Traders and Spiderman

The way the global stock markets are behaving these days remind me of one of the most fascinating superheroes of our time—Spiderman. Why do I say that? Because, the only way traders can stay in this market and sleep at night is if they can emulate the agility of our web-weaving superhero.

By the way, those who idolize Warren Buffet and still subscribe to this agonizing “buy-and-hold” strategy, need to rethink; and, do so really quickly! I am a big fan of the Oracle of Omaha, but am also a realist. If you don’t have the kind of money Warren has, then forget this strategy. He can wait and wait for a long time; moreover, he can move a stock price just by buying it. Some years ago, when he purchased the convertible bonds of this much-hyped technology company, level 3 technology (NYSE:LVLT), the stock price shot up (yes, the fundamentals remained the same but Warren’s confidence in the company was enough for investors to jump in). Isn’t that a beauty? You buy these bonds at a low price and stir the market, get the prices to go up, and then  convert these bonds to stocks, and sell. Great! Once you are really successful, it doesn’t matter whether you make a wise or a dumb decision; you still make money and everything is hailed as a “touch down.” Nothing succeeds like success!

Enough written about Warren; let’s go back to our discussion on traders and Spiderman. Since the market hit the March 2009 lows, the major indices have rallied almost 60%-70%. Even though, the sovereign debt troubles were lurking in the background, thanks to the printing presses of central banks around the world, markets kept hitting new highs. This year, though, it has been a different story. Every day, with every new headline, the market has swung both ways. China’s steps to curb lax lending and Greece’s potential default issues (the bulging sovereign debt CDS spread has been well-documented by several bloggers and financial sites, ex: www.zerohedge.com) have scared the investors/traders to take cover. On the other hand, every dip in the market has been used as buying opportunities by some big investors—institutional and hedge funds—scaring-off the shorts who like to take the market further down. In the midst of all these up and down swings, there are serious claims by many Wall Street  insiders that some of the big financial institutions with proprietary trading disks have been happily manipulating the markets, with complete disregard for the fundamentals, and raking in huge profits. As a trader, I can see that possibility. Just when you think the market is downbeat, around 3:30 PM, the market takes a dramatic turn to the upside. This kind of manipulation is even seen in systematic pump-up of S&P futures before the market open. In my observation what I have found is, even when the news is fundamentally bad (I am talking about equities in general) and the global markets are reflecting that pessimism, US stock futures slowly rise, from their deep lows, as the pre-market hours progress toward market opening. I have never understood why?

So, since President Obama came out with his declaration of “Volcker Rule” in 3rd week of January, financial markets have whipsawed with every news headline and economic data. Traders have been forced to buy when the markets went higher and sell or short when the markets went lower. Traders have done well if they have kept their Spiderman instincts and acrobatic skills highly sharpened. Those who wait for the markets to go in one direction, up or down, have been left waiting, because at the end of the day, they have been left with nothing to show. The mantra has been, “take your profits when you have them, and cut your losses when things go in the other direction.”

This can be really stressful. Yet, traders can survive these market swings before a long-term trend is put in place. One has to be disciplined and show great agility to move with the markets and profits can be made in this market. Unfortunately, for those investors who keep dollar-cost-averaging (ex:401k) if the eventual secular long-term trend is bearish, then another “lost decade” could be devastating. Market and economic forecasts from some of the big names (likes of Nouriel Roubini, Harry Dent, Md El-Erian) in the industry have been nothing but lower normal to bleak. After 20 years of expansion and the excesses, some pundits believe that we will be reverting to an historic mean, which in plain speak, means lower markets, lower returns and lower living standards.

I hope long-term investors would still end up earning good returns; but a careful consideration of investment “time horizon” is a must. I know that for most people who are in the stock market, it is simply impossible to move with the market gyrations (it’s not just about the stress, people just don’t have the skill or the time or interest to follow the markets). But those who trade and religiously follow Mr. Market, may do well to learn from Spiderman.

Timing is everything. Good luck to all!