The last straw in a trading conviction is often neither fundamental nor technical
On Friday a chapter in the US mortgage crisis finally came to an end. The US government has dropped all its efforts to sue Countrywide founder and CEO Angelo Mozilo.
If you watched CNBC back in 2006-2007, he was a legend. He was Mr Sub Prime. He was a housing cheerleader until the end and he had a ridiculous suntan.
Back in early 2007 markets were on edge but the timing the turn was nearly impossible. If you look at a Countrywide chart, it hit an all-time high at the start of the year and was bankrupt 18-months later.
The landscape was emotional. In those days if you were bearish you got thrown off of CNBC and never invited back. It was a parade of long-only pollyannas.
There was something in the air saying the world wasn't right. Still, it was tough to build a case that housing would crumble and the economy was headed for recession. It looked bad and the fundamentals were clearly shifting but the Fed confident and had plenty of ammunition.
To me, the fundamentals were clearly strained and something was wrong in housing but you couldn't predict how bad it was about to get. Looking at the charts, stocks were still flying high but the yield curve had inverted and that's the biggest red flag at all.
In order to really get conviction, it's not always the fundamentals or technicals. Oftentimes what makes it absolutely clear is some other sign. It might be a conversation with a 'regular person', or something on TV.
I'll never forget the moment for me
I was watching CNBC in early 2007 and a mortgage executive was on. It wasn't Mozilo and I would love to find the clip but I don't remember his name.
Anyway, he went on TV with a ski-goggle suntan. He looked something like this but about 30 years older. It was absolutely comical.
No one should ever go on TV looking like that but what made it even worse was that his company at the time was under fire. The stock was falling, the rumours had been doing the rounds and he had spent the weekend in the mountains. He was talking about how everything was fine.
There was no way a guy like that was going to save his company or anything else.
The trading lesson
At that point I knew it would end in disaster.
It's not often when you get that feeling.
There isn't anything in a how-to-trade textbook that tells you where to find it. If you've seen the movie The Big Short there's a scene where Steve Carell as Mark Baum goes down to Florida to meet regular people and that's when it becomes clear to him. He calls back to the office and tells his desk to short everything.
It's an overly-dramatic scene but the feeling he gets where he goes from skepticism to being a true believer happens from time to time. When it aligns with the fundamentals and technicals, that's when it's time to dig in and trade big.