Markets have been groping for some sort of a bottom (however temporary). The tone has been improving, as selling is starting to exhaust itself. Indeed, over the past few days, US equity futures that start out negative have finished the day in the green. Long-only shops must find this a welcome respite from the inverse that has been occasionally haunting their nightmares — and their trades.

For about 2 weeks, I have wanted to put back some of the higher Beta long positions (Emerging Markets, Small Cap, Technology) that I took off on August 1. I am waiting for some form of confirmation prior to entering the trade.

Note, however, that a Bullish instinct or gut feel or desire is no reason to enter any position. Data-driven objectivity must trump subjective, squishy feelings.

In fact, the bullish feel is the mirror image of the opposite bearish trade. Your emotions and instincts compel you one way, invariably with awful timing. Hence, why the need to wait for some combination of technical, quantitative, sentiment, valuation and/or market internal factors to pull the trigger.

I want to add to long exposure, if for no other reason that I expect an 8-12% rally from oversold levels. Ideally, I’d like to see markets more oversold and sentiment more extreme before putting on the trade, but we rarely get those perfect set ups. Trading (as opposed to investing) is more about laying out probabilities of risk versus reward; Investing is about valuations within the longer secular macro picture.

Our investing risk here is the downside of a significant earnings contraction in a possible recession circa 2012/13. The trading risk is missing the upside move of 8-12%. Indeed, the single factor most strongly opposing any buy is that so many people seem to fear missing the upside move versus fearing a significant loss.

By the way, that is a little known element about Greed & Fear: Greed is actually a variant of Fear — the fear of missing the move higher, fear of leaving profits on the table, fear of losing clients, fear of lower income, fear of losing your job. Hence, when most people say that Fear & Greed drives the market, they are really saying FEAR drives the market in both directions. True Greed doesn’t come into the picture, IMO, until we get to the stupid phase — think DotComs circa 1999 or Housing circa 2005.

Back to the potential Trade: Josh & I have been doing rebalancing portfolios into greater exposure as the markets have pulled back. Nothing huge, just restoring some proper weightings at advantageous prices. (This is simply good portfolio management).

I will be reviewing market volumes, internals and sentiment to see if I can find an objective trigger for the buys. Until then, I am watching and waiting, wanting to get long for a trade, but . . .

Category: Markets, Psychology, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

53 Responses to “Wanting to Get Long For a Trade, But . . .”

  1. call me ahab says:

    Trading? Who wants to hear about that?

    Please, more insightful political posts from Invictus

  2. “so many people seem to fear missing the upside move versus fearing a significant loss.”
    I disagree with this statement. Everybody is waiting for the smoke to clear. Many sentiment indicators are at 2009 levels.
    http://capitalobserver.com/?p=5541

  3. [...] Barry: “Trading (as opposed to investing) is more about laying out probabilities of risk versus reward”  (TBP) [...]

  4. JimRino says:

    This is when an “Investor” beats a “Trader”,
    as a trader you can’t take a “Long” position that doesn’t make a profit in 3 months.

    As an “Investor” we can buy in a down market for years.
    This may be the Only Time an Investor beats a Trader.

  5. dead hobo says:

    BR lamented:

    I have wanted to put back some of the higher Beta long positions (Emerging Markets, Small Cap, Technology) that I took off on August 1. I am waiting for some form of confirmation prior to entering the trade.

    reply:
    ———–
    While I have differing objectives due to personal and personality differences, I share your pain. I’m looking for a big bottom, and not of the Spinal Tap variety. There’s no reason for the market to rise substantially, or really at all, from this point and my trading style is more conservative and requires a holding period of a few months to feel comfortable. The market is more likely to go down a lot before it goes up.

    Idiot, lovable, optimistic shorts still think the market is a fair game and not an HFT playground. They keep trying to chase the market down and the computers just lie in wait for a healthy squeeze. I suppose these traditionalists also think oil prices are still based on supply and demand for the commodity. The computers likely thank you for your support.

    At some point, real funds holding real assets will sell off and this will make a satisfying thump as they hit a local bottom. Unwinding margin calls will assist. In spite of European pomp and playacting, it appears banks holding Greek assets and banks holding assets of banks holding Greek assets are going to cause a little spasm sooner than later. Economic slowdown will be a factor in pulling the markets down unless sales pundits sell the idea that today is a good day for a multiple expansion due to ___________ (fill in the blank with a good sales pitch that will be an AP headline later in the day).

