Well, we stuck to our guns and stayed short on the market and, painful though it was at times, we sure were richly rewared for it this week!
My long-time readers know I don't set out looking to be bearish – I never have fun shorting the market as I like to stay on the positive side of things but, as a fundamentalist, when I don't like the undercurrents that are forming in the markets I'm not so hopelessly optimistic that I don't shift the virtual portfolio to an appropriately negative stance.
One of the mistakes many traders make is they become attached to their positions and seek to defend them, despite new data coming in. I suppose part of this is that a natural fondness you develop for a position that's "been good to you" in the past and the other part is that everybody hates to admit they are wrong – and selling something you bought, especially with a small or not profit, is an admission you made a mistake.
There's a James Bond marathon on one of the cable channels this weekend and it struck me that he would make a good trader. Bond searches for clues, takes calculated risks, isn't afraid to get shot at once in a while and leads with his instincts but then questions his own decisions along the way. James Bond isn't afraid to to commit to a position but he's always ready in case the ally he's with at the moment suddenly pulls a knife on him. Bond forms temporary alliances with people (positions) he hates because he is focused on the big picture – solving the case.
In Octopussy, James Bond bids on a Faberge egg at an auction, not because he wants it, but to flush out who the real buyers are. He then follows that egg around the world, picking up clues along the way but he is patient and, when the opportunity presents itself, he takes decisive action based on the best information he has available. In one scene he is able to fight with a woman, make love to here and then arrest her and he's not ashamed or embarrassed by his changes of heart – this is how we need to be with our positions! Sometimes we love them and sometimes we hate them and sometimes they are good to us ans sometimes they try to kill us – there is no room for "loyalty" in the options market.
We live in a society where "flip-flopping" or being "wishy washy" is frowned upon. Politicians are derided for changing their stance on an issue and we elected a leader who's a "decider," somehow proud of the fact that no amount of evidence will ever convince him to change his mind. If you take that attitude into the options market you will be killed! Stocks go up AND down and you are operating in a very short time frame in which you need to be correct. Loyalty to a stock can be rewarding over time but loyalty to an option makes NO sense. It's called an OPTION for a reason! You may exercise it, you may not, but you pay a serious premium to give yourself the flexibility to change your mind – holding onto an option contract through thick and thin means you paid that premium for nothing.
That doesn't mean that we flip around like a weather vane whenever the market wiggles but it does mean that we remain open and flexible as new information is presented to us and we need to be ready to cut and run, reposition, double down or roll at a moment's notice because the windows of opportunity are very small and the market calls for decicive action. We need to search for clues as to what to invest in, take a few chances and stay "On Mission" at all times and our mission is to make money, not to wait for the market to turn!
Our mission this week was to take advantage of the dip in the market and get back to cash. After calling for half cash last week and again this week, I am very happy to report that the virtual portfolios are roughly 2/3 in cash and, of course, well ahead for the year. Although our stance is still generally bearish, as I said, I'm not really a downside player so I prefer to watch the carnage with money on the side, looking for opportunities as the tide of the market recedes from our beach.
High tide was our theme of the week and we'll see how far back the market will pull in next week's heavy data cycle but, as I said on Thursday morning, Obi Won had some very good advice on going with the flow so we will not head into the week banking on a collapse or praying for a comeback – we will "let go" of our prejudices and reach out with our feelings until the market picture comes into focus, keeping ourselves ready to take advantage of whatever situation presents itself.
