The collision of global markets and social mood

Monday, June 17, 2013

Extreme Opportunity

Incredibly, this chart was on the front page of Marketwatch this morning. This is like placing a huge mirror in front of the vast majority of investors, showing them exactly why they lose. Few will notice.

Exploiting this chart is basically what I do for a living. Generally I'm a buyer of maximum opportunity and a seller of maximum risk, otherwise known as greed and fear.

Make no mistake: there are plenty of other ways to take money from the markets. Many traders make their living buying thrill and selling euphoria. Some sell panic and cover at despondency. Some even sell options premium at optimism and patiently wait for the next round of optimism before they buy back the battered and shrunken premium.

I rarely sell options, usually only when I've built a very large non-option position (which I haven't done much of since March of 2009), but I try to take advantage of each psychological aspect of the market. I try to be long and short, in trends and in scalps, always with a feel for where "we" are in the above chart.

The toughest thing is that trading this way does not align one with the crowd, but against it. Consequently, it can be very "lonely" and require a great deal of conviction and fortitude, not to mention confidence. It's not a way to win any popularity contests in today's social media world. People may think you're against them when you're actually just for opportunity.

At the May highs, the Stocktwits Sentiment indicator was 72% bulls on the S&P. At the lows on June 6th, it was just 37% bulls. On Friday someone asked me what I thought would happen in the markets this week and laughed when I mentioned that 1653 could still get tested. That's just the way it goes.

If Friday's lows hold, I'll even raise the target. 1656-1660 could be the zone. A breakdown could eventually test 1536. This is basically a great time to trade.

The Nikkei and core-Europe (UK, France, Germany) are up solidly. The yen could find a low this week for at least a near-term bounce. There's a Fed meeting too. Quarterly op-ex is Friday. Now is the time to align with larger swings and wait for the extremes.

As far as I'm concerned, that's where the opportunity is.

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