Battling the Enemy Within (IYT, DIA)

I remember a job interview I had some twenty-five years ago. Can’t remember the name of the firm I was speaking with, but it was directly after college – one of those large-scale recruiting affairs with endless rows off booths and too much coffee in the bloodstream. In any event, the interviewer, a young lady not so far out of college herself, asked me what I thought then was a very odd question.

The thing threw me for a complete loop. I wasn’t sure if she had already decided I wasn’t appropriate for the position and just wanted to scare me off, or if she was after something legitimate. I distinctly remember burbling something incoherent and using the word ‘visceral’ in my response amid a great deal of sweating and fidgeting and internal panic.

The question was simply – who are your enemies?

It’s a question I can answer today with little discomfort, and that’s essentially the difference between a fifty year-old and a recent college grad. But then it left me in tatters.

question

Not so long ago, I saw a gent interviewed on the telly – university professor or some such – who said he didn’t think a man without an enemy was much of a man. His words exactly: “a man without a clearly definable enemy has no genuine purpose to his life.”

Heavy statement. And worthy of consideration.

After half a century, I can see his point, though I’m not sure I’d state it so starkly. By way of our enemies we certainly come to know who we are and what we stand for – what we’re willing to struggle for, fight for, die for – if, indeed, any of us still possess such deeply held beliefs.

The Struggle for Trading Prowess

 

But as far as markets and trading go, there is only one enemy, and that’s our very selves. The minute we come to trust ourselves overly or get too confident in our abilities, is the minute our fortune is stripped from us and we’re sent like Myron to the hoosegow.

fire

Arrogance. The sine qua non of the poor man, the bully, and the father whose kids will ultimately grow up to hate him.

Let’s avoid this quality, and let’s ever be on the lookout for that cockiness that comes from running a few successful trades in succession. We have to constantly question ourselves. And be wary of either closing out an initiative too early or too late. Greed comes from arrogance – that feeling that we can’t be wrong, that things will ever go our way.

It doesn’t work like that.

In the market a winner can turn into a massive liability overnight. And unless we’re attuned to the risks of our trade – micro and macro, structural and fundamental – we should be out of the market altogether, or until such time as our headspace again has room for appropriate analysis and healthy fear.

Confidence, yes – always. But confidence based on a thoroughgoing analysis of where we might have gone wrong, and an equal readiness to pull the plug should things move against us for whatever reason. That will bring us success.

Setting a Trade

 

Let’s look at the market now, with an eye to some specific dangers we see on the horizon, and compare that with our long-held market position that stocks remain in bull mode.

Consider the following –

• Oil is in the midst of a rout (along with the rest of the commodity complex) that MAY have more to do with shrinking demand than many want to admit,

sadface

• Chinese stocks just posted their worst one day loss since July 2009 (-7.7%), and its financial sector its biggest loss ever (-9.9%) amid recurring bad economic reports,

• The Bank of Switzerland created the worst week for the Swiss stock market since 2009 by delinking its currency from the Euro,

• The Russia/Ukraine conflict is getting hotter, and European forces are slowly gathering in the event that a NATO nation’s sovereignty is compromised,

squid

• ISIS has managed to draw increasing numbers into its ranks as the Western alliance against it (along with increasing forces) also grows,

• And at home, we’re facing both extreme weather and a string of policy initiatives that will sink us further into debt than we ever imagined possible.

Where will it end, Huey?

 

We can’t say for sure. We’ve struck some headwinds, to be sure, but the forces behind the bull market in equities are also powerful. We refer particularly to the vast ocean of liquidity already in the system, and the ability of central bankers to add to it.

What it means, clearly, is that we’ve entered a confidence game that pits, on the one side, those who have already lost faith in government and central bankers, a group that may at most represent some eight to ten percent of Americans (according to numbers we extrapolate from the ‘prepper’ movement) against the vast majority who, either asleep or awake, have perfect confidence that the system will carry on as-is indefinitely.

Where we find ourselves in this conundrum is determining the exact ‘tipping point’ of the equation, that threshold number of individuals that has to lose faith in the system before the whole house of cards is recognized for what it is and, accordingly, tumbles.

No Clue

 

Because we don’t yet see Main Street confidence levels in the stratosphere, we have to assume that the bull is still in force.

At the same time, we also see that the sellers have the upper hand of late and so we’re playing for a continued, albeit short term decline for equities for roughly the next month.

And, of course, we’re hedging our bets.

When the broad market declines it’s historically been the case that the transports declined faster.

Look here –

iytdia

We’re therefore using the SPDR Dow Jones Industrial Average ETF (NYSE:DIA) against the iShares Transportation Average ETF (NYSE:IYT), as follows –

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[mepr-rule id=”204″ ifallowed=”show” description=“options_trader_elite_members_only”]

Options Trader Elite recommends you consider purchasing the IYT February 148 PUT for $1.90 and selling the DIA February 170 PUT for $1.91. You’re credited a buck for the trade.

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[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]
Options Trader Elite recommends you consider purchasing the IYT February 148 PUT for $1.90 and selling the DIA February 170 PUT for $1.91. You’re credited a buck for the trade.

[/mepr-rule]

And you profit from any outperformance of the Dow over the Transports for the next month.

With love of the hunt,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

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