in price for in the money options was almost dollar for dollar - the "drawback" was you had to pay a higher price to make the trade.  Well worth it since you could get in and out of a trade within two or three days with 60-80% returns fairly regularly.

By buying in the money, you see movement in the option price as soon as the stock price moves.  Same dollar trading amounts, in the money options and at least 5 month's time before expiration are musts.

Quote:

I certainly don't want to discourage your trading strategy because it seems to work for you and I think it works for me also, but if you don't think there is much risk trading the way that you do, you may have a future in a major financial institutions risk management department. Wink

If so, my clients will be extremely happy with their portfolios. 

I just don't know if I could stomach having to take three showers a day in 15 Molar nitric acid from rubbing elbows with that crowd.  Tongue out

Back to the rockpile - listening to the 14 April 1972 Grateful Dead concert from Tivolis Koncertsal in Copenhagen does take the edge off the workload.  The Europe '72 tour is a crown jewel IMO.  If you are so inclined, here it is:

http://www.archive.org/details/gd1972-04-14.sbd.ashley-field.34931.sbeok.flac16

Click on the VBR M3U link on the left side of the page beneath the lightning bolt "Steal Your Face" skull and imagine the smell of patchouli oil wafting on the breeze.....I digress.

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S&P 500 at 1206! Woohoooooooooooo

I love watching this stock market meltup. The higher stocks go the more CONfidence people have regarding the economy. This is the greatest headfake in the history of the world.

This rally has made fools out of some of the best fund managers in the world. NO ONE saw this coming. The highest value I put on the SPX was 1150, never imagined in would reach these lofty heights.

So the media is going nuts talking about RETAIL SALES RISE FASTER THAN EXPECTED!!! Newsweek cover says "USA is BACK".

At this point no one in there right mind is going to short this market. Optimism is at extreme heights. Let the stock market blow off top begin!!!!!!!!!

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Re: S&P 500 at 1206! Woohoooooooooooo
bearmarkettrader wrote:

I love watching this stock market meltup. The higher stocks go the more CONfidence people have regarding the economy. This is the greatest headfake in the history of the world.

This rally has made fools out of some of the best fund managers in the world. NO ONE saw this coming. The highest value I put on the SPX was 1150, never imagined in would reach these lofty heights.

So the media is going nuts talking about RETAIL SALES RISE FASTER THAN EXPECTED!!! Newsweek cover says "USA is BACK".

At this point no one in there right mind is going to short this market. Optimism is at extreme heights. Let the stock market blow off top begin!!!!!!!!!

No kidding, BMT...

I'm still heavily short the S&P, and probably should have known better (don't say it Dogs, I already know what you think!). Like BMT I figured 1150 or so was as high as this could go before reality sank in. So much for rational actors...

I'm pretty close to bailing on the short position, which will of course signal the reversal...

Erik

 

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Re: S&P 500 at 1206! Woohoooooooooooo
Erik T. wrote:

I'm pretty close to bailing on the short position, which will of course signal the reversal...

Erik

Priceless......

Just email me or post here before you hit "Enter"  Sealed

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Re: Dow 11,000 -- Too Much Cheering

Eric I was short too but only 10% of acct value. I cleared out of almost all of those 3 weeks ago. Got tired of fighting the rigged market. Now they have even changed my investing. Might as well ride this wave up some more til it turns. It looks like the media maybe able to push this higher than we could have ever imagined. It is a bubble that will pop but when & how high?

Happy I stuck out these long positions so far anyway. I would be in cash but Faber makes me nervous with his inflation ideas & that cash will be the worst place to be. I am way heavy in energy & oil but this may pull back as well.

I really feel they have rigged the market to save the faith in this whole economy.......when this breaks it is going to be real ugly.

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Re: Dow 11,000 -- Too Much Cheering

UPS Earnings Jump 33% in Sign of Economic Reboundhttp://www.cnbc.com/id/36520397

Markets going higher IMHO as I hold my nose. Never in the history of the markets have we seen anything like this.

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Re: Dow 11,000 -- Too Much Cheering

It truly is insane. Ive been cash heavy, way too scared to short or go long at this point.

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Re: Dow 11,000 -- Too Much Cheering
bearmarkettrader wrote:

It truly is insane. Ive been cash heavy, way too scared to short or go long at this point.

The Bear is afraid to short? We must be at a pivotal turning point in the markets. Just joking....this rally has been so long and so weird that any sane person wants nothing to do with it.

I just can't help but think that this ubiquitous fear of shorting is the contrarian trading opportunity of a lifetime. Who's got the huevos to take the opportunity? Not me, I must admit.

Disclosure: Fully hedged, market neutral.

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Re: Dow 11,000 -- Too Much Cheering

The reason I'm still short is that I just have a really strong gut feeling that when the down-move happens, it will be big and sudden, leaving the side-lined bears behind.

The obvious thing to do at this juncture (actually, more like 40-50 S&P points ago) would be to get out, wait on the sidelines, and get back in short when clear signs of a reversal have presented themselves. I keep thinking that's what I should do, but something inside me keeps telling me to hang on to the short a bit longer. Something like a U.S. or Isreali strike on Iran could be the trigger for a sudden crash.

