Slowly Switching To Short Bias

by Olivier on August 1, 2011

There you have it. This is the first time since March 2009 that I am starting to lean towards looking at shorting opportunities. Make no mistake, we are still in a bull market. But, and that’s a huge ‘but’, the market internals have deteriorated considerably. I see lots of weakness in individual stocks which means leadership is clearly diminishing and thinning out. Only a few select stocks can hold up the indices. The Cubes’, QQQ -Nasdaq 100, outperformance is a good example. It is much easier for a few leading stocks to make this index move up.

To make a long story short: Looking under the hood I can only come up with the following terms to describe the situation: Continued Weakness and Distribution.

I also want to repeat what I have said numerous times in the past months:

For Position Traders, especially for those trading with a long bias, the best position in a sideways trading range is to be 100% in Cash. This is very tough to do though as most traders are addicted to trading. They simply ‘crave the action’ as I like to say. There is no reason whatsoever to be ashamed of being in cash on a regular basis. Take a look at veteran traders with 10+ years of trading experience. They all take breaks, they only play when the odds are in their favour and they know that the markets will always be there. Put another way: You will make tons of money when you are rested, are in a ‘flow state of mind’ and when you align yourself with the prevailing trend. In the long run you will lose big time when you trade day in day out without being selective, when you fight the tape, churn your account and exhaust yourself. Please review my post on Staying in Control and Mental Capital which partly addresses this topic.

The way I see it, the best description of what is going on right now is a huge battle raging between the ‘risk-on’ and ‘risk-off’ trade. We see strong trends in the Swiss Franc and the Japanese Yen, Gold and Silver. A strong indication the risk-off trade is gaining momentum. On the other hand we see country ETFs like EWI – Italy ETF, EWP – Spain ETF starting to get killed and quite a few traders putting on spread trades going long EWG – Germany ETF and shorting either Italy, Spain or France country ETFs. An interesting way to profit from the situation but still bypassing all the risk-on vs. risk-off debate. Might add a Europe – Sector Overview Chart to my public list in order to monitor this situation.

The next few weeks will be quite telling. I’ll be patient and wait for more clues as opposed to forcing trades. Here’s a few quick and dirty market thoughts most of you have come to appreciate:

Gold still represents the ultimate form of payment in the world… Fiat money in extremis, is accepted by nobody. Gold is always accepted. – Alan Greenspan

My public list with all my charts can be viewed here:

Buenas noches!

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