It's amazing how well techniques for trading in the futures pits translates to trading on the screen.
My shorts have paid off, but I'm not ready to cover them just yet, and here's why.
Pit traders are conditioned to "fade the paper," or take the opposite side of customer orders. The idea is that by the time the public's odd lots -- those 10- and 20-lot orders that are a sure sign of retail investor interest -- get to the pit, the real move has always been made. And although today's equity investors are often heralded as being smarter than the professional, even a cursory glance at this little-followed contrarian indicator confirms just the contrary.
That's why the
Ameritrade Index of individual online investors is one of my favorite fades. Look at some recent action: From March 31 through April 5, individual investors were buying stock. In that same period, the
(my benchmark for overvalued excess) dropped roughly 400 points. When the individual finally got around to selling on the 7th, the market rallied. This thing really works.
An old floor trader once told me that the market "exists to hurt as many people as possible." Take my advice: Don't be the public ... fade the public. Only when I see "Joe Six-Pack" flee on big volume will I begin to put reluctant bids back into this market.
Jonathan Hoenig is portfolio manager at
Capitalistpig Asset Management, a Chicago-based hedge fund. He is the author of
Greed is Good: The Capitalistpig Guide to Investing. At time this column was published, the fund was short S&P 500 and Nasdaq 100 futures, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Hoenig invites you to comment on his column at
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