DarterBlue Posted April 4, 2018 Report Share Posted April 4, 2018 Purpose: The purpose of this post is to share what I believe to be a better way of evaluating market movements over the short to intermediate term, and with that as the backdrop, evaluate where my short positions stand and my intended course of action tomorrow. Market Action: Financial market action goes in cycles. We move from bull to bear markets and then back to bull markets. In a healthy economy with a stable government, over the long haul, markets go higher. There are exceptions to the go higher, though. If an economy is stagnant, stocks can go a lifetime without going higher. The most current example of this is Japan, which topped in December 1989 and today trades for just over 50% of its all time high, 29 years later. It makes sense that in a growing economy stocks would go higher, as we would expect companies in a growing economy to command higher valuations. With that said, however, emotions drive market cycles. The emotions that drive market action are: Hope (in the very early to early stages of a new bull market); greed (in a mature, later stage bull market); fear (in the early stages of a new bear market); and despair (toward the end of a bear market when individual want to get out at all cost). At the beginning of a new bull market (the hope stage), stocks initially ratchet higher quickly. At this stage, most individuals are out of the market and many institutions are sitting on large losses from the prior bear market. After a few months, it dawns on investors that perhaps we are in a new bull cycle. At this stage both individuals and institutions put money to work. This is the beginning of the hope cycle. During the hope cycle, the money flows in cautiously. Therefore, markets go up, but volatility is relatively low. There are few highly volatile, up or down days. A normal bull market has lasted historically between 4 and 6 years. The hope cycle usually occupies 2/3rd of the bull cycle. The greed portion of bull markets usually occurs in the final third of the market move. Greed is characterized by individuals putting money they can't afford to lose at risk in an effort to catch up and/or beat the market. Margin debt (money owed brokers for stocks bought on margin), as well as options and other derivative activity expands in the greed phase. Also characteristic of the greed phase, is an explosion of initial public offerings, as well as secondary offerings. During the greed phase, volatility usually picks up, and while stocks may wend their way higher, they do so in an increasingly manic fashion. The fear phase of a market cycle often overlaps with the greed phase. As the market begins to selloff and daily market moves expand, fear slowly but surely creeps in. The paradox of markets is that individuals want to make money in them, but fear volatility. In the early phases of a bear market, greed and fear are in constant battle with each other. Not surprising as investors are flush with assets in the market and many have booked decent profits. Also, newer investors will have not yet experienced a bear market and don't understand the emotional and financial damage they can do. I believe we are currently somewhere between the greed and fear phases of this old, but as of yet, still alive bull market. The despair phase of the market cycle occurs after assets have lost 20% or much more of their value. By this time the bear market will have gone on for many months, and often years, and to investors, it seems that the market will never come back. Thus, they sell each rally, ensuring further declines, and towards the end, they sell into weakness just to stop the pain. We are clearly not yet in the despair phase of the current market cycle. The Effect of News on the Market: In bull markets, good news is great news, leading to big gains in stock prices. In bull markets, bad news is often totally shrugged off and markets will head higher on it or at the very least hold their ground. In bear markets just the opposite occurs. Bad news is treated as catastrophic with big selloffs on it. And, good news is ignored and markets either selloff on it or ignore the effect altogether. In markets making the transition from bull to bear or bear to bull cycles, news tends to have strange effects. Thus, one day the market will act "rationally" to good or bad news and on another, it will act "irrationally." Recent market action in the face of the news of the day, supports my belief that we are in a transitional phase of the market. This phase, however, can last longer than one would think and could take many months to play out. Status of my Short Positions and Action Plan: As of the market's close today, my short positions (LEAP Options on the NASDAQ 100, S&P 500, and Russell 2000), show an unrealized profit of $11,963, or 18% on an investment of $65,500. At Monday's close, it had stood at $23,858. Thus, in two rally days, approximately half of the profits were given back. Not good, but at least a very good entry has bought me some flexibility. I decided to report the above, as there is a very good chance I will liquidate my positions tomorrow. Why? Twice this week, on Monday, and again this morning, major support levels in at least two of the major indexes were breached. However, Tuesday repaired Monday's breach and today, after breaching them at the open for a second time, the market turned around and rallied furiously the rest of the day to close solidly up. The only thing missing was volume. Given the market's stalwart defense of support twice in three days, I believe the odds now favor further upside testing. Thus, while I am sure we are in the late phase of the greed cycle, stocks could easily go up another 5% to 8% from here before we get any further significant downside testing. If that is the case, it would mean waiting several days if not weeks during which time all the profits from the trade will have been surrendered. With that said, I will take the following action sometime after 10 am tomorrow (I almost always don't trade at the open, as I like to get an overall sense of direction): If the market opens significantly lower but then reverses and starts to climb higher, I will sell the entire position. If the market opens significantly higher and shows no signs of reversing after 10 am, I will sell the entire position. If the market opens flattish and stays that way more or less, I will evaluate volume, the strength of leadership and other factors I use to make a decision one way or the other. If the market opens lower and stays lower or keeps going down, I will hold the positions. The fact that I am leaning towards liquidating the positions does not mean that I think this current stand marks another protracted up leg in the market. It is old, overvalued, and its psychology has changed from greed to greed/fear. Markets in this stage don't usually go up for much longer. With that said, it may be better to get flat with the profits I have and wait for another optimum time to short it once more. After all, profits are a function of both market movement and time, and we could easily wait four weeks or more for the next down leg to occur. To my relief, I have found this cycle that I have not lost my ability to pick inflection points pretty accurately despite my 15 month hiatus from trading. At the close of trade tomorrow, or possibly before, if I liquidate the positions, I will post what I did and why. 2 Quote Link to comment Share on other sites More sharing options...
