ARCHIVED COMMENTARY
Slow Death
For Traders
For edition of April 06, 2005
Yesterday was yet another grueling test of patience for those trying to squeeze off a shot in the index futures. My crosshairs were trained on the S&Ps, but the only trade I executed all day was a misfire. I had a limit bid in somewhat below the market but inadvertently turned it into a market order with an impatient keystroke. So much for picking one’s opportunities. Naturally, I compounded the error in the usual way -- by attempting to turn a small profit on the way out. It was at this time of the morning that I received an e-mail from a market-savvy friend who has pulled back from trading recently. Below is his note, followed by my reply. The dialogue may be insightful for those of you, investors and traders alike, who have been frustrated by the stock market in recent months.
“[Tim E.] told me he's in five chat/trading rooms and can't seem to find anybody or anything to make money. He asked me what I'm doing. I told him that I'd find it impossible and probably self-defeating to try and follow so many people/disciplines. There are three markets, as you know. In two of them, you can make good money, since there is a trend up or down. But then there are the sideways trends characterized by narrow ranges -- just right for stopping out the bullish and the bearish. For my part I feel I've profited simply by recognizing that this is not a market environment to take much risk -- yet. I did tell him that I would start following your newsletter and eschew any others. I'm occasionally playing a gap or bond trade and little else.
Refuses to Roll Over
“Of course, I wasn't trading for a couple of travel months. But I did get my feet wet after returning, only to find that conditions were not right, at least not yet. While I'm convinced we're in a secular bear market, the persistence of the bullish countertrend has been stronger than I had anticipated, and the refusal of the market to roll over has been astounding. Just as you’ve been writing. Oil is pushing toward $60 yesterday and the Spoos are up over 4 points today as I write? I’d say ‘Go figure?’ but that would be just another futile exercise. Until the market again has a clear trend down, or even up, I'm standing aside.
(Click on chart to enlarge)
“I took a short-the-market stance at the close on the first Friday of the year. I increased that position later, but am still waiting to complete my intermediate-term short stance, which I anticipate will continue through at least the rest of this year, but quite possibly through the end of this decade. I'm short the S&P on my first round, short the Nasdaq later and will probably use either the Nasdaq or the Russell to complete my short portfolio. It's not just my mind that is screaming "SHORT!!" The technical reasons abound. But perhaps the most compelling technical reasons are demonstrated by simple Point and Figure Bullish Percent charts. Not only did every one of my short term ‘anticipators’ turn bearish, the intermediate ‘anticipators’ slowly rolled over too -- including my ‘main-man’-anticipator NYSE Bullish Percent chart, which measures the percentage of NYSE stocks on buy signals. While the market goes higher, the NYSE BP chart rolled over and has now crossed below the 70% line, becoming officially bearish. And yet prices have not yielded to the ‘gravity of no support,’ pun intended.
So my technical work is done, unless technical signs reverse. As you know, I have quit my fundamentalist background and go strictly with technical analysis now. Unless something changes, which wouldn't be unprecedented, the ‘dark side of the market’ is where I want to be. But the final question is when to pull the final trigger. A clear market breakdown would be an obvious, easy and unlikely scenario. If we could somehow launch a significant rally, I'd want to short it. But more likely I'm going to have to find other inspiration.”
My reply:
Years of Attrition?
“I think that this bear is determined, no matter how long it takes, to grind up and spit out the nimblest of traders, who, practically speaking, are the only players left in global markets these days. A couple of years ago, I was struck by the anomaly of a bear market that still offered plenty of liquidity to traders of nearly all stripes. But that has since changed, and my hunch is that hedge funds and black box traders are starving these days. But the process of attrition could continue for quite a while longer, as we both know, since many traders have big enough war chests to throw nickels and dimes at this market for the next five years.
“Even so, I doubt we’ll somehow be able to muddle along for years. And, as a glass-is-half-empty (or half-full – of hemlock) kinda guy, my ‘screw-‘em-all’ scenario is for the bear to attack European and Asian markets overnight. Wall Street would wake up to a devastated financial landscape -- one in which stocks and bonds had become untradable. We will all be affected, some investors catastrophically so, and whatever investment bets one had riding the night before would be frozen in place. That means if you’re big in real estate, you’ll be stuck in real estate until the worst is over; and if invested in stocks, bonds or whatever, there will be no scurrying to safety. This is all pretty grim, I know, but probably nothing less will suffice to bring the financial system back down to pay-as-you-go reality.”
