Cutting Back My Risk

By now, you have figured out that I executed a major “derisking” of my model trading portfolio today, cutting my exposure by two thirds. Most of these positions only had a few basis points in maximum profit left, so bailing here was a no brainer, a case of “Basic Risk Control 101.” Better to laugh about the market in a few days or weeks, than cry. My profits this year are so huge that they are well worth defending.

There is an eerie silence going on in the markets now. All real news has ceased. The government data releases that dictate the short-term direction of prices have come to a complete halt, thanks to the government shutdown. The rest of the news is all political, which is to say that it is useless. When markets are driven by opinions instead of facts and data, you want to run a mile.

I recently spoke to some Tea Party activists, and the extent to which they hate President Obama is frightening. They would happily subject the country to another Great Depression if it meant they could be rid of the community activist from Chicago for good.

The debt ceiling crisis gives them the means to do exactly that. Therefore, I believe that the current impasse in Washington will last longer than the market expects. What the Tea Party doesn’t understand is that once you shatter confidence, it is very hard to get it back.

As a result, my friends in the high frequency trading community tell me that the risk of a flash crash is rising. All you need is for the wrong comment at the wrong technical point in the charts on the wrong day and a deluge of cascading selling could result. That day could be October 17.

This is clearly a minority view, but it is not impossible. Take a look at how the momentum names, like Netflix (NFLX) and Herbalife (HLF) are getting hammered today and you’ll see what I mean. This was further confirmed by the volatility index (VIX) breaking through $20 today, up more than 50% from a month ago.

So I’ll let valor be the better part of judgment here and move from a serious “RISK ON” trading book, to one that is more clearly market neutral. That demands I cash in my winnings in short positions in the Japanese yen (FXY), and my long in Apple (AAPL).

As for my long in the Japanese stock market (DXJ), I’ll have to settle for a stop out with a moderate loss. It’s not the first time that I have lost money in Japan, nor certainly the last. This was the “Bridge Too Far” among my trades this year.

I still am sticking with my medium term bull case, which sees us moving to new highs by yearend. But we could see one big final flush before we turnaround. That’s when I want to jump in wit both hands and go fully invested once again. To best profit from such a scenario, you have to go into the next dump with the most cash possible. Today’s action gets us close to that point.

SPX 10-8-13

FXY 10-8-13

NFLX 10-8-13

HLF 10-8-13

Fed Govt Closed