Stimulus wins! The question we explored yesterday was which argument will win, stimulus or weak economic data. The vote on Thursday was stimulus. Greece is going to vote again this weekend, and all the central banks have reassured they have a plan in place for liquidity should they vote to exit the EU. Maybe the pessimist in me finds that hard to believe in this psychological game of financial chess that Europe is playing along with Greece. The challenge for today is simple… We are in position to break above the resistance at 1330 on the S&P 500 index, but Greece will vote over the weekend. If, we put money to work into the breakout, and the results of the Greece vote are negative, the breakout will reverse next week. If we don’t trade the breakout and the vote is positive we likely gap higher into the trading week and miss the trade. Thus, after two weeks of hell watching the indexes bounce up and down, it comes down to a speculation trade on the vote. If that isn’t a kick in the pants, I dont’ know what is?
I dont’ like speculation trading on news events. The number one rule of trading is… “don’t lose money!” If we put money to work on a news event and we are right we win, if we put money to work on news and lose, it is generally a bigger loss due to the emotions of the trading taking place on news. Thus, the decision is based on can you manage the risk of the trade appropriately?
One strategy for today would be to have reasonable open allowing an orderly entry to any trades. If we move higher on the day use the profits to hedge the positions into next week. The challenge with that scenario is we are speculating the market will move higher today which compounds the speculation. You can see how the emotions work and how we are attempting to put a square peg in a round hole. I am going through this exercise here today to help you and me understand how we tend to force trades in front of an event. The reality of today’s trade should be based on the entry price be hit, and determining if we can live with (emotions) and manage the risk of the trade. That is where the decision process has to be determined prior to the trading day beginning.
Example: SPY entry at $134 based on break higher through the resistance. We would normally allocate 20% to this position based on a normal risk cycle in the trade. Our normal stop would be $131 and the target $141.75. Because we are facing news events that could disrupt the trade, we are willing to allocate 10% and add to the position on Monday if the news is positive and the markets continue higher. If the news is bad and we hit our stop losing 2.2% on the trade, we cut our losses in half based on taking only half of the original position. Thus, we manage or downside risk based on a logical decision with the best data available today. We would also cut our profit potential in the trade as we only have half a position. If I am good with the risk reward of the scenario I can proceed with the trading plan as the market opens.
The key to the above example is you make the decision before you commit the money to the trade. Once the money is at risk the emotions we take on are real time and we are fighting a completely different battle. Thus, my focus today is to take the positions we have been tracking, but cut the risk by cutting the size of the trade in half. If they move higher on good news Monday I will set a maximum entry price to add to the positions based on the outcome. The trades all hinge on a positive market today as investors make the same type of decision we are discussing.
The defensive sectors are leading the push higher which makes this current situation even more interesting. Money is flowing into the market, but it is looking for less risk exposure. Healthcare broke higher on Friday along with consumer staples and utilities. The progress in those sectors shows where money flow is picking up. Technology, financials and consumer services are back at resistance points and could add to the upside short term. Watch the volume on the move today and trade within your discipline.