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I've found that the hardest part about trading isn't knowing the rules, it's following the rules. The first step to any endeavor is to have a game plan, but as my Minnesota Vikings will tell you, executing the game plan isn't easy (hint: giving up 2 special teams touchdowns to Da Bears was not in the game plan).
Last night on Fast Money, Dennis Gartman was asked how he could switch from being bullish to bearish with relative ease. Here's a link to the video, and his response is near the end, around the 7 minute mark:
http://www.cnbc.com/id/15840232?video=900139502
His response was basically that he has no problem changing his mind. This corresponds to his trading rule #2: Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
Gartman also mentioned that he was up on the year, so his rules have evidently served him well. Here are some other rules that are worth reviewing in this very difficult market:
--Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.
--In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
--"Markets can remain illogical longer than you or I can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
--Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.
--An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.
--Bear markets are more violent than are bull markets and so also are their retracements.
Gartman's method of trading is not for everyone, but it's worth considering if you are actively managing your portfolio. Don't let past mistakes stop you from making better decisions going forward. This market is the most challenging that many of us have ever witnessed, and the goal is to stay sane and preserve capital above all else.
TODAY'S MERCENARY TRADE
Following Gartman's Rule #2, the bears are on the winning side until proven otherwise and the benefit of the doubt must be given to the downside. Today is no exception.
With a bearish bent, today I was looking to employ Gartman's Rule #7: Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. All day, Real Estate and the Russell 2000 have been very weak, so when the rally didn't hold I jumped into SRS and TWM.
With volatility so high the trend could turn on a dime, so even short positions (perhaps especially short positions) must be handled with care. But if the bulls don't start running by 2:30pm or so, it could get very ugly out there. The pattern over the past 5 days is that momentum speeds up late in the day (click for chart of S&P 500).
Sure enough, while writing this post we've moved aggressively lower and I will ride SRS and TWM until the end of the day (with a trailing stop, to protect against a snap up). I'm not comfortable holding overnight, as anything could happen before 9:30am tomorrow (another global rate cut? a ban on all shorting?). I can't claim any special insight today other than trying to play the trend and follow a wise set of rules that have been tested by a professional. For a few weeks I've been stubbornly trying to play countertrend moves, much to my own chagrin (and the chagrin of my P/L). In this environment, it seems better to wait until the market moves decisively, and follow along in that direction.
Is there any doubt now that we will test the intraday low of 839 on the S&P? The test could come as soon as tomorrow. If it doesn't hold, look out below. It's time to start thinking about what to do if that happens...
FINAL UPDATE
There was a snap up, and the trailing stop protected the gains in the short ETFs. What happens tomorrow is anyone's guess.]
[Also posted on my personal blog, with charts, at www.thestocksurfer.blogspot.com]
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