DJIM #10 2009

If there’s one thing we traders learned during the past few weeks,  it is that there's no such a thing as certainty in trading.   Despite the improbable odds that we wouldn’t go much lower without some sort of relief bounce,  we just kept on going lower.   What we are referring to is the case where many traders have been looking for a meaningful bounce during the latest slide and they haven’t been able to get one.   From middle February till the close of Friday, a stretch of just less than a month,  this market has dropped a whopping 21%(SPX wise).   Usually, this kind of massive decline would take a year or two to complete, but we have had a 'Obama Bear market' already.    Of course, we are dealing with an extraordinary market environment here and the conventional way of thinking or behaving has been thrown out of the window.   Had anyone been going long aggressively during the latest decline, we can only feel their pain.  For those that are still holding their long term 401k account or similar type of accounts,  we can’t even imagine the kind of losses they are incurring.

As traders,  we shouldn’t have a political view on this market.   However, understanding how others feel would give us a better understanding how people behave in this market.   Clearly, the recent activity showed distaste for the new administration.   It just feels that people are throwing out their equity investment in a protesting way.    It definitely feels very emotional out there.   When it is this emotional, it usually coincides with the term... irrational.     At this point, we are only hoping that rationality would return to this market sooner than later.   Recently, everyone, including DJIM traders, has been very critical about the handling of market related matters from the new administration.   Whether we like it or not, we still have to come up with trading plans to deal with the change in political environment as far as this market is concerned.   Instead of pointing fingers in rage,  we may as well accept what it is and make assumptions on the likely outcome given what we know.

First,  we feel there’s a disconnect between how market wanted things to be done and what this administration wanted to do.   This means that this market will have to find a bottom on its own, or a natural bottom.   We shouldn’t count on any miraculous announcement from the government to give us a lift.   The upcoming hearing of “mark to market” accounting can potentially get a bit of excitement from the traders,  but we have to really believe it when we see it.   Second, we feel that this market has already discounted a lot of the grudge toward the government policy by selling down many assets across the board.   We may have already hit the “melting point” without even knowing it.   In any case, we are really close to a short term bottom in our opinion.    Because the market has been practically dropping every single day during the last few weeks, it’s really easy to jump on the bandwagon and call out the next level, let it be SPX 600 or 500.    It just doesn’t work like that and hopefully it adds more to the rebounding pressure.

As far as plays wise,  we are mainly sticking to ETF's mostly as they are virtually guaranteed to run up when this market bounces.   We have been buying some SPY/SSO/OIH in recent days and would add aggressively, if we see a strong uptick.   The recent resistance may be at SPX 720 or so,  but we feel we can just as easily go to SPX 742 on a strong run.   The coming week may be a good test to see how resilient the recent “irrationality” is.   It is tough out there,  but it isn’t the end of the world for traders. At this point, it does favor a long trade greatly compare to anything else.   If this game is nothing but probability, we like the long odds here.    Again, we also have to fully stress that no matter how we trade, we have to absolutely limit our exposure to this market to a comfortable level. Bottom line, we are actually looking forward to trading in the coming week.