Monday, May 10, 2010

State of the Market - 5/10/10

The volatility continued today on Wall Street - boy did it ever.  Market-wise, we obviously saw a strong session on the surface today with news of the new trillion dollar bailout of Europe via the EU and IMF and I am sure some other countries, likely including the U.S.   The key word in the last sentence was "news" as this continues to be a completely news-driven market.   I'm sure you'll hear a ton about what a great day it was, but in reality, the market moved completely sideways after the first five to ten minutes (actually it was more of a slow fade) and unless you got heavily invested on the long side on Friday afternoon, there wasn't much to do today in terms of making money.   I remain in cash as I have for the last week and have no problems with remaining that way for the foreseeable future.

Longer-term, I still think we are more likely to have peaked for the year and will fall further after we bounce a bit, but at the same time, I am not dismissing another massive liquidity-driven rally similar to the one we saw from March of 2009.   The EU has set the stage for it to happen - now will it work out the same way is the question?   I honestly don't have a clue if it will - that's why I will wait.   As I've been saying since Thursday, charts and technicals are too messed up for them to matter and it will take time for them to get back to normal.   I am bearish overall - not a raging bear but I think there is a better chance of lower prices from here than there are of new highs.

Now, back to yesterday's thoughts.  I was thinking about the state of the current market again and thought about poker.   A lot of people compare trading to poker and I do think that's a very valid comparison.    There are many professionals that play poker - they have earned that "title" because they have read, studied, and practiced to be the very best at what they do.   If I sat down at a table with Doyle Brunson, Phil Ivey, Phil Hellmuth, and Daniel Negreanu, I would most likely lose my money.   They are better than me, know more about poker than me, and because of that, they would be at a distinct advantage.   At least, however, I would know the circumstances of play going into the match.   I would know the rules and we would all have to play under those rules.   I may lose money, but it would be my choice and completely my fault if I did so.

Now let's imagine you are playing online poker.   You log into one of the popular poker websites and get into a game.   There are three other human players logged on (along with yourself) but since you need eight to have a complete match, the other four spots are filled by "computer" players.   You start playing and pretty soon you realize all the human players are losing money.   Then you all lose more money, and more money.   The computers keep raking it in.   One by one the human players drop out and the match ends with you having a good chunk of your account taken from you.

Although you know poker is tough and that you can lose money at any time, something still didn't feel right about your experience and it is really sticking with you the next day.   You are very much bothered by it.   Then you happen to read an article on Yahoo that the poker website you logged into last night is being investigated for fraud.   There are claims that their computer players purposely cheat.   They have programmed the computers to "see" the cards of the human players as they play and then plan accordingly.  Dealing is not random but skewed toward computer players.   Any level of fairness inherent in poker has been completely taken away by these computers.

The article goes on to state that it is not just this website that is being investigated.    Several other prominent poker websites are being investigated for the same claims - that their computers can see players cards and therefore take advantage of human players online.  It is even being reported that some human players (employees of the website) have used the computers to play on their own against other humans using the same advantage of seeing the cards of the other humans and rigged deals.   You look online and don't see much else about this article - perhaps it is not true.   But it makes you wonder???

Now, this example is of course TOTAL FICTION - I don't want to start rumors that poker websites are fixed.  I don't even play online poker so I have no idea how the sites even work.   I am using it however as an analogy.   Say this happened to you and you were made aware of this exact situation.   Would you continue to play online poker?   I am sure there would be many people that would continue to play, even in the face of these type of investigations.   Some are addicted to it and they need to play, regardless of whether they can win or not.   Others are confident enough (or perhaps naive enough) to think they can beat the computers anyway - bring it on, they say.    But what would you do?

I think this example is analogous to the current situation in our markets.   I have come to realization that I can't beat computers - I am not smart enough to do so and I don't have the resources to do so.   Perhaps I can come up with a strategy that will work for a while, but most likely any strategy I have will only work for a small while or until the computers come up with a way of overcoming it and taking more of my money.   I have felt this way for a while now, as I stated last night, but Thursday kind of magnified the situation for me.   A lot.    Having a full-time job, a wife, and two kids, I simply don't have the time or desire that seems to be necessary anymore to dedicate to "trading" in order to scrape 1-2% points from the market every month or so.

It's really up to you as a trader to decide what to do from here.   I am going to sit back for a week or two or perhaps longer and just observe.   To answer several emails and comments from last night, I am not "giving up" or "quitting".  I am "disengaging" for the time being.  I really don't think it makes sense to trade anyway right now because news is still driving everything - today was a prime example of that.   Trading at this juncture is too much like gambling and I don't want to do that.  Who knows, maybe I should just start playing poker instead.   I'll still be here writing and sharing thoughts, but those thoughts might be a little different over the next week or so than what you're used - at least until some sort of changes can get implemented or things settle down and traders such as myself can have at least a little confidence in the integrity of the markets.   Who knows how long that will take?

Here's a decent article about possible causes for Thursday's crash. - LINK    That's it for today - until things change or settle, the posts might be a bit random - hope that's OK.   Take care.


positiontrader said...

Excellent post Mac! Trust me, you are not alone in feeling like this or thinking about this. It is especially hard for your trading style where you swing trade and do not have time to watch the markets each and every second. But I do sincerely believe, there has to be and there is a way of beating these machines. They expect us to do the typical, so one might try doing the atypical.For example, not keeping stops at or just below obvious places like 50MA. If I might suggest, I think a review of your trades might help you. Like maybe you should have an early sell limit to collect partial profits. And if I remember correctly, you have missed out on a lot of profits this year despite being right but being ahead of the move by a day. I believe you sold FAZ just last week before this down move. Review of trades like that might be helpful. I sincerely believe that you are too good a trader to be in this slump for long and all you need is few tweaks in your strategy to be winning again. Of course, the way the markets have been since last week, no amount of fine tuning can help. But these are exceptional times.

Good Luck Mac! Hang in there.

Mac said...

Thanks for the kind words PT but I have to disagree with your assessment that with just some fine tuning these computers are able to be beaten. They may be able to be beaten from time to time, but it has gotten much more difficult to consistently beat them because they have resources to affect trading that we as smaller traders don't have.