Thoughts On Risk

So four year anniversary for this bull market huh?

It feels like just yesterday we were laughing about how the ATM fee at Citigroup cost more than a share of its stock. Conversations were about Dow 4000, not about bringing back the Dow 36000 guy. Amazing how much things change in just 4 years. From a market crash to all-time highs. You gotta love it.

But now what? That is the key question. And right now I’m at a loss for words (which is rare for me). As bullish as I was in the second half of last year, I just haven’t seen it in 2013. I’ve been very cautious on risk assets and in some cases I’ve been right. But when it comes to US Stocks, I’ve been dead wrong. The move has been to buy every single dip no matter how big or shallow. And sure, we’ve bought some stocks here and there, but by simply buying S&Ps or Trannies, or any index other than QQQs really, money has been so easy to make. And I haven’t done that.

As I mentioned last week, the defensive areas have been leading the way higher this year. Everything I’ve experienced throughout my career and everything I’ve learned has taught me to be cautious when I see that. Risk assets around the globe have gotten crushed. Dr. Copper – 8% off the highs, Crude Oil down over 9% from its highs, Agricultural commodities down 8-9% for the year, Gold & Silver down 9% & 14% respectively from highs, Emerging Markets trending lower since the start of 2013, Euro is crushed, Italy lost 17% with all the PIIGS correcting…I can go on and on.

Daily ranges in US Markets have been expanding, momentum divergences have been showing up. I mean literally so many things I look at have been saying to get out of the way of US Stocks. So I’ve gotten out of the way. And I’ve been wrong.

Now, I haven’t been blindly shoring S&Ps either. Thankfully. When trying to initiate short positions we’ve looked towards weaker areas like gold miners and steel and stuff like that. European ETFs have worked. But every time we try to short a bank, we get stopped in a second. Fortunately everything I’ve ever learned has taught me that risk management is the most important thing. But regardless, it is so frustrating to watch S&Ps grind higher every single day and not be leveraged long. Meanwhile if you’re irresponsibly buying the market every day with no stop and going on margin with every dip, you’ve been rewarded handsomely.

This kind of reminds me of AAPL shares until recently. For years I would work my tail off looking for nice risk/reward opportunities in assets around the world every day and then I would just hear people talking about how much money they’re making having their entire portfolios in Apple. It would frustrate the heck out of me. But being disciplined and following my rules kept me from chasing this thing at 700. Right or wrong at least I didn’t lose money. And that same thing can be applied today. But it’s hard. I’m human after all right?

So we look at other areas like currencies and commodities that are trending and we have conviction on and try to forget that US Stocks hit all-time highs every day. But again, it’s hard. I live in midtown manhattan USA. All I hear at bars is, “Bull Market Bro – gotta get rowdy tonight”, “Dude Bull Market, you’re not allowed to go to the gym on a thursday – that’s bear market stuff”. People ordering custom suits again, Steak dinners on mondays, conversations about secular bull markets already going. I try to tune it out, but it’s hard. Really hard.

So maybe the market just keeps grinding higher forever, doesn’t consolidate, and never gives me a good entry point. Maybe my warning flags are all wrong and everything I’ve learned throughout my career is incorrect. Maybe. Or maybe not.

So hey, I missed a nice move in S&Ps this past month. It sucks. A lot.

But you know, at least I’ve stacked my chips for when I really do have conviction. Like I wrote a couple of weeks ago, I don’t know. And I don’t not know everything all the time is ok in my book. It’s the I know everything all the time guys that get hurt in this market.

I write this not to preach or point to anyone thats doing something I’m not or shouldn’t be doing. I write this for the same reason I write all of my blog posts – to put my thoughts on paper and keep myself honest. If you’re reading this and pick something positive up from it, then that’s terrific. Nothing makes me happier than seeing an email from a reader on the other side of the world, college kid, pro, retired guy thanking me for a blog post or chart. But a big reason why I do this is to keep it real.

Maybe a month from now or year from now I’ll read this and laugh at myself. Maybe I’ve been wrong and I’ll continue to be forever. Or maybe my cautious stance this month will be proven right somehow and I’ll look like a genius. I have no idea. No one does. The only thing we can do is manage risk as best we can. That’s it. And right now, today, March 8, 2013 – being small, cautious, and scared to do much is the best way for me to do it.

We’ll see what happens…