Shark-jump trading: Great traders recognize when a pattern changes
The phrase jump the shark comes from a scene in the fifth season premiere episode of the American TV series Happy Daystitled “Hollywood: Part 3,” written by Fred Fox, Jr.[4], and aired on September 20, 1977. In the episode, the central characters visit Los Angeles, where a water-skiing Fonzie(Henry Winkler), wearing swim trunks and his trademark leather jacket, jumps over a confined shark, answering a challenge to demonstrate his bravery. For a show that in its early seasons depicted universally relatable experiences against a backdrop of 1950s nostalgia, this marked an audacious, cartoonish turn towards attention-seeking gimmickry and continued the faddish lionization of an increasingly superhuman Fonzie. The series continued for nearly five years after that, with a number of changes in cast and situations. However, it is commonly believed that the show, out of ideas and even trapped in its own success (largely due to the disproportionate popularity of the “Fonzie” character and the show’s (executives’) intense desire to continue “milking” that), began a downhill slide, becoming a caricature of itself often filled with little more than its popular catch phrases and character mannerisms.
In a 2010 Los Angeles Times article, former Happy Days writer Fred Fox Jr., who wrote the episode that later spawned the phrase, said, “Was the [shark jump] episode ofHappy Days deserving of its fate? No, it wasn’t. All successful shows eventually start to decline, but this was not Happy Days’ time.” Fox also points to not only the success of the episode itself (“a huge hit” with over 30 million viewers), but also to the continued popularity of the series. — Wikipedia
Good morning, good week, and happy Valentine’s Day Eve. Stocks are back to the “let’s try to climb” mode and we’re seeing the markets continue to try to break out to new highs. The bears, for the first time in a long time, are starting to really get scared and are worried that the pattern of market action of endless Greek Crisis Panics that constantly cap any significant break out…they’re worried that the markets have finally looked past Greece.
You guys know that throughout the last couple years that I have repeatedly loaded up on stocks and calls aggressively whenever the markets have panicked over Greece/Euro-crisis and that we’ve trimmed back and added to shorts when the markets are breaking out to highs. That pattern has been wildly profitable for the last couple/three years, but one of the most important traits that any great trader possesses is the ability to recognize when a pattern that had been working is likely to stop.
Great traders, including technical analysts who look at stock chart pictures to decide how to buy and sell stocks, know that all great patterns stop working after awhile, as the economy/markets/policies change and as other traders and investors start to recognize the pattern, it changes. And certainly I think you’d agree that our economy and Greece’s economy is very different than it was two years ago. The markets are different from five years ago. The policies in Greece, in Europe and in the US are very different than they were three years ago. Likewise traders have been figuring out what you and I have been doing so well — buying any panic caused by the Euro-crisis and selling it when the panic’s abated. That means those traders and investors who have finally figured out that panicking at the bottom whenever the media and the markets are panicking about the Euro-crisis are changing their strategies right now. At some point the Euro-crisis will “jump the shark”. And all of that will change the patterns that we’ve seen working.
The upshot here is that “the playbook” that we’ve been following for these patterns would have said to trim down our longs and increase our shorts as the markets are up big from their recent Euro-crisis-inspired panicky bottoms. But as you’ve noticed, I’m changing my approach lately, as I’ve covered up some short exposure and have let my longs mostly run, leaving us with a lot more long exposure than we’ve had at recent market tops.
I am not going to load up on a bunch of market call options or anything like that to try to capture profits on a broader market bailout as we’ve got plenty of long exposure and call options on the sheets right now anyway. But I will likely be adding to several of our long positions in coming days and weeks and I’m likely to cut back on some shorts a bit still too.
Stay tuned, we have a huge week ahead of us. My latest positions is next.
Fonzie jumps the shark
