The Pain Trade...

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

...Is waking up in the morning.  The pain trade is making decisions in a market where moves that should take days or weeks to play out, occur in hours.  Going for a coffee at the wrong time can cost you to miss a 2% move.  Leaving a stop while going for coffee can get you triggered out in a move that completely reverses in a few minutes.  The markets are broken.  That is the pain trade.  Trying to treat the markets as normal is the pain trade. 

Yesterday, I was listening to someone explain the shape of the yield curve and the implications for the market.  I felt like Homer Simpson, as all I could hear was "blah blah blah, Fed, blah, blah, blah, Fed, blah, blah, blah"  I don't mean to disparage the commentator in any way.  The thoughts were intelligent, but I couldn't help but wonder how you can really glean any information from the shape of the yield curve when it is being totally manipulated by the Fed.  I stopped looking at Spanish and Italian bond yields as closely as I once had, because the ECB intervention had taken out most of the meaning of the moves in that market.  What can you learn about how markets view the credit worthiness of those countries, when the markets aren't pricing the assets?  Long ago, I stopped paying attention to volumes.  I never understood why so many volume indicators were based on shares traded, rather than market value traded.  More importantly, I believe that a lot of the trading that occurs is computers churning around ETF's vs the individual stocks trying to capture tiny arbitrage opportunities.  A valid business model, but one that renders volumes relatively meaningless.

Do I look fat in this dress?  Does that question ever illicit useful information?  There is really only one response to that question (trust me, I have given the wrong response once, only once).  So the answer doesn't really provide information that is useful.  So in a market that is moving so much, where the daily changes, as big as they are, don't reflect the manic intraday moves, it is more important than ever not to rely on some simple adages.  It is really important to figure out what information is out there that is telling you something that is useful, and what has been manipulated to the point of being meaningless.

The market still feels too long to me.  In spite of being down 50 some odd points yesterday, it did not feel like we had capitulation.  It seemed like the entire market was hoping we would get the "Europe went home" rally.  When that didn't work, it felt like everyone started to get hopeful and position themselves for the "last hour" rally.  I started to write about the 3pm rally hopes yesterday 3 times, but couldn't bring myself to do it.  It just felt like it was too stupid of a thing, even by my low standards, to write about.  I convinced myself that I was just imagining that the market was buying stocks a little before 3pm hoping to get a rally into the close.  The market couldn't be that broken, could it?  Well, I think it was.  We will see if the bulls capitulate today, though I doubt it, since they can also hope for the "you wouldn't want to go home short" rally. 

What to do now?  1125 was my target for my short.  I will cut some, but the only reason I'm cutting any is because we are down 80 points in less than 48 hours.  I think the market is in worse shape than it has been at any time in the last year.  The European debt crisis has now engulfed banks.  The biggest economies are struggling.  The Fed and ECB and EU have played so many cards that I'm not sure what they have left in the deck.  I can't understand why the market isn't at new lows, I can't understand how the market went from so strong to so weak.  What I can understand, is pain.