Markets are Heating Up
"Don't let yourself get attached to anything"
If you haven’t seen Heat, what exactly have you been doing?
A five-star banger, starring two of my favorite actors - it’s an immaculate film.
And for this week’s ‘markets and movies’ metaphor, I’m focusing the infamous café scene between the film’s two protagonists - Neil McCauley (Robert De Niro) and Vincent Hanna (Al Pacino).
In the two megastar’s first ever scene together (despite both co-starring in the Godfather Pt. II), we find McCauley (a criminal) and Hanna (a cop) discussing McCauley’s approach to discipline:
[Neil McCauley] A guy told me one time: “Don’t let yourself get attached to anything… you are not willing to walk out on in 30 seconds flat… if you feel the heat around the corner.” Now, if you’re on me, and you gotta move when I move… how do you expect to keep a marriage?
[Vincent Hanna] Well, that’s an interesting point. What are you, a monk?
[Neil McCauley] I have a woman.
[Vincent Hanna] What do you tell her?
[Neil McCauley] I tell her I’m a salesman.
[Vincent Hanna] So then, if you spot me coming around that corner… you’re just gonna walk out on this woman? Not say goodbye?
[Neil McCauley] That’s the discipline.
McCauley’s philosophy here is very similar to my approach to markets right now: not allowing myself to get too attached to anything I am not willing to walk out on in 30 seconds flat.
Over the last few weeks, it’s an approach that’s served me well: bagging winners on RIOT and LULU - the two trades I shared last week - as well as the SPY 666C contracts I picked up at the lows before cashing out for 100% a day later.
Some might call it a ‘cold shower’ market - get in, get out. Because from where I’m sitting, there are just as many reasons to be cautious as there are optimistic.
As I wrote in last week’s newsletter, the outlook for the week was bullish - which is precisely how things played out. SPY not only recaptured the 50dma (red line) it also climbed above the AVWAP from the ATH level in late October (green line).
So where are we now?
At the time of writing, despite last week’s bullish price action SPY has failed to make a higher high on the daily timeframe, with last week’s pump coming on fairly tepid volume.
In isolation, this offers little reason to be super bearish or super bullish - it’s a wait and see environment in which bulls need to defend the prior lows and bears need to defend the prior highs.
If you’re short, keep an eye on 650 as a key level of demand and if you’re bullish, expect some chop around 680-690.
Where my approach in summer was to add swings with a multi-week outlook, my positions are much tighter now - targeting moves over a couple of days, or even hours.
Get in, get out. That’s the discipline.
Another reason to be cautious, in the short term at least, is the VIX.
Despite getting crushed after failing to make a new high last week, the VIX is yet to make a meaningful new low on the daily timeframe, with the present series of higher lows dating back to late August.
Should we see a wick below 15.81 over the coming days, then I may be tempted to add some longer dated calls in anticipation of a ‘Santa rally’ - but no sooner.
That’s the discipline.
Breadth remains in focus too. Note the chart above showing the percentage of SPX stocks trading above their respective 50dma.
This thing has been locked in a descending channel since the summer, showing mixed market participation despite SPX ripping to new all time highs between May and October.
During Friday’s session, all the talk was above ‘improving breadth’ and even potential breadth thrusts - but rather than getting carried away, I’m more interested in seeing whether this particular chart can ‘stick the landing’ and break out of the descending channel.
Should we see this play out, I’ll again add some exposure for January - but no sooner. If people want to try and front run a potential Zweig Breadth Thrust, that’s fine - but in my view, it’s much more prudent to wait.
That’s the discipline.
What’s The Trade This Week?
As you’ve probably figured out, I’m very much in the ‘wait and see’ camp right now.
While traders who chased Friday’s calls are getting chopped up in what looks like a pre-market shakeout, I’m sitting with one extremely unglamorous position: Procter & Gamble.
After retracing to the .618 and printing bullish divergence on daily RSI, I’m holding some small 155 calls (expiring Jan).
PG posted an inside week last week — I’m watching 150 for upside confirmation, with stops below 143. Not sexy, but sensible.
Because, as I’ve said all along, this isn’t the month for hero swings. It’s a market where discipline wins. A market where the traders willing to ditch a position the moment the heat shows up are the ones who keep their capital.
Closing Thoughts
What I love about Heat is that you end up rooting for both McCauley and Hanna — the thief and the cop — two forces opposed in purpose but identical in dedication.
This week, that’s exactly my stance.
Long when the bulls get the edge.
Short when the bears have the setup.
Not married to anything.
Not attached to anything I’m not ready to walk away from in 30 seconds flat.
Because in a market like this, you don’t win by picking a side.
You win by keeping your discipline.
Have a great week.
Al