Weekend Review 07/06/2013

A holiday shortened light volume week ended with the Russell 2000 at an all-time-high on a closing basis. Within one week I've noted a sentiment change from a market undergoing a counter-trend bounce with a high probability of failure to a market with small-caps outperforming but the volume is weak so should this rally be trusted. In some respects, hasn't this been the market of the past four years since the March 2009 bottom? There just seems to be a rush to the exits mentality of which I've noted I've suffered a number of times as well which thus far has been proven unwarranted.

Two things I found noteworthy this weekend has been the relationship between the Russell and the SPX. The market started this correction on May 27^th but the Russell had begun to show outperformance to the SPX well before that which has continued to this day. Additionally while the $BPSPX and $BPNYA are in Bear Confirmed on their respective point and figure charts, the $BPCOMPQ is currently in Bull Confirmed. From my point of view these are the indices that matter most and both are indicating stregnth.

RUT:SPX

$BPCOMPQ PnF

Two questions I asked myself this weekend are: How are the stocks that have the dollar volume to suck the wind out of the market's sails and drag down the indices behaving? Are they holding up well and trending, ranging, and breaking to new highs, or are they looking top heavy and showing decaying price patterns? The second question is how are IPOs and small caps performing. In going through the charts and the all-time-high list a number of institutional darlings are at their peak price, such as AMZN, CEEE, and WFM. Additionally there are a number of IPOS that are holding up well and are near or making fresh all-time-highs, such as BLOX, ANGI, AMBA, TSLA, NOW, DWRE, YY, YELP and SPLK. Some of these names are despised stocks that are heavily shorted and considered very richly valued and overpriced, but this has yet to be confirmed by the market so as long as this is the case I view the current state as positive because the story stocks are doing what they do during bullish phases which is punishing early shorts until they capitulate.

Unless and until there is evidence of selling either indicated by breadth or crowded stocks being exited en mass and IPOs starting to crumble, my current view is that the story the market is telling is a happy tale. Let the stocks explain how the headlines should be interpreted.

The Observer Effect

If I were to answer why I started to blog about trading I would begin with where I left off long ago, the desire to write. Through trading I wanted to satiate an appetite that was better left suppressed and hungry, my creativity. I believe being clever and coming up with something novel is a consistent theme in the early stages of trading and instead of pursuing the path to riches, the highway of brilliancy is sped down like the autobahn. I thought for a while I could come up with some unseen nuance to the market that would give me an edge that 10,000 Ph.D.'s monkeys with 10,000 supercomputers had not found. Eventually rationalization set in and I realized this energy was better spent elsewhere and it was time to return to writing.

I thought blogging would be a disciplined process of journaling, something that I could do for enjoyment as well as being a trail of bread crumbs that would lead me to the fruits of my labor: some edible and some rotten. One of the difficulties I've found in penning on paper is the inability to search key words or find key graphs and images that tell a story. I've tried to compensate by using different colored pens and drawings to highlight important sections to return to but I honestly rarely do. In addition to a number of sketch books inked from front to back there are thousands of files on my lap top to peruse as well, but often these documents do not see the light of day. It's too easy to stow these away as if they were a legend of antiquity, only to be opened for ritual or ceremony. By publishing some of my notes and thoughts publicly there would be an audience that at anytime could access them which gave me the sensation of some exposure. I felt that my ideas were no longer under lock and key rattling around my skull but open to rebuttal and feedback.

There were some unintended consequences of all this as well. I began to suffer the observer effect. Besides simply expressing some ideas I started to become those ideas, or felt responsible enough for those ideas that even if I changed my perspective or view a few days later I had an obligation to abide by them regardless. I was becoming self-aware of the process itself and seeking validation in the number of responses or hits for encouragement to continue to post at all and if so, to post what was getting the most views rather than where I was heading as a trader. It was becoming a self-referential cycle that was actually stagnating me somewhat as I was morphing into a composite of my most read pieces, some of which were mostly experimental or merely thought exercises.

What this led to was a decision to stop blogging for a period and take a step back. To stop journaling as much and take another step back. To stop thinking so much and take a further step back until I was a few yards outside myself observing the observer. From this vantage point I started to turn the self-awareness into mindfulness and instead of constantly writing free-flow association of the process of me doing, I merely jotted down a few notes daily of what I observed myself doing and what was most significant to begin changing. Instead of having an essay I simplified into haiku form and posted an index card next to my lap top as a daily reminder of the two to three trading task that were most important for me to instill into habit over a 28 day cycle. Everything else was stripped out and streamlined so that these few task took precedence above all else.

In the end I realize there is little difference between what I observed from what I've been writing down over the past couple of years. The primary distinction is that one is through my eyes and the other the projection upon my eyelids. One vision was trying to tackle everything imaginable and the other is trying to resolve what is manageable. One is who I am in general and the other through cohesion and conciseness. Sometimes moving one step forward requires three steps back.