So earnings are beating Wall Street estimates, Fed policy is less hawkish, the economy is a Goldilocks (not too hot, not too cold, but just right), and stock prices are in a steady uptrend. For the bulls, it is the best of all possible worlds. In the contrary logic of trading, that can only mean one thing: SELL!

Ok, so shorting since June has been a disaster. So what? That is the past, and it is too late to capitalize on the past. No tree grows to the sky, no uptrend lasts forever, and corrections are not against the law, well, not yet anyway.

I am going to try the short side again—and, of course, I will cut loss quickly if it doesn’t work out. I am talking trading strategy for aggressive traders, not conservative investors.

Posted by MysteryTrader at 03:59 PM | Permalink | Comments (0) | TrackBacks (0)

A reader writes: "First time I've made a comment. I've only been trading the S&P e-mini for a couple of months and have been following your comments and those of Dick Diamond closely. I spent 20 years as an equity trader for large investment banks in London and can only say that everyone is bullish before it all goes wrong. Where were all these bulls in May? It’s only a matter of time...."

M replies: I’m currently trading both sides, long and short, for quick day trades only. No overnights. My opinion, which obviously has been wrong, remains bearish. But I just relearned (the hard way—again!) this important lesson: Never let my opinion interfere with my trading.

As an active trader, and I do not have time to update this web blog frequently enough to give complete trading instructions. Please understand that successful trading demands great flexibility and the ability to change your position quickly at any moment in response to new incoming information from the market.

True that I am looking for a downside reversal, but I am trading in and out, not holding positions, at this time.

Remember that the market can take away in an instant what it has given slowly over days and weeks.

Posted by MysteryTrader at 05:28 PM | Permalink | Comments (0) | TrackBacks (0)

A reader writes [edited]:
I work at [name hedge fund withheld] and have been thinking about the recent news of hedge funds blowing up.
Investors were hurt, unnecessarily, because of the failure of the hedge fund manager to adhere to sound money management principles. Such failure leaves a fund vulnerable to a probable equity bust.
Apparently, some very large and supposedly “very sophisticated” hedge funds have no clue about basic money management--position sizing, risk of ruin, how to set stop loss position exits. They don’t seem to be aware that the greater the amounts they risk on any one trade relative to their capital base, the greater their risk of ruin. Or, worse, they don’t care.
Contrary to general perceptions, size and previous success are no guarantee against failure due to lack of sound money management discipline. Multi-billion dollar hedge funds are vulnerable unless they exercise this essential discipline.

M replies: Exactly right. Such a failure is a violation of investors, in my opinion. Any hedge fund manager who takes too much risk can go bust. The markets are ever uncertain, and a manager has to know and respect his limits.
Investors, before they invest their hard-earned money, ought to have a right to know exactly what sound money management principles the manger intends to strictly adhere to.
And there ought to be penalties, other than simply closing the fund, for managers irresponsible enough to break these principles--to break their promise to their investors.

Posted by MysteryTrader at 01:16 AM | Permalink | Comments (4) | TrackBacks (0)

A concerned reader writes, “You must be getting absolutely crushed.
The market dictates to you what happens...not the other way around. It IS overbought--but you don't fight it.”

True words of wisdom. And I DO appreciate your concern.

We all get our chance at being wrong. The market is an equal opportunity punisher. The bulls lost their shirts in 2000 to 2002, and now the bears are having quite a challenging time.

But please don’t worry about me. I use pretty tight stops, you see, so I get out at a small loss when I am wrong. True that the small losses add up when I am wrong day after day. But one fine day, in the not too distant future, I expect to very quickly make back those small losses—and more.

Clearly, the rally has lost momentum here. I am short again, and I expect a big pay day next week.

Posted by MysteryTrader at 08:21 PM | Permalink | Comments (2) | TrackBacks (0)

If OPEC cuts production, as reported this morning, that might change things in stock land a great deal.

Federal Reserve Board members are dropping conflicting hints. Vice-Chairman Donald Kohn said, "The risks to my outlook for economic activity may be skewed a bit to the downside, while those to my forecast of gradually declining inflation are tilted to the upside. In the current circumstances, the upside risks to inflation are of greater concern."

The stocks market's recent rally has been unusually large and persistent, but now stocks appear overbought. I am selling short again.

Posted by MysteryTrader at 03:07 PM | Permalink | Comments (1) | TrackBacks (0)

Stock prices are indicated slightly lower before the open.

The September rally may have reflected marking up prices for the end of the quarter. Once that is over, overbought conditions may encourage profit taking.

Furthermore, estimates of double digit growth of corporate earnings may be overly optimistic. Slowdowns in housing and economic growth could hurt earnings going forward.

I am holding short.

Posted by MysteryTrader at 02:20 PM | Permalink | Comments (0) | TrackBacks (0)