    I’ve already scoped out a few good places to put cash, hopefully starting on the day things look most terrifying, assuming the market is cooperating and also at an extremely low level. Then I will let the computers do what they do best and prop a sick market, watch the capital gains grow, and cash out when it looks like the fuel powering the rise has been spent.

  6. ephone1 says:

    I fear that fallout from the debt crisis in Europe could blowout any long positions I might take. I don’t think it’s fully priced in to the current market either.

  7. Orange14 says:

    Good thoughts for a Friday. While the turmoil in the market since August 1 has been disturbing, one must have the courage to hold fast to a sound strategy (as per your constant reminders). Of course everyone will have a different take on how a portfolio should be structured. I don’t step into emerging markets because as an independent investor, I cannot be sure whether the financial statements that I read are valid or not (of course this is the same rationale for staying away from bank stocks; and if the Republicans overturn Dodd/Frank and Sarbanes/Oxley all bets are off here as well). There are value investments out there and some sectors of the economy that have held up quite well despite everything going to hell in a hand basket.

    I’ve actually added two new holdings to my portfolio over the past three weeks and am content that the overall principal and dividend flow (I’m a retiree so the second is important given bond yields) are reasonable secure. What it takes is just a lot of hard work as there are no shortcuts to analysis of balance sheets (though the macroeconomics do need to be factored in).

  8. NervousRex says:

    It all makes great sense, except perhaps the end: I don’t understand the contrast between rebalancing portfoloios
    and going long… Wouldn’t rebalancing involve new longs? (Or perhaps closing shorts or other instruments).

    In other words, and this may be asking too much detail, if the portfolios are not balancing towards long,
    where are they balancing to?

    Many thanks.

  9. Orange14 says:

    For some reason the Internet gremlins ate my original post so here goes try #2. Good reading for this Friday. I’ve managed to keep my strategy intact since August 1 and have stayed long with my core portfolio. I’m secure in thinking that the holdings will continue to go up and down because of weird news but that the underlying value of the individual companies are solid. I don’t go into emerging markets or anyplace where the balance sheets are either suspect or indecipherable (e.g., banks and other financial institutions). What I find most worrisome is that Dodd/Frank and Sarbanes/Oxley will be consigned to the graveyard if the Tea Party takes over next year. If that happens, it’s Katy bar the door.

    As a retiree, I’m hoping to defer Soc Sec as long as possible because I know that will save me in the end! ;-)

  10. Ted Kavadas says:

    IMHO this is a very “tricky” (U.S.) stock market. While I see some compelling reasons to be long, I still believe what I wrote in a late August post will prove correct – that the S&P500 will go below its August 9 low of 1101.54.

    Here is that post, for those interested:

    http://economicgreenfield.blogspot.com/2011/08/near-term-direction-of-stock-market.html

  11. machinehead says:

    ‘I will be reviewing market volumes, internals and sentiment to see if I can find an objective trigger for the buys.’

    One objective trigger was VIX over 40, on more than ten days in the past month.

    It is very difficult to lose money buying stock indexes when VIX exceeds 40, even if the market temporarily plumbs lower lows.

    Yesterday the NDX reached its highest level since early August — another clue suggesting that a ragged uptrend is now in place.

  12. wally says:

    These are always your most interesting posts.

  13. Potomac says:

    Paralysis by analysis…

    ~~~

    BR: For a trader, perhaps, but not for long term asset management with safety and capital preservation as the goal.

    UPDATE 9/23: On my old trading desk, you would be painted with “Nice call, Jackass” for that comment

    FAIL

  14. [...] Looking to get long for a trade.  (Big Picture) [...]

  15. MayorQuimby says:

    And I am waiting to reshort.

  16. theexpertisin says:

    From my perch, it appears that the avalanche of investment products,” pop business” media channels, research and opinions proffered by professionals and pretenders worldwide since the late 1990s have made investors (especially mom and pop retail investors) less confident and more prone to churn their portfolio for the better idea.

    Stop The Madness and not succumb to investment overload. Too many of my acquintances are spending more time worrying about which double short fund will counter their long position in “x” then living their one and only mortal life.

  17. Clem Stone says:

    “I expect an 8-12% rally from oversold levels.”

    The market is already up 9%.

