Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

A Wise Sloper Writes

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Prompted by my post about my worst trading day ever a year ago, one Slope of Hope reader wrote to me the email below. I found it thoughtful and helpful, and the writer gave his kind permission to publish it here. Thank you.

I enjoy reading your commentaries. More importantly, I admire your commercial success. To begin, expand, and ultimately sell a business reflects enormous skill and talent. And a willingness to take chances at every step.

I am a semi-retired Wall St. pro. With a 40 year history of retail broker, analyst, institutional desk manager, etc. I am most proud of the fact that I left the street financially and intellectually intact. And still earn my living today as a trader. For myself.

Having set the table, here is my observation: I read your post regarding last year being the worst day of your trading life. With follow on comment(s) about Bernanke this and that. All well and fine, except for one thing. Something I learned a long time ago: January 1980 to be precise. I had a client, a brilliant economist, writer, analyst. Who was long gold. Very long. For all the "right" reasons (yeah, you know: the weakening dollar, trade deficit, blah, blah). And when the market started to sell off, he did not budge. You see, he was long gold for all the "right" reasons. He had acted precisely as his strategy dictated.

Problem was, Gold did not care. It continued to go down, and my client was sold out (actually, he was taken away from me. In the old day's, you were not allowed to keep clients who were in margin trouble).

Anyway, know what I learned? It was my first – and best- lesson ever: When it comes to trading, there is no right or wrong. Only profit and loss. You want to maximize the former, and minimize the latter. Rest of the time, enjoy your family and friends. If you want to play at being right and wrong, become a contestant on a game show.

You are a very clever analyst, and a far cleverer (is that a word?) observer of market dynamics. I am not saying anything you don't instinctively understand. Merely commenting on what the market taught me. Repeatedly over many years, as with a 2 x 4 over the forehead. But that first lesson stood me in good graces with the trading god's.

Whatever is said this week, by whoever says it, the market will react. It always does. Our duty is to spot the opportunity, and profit from it. Not debate it.

I hope you accept this letter in the spirit it was written. I greatly admire what you have achieved. But I do have a few years head start over you in trading.

Always Fighting Our Last Battle

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About a year ago was the single worst trading day of my entire life.

The day was September 1, 2010. I came into the day 135% committed and entirely short. In other words, I had used all my cash and an additional 35% in margin buying power on a huge quantity of short positions. The market pushed higher all day. I was deer-stuck-in-headlights shocked, and I bear the mental scars even now from both that day and the months of QE2-inspired upswing that followed.

I thus view Jackson Hole 2011 with no small amount of discomfort. What really killed me last year was the notion that the head and shoulders pattern (that everyone – I mean, even the likes of Cramer – was talking about) was going to precede a big drop in the market. On the contrary, things flipped higher and didn't look back.

The easy assumption is that Bernanke will QE3-ize the environment and, just like last year, the market will shoot higher. I was reviewing the posts from last year, and I was surprised to recall that the market actually fell last time after Bernanke's speech. In other words, the big push higher didn't take place until several days afterward. So the idea that we're "in the clear" a few moments after the text of the speech are released Friday morning is simply untrue.

Looking at the post from the end of that awful day, the amazing thing is that the market wasn't even up that much. The killer was the level of commitment. The devastation I suffered was so horrendous that, in a later post, I actually wondered out loud if I was dead wrong. Just take a look at this quote:

"what if I'm wrong about the economy? What if all this government intervention, in the end, turns out to be a brilliant stroke, and it really does set the economy on the road to a robust economy complete with healthy, growing earnings, growing employment, and worldwide prosperity?"

Well, it seems pretty clear I wasn't wrong, but it didn't matter a whole lot. Jackson Hole commenced a nine-month puke-fest of rising prices which just about killed me. The market then spent nearly the next three months farting around and whip-sawing everyone, and only during a few weeks that followed did reality reveal its beautiful self again.

I guess what's disappointing to me is to realize (through research, since I had forgotten) that Friday morning doesn't mark some kind of milestone for us. It won't be like the unemployment report or the FOMC announcement whereby the market will figure out its direction with a couple of hours of gyrations. No, if last year is any guide, it could be days before the market gets its bearings.

So the reaction Friday will frankly not really help any of us. If it lurches down – – well, it lurched down in 2010, and the bears got butt-hurt for months on end afterward. If it lurches up, well, God knows what the means, although a push to 1250, I continue to maintain, might be the greatest gift from God to the bears in history.

So I guess in reviewing the various posts leading up the That Awful Day, it has actually imbued me with some additional caution. I am, as I type this, 47% committed, and purely short, but I don't think I'll get aggressive until at least the middle of next week.

The charts that I'm closely following fall into two broad camps – – one smallish camp are those that seem appropriate to short right now (and, thus, I am short them); another large camp are stocks which have a long way to run before they are safe to short. That gives me a muddy picture, since it either means the market is going to start falling again next week, and the beaten-down stocks are simply going to get uber-beat-down; or the market is going to rise, which means the shorts I have now are totally premature.

The two sectors that I am seeing the most potential for weakness right now are Real Estate and Energy. The sector that seems to have to most room to run higher is Financials.

I will say this, however: no matter what happens with Dr. Bernanke, my faith in a ferocious bear market in the coming months is stronger than it has ever been. I think it is simply impossible for 2012 to pass us by without a devastating worldwide economic calamity. The only thing I don't know is whether it is right in front of us or if we have to suffer a QE3 rise in order to partake. This uncertainty compels me to remain cautious for now.

Thus ends my ramble. Thanks for your patience with me.

Cash is my Long

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Maybe stocks have finally put together a nice base for a rally. There's an all-too-obvious inverted H&S pattern on both the NQ and the ES, and a lift back to around 1180-1190 seems not that difficult.

For me, I simply say – – and I really say this, out loud, to myself – – cash is my long. I am not interested in chasing bear market rallies. I'm going to probably miss some potential profits, yes, but I think buying into these rallies is ultimately as profitable as trying to short powerful bull markets. You never know when things are going to flip against you.

So I've got no problem having most of my portfolio in boring old cash and maintaining short positions on a stock-by-stock basis. Refering to the ES chart below, Chairman Bernanke – – good Dr. Bernanke – – could probably goose things up through that green rectangle and, gosh, with his team of patriots, maybe even push it into the red. That is, anywhere from 1250 to 1310 or so.

Safe travels to Jackson Hole, sir! Sha-freakin'-lom!

0823-es

Hedging Update

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Hedging when volatility is low

Something I've mentioned in previous posts (such as this one, "Plan not to Panic") is that investors ought to consider hedging when volatility is low, and hedging costs are relatively low as well. That's not the case now, as you can see from the second table below. Nevertheless, if Portfolio Armor downloads and subscriptions are any guide, every day the market tanks, more investors start thinking about hedging. It seems that some long investors start shopping for umbrellas after they get soaked.

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