Flowers: Where are the decent trades?

"Where have all the flowers gone, long time passing?"

Pete Seeger (1955)

The same question might be asked of trades. As I look at my status board, I see my holdings shrinking alarmingly with no new positions coming in as replacements.

This week I've closed three positions, leaving only five in my portfolio. I've added no new positions since Aug. 21, an endlessly long time ago in my short-term world of trading. At that rate, my garden will be a tangle of brown stalks whose petals have dropped away to be blow by the wind.

What's going on here?

Arguably, I'd say, what's going on is that my system is working.

One of my great advantages as a private trader is that I don't have to trade. I can sit out a lousy market with my funds in cash and spend my days listening to old vinyl records of Peter, Paul and Mary. No one is going to tap me on the shoulder and ask me why I'm not doing my job.

And it really is a lousy market.

The S&P 500 completed a run up to 1669 on May 22 and since then has been struggling. It hit a higher high of 1710 on Aug. 2, but it didn't stick and instead retreated.

This market is churning, and a market like this is an invitation to lose money. I'm a trend trader, and there hasn't been a trend at the level I trade since late May.

The way this shows up in my analysis is poor odds.

I analyze symbols for the percentage of successful trades in the direction of the breakout during the period of the present long-term trend. I'm using Oct. 4, 2011, as my start point now. If the present churning turns into a downtrend, then the Aug. 2, 2013 high will no doubt become the new start point.

When the markets first began to churn, I started to see more breakouts to the downside, but they all had terrible odds of success. And no wonder. We've been in a strong uptrend since the fall of 2011. Any bear moves were more in the nature of retracements during the upward march rather than true changes in trend.

More recently I've seen better odds on downside breakouts, but not really on the large caps. More generally, the tradeable odds are on the smaller stocks that are more likely to have been contrarian during the long uptrend.

That brings in the complication. Bear plays by their nature require greater liquidity to construct a trade.

There are two ways to profit from a stock in decline: Open a bear position in options, or borrow shares and sell them short.

Lower volume and even mid-volume stocks can't be borrowed, so the shares can't be sold short. And stocks that trade under around 2 million shares a day generally don't have options with sufficient liquidity to meet my standards (three-figure or better open interest).

When the downtrend is sufficiently established, I'll start getting better odds on more symbols giving bear signals, and that will increase the number of positions in my portfolio.

If the uptrend resumes, then I'll start getting better odds on more symbols giving bull signals, and that will be more trades.

Meanwhile, I can continue to run my daily analyses secure in the knowledge that my rules will keep me away from the trading screen when I have no business being there.

Note:

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.