Try the Sitting on Hands Strategy

Yesterday, the Dow had a trading range of 319 points, which by itself isn’t that amazing (the range last Tuesday was 419 points), but keep in mind that futures were down 200+ points Sunday night and yesterday morning, and the Dow managed to close in the green yesterday by 21 points. Of course, all of the other major indexes didn’t fare as well, with the RUT down 1.87% and NDX down 1.55%. SPX was off by 0.90%, but managed to close at 1276, just above that important 1270 level from the intraday January 22 low, though nobody believes that 1270 is actually going to be firm support at this point.

Bear Stearns (BSC) announced its acquisition for $2/share by JP Morgan (JPM). One of the more interesting conversations around the office and around the internet was why BSC traded up to $5 Monday, closing at $4.81. Theories ranged from last-ditch bids from other players, to Joe Lewis-related shenanigans to force a higher price from JPM. People could not seem to shut up about the fact that Bear’s building is worth $1.2 billion.

This is a particularly eventful, if weird, week: The Fed is cutting rates today, Lehman and Goldman report earnings today, Visa is scheduled to start trading on Wednesday (we are bullish), and Thursday is March options expiration, though trading should be relatively lighter ahead of the long weekend. In light of all that, and given all the bouncing around we’ve seen intraday over the past few weeks, it’s not a bad time to step away from your trading platform if you’re a casual position trader.

One of our readers, Larry, sent in the following note, which captures our mood exactly:

SOH: A Legitimate Strategy
In these times of extreme volatility, a trader needs to constantly be reminded that we trade to make money, not to have activity. It is also important to remember that Cash is a position and that SOH (Sitting on Hands) is a legitimate strategy. Repeat it to yourself three times – I do not have to place a trade today! It is a freeing concept and helps preserve the one thing that keeps us in the game – our capital.

During the last week giving yourself permission to employ the SOH strategy would have been a wise choice for many traders. One market commentator made an interesting observation: “We’re not even gonna bother trying to explain what’s going on in the broad market because basically there is no explanation….As far as the S&P is concerned the constant barrage of news is creating charts that have no respect for technicals.”

This is an astute observation which reinforces that in a week which includes the FOMC, surprise Fed announcements, the demise of Bear Stearns and option expirations the best strategy for all but the most astute scalpers or those who are taking advantage of selling high volatility with well defined trading plans is to SOH.

So yeah, those really seem to be the only three rational strategies right now:

1. Sit on Hands
2. Scalp movement intraday, or
3. Short these volatility spikes with risk-defined positions, like the ones we trade.