  18. Hence, my hesitation . . .

  19. MayorQuimby says:

    I still maintain we are going to be flat to slightly up through the holidays. Too many shorts and negativity. I also think there will be no QE from the fed as CPI is way too hot. But this current deficit, borrow, monetize situation has run its course and real austerity is coming because we simply don’t have the money to pay for any of the crap we pretend we can afford. So is another recession. I think longs are safe for a few months until the happy holiday chatter begins. That’s the time to scale in short side possibly.

  20. Petey Wheatstraw says:

    I’m with Quimby, here. Not that I’d gamble in this environment, and not that anything ISN’T a gamble in this environment, but the markets belie the reality, globally, and it can only pay to keep an eye on them — as well as commodities, policy announcements, blogs, etc., (if only to understand the difference between which direction the wind is actually blowing, and which way the weatherman says it’s blowing).

    Ahab, my whale-bitten brother, politics is everything right now. Winners and losers — in business, not only in broader societal terms — are political choices. To support the markets, in lieu of the overall health of our economy, generally, was a political decision. The results are just beginning to ripple through society. Invictus’ post had everything to do with our shared future wealth and security.

    Again, looking at the markets and comparing them to the broader situation, it’s fairly obvious that something ain’t right with this picture. Something has gone insane, and it isn’t reality. While it would be easy to go with the flow and fall back on the old chestnut that the markets can stay insane longer than one can stay solvent, it’s important to remember that insanity seldom, if ever, results in a good outcome.

  21. Petey Wheatstraw says:

    Here’s an example — top linked stories on yahoo finance:

    Wall Street Gains for 4th Day on Central Banks’ Move- Reuters
    Wall Street gained for a fourth straight session on Thursday after major central banks coordinated efforts to offer liquidity into the strained European banking system.

    Jobless claims post surprise increase – Reuters
    Rate on 30-year mortgage falls to record 4.09 pct.- AP
    Rogue trader causes $2B loss at UBS- AP
    Netflix lowers subscriber forecast on plan split- AP
    Housing market: Foreclosures rise in August- CNNMoney
    Lagarde urges unified action against Europe crisis- AP
    ECB to provide banks with dollar loans- AP
    Consumers paid more on wide range of items- AP
    Gold’s luster a bright spot in tough economy- WSJ

    Total. F’ing. Insanity.

  22. Andy K says:

    “Paralysis by analysis…”

    Potomoc: I used to hear that expression from idiot retail brokers all the time. What is it you do?

  23. ruthie says:

    I agree with everything in this post with one exception: anyone who has watched and traded markets for long enough(and survived) Does develop a gut feel. I believe the best traders act on this feel, even if it happens to conflict with their natural bias. By the time the data or news is out, it is generally too late to make a real score. For example, the S&P rallied 40 points yesterday, most likely in anticipation of today’s news.

  24. [...] Ritholtz has an excellent post up this morning (as usual).  This one makes an excellent distinction between trading and [...]

  25. AHodge says:

    you been right pulling staying mostly out
    i regret doing small buys 2 wks ago’ have lightened a little
    still really like my gasoline short–which has covered a lot
    the big risk s to short UGA are iran etc blowing up or a big europe deal.

    europe festering is slowly bleeding altitude out of global economy
    Europe festers till banks get a deal more to their liking?
    which will be a go0d time generally to get long

  26. rpseawright says:

    Excellent post, as usual.

    “By the way, that is a little known element about Greed & Fear: Greed is actually a variant of Fear — the fear of missing the move higher, fear of leaving profits on the table, fear of losing clients, fear of lower income, fear of losing your job. Hence, when most people say that Fear & Greed drives the market, they are really saying FEAR drives the market in both directions. True Greed doesn’t come into the picture, IMO, until we get to the stupid phase — think DotComs circa 1999 or Housing circa 2005.”

    To fear and greed I woiuld add ego.

    http://rpseawright.wordpress.com/2011/09/15/fear-greed-ego/

  27. AHodge says:

    a european bank bailout w timmies guidance help?
    I a little nervous for tomorrow, but not that nervous think its early

  28. MayorQuimby says:

    It is very simple actually – everything is in a bubble and everything will crash at once because the hubris and tension and pushing against reality is at record levels.

    Just be right and sit tight. Lower prices are coming and Ben’s reflation cannot work.

    Remember – there are a METRIC TON of incredibly stupid rich people who like to “invest”. They will get obliterated at some point and will have nowhere to turn.