noonereal Posted April 5, 2018 Report Share Posted April 5, 2018 Isn't the stock market, by design, supposed to a place to invest? You post does not speak to investing at all. Think about it. My point, this is not capitalism, it's a bastardization of capitalism. BTW great post as usual as you dissect the "market" (casino) pragmatically. Quote Link to comment Share on other sites More sharing options...
dbcaptiron Posted April 5, 2018 Report Share Posted April 5, 2018 Yes nooner prefers the landowner /serf more direct approach .... you know...like South African style....that’s the apartheid style that he lives.... right nooner... 1 Quote Link to comment Share on other sites More sharing options...
noonereal Posted April 5, 2018 Report Share Posted April 5, 2018 I see noone lives in someones head. Quote Link to comment Share on other sites More sharing options...
dbcaptiron Posted April 5, 2018 Report Share Posted April 5, 2018 If you think so ...go try and feed that ego some more maybe I just live here some times and you are the biggest buffoon to get laughs.......at.... you certainly are deserving of ‘some’ response for all the time and effort of your living and posting here... post away champ...I have never pointed anything at you except responses to your posted stupidity... Quote Link to comment Share on other sites More sharing options...
DarterBlue Posted April 5, 2018 Author Report Share Posted April 5, 2018 54 minutes ago, noonereal said: Isn't the stock market, by design, supposed to a place to invest? You post does not speak to investing at all. Think about it. My point, this is not capitalism, it's a bastardization of capitalism. BTW great post as usual as you dissect the "market" (casino) pragmatically. Actually, the stock market by design, in a well functioning capitalistic system, is a place where growing companies can raise capital to fuel growth. Companies are able to do this, because the stock market provides liquidity. Liquidity enables individuals to see the market as one vehicle in which they can store wealth. Ironically, the liquidity that makes the market a good place to store wealth is fueled by speculators (people with my mindset toward the market, but with a lot more capital). In normal markets, the liquidity is not accompanied by a lot of volatility. The greatest amount of volatility is generated at major inflection points in the market. The transition from bull to bear and bear to bull. We are, or at least were, at such an inflection point since the end of January. As of now, the market seems to have found at least a temporary bottom. Whether this will be sustained for a long time or not is to be seen over the next several weeks. With that said, the path of least resistance over the next week or more is to the upside. For this reason, there is a strong possibility I will cover all my shorts today, take my small profits or losses depending on how things open up, and return to the sidelines. 1 Quote Link to comment Share on other sites More sharing options...
noonereal Posted April 5, 2018 Report Share Posted April 5, 2018 6 minutes ago, DarterBlue said: is a place where growing companies can raise capital to fuel growth. That sure as heck is not what you described. seems that objective is now a byproduct of what is really occurring. Quote Link to comment Share on other sites More sharing options...
dbcaptiron Posted April 5, 2018 Report Share Posted April 5, 2018 4 minutes ago, noonereal said: That sure as heck is not what you described. seems that objective is now a byproduct of what is really occurring. Still trying to argue with a professional.... in his own field .....about a topic you admittedly despise ....and do not partake in or understand...... and you wonder why people can only either laugh or shake their heads... piss poor poster you are... Quote Link to comment Share on other sites More sharing options...
DarterBlue Posted April 5, 2018 Author Report Share Posted April 5, 2018 22 minutes ago, noonereal said: That sure as heck is not what you described. seems that objective is now a byproduct of what is really occurring. Growing companies are able to raise capital in the financial markets because they have liquidity. But ironically, the liquidity is provided by speculators. That is the dichotomy of the financial markets. The two seem at odds. But the one satisfies the other. It is also the reason the financial markets need good, sensible regulation, as they tend towards bubbles and fraud in its absence. As the USA has become a more debt dependent economy, financial markets have assumed an over sized importance in the economy. I am not convinced that this is for the good. In fact I fear it's for the bad. But hey, I did not create this game; I am a mere participant playing the hand I was dealt. 1 Quote Link to comment Share on other sites More sharing options...
