Explanation of GOOG Trade

The GOOG equity model portfolio short position I started today runs counter to the idea of a final market bounce as GOOG would most likely move higher with a market bounce like most stocks so I just wanted to address the seeming contradiction of shorting GOOG today while still leaning toward a final market bounce that would likely send GOOG higher.

Lets not lose sight of the goal. Early in this top there was a bunch of chop, we had good signals but a move up rarely would last more than 3 days; it made no sense to try to play an equity long that might make +3% on the choppy bounces, so we used options on otherwise good long signals, but trades that otherwise didn't have enough profit potential. I view any trade as risky, look at the MBS market, that would seem to be a low risk trade with real property backing up the investment. So if I'm going to commit to a trade, I want the best return possible for taking the risk of entering the market.

We did very well with those trades, from the ones I placed they ranged from +7% to +244% with most averaging +30%-50% in 2-3 days and when the bounce was ending I (and I know a lot of you) started building short positions in equities - NOT OPTIONS (except a few cases). My personal preference is to phase in to these positions generally in 3 parts, leaving room to add to them at potentially better prices as well as committing more to the trade the closer we are to the actual break to address opportunity cost and general market risk.

 The reason I used equity shorts rather than options is because I expect a longer term downtrend (what we have seen since May 1 doesn't even scratch the surface of the potential downside) and I don't want to deal with expiration pins, time decay, etc. All of the equity shorts I started are pretty much maintenance free, I may look at them once a week unlike options which we had to keep an eye on everyday.

While leverage and the gains in options is exciting, I personally don't care to be over-leveraged. The options trades made sense for the conditions in the market, but the equity shorts are meant for a different kind of market, one that is more of a trending market, so that's why there has been a transition from using a lot of options/leverage toward building positions for the next stage of the market (stage 4 "decline"). Leverage cuts both ways and our longer term market analysis suggests we'll be just fine with equity shorts which can make more than 100% contrary to popular belief as I have shown you in the article I wrote, (which is linked at www.Trade-Guild.net) "Making More Than 100% in a Short".

For my larger view analysis of the market, I have no use whatsoever for a market bounce (even though I initiated a few small spec long positions which represent very little risk) except for the opportunity to fill out a couple of short positions (BIDU is at 50% of the intended position size; CAT is at 50% of intended size; PCLN is at about 85%; AAPL is at 85%; XOM is at 65%; BEAV is to big at 125%; GOOG is at 100%) and I need to add a couple of Industry groups like Financials.

So while I would love to see a bounce to get the best positioning with the least risk and excellent probabilities, the goal is to fill out the short positions, the spec long plays are only a minor concern as they are so small being they run counter to my market view.

Adding GOOG today allowed me to short in to price strength in what is a higher probability short and I was able to do it with about 1.2% risk. If GOOG moves higher, it will still be in what I believe to be a head fake breakout just like the GLD trade that we used puts with for a nearly 215% gain in 3 days or so,  it stayed above resistance in a head fake breakout for 6 days, BIDU was in a head fake breakout for almost a month. If I have to cover GOOG I don't envision (even with a gap up) having a portfolio loss of more than 2%. I'd actually like to be able to short GOOG higher, but again the entire point of looking for this final bounce that shakes out shorts and would likely be a volatile move, is to fill out positions for the end game. GOOG's risk made sense in moving toward that goal.