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Macke: How I’m Playing the Market’s Range

Breakout

There are no unused superlatives to describe the trading range that's been trapping markets for more than two months. The range has become something akin to the moon 100 years ago; it just sits there, placidly denying man's feeble efforts to impact it in any way.

Just about every trader we've spoken to on Breakout for the last month has genuflected before "The Range." If I hear "I'm positioned defensively" again I'm going to go chicken killer. Heck, if I say "I'm positioned defensively" again I may rip out my own tongue. From where I'm sitting the time for defense is ending. Range-bound though we are (as I type), stocks are moving higher more readily than they are falling. No one is positioned properly for a strong breakout, save for those "buy and hold" types who've gotten to enjoy the entire collapse.

(This being Wall St., that likely means the range will have ceased to exist by the time you read this note. If it's after 4pm on the East Coast and your screen says the S&P closed at 1,225 or more, please disregard and re-title this column "Stocks Make A Giant Leap for Mankind").

Good trading means making plans then ripping them up as events warrant. A couple weeks ago my plan was to add to my cash-heavy portfolio as the market fell through 1,100 and toward 1,000 on the S&P. As we all know, 1,100 held and stocks ran straight up to the top of the range yet again. The ostensible catalyst was an announcement from the Germans and the French that they had plans for Greece and the EU, and then announce it sometime later this year. This wasn't fundamentally good news but the markets acted like it was the Second Coming of the Internet bubble. When stocks stop trading down on bad news (like China's stockpiling of copper and Alcoa's (AA) forecast of doom), it's a bullish sign. When stocks start ripping higher on news, no smart person on earth regards it as a positive sign.

I'm faced with a Goldilocks choice set. The "Too Cold", as in dead move, would be to dig in my heels, deny what I see on the tape and review the literally infinite reasons to be negative on both markets and the global economy. Then I could write a long, seemingly insightful piece designed to both impress bears and convince myself I'm right. I could defer to the mighty range and wait for clarity. That doesn't seem right at this point.

The "Too Hot" move would be to start throwing in bids at anything that moved in a fit of fearful rage over missing the "Great Rally of 2011." Chasing stocks is the siren's song of investing; it seems impossibly alluring and sexy then it drags you to a hideous death. Let me push you up my learning curve: don't chase stocks; you'll almost certainly get another - and better - shot.

At the moment what seems to be just right is increasing the pace at which I'm putting money to work on dips. I'm respecting the range, that is not getting long every time the market approaches resistance, but I'm skewing my book further to the long side. In order to impose a mental discipline to the process, I'm picking away at the long side only on dips of 1% or more on the S&P. If 1% seems arbitrary, well, it pretty much is. The important thing is having a framework in place to keep me from listening to the animal spirits that make a man want to do dumb things like buy high, sell low or chase women of ill-repute. I'm also buying in units of 10%. For example, if I had $100 to invest I'd buy $10 worth then take a little stroll or play a round of Angry Birds or some other safe activity.

As of this morning I've gone from about 1/5 long in my investing portfolio to somewhere between a quarter and a third invested. I bought high-ish beta stocks you've no doubt heard of but I refuse to name here, lest I be accused of pumping.

I've got a natural stop at the levels in the range. I've got stocks that have been outperforming on both up and down tapes of late and I'm pacing myself. I could certainly be wrong but I've controlled my risk in a rational way and am trading in the manner that's worked for me for more than 15 years. I'm not giving you advice. I'm simply telling you how I see it and what I'm doing about it.

Your book is your own to run; if you care to share with the group let us know how you're playing in the comment section below.

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