GDP Holds the Key

I can't really tell right now if the lack of conviction selling is a positive or if this is simply just propping up the market so we can sell it off hard when GDP comes out regardless of results. I have come to realize over the years that in the absence of real news to push stocks, the illusion of performance can be predictable. This is obviously based on the psychology of traders and money managers since ultimately they move the market and the market trades on psychology. Take this week for example, going into month end the market is moved by those people getting in and out of stocks ahead of the time when their performance is measured. By deducing what we know about people, that they are greedy and fearful, we can determine probabilities for short term movement. This is by no means a hard and fast rule but so far things have acted fairly predictably up until this point.

We had a large run, those people who are somewhat reasonable will want to sell their positions and lock in their monthly gains if they just caught a 10% move in the S&P or more, they can afford to sell stocks down 2% while locking it in. After that selling pressure is relieved, the people who missed out on the rally for the most part want to jump into the stocks that went up so it looks like they were holding them the whole time. This creates a snap back or at least a temporary floor in prices. It is essentially the reverse if we have a large decline.

Keeping the typical money manager in mind and their quest for absolute return you then speculate as to what reactions may be for up coming events. This can help give you an edge(or at least a perceived edge). Overall, most people likely want stocks to go up because it is much easier when they do and everyone looks better for it and makes more money. We are somewhat in a pickle because we have run up quite a bit into this number so you wonder what is priced in for expectations. However, if we were to somehow get a positive GDP number I think we could see the rally continue because this will be a reason to buy stocks and it also coincides with the 31st of July so any added gains would be a bonus, adding pressure to the upside as shorts cover and longs pile in so they don't miss the rally.

The consensus on intrade is that we have a 75% probability of a positive GDP number. I was unaware of that statistic until today but makes me want to be long biased if people smarter than myself think there is a 75% chance of it coming in higher than estimates. Obviously I still have to manage risk properly but I am now skewed long.

Today was fairly boring, although I was fairly pissed off because my entire loss was due to my /ZC position until it reversed late in the day. Small losses, small gains and large gains are fine, it is the large losses we want to avoid which I didn't do last week so overall I consider it positive when I end up flat or higher after I get into new positions.

I am trying a long term trade on a stock and we will see how long I can be patient. I essentially took a synthetic stock position in DSX for March 2010 expiration. This is purely a play on the idea that we will have some what of a recovery going into next year and if not, as long as things essentially stay the same I will collect a nice premium in the mean time. The beauty is that even if it does nothing I will make 10%. I of course still have my exit chosen in case a recovery does not happen. I also decided to get into CHK on the pull back to near support. My concern is these stocks have all run up significantly recently but if the rally keeps going, so will they. Not to mention it held up nicely even as UNG was selling off.

I sold some front month puts on ACH as it pulled back to a pontential support level. I also decided to sell some front month calls on IYR as a hedge to the downside. One of the reasons I hate selling is it just uses up so much capital for margin and you have limited upside but I felt like this hedge was decent because it should be on a relative weakness candidate and even if it does go up the volatility should contract in my favor. In retrospect I could have sold less calls and bought long puts as my hedge but we'll see what happens.

Friday could very well determine the next couple months and 50 points in the S&P. Since I am net long I'd prefer a rally on better than expected numbers but I am willing to be flexible. Expectations on jobless claims seems fairly low so I doubt it is a factor tomorrow but could be a catalyst for selling if it is unexpectedly bad.

Total Return for 2009: 138%