Thursday, October 14, 2010

An update on allocation...

I received a few emails over the last weeks from some hedge fund managers who seem to be close to blowing up, curious market participants and from some individuals asking about whether or not I am short. I want to answer a different question. The reality is that if it is necessary to ask someone regarding a position or trade then one is most likely looking for support or rationalization regarding a position and it likely over allocated. Without question the primary issue that I see for traders is over rationalization, allocation or concentration. The markets are not rational and nor are they very forgiving. 

I do not trade that way. Let me give you an example. If I trade a weekly strategy, I know that my average winning trade is going to be around 110 SP points, I also know that building a position may result in scaling into an average of 35 points but up to 80 points. The question how much I am going to risk not how much I am going to make. Additionally, the best risk management of all is NOT stops, its proper allocation. So, where I may trade a 15% allocation of risk capital in one system for a daily chart, I know that the average risk is 15 points and up to 45 points, therefore, I can trade for a 1.75% risk to 3% risk depending on how aggressive I am. If I am going to achieve that result with a weekly system I may have to trade at a 7% allocation. Trading just 7% of your money in one strategy may not seem like a lot, but the rabbit rarely wins the race. In the markets its about doing the opposite of what you think and want to do and doing the disciplined and practical thing. People are rarely practical about losing money and exceptionally rarely disciplined about it.But those are precisely the things that will make us successful. So we must think about our weaknesses and capitalize on them. My experience is that the market is about hitting base hits not home runs.

So, in response to whether I am short or not, I have Weekly systems that have built short positions in some major markets and now some dailies, however, I also trade intraday long and short across quite a few markets, so, its important not overreach. I am not short 50% of assets, probably more like 8% of assets right now. Keep in mind that the maximum avererage allocation percent I will take is around 20% and that generates a very hefty return. If the market rallies, intraday longs and shorts will be taken without regard to my opinion of the market or any long-term positions - they will  be taken as appropriate with strict risk rules. As a note, I regard a break of 1122.5 as a key confirmation of a larger short move.

I hope that answers the question and gets people asks some questions of themselves too...

Wednesday, October 13, 2010

Market Update - more panic...

Ironically on the day that the Fed, I mean JPM reports earnings, the financials produce bearish action on rather not bullish volume. The shorts are non-existent and are now certain that POMO and QE will work to run over them with eighteen wheelers. Yet the bulls feel safe while the market has moved essentially sideways for 28 of the last 30 days. There have been very few trend days and even today closed near where it opened - that is not bullish! However, it is classic behaviour for a cheaply manipulated market (by a bunch of charlatans masquerading as Bennie and the Bets) as its much easier to move overnight prices than intraday prices... When you bankrupt the shorts there is another side effect - NO BUYERS ON THE WAY DOWN. Bennie and the Bets better have their dancing shoes on - they will be the only buyer left.

It may not be popular to be short...but from my vantage point...I hope that we remain at these levels till the end of the week so that the weekly systems can add to their positions short. I am not optimistic that we will be able to remain at these levels and feel that a cascade lower could happen at any minute - regardless of the perception of Fed support and intervension in our non-market markets.

The common theme right now is, Economy bad - Gold up, Market Up because of QE. Economy good - Gold Up Market Up, Economy stagnant - Gold up Market Up, Bank's broke - QE, Fed, Stimulus, Gold Up, Market Up...and for heaven's sake that Cramer guy is a raging bull, I guess BoooYAA is making a comeback and Gold Up, Market Up - No worries! Yes No Worries. These are manifestations of a top - not a bull market...the bears even buy into the above thinking. People are bullish - plain and simple they are ridiculously bullish and at the same time they feel negative. Perceptions of prices do not have anything to do with overall feelings of well being...therefore this market full fills two criteria - most people are negative regaring their wellbeing, yet positive about prices and socialised intervention supporting inflation asset prices.

Tuesday, October 12, 2010

Market Setup Updated

Get ready for fireworks...a failure of the overhead trendline and control, indicated in red on the chart below, targets 810 to 800. I am currently short EURO from 1.40ish and short TF, EMD, ES and NQ via weekly systems. FYI, weekly trades may add another entry at this friday or next, but the hold time for weekly trades is 3 weeks to 3 months.

Please note that the ten year bond is not confirming the recent highs. In fact this is the largest non-confirmation divergence I have ever seen between Equities and the ten year, indicated in light blue on the chart below...not good.
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