New home sales...

I don't have much to say on today's new home sales figure, except that its bad. In order for my "bad, but not that bad" scenario to play out, home sales have to continue at a reasonable pace. I'm not worried yet, but if I see a continuation of monthly declines in new home sales, I'm going to get nervous.

One question that always looms with any trade is deciding at what point the trade was wrong and you need to take you loss and walk away. As a money manager, I don't have any particular time horizon to deal with, as opposed to a prop trader who usually takes a hit on capital after a position becomes aged. Regardless, you have to think through what kind of evidence you need to know that your position isn't working. As I've said before, I have positions in some home builder bonds as well as Washington Mutual. Both are bets that the housing market will be "bad, but not too bad," and therefore current wide spreads on these bonds are not justified. Obviously there is a chance I'm wrong. If home builders aren't clearing their excess inventory, then I'm wrong on the home builders. Its not a loser trade yet (in fact, I've made money on the trade) but its on my radar screen.

One thing I won't be doing is doubling up here. That's not a strategy I like to pursue ever. A trade like that is almost always emotional, i.e., trying to "make up" your losses. Plus, after the double up, you inevitably wind up with the new position dominating your portfolio returns. That further clouds your judgement. Traders are human like anyone else, prone to emotion-driven decisions. The smart ones do whatever it takes to keep it cold and logical.