  29. cjcpa says:

    I have seen the future

    http://www.ritholtz.com/blog/wp-content/uploads/2009/08/secular-bear-markets.png

    Barry,
    I think you should repost this graph with an update.
    I kept a copy myself…

    cjc

  30. Greg0658 says:

    PT Barnum circa1885 “Theres a sucker born every minute” .. w/world population 1.5Bil
    update circa2011 “Theres a sucker born every 15 seconds” .. ie/population inflation

  31. Moss says:

    The banksters both private and central need the markets to go up into the end of the year.

    It appears that any angst will be met with ‘any means necessary’ to stabilize the financial markets.
    What is unknown is when all the means necessary lose their intended effect. With computers running the show it is hard to figure out what the next algorithm will do.

    It is very difficult to bet on a collapse when natural forces are met with significant intervention. Case in point is the SNB intervention in the Franc.

  32. James says:

    I will be reviewing market volumes, internals and sentiment to see if I can find an objective trigger for the buys. Until then, I am watching and waiting, wanting to get long for a trade, but . . .

    Good luck on finding that trigger in this environment, which is largely driven by developments which are difficult to anticipate. If late tomorrow, for example, Germany announced it had finally had it with the ECB’s bond-buying program, or Greece announced a default was unavoidable, futures would nose-dive, and any discussion of oversold conditions woulld evaporate. A week ago, of course, it was the out-of-the-blue decision by Juergen Stark to quit his ECB post because of ECB policy that moved the markets down.

  33. TrndTrader says:

    “I expect an 8-12% rally from oversold levels.”

    The 20-day ATR in the S&P right now is ~2.7% and in the Dax ~4.6%. So if you’re talking about the S&P, then that means you’re looking for a 3-4 ATR multiple move off the lows a lot of which is already done. Such a move would likely not even stop out long term short positions in robust trend following systems which already have locked in substantial profits, especially in the Dax.

    As opposed to “looking” for stuff that will create some combinations of feelings within yourself to allow you to then pull the trigger on long positions, consider having a well-designed trading system/plan active that is only trading price off the low as an entry. Use either outright % values off the low, or for more robustness a multiple of ATR off the low on intraday data, 15-60min interval, all this doesn’t have to be precise. It will take that long position (would have already) when your gut is not nearly ready to be long. Instantly a stop loss order goes in the market(s) based on a reasonable risk (some multiple of ATR off the entry for example).

    This will stop the second guessing, looking for that perfect entry set of criteria, etc, etc. A method like this worked great so far this week in the Dax and DJEuroxStoxx50 index futures. ;)

    Use a trailing exit stop with a wide berth initially, manage risk as a % of total equity (i.e. peel off size if the risk to the exit gets too large as the market soars upward), and then wait for that sell-the-news moment to either close the whole position or really reduce size and let the rest stop out over time.

    ~~~

    BR: ahhh, but these are not active trading portfolios, they are long term asset allocations

  34. PDS says:

    BR….sounds like you are suffering from a severe bout of volatility induced “irrational investor schizophrenia”…..my advice?…go home…light up a cuban…..engage a copious quantity of single malt…and watch “The Boiler Room”…you will see the light and be cured of your habit of looking at the BP time horizon as lunch.

    ~~

    BR: I’ve been loving this banana rum I picked up int he Caribean . . .

  35. macrotrader603 says:

    most of you, including my main man BR, sound a little lost.

    Develop a trading system based off price, algos, or some other quantifiable data, and you won’t have to have all of the confusion over what to do.

    You get a signal you make a trade, no signal, no trade, nothing to think about.

  36. macrotrader603 says:

    BR, what data are you looking at to see the market as “oversold” at this point?

    SPX is up 9% or so. An 8 – 12% rally from oversold levels puts us right where you are now.

  37. Concerned Neighbour says:

    If you mean an 8-12% rally from current levels, you are expecting the S&P to be within spitting distance of its year highs?

    With all the miraculous Birinyi ruler afternoon meltups by our HFT overlords, coinciding with the floor falling out of the economy and signs of financial system chaos, I would like a further explanation as to how this market is overbought.

  38. the pearl says:

    waiting for the all clear is very rarely profitable

  39. the pearl says:

    Nice bounce for the Germany ETF (EWG), right off the May/June 2010 low. Just saying.

  40. JimRino says:

    Can someone explain the Greek Hysteria?

    As Shiller says, with a 10 year outlook 150% of GDP is really 15% of GDP.
    High but not really a Panic.
    Just Banks trying to Extract more Income, with No Risk, thru the backing of European Governments?

  41. ben22 says:

    “Develop a trading system based off price, algos, or some other quantifiable data, and you won’t have to have all of the confusion over what to do.

