Thursday, March 15, 2007

This crazy market

Yesterday's reversal was quite intriguing. Both the Dow and S&P pierced last week's lows (e.g. 12040 on the Dow) before making a "V" bottom and finishing positive. I was shorting several investment bankers and home builders and did not get out quickly enough. I ended up closing those trades first thing this morning which meant I gave back half the profits. It was a dear lesson: I needed to set tight trailing stops to secure the profits and trade against extreme emotions in the market.

In the very short term (read: days), the market has taken a stand. Let's take a look at HUI below. I chosse HUI because of my commitment to PMs. The fact is, HUI has moved in tandem with the major indicies and the divergences are visible there as well. [By divergence I'm referring to the fact that yesterday's price was approximately equal to last week's low but the momentum indicators did not drop to the previous low. This is called a "positive divergence" which usually foretell higher prices to come.]

So does this positive short term outlook in any way alter my bearish views on the economy? None what so ever. Short term market gyrations are usually associated with trader's emotions and rarely with the underlying economy. For that I urge you to read up on alt-A mortgages, collateralized debt obligations (CDO) and the like (e.g., at CalculatedRisk as I have always suggested). I still see risk aversion as the theme for the next while. As someone once said, the idea is to reduce your risk exposure before everyone else.