Sometimes Simple Is Best

I try not to go short during the last few months of the year unless one of the two following things happen:
  1. The sentiment indicators I look at are clearly at an extreme.
  2. There is a bubble bursting like in 2007 and 2000. 
This does not mean that I must go long or cannot be hedged but it means that I try to avoid being net short. In general, I am willing to go both long and short and am a mean reversion trader. The fact that a four month straight up rally did not run over me is surprising. A few years ago it likely would have. Not only have the past four months been not bad, but they have actually been good.

I changed my posture to net short about two weeks ago once sentiment was very clearly at an extreme and I have gotten nicked for about 15 points on the S&P 500. During the past few months some readers commented that my unwillingness to go short because of the calendar was simplistic. I would rather be simple and avoid losing money than sophisticated with large losses.

13 comments:

Anonymous said...

Reaction to Chi PMI very bearish. Just as with the IJC. I am going with you for a trade. Apologies in advance for the jinx...

JD

Anonymous said...

Covered ZLC @ 4.45

cash money $$


OL DAWG

Anonymous said...

I believe traders are more sophisticated these days and daytrading short the sentiment. tho short interest has been falling, short term traders have been aggressively shorting and covering intraday. shorting intraday and covering higher the same day does not reflect in higher short interest data. today they are not many intraday shorters and overnight shorters are all but gone

Anonymous said...

basically past month or so, longer term shorts gone, but intraday shorting has been very aggressive and wrong.

Anonymous said...

Bingo!!

New money is not needed to drive the market up, you just need the buyers to be more eager than the sellers.

Short, get stopped out, re-short, get stopped out, re-short, get stopped out, on and on it goes. All the wannabe contrarians feeding the wall of worry.

That is precisely what this market has felt like this whole move up. Obviously an over-simplification but I think it is pretty close to the mark.

It will eventually die, the only question is whether it is from exhaustion or capitulation. I would like to see a capitulation spike higher then reversal down day. Today there is evidence of exhaustion though. Time will tell I guess.

JD

Anonymous said...

I work on a prop trading floor and observe. it is more reflective of real activity than EOD short interest data or EOD sentiment indicators. it is more valuable than stuff anyone can pick up for $20 online.

Tsachy Mishal said...

Looking at the following:
1) the rise in margin debt
2) positioning surveys pointing to higher equity allocation
3) short interest decreasing
4) put/call data

It is clear as day that cash has been flowing to the long side. It is not simply the aggressiveness of the buyers.

I am not even certain what "the aggressiveness of the buyers" really means or how it can be tracked. If money is not flowing into the market than what cash are buyers using to be more aggressive with?

Tsachy Mishal said...

I don't care if you are Warren Buffet himself. I am strictly interested in the logic behind an argument.

Anonymous said...

"I am not even certain what "the aggressiveness of the buyers" really means or how it can be tracked."

It can't be tracked in any definitive way. You track it by following the footprints it leaves on the tape. At least that is what I try to do.

"If money is not flowing into the market than what cash are buyers using to be more aggressive with?"

There is no money flowing in or out of the market (outside of IPOs and so forth). I know you are familiar with Hussman's work, he is the best at explaining this via his 'cash on the sidelines' demythification (yeah I know, made up word).

For every buyer there is a seller. If I put money in, someone else must be taking it out, by definition. The most important variable is whether the buyer pulled the trigger or the seller. That's what causes the price to move.

JD

Tsachy Mishal said...

Please explain what footprints are left on the tape? How can I see them? Because Hussman says so, does that make it so?

Anonymous said...

"Please explain what footprints are left on the tape? How can I see them? Because Hussman says so, does that make it so?"

"Footprints on the tape" is just a figure of speech, sorry, thought that was obvious.

Surely you are familiar with the term 'reading the tape'. Traders attempt to determine the short term positioning of the market by interpreting the price action/flow. There are as many ways to do it as there are traders. It is highly subjective and debatable. I have shared my opinions on what my current reading is. Plenty of people disagree and that is fine with me. It isn't a mathematical formula like a 10 day moving average.

...

Also, I didn't say anything was true because someone else 'says so'. It is true (no such thing as cash on the sidelines) because it *IS* and Hussman just happens to be someone who has done an excellent job of explaining it. I assumed you were familiar with his writings on the matter as he is well known for them and you link to him on your blog roll.

http://www.hussmanfunds.com/wmc/wmc060710.htm

He has written about cash on the sidelines in more detail recently but that is a good one to start with if you or anyone else is interested.

JD

Anonymous said...

I understand Tsachys argument it seems to me like a supply and demand mentality. I don't get the aggressiveness thing either please explain how its different than supply and demand.

Tsachy Mishal said...

We seem to be running in circles. In George Soros' book The Alchemy of Finance he laid out a theory and than gave some real life examples of how it works. Can you please clearly articulate your theory and give some real life examples of how it works in actual markets.