ETF Trading with Larry Connors: Trading Through a Black Swan Event
This is being written an hour before the employment report.
The culmination of the past two weeks, capped off by yesterday’s large decline, is an example of a black swan event. No one saw it coming. If anything, there was panic buying only 5 weeks ago when the market went on a one-way runaway move to the upside the last four days of June and into early July.
I mentioned this to someone yesterday. These once-in-6000-year events which just occurred seem to happen every few years now. Some can be seen, but most can’t.
There was structural damage done yesterday and having done this for thirty years I’ve seen it a number of times before. Whether this gets larger is unknown. But over time it will repair.
When these events occur, decisions need to be made. If you are using the Dynamic Hedging Feature within The Machine, you’re likely in good shape. You were protecting your portfolio and that’s good. We as a firm are going to continue to encourage people to use this tool.
For everyone else, the decision today is that there was an event that has now occurred that has rarely been seen before. It’s out of the ordinary. And out of the ordinary can potentially be a warning sign that something bigger is on the horizon. In 2008 there was. Sometimes it’s a warning and others times it’s just a very deep pullback. As of today though, it’s out of the ordinary.
When things are not normal the option is:
1. Trade as usual and hope this is the bottom. If you’re right, you’ll likely make a good deal of money. The opposite will occur if the market keeps dropping.
2. Stop taking on any new positions until things normalize.
3. Take the middle road and take partial (1/2 positions) until things normalize.
You control these options and you know what fits best for you. Again, the market is in unknown territory and the 3-5 times a decade this does occur, deciding ahead of time how to proceed is the best course. You have the option of making that decision before the market opens today. These decisions only apply when days/weeks are abnormal.
Bigger picture: today’s jobs report, next week’s potential QE3 announcement, along with the fate of Europe are in the works at the same time. Volatility will remain high for quite some time giving everyone ample opportunity to take advantage of it over the upcoming weeks/months.
If you are on The Machine, there is a description on how to use the Dynamic Hedging feature when you click on the Hedging tab. This is knowledge for the future with the understanding that these outlier events do occur.
Enjoy the weekend. Things will get better (they always do)
The above is from Larry Connors’ Daily Battle Plan.
To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.
And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.
Larry Connors is founder and CEO of TradingMarkets.com.