Don't Have to Swing

The stock market is a no-called-strike game. You don't have to swing at everything you can wait for your pitch. - Warren Buffett

Its probably more profitable to just look at the market 1 hour a day at the US market open and then shut off the computer.  When you are constantly looking at the charts, watching CNBC, reading whatever they have to say in Bloomberg,Wall St Journal, Twitter, etc., you get ideas.  And when you get ideas, you feel like you have to do something.  A lot of times, those shorter term ideas have no edge, and are a distraction from bigger picture, longer term trades, which have an edge.  Most of the time, in the big markets like equity indexes, Treasuries, commodities, there is nothing new and what is a good buy remains a good buy, and what is a good sell remains a good sell.   For long term trades, the day to day movements usually don't change the  picture.  

In investing, you don't have to buy or sell.  Its not baseball, where there are called strikes and you can strike out by not swinging.  But as a full time trader, its hard to just sit there and do nothing.  Most of the time, there will be something good to invest in for the long term.  In those cases, you should already have long term positions which normally don't change based on day to day movements.  If you are already long and have a full position, there really isn't much to do.  And if its a bad time to invest in stocks or bonds or commodities, then you should either be in cash, or if you are aggressive and have a strong signal, be short.  

Looking back at my biggest losses, they came from premature entries.  Eventually most of the trades would end up being profitable, if I was able to hold on, but I wouldn't be able to hold on.  I would get in too big too early, and not be able withstand the drawdown and either puke it out at bad prices, or feel so much stress from the underwater position that I get out at the first opportunity to limit the damage, only to see it go much further in my favor after I get out.  It happened on Monday, when I sold at 4460, only to see it go up another 50 points in a few hours, and then another 50 points, 24 hours after that). 

If I had just done nothing until the opportunity became so good and the urge to put on a position became so great that I couldn't resist, then instead of getting long at 4560 down to 4470, I would have just waited a couple of more days and would have been able to buy in the 4300s.  It doesn't always work out like that.  But often you will get a great opportunity that you can't take full advantage of because you bought it when it was just a good opportunity, and it went down even more.  

Straight down, volatile chop for a few days, and then straight up.  Sick.  Got into a short during this volatile environment, after a big drop, on the rebound, breaking one of my rules for this type of market.   Now looking for a graceful exit.  Too early to short, too late to cover. 

FB dropping 23% on an earnings miss.  NFLX dropped 25% on an earnings miss.  AAPL goes up 7% on an earnings beat.  GOOG goes up 8% on an earnings beat.  There is a definite imbalance there.  I haven't seen these kind of monster drops on earnings misses since the dotcom bust era.  These are game changers.  The SPX is going to live or die with big cap tech.  Energy stocks aren't going to move the needle, no matter how strong they are.  2 of the 6 big megacap tech names have cratered, and have left a mountain of bagholders in its wake.  FB and NFLX are now broken stocks.  NVDA and TSLA are so ridiculously valued that their demise is really only a matter of time.  AAPL, GOOG, AMZN, and MSFT are the big boys that are still left standing.  One by one, the pillars of the SPX are being taken out.  

Sometimes we think of the SPX as this abstract monster that has a life of its own, but its an index.  Its performance depends on the biggest stocks in it.  And those are megacap tech.  When those tech stocks no longer warrant those big P/E multiples, then you have a problem.  They have been the momentum stocks of this decade.  If the momentum goes in the other direction, the growth guys don't want to touch them anymore, and they are still too expensive for the value guys.  The worst of both worlds.  

The supporting evidence that we've seen a major top in the SPX is growing.  The market usually doesn't go down in a straight line and there will be extended countertrend rallies.  Trading from the short side is difficult, so you have to be pickier when choosing your entry points.  So while I see the signs of eventual doom for stocks, I'm not excited about the short side yet.  Looking at the investor surveys, it is clear that a lot of investors have gotten cautious, so its not a great spot to be short.  Put/call ratios are still elevated, even during the strong bounce this week.

The ideal setup, and something I expect to see in the spring, is an extended countertrend rally that reduces the number of bears, increases the number of bulls who think the worst is over, and complacency returns.   That's the time to strike and layer into a big short position and buy index puts.