Trading Psychology Captured

Guest Post by Macro Story;

It’s game 7 of the world series, bottom of the ninth and you are up by 3 runs with a runner on second and third with no outs. As a second baseman or any position for that matter you know before the next pitch how you will react to different scenarios. If you wait until the ball is thrown and batter swings to determine where you will throw that ground ball to you it is too late.

Markets are no different and as as we approach what likely could be a very volatile trading week it’s important to know before the opening bell how you will react intraday. Perhaps you have such a long time horizon that you will do nothing and that is fine. But what, just what if markets present you with a major intraday swing either way of 5-7%. Will you enter limit orders to capture such move should they happen?

Plan ahead and don’t wait for the moment to ask yourself what to do. Decisions made during times of high emotions are often regretted down the road. This is a decision you must make. No one can make it for you. Be prepared!

With that said below are a few random thoughts as we approach the first trading day of the month and quarter.

Redemptions

We have all heard the reports of massive hedge fund losses. Zero Hedge reported on GS even blowing up a quantitative fund. The question then is how many redemption requests are facing these funds? How many have begun the process of raising money to mail out checks?

In a highly leveraged market as we currently are in (see below) forced selling to meet margin calls is not only a high probability but one that begins the “selling begets selling” vicious cycle. Perhaps we are not there but this bullet has been dodged many times in the past. How many times can investors push their luck?

Watch for AAPL as it is the most widely held and liquid stock. If there is a need to raise cash as I have said countless times the ATM will be raided.

Good News Was Sold

I use the term “good” loosely but on Friday the good news in terms of Chicago PMI and Consumer Sentiment was sold off hard. That says a lot about the mood of the market.

Technicals

The Vix (see post here) looks poised for a major move higher. Additionally the EUR/USD is poised to break down hard while the USD is poised for a possible 10% move higher. Copper sits $.04 from another break lower while oil as well is breaking down further.

Short interest is likely well off recent highs and with longs all in as measured by record low cash levels where will support for this market come? With the early ramp job last week any oversold conditions have also been somewhat worked off.

Growing Counterparty Risk

This is the behind the scenes stuff most of us are not privy too. Stress within short term funding markets and within shadow (non deposit based) banking. On Friday news broke that California will no longer participate in the 50 state Attorneys General global settlement regarding robosigning.

The banks in their negotiation had pushed hard to receive immunity from all future liability. They pushed too hard and talks have broken down. So now you have 49 states and the state of CA. It is only a matter of time before attempts at a global settlement completely dissolve. BAC is an even bigger counterparty risk today than it was on Friday.

Counterparty risk is not limited to BAC though. Watching equity will tell you nothing about this. It is only within credit that such stresses are truly known.

Be careful out there. Don’t be a hero, temper emotions and don’t put your own limitations upon the market (i.e. don’t be afraid to see your targets hit).