Playing Chicken with the Government

Earnings season is upon us again. Leading up to last night's release of Alcoa's (AA) earnings report, many pundits and traders have been betting we hit the peak in the middle of a "W" shaped market recovery.Thus, swords were drawn and shorts have been ready for Spartan glory.

This morning, it seems there are still plenty of institutional investors pleased with Alcoa's report and other luke-warm econ data. Most importantly, the government is considering an extension of the wildly popular home-buyer tax credit. Further, Bazooka Ben Bernanke and his team of Gutenberg acolytes have not eased their passion for printing dollars.Thus, I see an epic battle continuing, and it seems the government with their weapons of economic disfunction may be winning another game of chicken.

Rather than simply throw more cash into a thesis that the market has another sharp leg down, take some time to reflect on timing. Pick an important level in the S&P500 and draw your line in the sand. If that line is breached to the downside on strong volume, start trading your pessimistic theory. However, if we don't break that line (or a break is suspect with no strong follow through), consider waiting on the sidelines while the market goes higher or consolidates.

Successful trading is more about knowing when to trade than being right. In fact, as Jim Bittman at the CBOE says, "A doctor must be correct 100% of the time. Same with your lawyer and accountant. But a trader can be right half the time and still make a liviing." The key to this last part is the word "can". Without proper risk management techniques, you cannot make a living unless you are psychic.

This earnings season practice fighting the urge to predict earnings. Rather, watch, listen and analyze your way into winning trades. Otherwise, you may find your portfoio smeared across the front windsheild of a tractor trailer speeding through the economy at 150 mph with Bernanke and friends at the wheel.