re:........ "The Katrina Gap."
Corrections are multi-faceted.They are not just made of time and price -- causation is also a factor.
The "Katrina Gap" has more to do with "causation" than it does with time, or the tape (price).
What caused the Katrina Gap?
Mass leverage and speculation that the U.S. Government bailout package would exacerbate deficits to levels creating a rollover and a collapse in the U.S. Dollar.
Natural Gas, Gasoline & Crude Oil speculation led...and other commodities like Gold soon followed.
The danger of popular delusions and mad crowd/herd behavior is that occassionally they over-correct in the opposite direction.
Is the "unfilled gap" a technical phenomenea, or a fundamental one? .... or more related to popular delusions, the madness of crowds and herd behavior?
That's the $64 question.
What caused Mother Rock & Amaranths demise was hubris mixed with massive leverage...and the failure to differentiate between a High Reward:High Risk bet and a High Reward:Low Risk one...
Have you ever seen a herd of cattle spooked?
Herds can be highly unpredictable as to direction.
What is predictible is -- movement.
a.k.a. V-O-L-A-T-I-L-I-T-Y !
When the potential reward is high, but the risk is also high...the best bet is often not on direction, but on movement -- ie: a bet on volatility.
Can you say -- options straddles?
-- Less portfolio exposure.
-- Defined risk.
-- You don't have to be perfect on the timing.
-- You don't even have to be right on the direction.
-- You can often collect in both directions.
I've spoken about "straddles" on many occassions... the chihuahua crowd poo-poo'd them each time.
Each time they made money -- in both directions.
LEAPS made a lot of sense in this manic market of late.
For those that are uncomfortable in going short (it's often equally, if not more profitable and often the money comes faster) -- LEAPS...either simply buying some puts when you cash out at the top, or buying some calls into these deep corrections... keeps you "in the game"...but, not at the mercy of the herd.
The corrections in all longterm commodity cycles are so deep as to nullify any buy & hold thinking. You are still going to have to market-time to some degree.
The key is to correctly identify changing risk:reward dynamics. You need to know when to be levered and when not to. When to sell into strength and buy all corrections; when to sell into strength and use straddles; when to sell into strength and buy puts & go short; and when to ultimately walk away.
Trying to trade every market, day to day... week to week... and month to month is a fools game.
In baseball when great hitters don't get a good pitch to hit...they exercise patience... they take the pitch and accept a walk.
They don't swing at every pitch, nor do they try to drive a slider knee high and on the outside corner of the plate...over the centerfield wall. Sometimes they just try to make contact on a tough pitch and get a basehit.
You swing for the fences when you get a waist high fastball right down the center of the plate that looks the size of a beachball... that's when you swing for the home run.
Be disciplined, be patient...and trade like a Ted Williams, or a Tony Gwynn... not a Jose Conseco.
You don't become a .300 hitter and a Hall of Famer on just Home Runs... you need a few singles, doubles, triples and walks to make it to Cooperstown.
Trading is no different...
later,
SOTB |