    You get a signal you make a trade, no signal, no trade, nothing to think about.”

    nothing to think about?

    puhleese

    all trading systems, even mechanical ones, need to be monitored on a constant basis because eventually they don’t work anymore or they could be improved

    did you start last year?

  42. bulfinch says:

    PDS says: .my advice?…go home…light up a cuban…..engage a copious quantity of single malt…and watch “The Boiler Room”

    Pfft… this strikes me as way too poncey for a guy like BR. To loosen up, I say, go home, light something/anything on fire…swan down a glassful of Everclear and play some hardcore mumbletypeg while laughing yourself hoarse.

  43. macrotrader603 says:

    @ben22…I started trading in 1988, thanks for asking.

    Optimizing a trading system is not necessarily a constant basis. Don’t assume that you know it all.

  44. ben22 says:

    you’re right macro, you should stand by the statement that once you develop a mechanical system there is no need to think

    sure, or sometimes that’s the case, I suppose that’s what you’re saying there at 8:29

    good luck to you

    oh, btw, as for knowing it all, wasn’t that what you were doing when you were advising people on how to handle the markets, or did I misread you there? You know, you came to help out all the people that ‘sounded a little lost’ right? You knew just what was needed for the lost ones here, iow, you knew it all……

  45. Sunny129 says:

    1982-2000 great for Buy and hold type investing!

    2000-2003 Demise of Buy and hope

    2004-2007 – online trading+ globalization= market reacts in seconds to news flash of any significant kind

    Financial blogs give head start over the kool aid doled out by MSM!

    2008- put options on FIRE Economy – no brains trading!

    2009- 2010 Fighting tape and Fed was hopeless!

    2011: more trading with hedges and less investing(only in Div paying stocks/ETFs!)

    Mkt zig-zag between perception+ hopium vs REALITY+Fundamentals! Since early TRADING(with hedges) is winning over investing!

  46. macrotrader603 says:

    @ben22…my view is that I see alot of emotional uncertainty in these posts, and it is my belief that systematic trading is superior to emotionally uncertain discretionary trading.

    I used to trade with emotions, news based, opinion based, one day bull, one day bear. When I decided to develop and use a mechanical system, it made things much easier and much more profitable for me. Just my experience. Every one has to trade the way they are most comfortable.

    I can tell you I watch very little financial news, read no financial papers, care little about anyone’s opinion and consistently knock the cover off the ball using a price based trading system.

    That”s all I have to say. To each his own.

  47. ben22 says:

    macro,

    you know what, I’m being rude, sorry

    but here’s the thing, if you really do believe what you say you’d have to admit you are dealing with new traders/investors, probably not best to set expectations for them that once they have a mechanical system they “don’t have to think”….personally I find that “advice” dangerous

    but whatever, I’m down with what you are generally saying, emotions are the toughest thing to master without a doubt…..even when you do have a mechanical system ;-) surely as a trader since 88′ you can count the times you’ve questioned if your system was really right this time, I don’t care how successful you’ve been with it, it’d only be human to have done that at one point or another

    also, there really isn’t much reason to watch the “news”

    and seriously, good luck!

  48. TrndTrader says:

    Remember what “news” actually stands for: Nothing Educational or Worth Seeing.

    As far as trading, I think the point ben22 was trying to make is that once you have a system in production trading, executing its orders is not a time to second guess things. You practice a rehearsed mental strategy of “see the signal, recognize it’s familiar, feel good about it, place the order”. That’s the mechanical part of executing a system. You just do it. No second guessing, no what ifs, etc.

    As you gain experience with your system, there will be times when your gut knows it’s time to break the hard cast rules. They are very rare times, but you’ll know it and likely just do it. Perfect example is the CHF/$ rally recently when after being long for a significant time for a trend system on daily data, the Swiss has its biggest daily percentage move in not only the history of the trade but the history of the currency vs dollar. It’s times like that were a mechanical trend system doesn’t (and can’t due to DOF issues) have rules to handle such — you just get out — all on discretion.

  49. macrotrader603 says:

    @TrndTrader…the systems I trade use volatility based exits for stops and profit taking based on ATR and range expansion…there would be no need at all for discretionary override as range expansion dictated scaling out and ultimately exit of long position.

    The key point is that systematic trading does not need discretionary override.

  50. macrotrader603 says:

    @TrndTrader…simply stated, either you trade system or you do not.

    Most good systems will have some type of volatility based exits in place.

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