Tuesday, November 02, 2004

Short the Market!

My move to short the market will either look prescient or stupid. And the market will soon be the judge. I did sell my final position mid-morning today, McDonald's. Gain? Just a little over 3.00% on that trade. Being completely out of the market left me flush with cash for my next investment opportunity.

I waited patiently all day today for just the right trigger. I wanted to see a range expansion to the downside breaking the strong uptrend in place all day today. My moment finally came late in the trading day. And I sold short the QQQ as fast as I could.

After my initial trade was safely in the green...I waited and watched for signs of some consolidation to initiate another short on the stock with just minutes to spare before close.

I'm expecting the market to open up Wednesday and that's where I would like to initiate my final short on this stock.

This has been one very tough trade. Just thinking through all the crosscurrents of the market this week have been taxing on my mind. It's almost a relief to finally have this trade underway. If it goes my way...great. If not...a lesson learned.

Once again, I'll give you my quick ditty on why I sold everything and went short.
  • Good news was priced in. Everyone was touting an expected rally once the election was over. The old axiom...sell hope and buy fear never felt more applicable.
  • Long-term interest rates have fallen for months giving the market a quiet underlying strength. But, long-term rates are now hitting against the bottom of their downtrend channel. Most of my positions were in financials...particularly regional banks. I feared that any bump up in rates were sure to put a drag on these stocks.
  • The market's ignoring high oil prices and focusing on the presidential election instead. After the election, oil prices will still be high and I'm afraid their effects on the economy just beginning.
  • The S&P 500 and Nasdaq Composite were bumping against the upper portion of their downtrend channel. I'm a big believer in trend trading. Going with the trend is usually half the battle. Then pick your entry correctly to give you the confidence to weather any short-term volatility against that trend. The S&P 500 and Nasdaq Composite were bumping against the upper portion of their downtrend channel. In fact, I believe the Nasdaq Composite hit a new 84 day high. This seemed like a good place to gain entry into the mid-term downtrend.
In addition to all these factors...the thing that gives me the most confidence in my view and my trade is simply a quote...

Usually when making investments, it is implicit that investors believe they have some degree of knowledge about the future. So Wall Street has more fortune tellers than any other industry. I feel I've had an advantage over the years because I am clear about a couple of things: 1) it is part of the nature of life itself (and markets are simply manifestations of people's expectations) to trend, and 2) I will never have a complete or full understanding of anything. Therefore, all investment decisions should be based on what can be measured rather than what might be predicted or felt. -- John Henry, famous commodities trader and Boston Red Sox owner

As I'm ending this post...the presidential election is still very close. It looks that momentum is with President Bush. If so, tomorrow could see a nice little pop to the upside. Looks like more work and gut wrenching is still ahead of me.

Have a good night!

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