1) At the recent craft beer gathering I hosted, J.C. Parets--to my surprise--made a strongly bullish case for stocks. I told him in no uncertain terms that I was bearish. The conversation stuck with me because I listen to smart people. A healthy degree of self-skepticism is a good thing: the greatest losses come from drinking too deeply from one's Kool-Aid. J.C. spelled out his bullish case--his challenge was: what sector is breaking down?--and I took that to heart. Since that time, I've still traded the bear side, but I've been quick to take profits because I haven't seen a wholesale breakdown. Was I right in my downside leanings? Yup. Was J.C. right about underlying strength? Yup. On Friday we closed with 541 stocks making fresh monthly highs. That's the highest number in over two weeks. We also closed with 754 stocks making fresh monthly lows. That's the highest number in almost two weeks. It pays to listen to smart people: if smart people disagree about the market, perhaps the answer is to trade nimbly.
2) Another smart market observer, @ivanhoff, points out that corrections in bull markets often occur through sector rotation. It makes sense: when interest rates turn a corner, some industries and companies will be adversely affected; others will benefit. High-yielding utility shares have been relatively weak; banking issues have been relatively strong. We've been correcting, but through rotation. That's not how bear markets behave.
3) I find it useful to follow the tweet stream after big data releases and parse the signal and the noise. @RedDogT3 is another one of those smart guys I listen to. His focus on bank stocks after the Friday number made lots of sense.
4) I found happiness in a romantic relationship when I finally got it into my thick skull that what I needed was no drama. None. Zero. All the things I had told myself about moody people being somehow deeper and more complex were hogwash. Moody people, for me, were tiring. Even now, I start to read an email or tweet high on the emo scale and I'm reaching for the block button. A major step in my trading was coming to the same realization. If I wait for the right things to line up and limit myself to signals with a demonstrated edge, my experience is far more rewarding in the long run than going through the ups and downs of trading less selectively. Sizing up when you have something very reliable that you know very well: not a bad formula for relationships and trading.
5) After a period of trading actively, I had to stop trading altogether from 2010 through last year due to compliance regulations at the hedge fund where I worked. That was also the period in which I had to step back from blogging. Since returning to trading, I can say that markets are more difficult than when I left in 2010. At first I thought it was just me, and that I was rusty from my time away. But it was more than that. I see many more sharp market moves on sudden flows that will take prices uncomfortably beyond recent highs or lows. Maintaining a healthy skepticism on seeming breakout moves has been adaptive. I have benefited greatly by going with market trends and by patiently waiting for counter-trend moves for entries. One of the best emotional indicators telling me to stand aside is fear of missing a market move.
Further Reading: A Theory of Romantic Relationships
.
Posts
