My Mea Culpa on the Markets

When the market let?s you out with a nice profit ahead of two major risk events, you take it. We have 64% of the potential profit in the S&P 500 (SPY) May, 2014 $192-$195 in-the-money bear put spread at today?s prices.

We have an important Federal Reserve meeting where they are expected to announce Taper IV, cutting their monthly bond buying to only $45 billion. The Fed is almost certainly going to take a hard look at the slowing real estate market (see yesterday?s letter).

Yesterday was also the end of the month, so you could expect the usual fun and games at the close as fund managers window dress. On Friday, we get the April nonfarm payroll, which could be anywhere. Go toss a coin.

The cruel lesson of the past two months has been to take profits quickly, to take the money and run. So, let?s do so.

If our remaining (TLT) put spread expires at its maximum value, and we get the (VXX) back up to cost, then the model trading portfolio will be up 13% on the year. I have had to work three times harder to make that 13% than I did to earn last year?s blowout 68% profit. It seems like every time I punch through to a new performance all time high, an invisible hand pushes me back down again.

I warned readers many time in 2013 that the market was sucking performance out of 2014 and bringing it forward into 2013. That is exactly what has happened. Almost all managers are down this year, and many hedge funds are getting crushed in these whippy, volatile conditions.

The last two months have been especially difficult. The ranges have been so narrow that it has been hard for anyone to make money. In technical terms, outside reversal days to the downside are then frequently followed by outside reversal days to the upside. This is a traditional trader?s worse nightmare. Only the high frequency traders are laughing their way to the bank.

If this sounds like a mea culpa, it is. Last year I delivered a mind blowing 17 consecutive profitable Trade Alerts, suffered a couple losses, then wracked up another 15 winners. I lulled people into thinking that making money in the stock market was easy. News flash: It?s not easy. You can earn profits, but only after the expenditure of much blood, sweat, and tears. Windfalls out of the blue only happen in the movies (loved Trading Places).

The goal here is to stay small, nimble, and still standing when trading gets easier in the second half, as it inevitably will. No one ever said trading was fair or easy. That?s show business.