RealMoney

Over the last few weeks I have sold a number of my longs including (but not restricted to) all of my Dillard's (DDS) , Macy's (M) and Twitter (T…

Apple (AAPL) (my largest individual short) has reversed lower and is now -$3 from the day's highs. Excluding FANG -- Facebook (FB) , Amazon (…

Bidding for more (SPY) puts.

FAANG reverses hard to the downside and I pressed my (SPY) puts and (QQQ) short. Now medium sized short in net exposure.

 

"Just one more thing." (actually two things!) -- Lt. Columbo

* A reversal will encourage me to expand my net short exposure My guess is that we are approaching a possible blowoff phase (to the upside) in F…

Some midday observations: * Dillard's (DDS) is back on a tear (+$3.40) in an only slightly better retail tape. (I am out of the name but it remains on my Best Ideas list because I want to buy weakness). * FAANG  -- Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) -- is back moving parabolically (My only long is tagends of GOOGL.) * Twitter (TWTR) is moving in conjunction with the FAANG stocks. (No position, fully priced on fundamentals, in my view.) * Slightly higher bond yields. * Dropbox (BOX) is hot! (I moved to a large long on the dip under $25 two weeks ago.) * Starbucks (SBUX) at day's lows (-$5.55). * Kraft Heinz (KHC) is breaking out. (It was a recent add.) * SPDR Gold Trust (GLD) stinks but I am adding. I have added to my SBUX short and to my Comcast (CMCSA) long today. I have also taken a position in July monthly SPDR S&P 500 ETF (SPY) puts ($280 strike) -- I am planning to add on any further market strength.

I have moved back to a small net short exposure via the purchase of (SPY) (monthly) July $280 puts at about $4.68. Defined risk.

* There is no place for dogma and emotion (and sometimes even an intermediate term viewpoint) in developing a strategy to opportunistically trade over short term periods in the 2018 market * The market's structure (and dominance of passive and quant strategies/products) provides exceptional near term trading moments * Yesterday was another example of the value that can be extracted from premarket and aftermarket trading (I am a 'pajama trader' and proud of it!) Yesterday I started the day with a negative outlook for the markets in my opening missive, "The Orange Swan Returns... Again." Soon thereafter, in response to a -40 handle drop in S&P futures (seemingly induced by more aggressive trade rhetoric out of the White House), I covered my entire (and very large) short (SPY) position - as well as covering all my trading shorts in (ALL) and (GM) and adding to several long positions - and, I turned, moved from medium sized short exposure to small net long exposure in a matter of an hour or two. For now, the move was the right one as, adjusted for the 9 handle rise in futures this morning, the Spyders are trading more than 30 handles higher than my short cover prices in premarket trading yesterday morning. Price Discovery In a World of Machines and Algos Some will say/write that Trump's aggressive trade tactics, throwing a hand grenade at China's trade policy, was another example of the market discounting the President's hard line of policy negotiations (so often seen as part of his negotiating approach) - and another "V" type recovery in the markets, that has "learned" to know better than to take the President literally. To some degree, I respectfully disagree. To me it was the machines and algos that materially (and artificially) tanked futures and provided yesterday's trading opportunity. The Trump pronouncement over the weekend of more tariffs targeted at China was simply the fuse. The machines and algos were the dynamite. Explaining the Juxtaposition of Short Term Bullish/Intermediate Term Bearish How can one be negative in view and at the same time move into a net long position? * Unemotionally trading around a "view" in a period of much more heightened volatility is a key component of my tactical approach to the markets in which passive strategies, products that worship at the altar of price momentum and strategies that allocate to risk (e.g., ETFs, risk parity and volatility trending) * These products and strategies exaggerate short term market moves - often artificially extending bouts of depression and elation. * If one has a view of "fair market value" in the indices, sectors or individual stocks - this is one heckuva opportunity to deliver exceptional trading profits (by moving contra to the moves) when the difference between that "fair market value" calculation and the current share price widens. * Investors and traders have differing time frames. Even traders have differing time frames. Some trade hourly, others trade with positions (often held for several weeks) - and in times in between. For me, given the new regime of volatility, it is consistent to have a bullish and very short term long exposure at the same time being intermediate term bearish. (Indeed throughout the first half of 2018 I have often been net long in exposure though holding to an intermediate ursine market view). Depending on my calculus of the downside risk versus upside reward -- that condition can continue for "some time." However, given my calculation of the bearish skew of risk versus reward it is not likely that I will even be small net long in exposure for very long! I ended yesterday in a small net long exposure. Downside Risk Dwarfs Upside Reward Now Here are my reward/risk parameters: Market Downside: 2400 to 2450 'Fair Market Value': 2500 Trading Range: 2550-2750 to 2800 Current S&P Cash (Adjusted for this morning's future rise): 2775 Here are the current reward versus risk parameters (based upon the +5 handle rise in S&P futures, 2750 S&P equivalent): 1. There are 350 points of downside risk against only 25 points of upside reward (compared to the top of the expected trading range) in my new pessimistic case (2400-2450). This is an overwhelmingly negative reward vs risk ratio (14:1). 2. Compared to 'fair market value,' (2500) there are 275 points of downside risk versus only 25 points of upside reward. That's a negative 11:1 ratio. 3. Against the expected trading range, there are 225 handles of downside risk and only 25 points of upside reward (to the top end of the anticipated trading range). That's a 10:1 adverse ratio. Yesterday Underscored the Value of Opportunistic Premarket and Aftermarket Trading (I Remain a Pajama Trader and I am Proud of it!) Investment opportunities take multiple forms and for the life of me I cant see missing market opportunities - whether they arise at 1pm or 1am. If I blanketly rejected such an opportunity, some of my investors would no doubt reject me as an investment manager! Some commentators on this subject - though I can't understand the logic - reject non market hours trading. Here is that view as presented by one of our contributors. By contrast, as expressed in my March, 2018 post, I am a pajama trader and proud of it - as it routinely yields exceptional opportunities: "Markets evolve -- and, to me, it is the responsibility of market participants to change with it. I am a "pajama trader" (during outside of market hours) and I am proud of it! I don't understand the objection, in some circles, to trading stock futures (and securities) opportunistically whenever the market is open -- whether it is 2 pm or at 2 am. Does this mean the trades/markets are not real in the after hours? Trust me, they are real -- these trades importantly impacted by P&L. Does this mean I shouldn't capitalize on extreme reactions to news (like the after hours Gary Cohn resignation)? That would be an extremely poor decision, in my judgment. I try to capitalize on the inefficiencies or quick interpretations to news (and other factors) outside normal trading hours -- and so do many others. It's an opportunity that Mr. Market affords market participants. At least I try to exploit the opportunities -- with increased activity, particularly in a period of rising volatility. That said, I now trade at least 40% outside normal trading hours, as I see expanding opportunities flourishing in these periods. Do I care if the futures go to extremes in the after hours and may not be indicative of the next day and may not follow thru? Who really cares if an opportunity is being presented in the after hours for me and other pajama traders!" - Kass Diary, I am A Pajama Trader and Proud of It! Bottom Line