Comments From the Forum (May 20, 2010)

Jobless Claims was pretty ugly — largest rise in quite a while.  Keynes vs. Friedman?  I gotta say the Keynesians are getting a bit nervous, while the Friedmanites are wondering if they’ll ever get the ball.  (My bet?  Nope, you won’t get the ball.).

So the futures are pointing to a really ugly open, I mean really ugly.  The  S&P Futures are down at 1088, which is below the intraday low of Friday, May 7th (the day after the end of the world as we know it was briefly on the table…and then taken off the table)

My bet is that this morning will be bought it’ll take a few minutes for all the “Oh Crap — I can’t take it anymore.  Stop the madness and just get me out!” to run their course.  We are reaching the apex of volatility.  Remember that I always chat about volatility — volatility squeezes, volatility expansions, etc.  Remember that volatility is cyclical.  When volatility becomes very very high, it is a fact that the end is near…the end of volatility.  Traders get tired; emotions get numb; activity begins to wane if only by virtue of investors having moved to the sidelines or taken positions that they’re happy with.  The violence that leads up to the peak in volatility is the “argument” between buyers and sellers.  Both sides feel strongly.  Both sides feel that theirs is the only “correct” thesis and they act accordingly.

At some point, the “argument” ends just as an argument between a dysfunctional couple.  They start fighting because Jethro left the toilet seat up and Maude didn’t have a good experience when she forgot to turn on the light in the bathroom at 3 am.  That fight morphs into bigger issues, including issues that were long forgotten.  They fight and fight; screaming, yelling, pointing fingers, etc.  At some point, they come up for air, look at each other and say, “Um, what were we fighting about?”

They then make up, as they always do, and then go on about their merry way with a calmer demeanor.

I’ve just described the nature of volatility.

This is what the market is doing right now, and I suspect that this morning, at about 9:35 am ET, we’ll see Jethro and Maude reach the tipping point in their arguing and the decibel level will be very, very high.  Something will get smashed — a vase, a plate, maybe a cocktail glass left unwashed from last evening.  That will be it.  The spell is broken and the decibel level will start falling.

In “market speak”, I’m saying that we’ll see a very ugly open generated by an influx of selling at the open.  Market orders…short selling by ill-advised retail traders who are finally jumping on the “short the market” bandwagon.  Meanwhile, those who were shorting yesterday or the day before will be covering their shorts (I know I will) — short high, cover low.  You’re now in cash and in a position of strength, ready to grab the stretched rubber band as it snaps back to the upside.  Those who were in cash will start buying beaten down stocks because they finally feel comfortable putting their cash to work.

That’s my stance this morning.  That’s good and bad.  It’s good because I think there’s money to be made, and that’s what I like to do.  (Those who attended the Basic Training workshop know this.  First page of the book had several quotes from fighter pilots, one of which was talking about having a “code” and wanting to “fight fair” rather than shoot the enemy down when the plane was wounded.  My quote: “I don’t want to fight fair.  I just want to make money.”)

Over the past few days, the leaders have finally been sold.  AAPL was the most notable.  Managers will work to raise cash during times like this.  They are taking risk off the table.  At some point, they realize that they no longer want to sell the most beaten down stocks (which they have already lightened up on–which was the cause of the big declines in so many stocks).  They instead start selling their profitable positions — particularly the most liquid ones.

That’s AAPL.  Do I think that $225 is still a possibility?  Sure, but the ebb and flow of a stock like this allows for some great money making opportunities along the way.

So let’s watch for some buying this morning.  Let’s not anticipate it…just watch for it.

If you have stops on your positions, they’ll likely get hit at the open.  If that’s fine with you, then great.  But don’t forget about them.

Dan

10:12 am ET

Bounces: Team, we are not seeing any kind of bounce in the market.  Select stocks are bouncing, but the bounces are really far and few between…and don’t have much force to them.  I do believe that we’ll see a relief rally at some point today — the market is just way, way oversold and we are right in the middle of a pukefest.  A Frat Party gone awry with a bad keg and hard liquor brought out way too late in the evening.

At some point, the cleanup will begin and we’ll see a lift.  But the fact that those stocks that ARE snapping back are not snapping back by much reveals that there is still a lot of supply–a lot of selling pressure.

If you have a lot of cash (and I can tell you that I do have a lot of cash.  The most prominent tickers that I own are my heart, and my watch [which is actually digital, so I guess that doesn’t count]), then you are comfortable and perhaps a bit eager.

If you held too long and are now sitting on some massive losses that you have not closed out, then you are wondering why you ever thought you could trade stocks and are feeling like the victim in a really gory horror movie.  But rest assured that you’ll improve and learn from the experience.  Learning and Trading go together.  When you stop learning, you should stop trading.

Remember that this is just one day.  The trend is still down.  This is not “THE” bottom.  Bottoms occur when the market rallies on bad news.  This market is selling on bad news…which is what happens in weak markets.

Last point about trading: If it ain’t working, then fix it.  If it ain’t broken, then don’t fix it.

Dan

3:54 am ET

Embrace the horror that you will not catch the bottom.

Now, having embraced that horror, you won’t be compelled to be continually looking for a bottom, buying and taking a loss…buying lower and taking another loss…buying lower still…and selling even lower.  Whether you get cut in half by a buzz saw or slowly bleed to death by thousands of little pin pricks and paper cuts, the result is still the same — a loss of blood leading to death.

If you’re stepping in front of this move, then you are a trail blazer.  Good for you!  Back when the west was won, there were many trailblazers who got rich staking out their land in the west.  But a greater percentage of them ran into Indians who were really, really mad and didn’t even speak English.

It didn’t work out too well for the trailblazers…though the Indians were eventually corralled onto the reservation (where they ultimately got rich creating gaming casinos).

Don’t be a trailblazer — the odds are against you (and if you’ve been buying today, then you undoubtedly know this already, though you are suffering in silence).

If professional traders–the guys who make their living managing other people’s money–are cutting risk, then why are you going against them?  Do you know more than they do?  Memo to you who believe you know more than the professional hedgies: “You don’t.”

Dan