DarterBlue Posted April 5, 2018 Author Report Share Posted April 5, 2018 17 hours ago, DarterBlue said: If the market opens significantly lower but then reverses and starts to climb higher, I will sell the entire position. If the market opens significantly higher and shows no signs of reversing after 10 am, I will sell the entire position. If the market opens flattish and stays that way more or less, I will evaluate volume, the strength of leadership and other factors I use to make a decision one way or the other. If the market opens lower and stays lower or keeps going down, I will hold the positions. The fact that I am leaning towards liquidating the positions does not mean that I think this current stand marks another protracted up leg in the market. It is old, overvalued, and its psychology has changed from greed to greed/fear. Markets in this stage don't usually go up for much longer. With that said, it may be better to get flat with the profits I have and wait for another optimum time to short it once more. After all, profits are a function of both market movement and time, and we could easily wait four weeks or more for the next down leg to occur. Action Taken: Between 10:10 am and 10:25 am, I liquidated the following positions: 17 Contracts of the QQQ (NASDAQ 100) puts, Strike 160, Expiration January 2020 18 Contracts of the IWM (Russell 2000) puts, Strike 150, Expiration January 2020 14 Contracts of the SPY (S&P 500) puts, Strike 250, Expiration January 2020 Including commissions costs, on the day, I lost $2,609.52. Subtracting this, from the cumulative profits on the trade through yesterday's close, I booked total profits of $9,353.70, or 14.2% on the approximately $65,500 traded. The return was made over approximately 10 trading days. At its high point unrealized profits in excess of $23,850, or over 36% were accumulated on the three positions. In retrospect, it may seem that I let too much of the profits go. Do I view it that way? The answer is a qualified no. Philosophical Discussion: I have always been a position trader in the sense that I try to make big money (50% or more) from my really profitable trades. However, by taking this approach, I have many times sacrificed a large chunk of my gains on a good percentage of solidly profitable trades. Why? Because to make large returns on some of your trades, you have to give them time to run. But in doing so, you have to, as of necessity, allow them to test and break through either support or resistance (depending on whether you are short or long). Often, as it appears in the current case, they do not successfully get through the support or resistance areas. So, in those situations you sacrifice a good chunk of your profits, take what is left, and go to the sidelines. Having given my justification for giving back significantly more than half of my profits on this trade, why then did I say that my answer was a qualified no? The answer to this lies in the following question: why did I become a position trader to begin with and not resort to swing trading or even day trading? The answer is part psychological and part practical. From a practical perspective, transactions costs are much higher for high frequency traders. They are higher in total, and higher in relation to the amount of profits or losses sustained in each trade. A second practical reason is the fact that when I had a full time job, I did not have the luxury of devoting as much time to market action as I have today, so the probability of trading well on short term movements would have been greatly reduced. The psychological reason has to do with my own mental makeup. I have always been a thoughtful deliberative kind of person. This has served me well in life as if I were not, I would most likely not be here today, given my early beginnings. Very short term trading requires rapid responses to ever changing data. While I believe I could modify my life's behavior at this stage to accommodate this, successfully (given much more free time on my hands now), I believe that the additional stress level induced by doing so would probably reduce my overall happiness. Future Course of Action: I will now sit back in cash and await what I think will be the first major test of this attempted market rally. This test will come at the 50 day moving averages (we are currently below them on all indices) of most of the major market indexes. Should they get repulsed at the 50 day, then we probably reverse down again. My decision to go short or stand aside in the event of this occurrence will be driven by my assessment of the market's internal health going into it. On the other hand, should the market get through the 50 day moving averages successfully, I may take a few long positions. If I go this route I will do so in individual issues and not indices as I feel that the bull market is old and provides very limited upside potential in the indexes. If I am wrong about yesterday being a bottom and the market turns around and goes lower today or tomorrow, then I will need to assess the situation and act accordingly. Future Market Posts: If there is enough interest, I will continue to post select trades I make over the coming months, as well as thoughts on the market. The posts will be from inception to close out, most likely with weekly updates on their status. I don't feel I need to do this anymore, as I do feel I have regained my market rhythm which frees me from having to talk through my thoughts, if you will. You can let me know your thoughts in a post. What I have done has been solely for educational purposes and to stimulate discussion, as I have no interest in trying to solicit business of any kind. I am past that stage of my life. 2 Quote Link to comment Share on other sites More sharing options...
dbcaptiron Posted April 5, 2018 Report Share Posted April 5, 2018 49 minutes ago, DarterBlue said: Action Taken: Between 10:10 am and 10:25 am, I liquidated the following positions: Noted.... that you waited for the 10:00am money to come in before you made your plays ....smart... I don't post alot of replies, as I think your posts are very good, and rather enjoy just reading them... Please don't let any idiots distract from this, and continue these posts when you can. Thanks... 1 Quote Link to comment Share on other sites More sharing options...
