While we saw some early morning action, it looks like I picked a decent day to spend an entire morning in the dentist’s chair. For you young traders out there always wondering why Doug Kass or I or someone else is in that chair, just wait until you get older. I’d advise you to take care of your teeth like you take care of your trading capital.
Still, it gave me time to reflect on the markets, and when the dentist finally granted my freedom, I pulled up a 30-minute chart of the SPDR S&P 500 ETF (SPY) to see if my eyes saw what my mind theorized in terms of a trading plan. The good news is this isn’t a complex plan. It’s not even unique. The chart still screams volatility, but even more so it screams: Do not push your luck. If you buy a dip, then sell the first rip. If you short a rip, then cover the first dip. Rocket science? Hardly, but the market rarely is these days. I don’t know that it ever has been outside algorithms.
We’ve spent months without these gaps and it has lulled many into a false sense of comfort. I honestly forgot what a painful gap felt like until the action on Friday. They sting and weigh on emotion. They blow through stops and wipe away hedging. They often push correlations to 1 and that diversity you thought you had is nothing more than a shadow in a rainstorm. Gold and Treasuries didn’t offer you shelter from the storm. They fled with your shadow, leaving you wet and cold and alone.
It takes these kicks in the pants to remind ourselves not to get complacent. Predicting these changes is difficult if not impossible, and I’d wager the majority of the folks who did catch the move lower this time tried to catch it incorrectly many times before. I’ve been looking for it along with volatility for weeks. Yes, it finally happened, but I took quite a few hits being stopped out of positions while waiting for it. That’s the nature of the beast.
The bears have their shadow comfortably beside them over the past few days. It’s unfamiliar to them, but so is the loneliness the bulls are feeling at the moment. Balance the euphoria and the worry, so you can focus on what the market is saying. To me right now, it is saying don’t get too comfortable in any position.