To Trade or Not To Trade?

by Dan August 15, 2011 5:38 am • Commentary

As most readers of this site have become acutely aware by now, not only do I not believe in “buy and hold’ investing but I tend to be a bit of a contrarian when it comes to trading.  Since the markets turned south from the early July high, I have been laying low, I quickly trimmed a lot of my long positions, reduced the time horizon of my short positions, and tried to trade the swoon from a tactical defined risk perspective.  Some of those tactical trades worked out very well and others will take some time to play out……but at the end of the day, in all instances I defined my risk, and in a time where risk became undefinable to most.  THIS IS REALLY THE GOAL OF THIS SITE……we are not peddling options because we have an ulterior motive, we don’t own a stake in an options broker/dealer and generally don’t care how you express your views.  But we do care a great deal about is offering our subscribers an alternative to the usually punditry and narrow broker tool kit of just buying or selling an equity, index or etf….oh and we think our ideas are good too.

I am not that active right now because I generally don’t have too strong of an opinion about where where we are headed in the near term.  Barring any bad news out of Europe, or really bad economic data here (and we will have plenty this week, with housing starts and industrial production Tuesday, PPI Wednesday and CPI Thursday, followed by a busy Friday morning of Jobless Claims, Leading Indicators, Philly Fed and Existing Home Sales), if the market starts to look at data with rose colored glasses then the fix is in and we are likely to head back to what will be a very important technical level of about 1250 in the SPX, or about 6% higher from current levels, which would place the index back around unchanged for the year.  I will not be playing that move from the long side, I don’t believe in it, but I am not starting to fade it now.  If nothing has been resolved and we grind back up to 1250 on relatively mediocre volume than I will look to make stand there, but not until then on a broad basis….

One of the main reasons I won’t/don’t believe in any such rally is that the bank stocks are telling us something very different.  Friday’s action in the sector couldn’t have been more bearish, and not just for those stocks. I am firmly in the camp that some kind of evil is going on there and that the price action will be followed up with a full on crisis at some point over the next few weeks to months… rather than just expressing a broad negative view I am looking for opportunities where stocks like JPM (here) could catch up to some peers on the short side, or where in the case of CSCO (here) that sentiment had just gotten way too bearish and too much bad news was already in the stock.  As for a few other things……I covered  HPQ short, that started out as a vol play and then turned into a Put Spread, as I thought the stock went too far to fast and hadn’t even had the earnings event (read here).  With earnings this Thursday this one could very likely play out similarly to CSCO this past week.

And then there is my old friend AAPL: If the company does in fact announce their new iPhone soon, followed by a quick release in Sept, then this stock will clearly make new highs above $400.  As many of you know I have been active in the name in the past couple months and generally have been right…… Prior to earnings in June, I suggested a structure to get long into the print with no premium outlay (read here) and promptly took it off for solid gains following the print.  Then, in a tactical manner into the market swoon on Aug 2nd I tried to play for a short term move lower (read here), problem with this one is that I got the direction dead right but the timing for the structure was dead wrong… I took off for a small gain……Last Monday at the depths of the our little mini-crash, I wanted to use the broad market weakness to get back in for the iPhone5 trade and I bought a Sept Call Spread when the stock was $355 (read here).

Rather than breaking my arm trying to pat myself on the back I am trying to express the point that I am focusing on a lot of macro things to help formulate my views on a few micros things….. But, I feel in general that the more I try to do now the more money I will piss away…..I know many of you are thinking that this is a great time to buy stocks for the long term, well you know I am not in that camp, so I will continue to try to identify opportunities on the long side where I will define my risk and make well thought out tactical bets.  Right now I want to preserve capital and take calculated risks.  I do think we will make new lows, and it will likely be led by the banks, and if you thought the VIX at 45 was ugly just wait until u get a load of it at 65, or 75!   The point is, if we don’t get any stimulus and the data gets worse, the Fed’s little trick about low rates for ever won’t help much at all.