DarterBlue Posted April 5, 2018 Author Report Share Posted April 5, 2018 1 minute ago, dbcaptiron said: Noted.... that you waited for the 10:00am money to come in before you made your plays ....smart... I almost never trade till the market has had a chance to "show me" its intentions. A lot of the early trade is done by emotional, overanxious individuals. For that those two reasons, I usually do most of my trading between 10:10 and 3:10. I don't usually initiate new positions in the final hour either. However, I may cover existing ones in the final hour. Quote Link to comment Share on other sites More sharing options...
dbcaptiron Posted April 5, 2018 Report Share Posted April 5, 2018 1 minute ago, DarterBlue said: I almost never trade till the market has had a chance to "show me" its intentions. A lot of the early trade is done by emotional, overanxious individuals. For that those two reasons, I usually do most of my trading between 10:10 and 3:10. I don't usually initiate new positions in the final hour either. However, I may cover existing ones in the final hour. until the last sentence I was worried you were going to say you would not cover or even 'close out' positions in the final hour LOL. When I day-traded on the side...many times I would make my .5% before 9am ...and be done with it for the day...LOL No I don't do that any more... But can you Guess what kind of strategist, most of my 'financial advisor' friends always called me? 1 Quote Link to comment Share on other sites More sharing options...
DarterBlue Posted April 5, 2018 Author Report Share Posted April 5, 2018 10 minutes ago, dbcaptiron said: But can you Guess what kind of strategist, most of my 'financial advisor' friends always called me? They probably though you were "nuts." Of course most financial advisers are really glorified, sales people who have little understanding of market action. For most individuals they serve a purpose. For me, I could never work with one even if I lacked much financial knowledge. I have always felt that the best protector of my financial health was me. I tend to avoid after or before hours markets as they are relatively thin. 1 Quote Link to comment Share on other sites More sharing options...
dbcaptiron Posted April 5, 2018 Report Share Posted April 5, 2018 1 minute ago, DarterBlue said: They probably though you were "nuts." Of course most financial advisers are really glorified, sales people who have little understanding of market action. For most individuals they serve a purpose. For me, I could never work with one even if I lacked much financial knowledge. I have always felt that the best protector of my financial health was me. I tend to avoid after or before hours markets as they are relatively thin. Agreed on everything here...and the early trading was only on silly opening numbers for certain stocks I followed very closely. Everyone called me 100% contrarian in methodology...go figure LOL. But that is actually not a bad viewpoint when quick trading...and where some of the best money is made...would never try it in futures tho, that's a poker BANKROLL game, where in order to make $....someone else (usually bigger than you) has to lose.... .. Quote Link to comment Share on other sites More sharing options...
DarterBlue Posted April 5, 2018 Author Report Share Posted April 5, 2018 1 hour ago, dbcaptiron said: But that is actually not a bad viewpoint when quick trading...and where some of the best money is made...would never try it in futures tho, that's a poker BANKROLL game, where in order to make $....someone else (usually bigger than you) has to lose.... .. What makes futures so dangerous for most individuals is the leverage implicit in every trade. For anyone starting out in the futures markets, they would be well advised to trade single lots regardless of their account size till they actually developed a very good understanding of what they were doing and of the volatility involved in each tick. And yes, it is a zero sum game with transactions costs involved. Kind of hard to win at such games unless you possess great skill. But the options market is more or less similar in that respect and I have never had an issue trading options. Of course, as you probably surmised from the trades I just closed out, I either trade options with a lot of time value left in them, or when I trade the shorter duration options, I keep the stakes very, very small. Quote Link to comment Share on other sites More sharing options...
dbcaptiron Posted April 5, 2018 Report Share Posted April 5, 2018 37 minutes ago, DarterBlue said: And yes, it is a zero sum game with transactions costs involved. Kind of hard to win at such games unless you possess great skill. But the options market is more or less similar in that respect and I have never had an issue trading options. Of course, as you probably surmised from the trades I just closed out, I either trade options with a lot of time value left in them, or when I trade the shorter duration options, I keep the stakes very, very small. Underlined the three most important words that most people do not understand about options.... Better know your shit, if you want to dabble in those...and yes, certainly the only place I ever saw 'my trades' move a market LOLOL.. Always did better personally in stocks...But long options with some profit i always thought was a nice play... Short DURATION options have too many bankroll squeezes by other players for any small time investor not to get squeezed at some point..... (basically I don't enjoy playing poker when 'shortstacked' against the market) But as a 'contrarian' have been stuck in cash for a while now...next HUGE correction (or panic LOL) I might jump back in... 1 Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.