My Perfect Market Scenario

As you know I have been pretty bearish since I started this blog seven months ago. Sure I’ve made some long calls, some good some not, but my major theme has been being short this market. Frankly it’s where I have made almost all my profits this year. I’ve probably out performed most of the long/short hedge funds out there as well as some “short only” funds that take 2 and 20. I used to take those fees and before I started trading my own funds I never did less than 20% in any year for my investors. In my conversations this past week with hedge fund managers, sell side guys, a couple of analysts, and reading some of the posts of some of the better bloggers out there, my conclusion is that it is becoming virtually impossible to figure out “this” market. Trends sometimes last a day or two instead of longer periods in the past. Guys I know are getting their heads ripped off because what is a breakdown, breakout today, will turn around and kill you tomorrow.

The volumes on the upside this week and during past pops, have not been the volumes that have made up the bad days. Some will argue the summer doldrums, but then why does the volume come out of the wood work on the down days? Many of the rallies are pure short covering because shorts refuse to be caught leaning on the wrong side even if it’s for a day or two. Their performance or lack thereof is too precious to risk, so they are forced to follow the trend even if it is for an immediate moment in time, after all they can always do the opposite tomorrow morning. Black boxes and program trading rule the day, and models and benchmarks that we used to use, no longer seem as relevant.

So what is my perfect scenario? Well, for me to be comfortable again as a “long” player in this market, it means for us to break the July lows with a vengeance. A true textbook capitulation. When credit card and auto defaults hit the front page. Not the sector by sector “slow bleed” that we are experiencing, whereby the financials supposedly bottom followed by a down turn in commodities. Maybe I will never get it, as this “new market” does seem to have spawned a new way of doing things. I do think though, at the end of the day, some things do stay old school, and a new wave down is quite possible if not likely. I will try my best to be prepared either way. Maybe we did bottom, but in my heart of hearts we really have not.

In the meantime I will continue to “trade what I see” and not “what I think”. That also means smaller positions, tighter stops, and unless I really have the wind at my back on a particular trade, just all around cautious behavior. This has not been a good swing trading market for all the reasons I have described above, except in certain random situations, so I will continue for the most part to stay on a fairly strict day trading diet. As usual if I am taking something home, I will let you know.

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