The Reluctant “What Now?” Post

After much debate with myself, I’ve decided to throw caution to the wind and go ahead with it. It’s not normally my style to put out a specific short term trading plan, but these aren’t normal times. Once the bond vigilantes came for Italy, the genie escaped his bottle.

In equities, expect a vicious short squeeze rally soon. Perhaps not today (Friday 5 Aug.), but if not today, then early next week, after the customary soothing sounds from the Eurocrats over the weekend. Then a bit of sideways trading, and another drop when everyone realizes the Eurocrats haven’t gotten a grip on this situation at all. (If we don’t get a short sqeeze rally, then it really has all gone to hell)

General trading plan:
1. Don’t be short now, you’re likely to lose your shorts.
2. Take advantage of the rally to unwind any longs you aren’t keen on holding through another crisis.
3. If you are particularly brave, go short after the rally, during the sideways bit.
4. If you’re not particularly brave, stay on the sidelines until this thing clears, don’t fall for sucker rallies, then get back in on the cheap. Remember 2008-09?
5. Currencies and precious metals don’t count as being on the sidelines. Central bankers will make currency traders crazy, and the precious metals are subject to more forced unwinding because institutions are in with heavy leverage.

That plan is all subject, of course, to going terribly wrong at a moment’s notice, but it’s my plan…for now. It may, needless to say, be completely inappropriate for anyone else. Caveat emptor.

Good luck, and for heaven’s sake please be careful!

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2 thoughts on “The Reluctant “What Now?” Post

  1. Hi Harry,

    This is looking highly Bearish. Oversold is becoming more oversold. Price is outside of the lower Bollinger Band. This August month is merely 6 days old, already having given up 76 points. IMO, it is looking worse than the April 26, 2010 consolidation.

    The Head & Shoulders formation has been confirmed by the breaking of the neckline.

    Like I had been saying, the market was looking bearish, with the weekly chart. The market has taken to sell off the deficit deal. I am so glad to have been wishy washy, reverting to my former outlook.

    Now I am thinking Secular Bear, dating back to 2000. The angle of selling is very steep. The $VIX is spiking upward.

    2:25pm EST and the market is tumbling further. The statistics I quoted are already outdated.

    I agree with you that at some point there will be a temporary support level. I am waiting for the rally or sideways movement, afterwhich I will short. And the market may even attempt to retake the H&S neckline at about 1270ish.

    A numerical illustration of how bad this selling is goes like this. Today’s price spread is 79 points, from 1198 to 1119. The low for July 2010’s consolidation is 1010. That is merely 79 points away.

    Like I am saying: Secular Bear comes to mind.

    Thanks for letting me voice my opinion. I hope I am not shooting myself in the foot again.

    Aloha,
    Shirley

  2. Hello Shirley,

    Thank you for your comments. You have been leaning bearish, if memory serves, since the March highs. Events have proven your stance to be correct. I had been more optimistic based on corporate earnings, though happily overweight cash and normally allocated to bonds in the total return portfolio. My outlook was for a more common summer trading range and we were simply waiting for the fall to take our long positions.

    My macro outlook all along has been that there is little hope for saving the euro, and that there would come a day of reckoning for the European banking systems. On the other hand my expectations for US policy and the US economy were more constructive but, alas, seem to have given them too much credit. On the bright side, they have given us another opportunity to pick up quality assets at a discount at some future date. I have been awaiting the opportunity to vindicate myself for the overly timid buying we did in March 2009.

    This type of market is treacherous. Any sort of pronouncement from any number of actors, sage or foolish, can set off large moves against a trader’s positions. It is unlikely that I would venture into this kind of storm to try to scalp a few points, long or short. It suits me better to remain on the sidelines and perhaps occasionally heap derision on the players. I will however be looking to liquidate a few long positions on the bounce.

    Cheers
    Harry

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