Zak Mir’s weekend tale of woe – the man who went Short the S&P v Long Apple

The life of a chartist is very often an interesting one given that the financial markets are of course the greatest show on earth. But what can be said about the job is that very often, you are talking about stocks and markets where unless you have positions in them, there is a curious detachment.

It is also the case that even in a time of wall to wall social media, you do not get feedback on your comments very often. At the same time, in our age of remote working it is rare to meet any of the traders/readers you are writing for, apart from conferences  for example. But occasionally, there is someone who makes contact to get particular or “specialist” advice. In fact, a couple of weeks back, the person who emailed me was more in the market for a shoulder to cry on than anything else, and I certainly do not blame him. He is currently on the wrong end of a large £200k + running loss pairs position at a leading spread betting company. You may ask what the bets are?

He is short S&P v Long Apple. …

Now, had these bets been taken in recent days, with the U.S stock index careering towards multi year highs and Apple down from $700 plus in September to just under $450 then you might have liked the concept of this mega pairs trade. Indeed, selling the S&P today at the top of a 2012 price channel at 1,500 and buying  Apple near $450 could be argued as a decent proposition – albeit a high octane one.

But no. The short in the S&P was taken just after the U.S. Presidential Election near 1,370, with the long in Apple also $100+ offside, say at $600 plus…. Indeed, part of the reason I am writing this blog today is to grapple with what kind of advice you can give on such a pair of trades? Can you really say that the S&P is grossly overbought and has to go back to say 1,350, or that Apple at $450 really represents exceptional value? The answer to both is not necessarily yes. At the same time, you cannot be bearish on the market otherwise the S&P short will cause pain and it could also lead Apple down another $100. In fact, the only answer here is to look at each situation objectively and independently.

The problem though is that while my new friend is suffering, as you can quite imagine, my guess is that this is a situation which is being replicated among thousands of other retail traders who went long of the most valuable company in the world on the basis that it would get more valuable, and in recent weeks went short of the S&P on the basis that this would be rewarded in the run up to the debt ceiling issue. Indeed, perhaps the worst aspect of the S&P short  was that even as the U.S. negotiations on Capitol Hill were stalling going into the New Year’s Day deadline  there was the opportunity to scrape a sub 1,400 exit – albeit with hindsight. This strikes at the heart of one of trading’s greatest dilemma’s, of how very often a small loss is rejected  in favour of taking a big loss. There is only one solution which avoids all this grief: use a stop loss that you are happy with, and at a level where you “know” you  do not want to be in the market anymore.

 Ah, the life of a chartist is not so bad after all!