It seems obvious-the Asian Markets Have Widened Their Cracks Much Faster. And reversion of risk trade towards the Dow and Euro Area mean the Western World could Outperform Asia in the Short to Medium Term. India and China look especially weak, not forgetting Hong Kong which is getting negative headwinds from the Mainland. One sector, that has driven outperformance in Asia and seems likely to fall big seems to be the Banking sector-if Financials are really fudging NPA numbers as most believe, then it should show in the numbers declared over the next few quarters. At the same time, currency appreciation and structural inflation will be the bigger headwinds for Asia. It could get really ugly in the short term if money gets withdrawn by the Hedge funds from Asia.
It is no wonder that several doyens of hedge fund management have very vocally thrown in the towel on the shorting game and now run only long funds. In a world dominated by bailout regimes and Central bankers running amok with printing presses, any attempt to run a short book is made to look pedestrian on a regular basis. We tried our hand at putting out a protective short in VGA between 2800-2820 and that position has lasted all but a few hours and is already under water.
In fact, it is close to getting stopped (STOP at 2858) out. So much for trying to buy some protection. As a sharp trading client of ours remarked to us yesterday – "I lose more money running around covering my shorts and seem to always be fire-fighting in that book". We understand and appreciate that sentiment. We do not have a good answer to this conundrum. Hedge funds need new nomenclature if they are not going to have hedges!
We suspect that running a short book in a market that continues to be in an uptrend requires only two attributes – Thick Skin i.e. the ability to move on after taking a loss and Discipline, so that you only give a little bit back every time your shorts squeeze. Shorting requires discipline and discipline requires character so actually shorting builds character. It tells you a lot about the tape. You somehow feel the tape better when you are getting squeezed. Pain is a strong emotion. The feeling makes you better as a trader – much like a boxer who manages to pick himself up on the count of 8 and gets ready to throw and receive a new set of punches.
There are times when walking away from the short book and focusing purely on market direction is the correct and only durable money making approach. Looking at the chart above, it seems like this is one such time. The sharpness with which this market has reversed its recent fall, is suggestive of that. Above is the European 600 and we did notice yesterday that the closing price chart had hit the up trend line from the July lows. The uptrend is intact. The fact that the Index took resistance at the April high, pulled back to the trend line and is now again pointing north, is a reasonably strong indication that this market has every intention to squeeze the hell out of the fresh round of recent shorts.
We've messed around with our call on the financials recently, but it bears repeating that the relative chart of SX7P against SXXP has not yet broken below its 8th Jun relative low. The pace of the decline has also receded and the chart may be getting ready to curl up again.
Metal and Mining stocks (SXPP) have arrested their mini pullbacks and put themselves in contention to make new highs. A comment on Gold and Silver is pertinent. Both held their recent up trends and no lows have broken. We have seen a few bear calls recently on these two commodities. Few shorts may have come in. We suspect another scramble is ready to begin here again.
Take a cut if stops get hit on shorts. Watch the banks here as they are not breaking down. The IBEX is in a higher low position despite all the recent bearish Spain chatter as is the FTSEMIB. These are good clues.
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