The week ended with selling hitting the tape as 517 stocks in my universe were down 4%+ for the day. The last such occurrence of this magnitude happened on 06/20 of last year. Whether or not the ensuing action is similar remains to be seen, but caution is clearly warranted yet again. The mere utterance of suggesting caution here reminds me of every day in 2013 that had a sell off on the major indexes above 2% only to see them rebound quickly and blur the fine line between risk awareness and risk aversion.
Over the past few years as I’ve honed my craft I’ve spent a considerable amount of time pondering and writing about market breadth and timing. At times I’m unsure whether what I’ve written was from earnest or ignorance, and perhaps there isn’t much distinction between the two when it comes to trading, but warts and all I’ve externalized my process and have bread crumbs to follow. What’s noteworthy is that in 2013 I was completely off base as the general market lacked cyclical behavior and often I would chastise my own analysis for not being more attuned to this, but in the least I’m in good company as the year 2013 befuddled many.
In hindsight 2013 appears to be an anomaly. The slow and persistent grind up with corrections lasting mere days, yet just enough to get the claws extracted before the horns thrust upward befuddled and dumbfounded many. I was fooled often and somewhat perplexed as many of the signals I use in my risk management tool box turned out to be nails and the market was the hammer. What I had begun to practice the preceding years and learned to trust tested my belief, however, isn’t this exactly what the market does?
Two weeks back, Frank Zorilla posted the following on his blog: 2013 Conditioned Me To, and this got me thinking again about the concept of maximum adversity as described by Penfeld and viewable here: Maximum Adversity. In circumspect, 2013 looks just like a market that is setting up the most participants for the most hurt as it has likely conditioned the most for it.
In keeping with this spirit, one of the things I’ve been reflecting most upon is what did the market of 2013, or perhaps more precise late 2012 to current condition me. Perhaps most disconcerting is that it did indeed cause me to lose faith in signals, especially this suggesting breadth was extended and the market in need of a pause. In addition, when these signals arose I threw caution to the wind and failed to make proper adjustment to positions sizes and targets in a market that was extended. In fact I thought that if anything the overheated nature
would continue which brought misjudgment.
An example here is the signal I had for trading the VIX which began to show up a few weeks back, about the same time that my positions were beginning to show a lack of follow through, gap downs that lost profits, and stops getting tagged consistently. Of course this could just be recency bias and it remains to be seen if the the cycle required to profit from this signal consistently has returned to the market or not, but the simple fact is that signals are to be taken regardless of outcome if they have shown to have an edge over time.
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| 2013 conditioned me not to follow bearish signals |
To a strong degree risk awareness comes down to situational awareness and refining the nuances that each market period expresses and being able to adapt swiftly and bend like a branch, bow like the trunk, but never break. In experiencing multiple market cycles and knowing that there will be periods that test one’s resolution and show one to be incorrect repeatedly, yet not being swayed in the moment. realizing that over time there will be cycles and periods of pain.
Going into next week I have a couple of thoughts about what my plan of action will entail. From a long perspective I see little point to expose myself under the current market conditions. I’ve said this before and I’ll say it again with the acknowledgement that come Wednesday everything I believe today may be wrong. Additionally I’ve recently expressed my views in a few tweets about my current perspective on China:
With the Chinese new years upcoming and their market being closed for and extended period I suspect all types of shenanigans to occur in these stocks, especially the potential of a hit piece from select short sellers. This is my hypothesis until proven incorrect. I am also focused upon biotech and shorting IBB by selling premium as I view this to be overextended and will be looking to trade around what I expect to be a down draft. Other than this, I will continue to monitor earnings and curating a watch list of stocks that have the best reaction.