Huevos? Yeah, I guess so. In fact I'd go so far as to describe myself as incredible! But whether that turns out to be incredible prescience or incredibly stupid remains to be seen! :-)

This market ain't for the faint of heart, that's for damn sure.

Erik

 

Subprime JD's picture
Subprime JD
Status: Platinum Member (Offline)
Joined: Feb 17 2009
Posts: 562
Re: Dow 11,000 -- Too Much Cheering

Erik,

 

For some reason I have the same gut feeling that you do, that when the market corrects, it will do so in a fast and vicious manner. The question is how much higher does this market go and for how much longer when considering all the downside risks this market has.

Hmmm

John99's picture
John99
Status: Gold Member (Offline)
Joined: Aug 27 2009
Posts: 490
Re: Dow 11,000 -- Too Much Cheering

From market high in 2007 to low in march, '09, the fibonacci retracement of today is almost at the 68% resistance level at 1228 on the SPX.

The article also shows the fibonacci chart for 1929 in comparison.

http://www.zerohedge.com/article/fun-fibonacci-and-great-depression

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Dow 11,000 -- Too Much Cheering
Dogs_In_A_Pile wrote:

Here's where Lerner and I disagree. .

Assuming of course you have the discipline to get out of a trade that backs up on you and not dig in your heels by convincing yourself you are "just a little early".

Prophetic words -- Guy Lerner has posted a follow-up essay, reiterating his short trade entry which is now 5.5% underwater:

http://www.safehaven.com/article/16419/is-it-time-to-short-the-sp500

The distinction from 'digging in heels' is that his system has been tested on 55 trades since 1984 and produced respectable results. If you're going to trade a system, you have to do so consistently, not cherry pick. Lerner is asserting that while this particular trade may end up a loser or a scratch, it also could improve from here for those entering now.

iDoctor: 'Never in the history of the markets have we seen anything like this.' Well, late 1998 to early 2000 was kind of like this. In fact, Intel just posted record sales and earnings -- Tech Bubble II? Nasdaq 5000, anybody?

I contend that we are in a speculative Bubble III -- it's only a question of which assets are going to be driven to insane heights by the wall of bailout fiat liquidity. It would not be surprising in a couple of years for the S&P to push back to its record high around 1560. This would establish a giant triple top (years 2000, 2007 and 2012) in nominal terms. But note that in real (inflation adjusted) terms, it would constitute a series of declining tops. The Bubble I high in the year 2000 probably was the 'end of an era.' Those that follow are illusory 'echo bubbles,' erected on increasingly rotten foundations.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Re: Dow 11,000 -- Too Much Cheering
machinehead wrote:

Prophetic words -- Guy Lerner has posted a follow-up essay, reiterating his short trade entry which is now 5.5% underwater:

http://www.safehaven.com/article/16419/is-it-time-to-short-the-sp500

The distinction from 'digging in heels' is that his system has been tested on 55 trades since 1984 and produced respectable results. If you're going to trade a system, you have to do so consistently, not cherry pick. Lerner is asserting that while this particular trade may end up a loser or a scratch, it also could improve from here for those entering now.

MH -

What do mean by "trade a system"?

Erik T.'s picture
Erik T.
Status: Diamond Member (Offline)
Joined: Aug 5 2008
Posts: 1234
Re: Dow 11,000 -- Too Much Cheering

AAARRRRGGGHHH!!!!!

So predictable... After watching the very steep rise in the S&P within an hour after the open and reading Art Cashin's comments on ZH, and after riding the short up for the last 100 points, I finally said enough is enough and pared it back to half its original size. At the exact top. To the tick... The blue marks are my (3) buy points. Then the trend instantly reversed and moved down as quickly as it had risen.

I'm going to go cry myself to sleep. The SPX should be at 900 by end of session if Murphy's Law has anything to do with it.

&%*(@))$*@!

Erik

 

Lemonyellowschwin's picture
Lemonyellowschwin
Status: Platinum Member (Offline)
Joined: Apr 22 2008
Posts: 561
Re: Dow 11,000 -- Too Much Cheering

Next time, just let us know when you are going to make your trades.  Or would that be insider trading?

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Dow 11,000 -- Too Much Cheering
Dogs_In_A_Pile wrote:

MH -

What do mean by "trade a system"?

In the SafeHaven article, Guy Lerner describes a mechanical trading system based on an indicator composed of crude oil, gold, and T-bond yield (jagged red line in lower panel). When the indicator goes over a threshold (horizontal red line), he shorts the S&P. When the indicator falls back below the threshold, he closes the trade.

http://www.safehaven.com/article/16419/is-it-time-to-short-the-sp500

In 55 trades over 26 years, the system was profitable, says Lerner.

My point was that if you develop a profitable mechanical trading system, you have to take every trade. Trying to cherry-pick trades nearly always will degrade performance -- the system is smarter than you are (or I am), so to speak! Wink

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