A panelist on a CNBC special on a Wednesday afternoon a few weeks ago made a blanket statement when asked “who is making money right now” in responding that “nobody” is making money. That is not true obviously, but the market environment of the last few weeks has been extremely difficult. Longer-term traders are afraid to be long because of the possibility of harsh precipitous declines but equally afraid to be short because of almost random spikes in prices (and vice versa). So what is going on and what are successful traders doing? What is going on is reactions to every headline on the heels of the two basic trader emotions- fear and greed. There’s a number out which indicates the jobs outlook may not be up to snuff so whammo- 1% loss. There’s a story out that State Street (STT) is doing better than expected. So maybe things aren’t so bad for banks so instant 3% S&P rally. These are indeed extraordinary times in that people’s emotions are worked up because of the fear of the double dip in the economy tempered of course by the thinking that one can become wealthy by riding the volatility waves. The other thing sparking the moves are computers. I did a piece on algorithmic trading last week. Anyway, I know this is controversial so I’ll temper it by saying that people program computers. But if most everyone has the same algorithms, what’s gonna happen but big moves due to groupthink? Suffice to say that the human factor simply hasn’t been as readily apparent in the last few weeks as evidenced by pioneer day trading firms like Schonfeld which let go a number of traders a few weekends ago in including this statement in their letter: “Bull and bear markets come and go. Good trading markets come and go. But unfortunately, our vision of the future of trading has changed. It is getting much tougher for traders to make a living or get by. The direct competition from black boxes, stat arb and high frequency trading which continues to grow at exponential rates is here to stay and has caused us to change our outlook for lesser skilled traders.”
As for the question “what are successful traders doing,” there are a couple of basic answers other than “adapting.” I am going to answer this both from the vantage point of what I am doing since I’m still scraping out a living along with what the other profitable traders at my firm are doing as there are a few discernible things in common. Also, today will be a general answer...I am going to delve more specifically into the matter in coming days. First, as has ostensibly preached by me for years, know the difference between a quick trade and a longer-term trade. If your goal is to get in/out in seconds or minutes, do not build a position by adding to what you have as the stock moves substantially against you. As was shown on a day like last Monday, there are trading sessions where the market only moves in one direction. Second, it’s not something I want to say, but my average trade size and total trading volume have both decreased in the last three weeks. If the markets are jagged, this means that things are that much more uncertain so who am I to get bold in that type of circumstance? Third, I am still typically exiting wrong positions expeditiously and doing the whole ½, ¼ ¼ exit strategy when right. But I am giving slightly more leg room due to the raggedness and by taking smaller positions. Basically, if the markets are moving sharply but with many false fits and starts, it’s easy to con oneself out of what may well be a winning position. So, if something is not working, I’ll give it two shots instead of one. If something is working, I hold the thing as long as the market is trending with the position (which can be a matter of a few minutes instead of seconds). Finally, I know that the market is ever-evolving so I along with everyone else has to evolve with it and accept that slight changes are always necessary if one wants to maintain profitability. I am not looking to re-write the rules, but I am looking to tweak exactly how the rules are defined on a daily basis. If I don’t, I don’t have a chance. So, as the dynamic changes, change with it in keeping your mistakes to a minimum amount of damage all the while realizing there are plenty of opportunities out there. In coming days, I am going to write more specifically about all of this as I attempt to focus on the changing dynamic.
Markets overseas were very strong overnight over a Goldilocks-type manufacturing number out of China. It showed that manufacturing activity had slowed a bit but growth is still strong which means the Chinese government is less likely to restrict growth yet things hum along. The news sparked a 1.3% rise in Shanghai and a 1.8% advance in Hong Kong. A slew of big banks such as HSBC reported strong earnings in Europe with the rally continuing there as London, Paris, and Frankfurt all advanced around 2%. The dollar is little changed with oil strong. Futures are showing very strong gains on the back of all of this rosiness. Look for a little give-back from the open as the overall newsflow in the States is a bit more mixed but the markets should hold overall today. Focus on relative weakness plays and selected news plays such as the earnings plays and the credit card sector.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
APL- closed near a high
WYNN- major reversal in closing near a high after posting earnings
BIDU- closed near a high
RIMM- closed near a high
UFS- closed near a high after posting good earnings
AGP- closed near a high after posting good earnings
MXWL- closed near a high after posting good earnings
HUM- decent earnings
OSK- decent earnings
VRX- decent earnings
CLF- announced close of acquisition of coal operations from INR Energy
Bad-The following stocks have bad news and/or a weak technical pattern
BIOS- closed near a low after posting awful earnings
NTRI- closed near a low after posting awful earnings
FSLR- closed near a low after posting awful earnings
ARBA- closed near a low after posting awful earnings
GS- closed near a low
CRL- poor earnings
MET- share offering
MOS- preliminary injunction granted barring MOS from expanding a key phosphate mine in Florida
V, MA- a Bloomberg story indicated that T and VZ will take aim at credit card firms with smartphones
RIMM- UAE and other nations look to block services
Earnings:
MON AUG 2 BEFORE
AGN HLS
HUM L MNTA
OSK VRX
MON AUG 2 AFTER
BGC BMRN CRL
CUTR DDR DVA
HLF HOLX PFG
RBC SBAC SM
UDR VMC VRSN
VVUS
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
Joseph R. McCandless- Managing Partner
D. Timothy Seaquist- Managing Partner
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