The #NewNormal and $SPX 1680

Jan 6th, 2013 | By | Category: General Comments, Steven Spencer (Steve's) Blogs, Trading Theory
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I was on BBC a few days ago to talk about the market’s reaction to the “fiscal cliff” legislation. I had hoped to use the opportunity to spend some time clearly outlining a concept I discussed in my final webinar of 2012. The BBC economics reporter prattled on longer than expected so I only had about 60 seconds to outline my market observations, which I have termed the New Normal. The idea is that after four years of above average volatility in the US equities markets we had clearly entered a period of reduced volatility. And with the failure of each successive negative macro headlines failure to increase volatility, but for a few hours, this period should be accepted as the New Normal.

As an aside I find it a bit surreal to see major financial news media continue  to promote the idea that we are living in some type of volatile period. Most traders in the trenches recognize that volatility has disappeared, which is doubly strange as there is less liquidity as well. The classic argument is that with less liquidity volatility should be increasing and we have seen the opposite.

As a student of the market this change is interesting to me but more importantly as a trader I ask myself what adjustments should I make to profit from it. So here are a few of things I will be trying in 2013 to better capitalize on these conditions.

  1. More swing positions. It has been many years since I held swing positions on a regular basis. I felt that the risk/reward related to overnight risk were not justified compared to intra-day opportunities. But you have to look back to 2011 to find a period of violent reversals in trends that made overnight risk more difficult to assess. One of the huge benefits of being a “tape reader” who primarily derives profits from precise intra-day entries is I can improve the risk/reward on swing positions. So in a more favorable swing environment it becomes even a better time for an intra-day tape trader to expand their playbook.
  2. Only Swing Specific Setups. This item may lead you to believe I’m a bit nutty as it will appear to be the opposite of my first point, but remember nuance is key in trading. This isn’t politics! In Play names that show relative strength/weakness are good swing candidates. Stocks that break weekly trends on heavy volume on a news’ catalyst are good swing candidates (see my webinar). Sectors that have moved out of bases are good swing candidates. The market itself is not a good swing candidate as the New Normal has reduced cycle times and the size of overall moves. So be focused on swings for only the best risk/reward setups. If you are attempting to swing the market via $SPY, $IWM or $QQQ be quicker to ring the register than you were in years past.
  3. Cut out most momo trades. 2007-2008 was the best momentum market since 1999. You could hit bids and pay offers all day and use your fat paycheck at the end of the month to buy some gold bullion! But each successive year from that period has given very limited momentum periods with 2012 offering none. So other than intra-day breaking news and momo in first 15 minutes don’t hit the bids or pay offers. You aren’t gonna make money that way. For those reading this who are higher time frame swing/position traders don’t worry about this point as you most likely define momentum trading differently than a day trader would.
  4. Buy stocks/sectors into pullbacks. This is pretty much what I was begging our momentum traders to do in 2009 after the market had bottomed. 2013 is different than 2009 as we aren’t coming off of an historic bottom but what is similar is the continuing strong underlying bid in the market. And the SPX breakout from 12/31-1/2 is comparable to the type of move you see off of a market bottom. Perhaps I have a bias toward the market making a new all time high and going higher but that is what I’m seeing in the tape.
So those are some of the ways I intend to pull more money out of the market in 2013. In terms of the $SPX hitting 1680 that was simply a target designed to have my brain focused on this market’s ability to continue to grind higher. But honestly if Asia starts to accelerate a bit, if US companies finally start to invest again and deleveraged consumers remain at status quo is it that big of a leap to think the SPX can trade up 15% in 2013 after seeing its incredible resiliency in 2012. I don’t think so.

Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is sspencer@smbcap.com.

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