This morning's news stories and coincident market gyrations are a perfect example of the concerns I have previously stated regarding the trading environment in which we find ourselves.
To be sure, this remains a very difficult stock market environment as the market tends to react violently to each and every headline. For example, at approximately 9:00 am eastern, the ECB announced its latest banking operations designed to provide increased liquidity to the European banking system. The futures jumped sharply higher almost instantaneously. Expanding our view just a bit more, the S&P futures were at +1.50 shortly after the 08:30 ET economic reports and the news that jobless claims rose again and the Empire State Manufacturing Survey Index fell again. The reports were both worse than consensus expectations.
This very bad economic news is being completely ignored now that we have the ECB news in front of us. However, we must now ask ourselves if the bullish response is part of what will become a sustainable ongoing advance. If instead it is a knee-jerk response by traders who were caught wrong-footed and are now covering shorts then this may not last long.
I would expect questions to soon be voiced regarding the ECB move. For example:
- How bad were things that they needed to do this?
- Aren't all the problems still there?
- Does this change anything at all regarding the worsening economic situation in the U.S. and globally?
I am part way through my normal daily review of morning research pieces and general data & news. This post was triggered by two different research items.
One of the items was more intermediate-term to long-term in nature and indicates a rather strongly bullish outlook going forward. The other was more short-term in nature (a few days to a week or two) and warned of a deteriorating situation beneath the surface.
These two research reports are merely the latest in what has been an oft repeated tale over the past week or so. I am repeatedly seeing reports and metrics which point to a quite bullish outlook for the longer term timeframes (at least 3 months, usually 6 months and extending out to 1 - 2 years). At the same time there have been a significant number of reports and analyses which point to an increasingly risky short term environment.
The simple summation is down first, then up big. The question becomes how best to play this scenario, assuming it is accurate, which of course is not assured. Does one build bullish positions with an eye toward "playing through" the short-term decline if it occurs. Or are we better served by focusing on the short-term outlook and trading our book in line with the shifting near term prospects for the markets.
I believe that there is no single answer, but that instead we must each choose the approach which best fits our own personal trading styles and personalities.
My solution is to do some of both. I have broken out my personal funds into what I term my "Serious Money" and my "Aggressive Funds" with the "Serious Money" portion roughly 80% of the total. That portion is invested with a longer term time horizon in mind. I gradually adjust my asset allocations as I attempt to increase my invested position near bottoms and decrease it near tops. At least that's the plan even if I don't always execute it as well as I would like.
My "Aggressive Funds" are traded with a micro, short or intermediate time frame in mind. This means taking positions with an intended "life" of between a few hours and several weeks.
As to the current "mixed picture" environment, I do not now plan to change my "Serious Money" allocations although I may add to my equity exposure if the market does decline over the next few weeks. For my "Aggressive Funds" I intend to do more selling into a further rally and then to buy back in as the market pulls back. That of course assumes that the market does move in such a manner over the next few weeks. It may not and the picture could get better or worse at almost any moment. We must all remain flexible and work with the market we do get, not the one we felt we should get.
Have a great day!
Curtis Bergquist
Editor: Daily Decision-PRO
Editor's Note: We've heard from Curt. So, what are you doing with your accounts these days? Feel free to let our readers now via the comment section below.
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