The below commentary was posted to the Mercenary Live Feed on March 19th, 2013.
It’s a nice example of our thought process in grind-’em-up enviroments…
In addition to featuring our trading setups in real time (typically broadcast an hour before the market opens) — along with real-time executions available via text and twitter — the Live Feed serves as a sharing point for all our thoughts on strategy, market tone, macro factors, and more (as you can see below).
8:16 am – March 19, 2013
French composer Claude Debussy once said, “Music is the space between the notes.”
This is a very useful idea. At certain times one could say “profit is the space between the trades,” or “profit is the space between inflection points.” Selective periods of low activity contribute as much to long-run P&L as periods of high activity.
This is a hard lesson to learn. It is probably one of the reasons Warren Buffett plays bridge twelve hours a week. It is an even harder lesson to absorb from a trading perspective, where the dynamic profile of being small, nimble and unconstrained creates the ever present possibility of making large profits very quickly. You make those profits via, bold decisive action. So what is happening when there is no action (or very little action)?
It is counter-intuitive to think that a lack of activity produces profit. How do you get ahead of the crowd by expending less energy?
Of course, it is key to act at the right time. If you wait and wait to ramp up activity, and then continue to wait when the inflection point arrives, and do not jump on it with gusto, then all the previous waiting was a waste of time. So it’s really not just a lack of action that makes money, but a lack of action combined identifying the right moment and stepping up when it comes.
The markets overall offer up a handful of “inflection points” per year — periods where an exceptional degree of opportunity warrants ramping up exposure and activity within a narrow window of time. If you miss one of those inflection points, it can be like missing a bus or a train — there is a broad sweep of movement that unfolds by and large without you, requiring patience until the next bus or train (inflection point) comes along.
The last major actionable, exploitable inflection point the market presented was smack in the middle of the “fiscal cliff” drama — the major bullish engulfing day registered by the major indices on the last trading day of the year in 2012, followed by an opening-year gap higher. We did not press that inflection point aggressively to the long side as we should have, out of worry over political uncertainty and potential violent reversal.
It can be unnerving buying in size when the words of dumb politicians can body slam the market in a heartbeat. But we should have better respected the loud and clear “Go!” green light signal from the price action at that point, and not been held back by the surrounding fog of the fiscal cliff.
This is water under the bridge, but the point is nicely illustrative. Price action is the ultimate arbiter of inflection point opportunity, and there will always be fog on the fundamental side. It was a good lesson learned in terms of outlier coupling of an extremely clear signal (the movement in the major indices) juxtaposed against extremely loud uncertainty (the fiscal cliff BS). We have much more clarity as to which way the chips should fall next time when a juxtaposition like that comes along. Managing the downside is what risk control is for… risk control is no excuse for inaction when the moment for action is telegraphed.
For now we continue to hunt and observe with a “small ball” mindset, finding attractive pockets of weakness here and there, via individual names, even as broader markets creep further out on a limb and the majors resolve toward a correction that is taking its sweet time. The macro picture continues to be bullish drivers for the US economy — with analysts increasingly table-pounding in their optimism — even as Europe coughs up a new giant hairball every few weeks (first Italian elections, now Cyprus, next…?). When the time comes to act boldly and in size again, we’ll be ready.