Staying in the Game When It’s Not Any Fun (Feb. 5, 2010)
Good morning Team. Just a quick note.I think the jobs number matters. Here’s why:
1. As an indicator of longer term stuff, it’s not very meaningful because it is subject to revision. It’s also reflective of the hiring of a bunch of census workers. However…
2. The short-term impact on investor psychology is simple: It makes us feel better because at least we have a sign that the economy is not getting worse! Soooo…
3. Investors will start to feel that the high level of risk that I was referring to last night is abating. The risk of further downside is decreasing.
4. But the risk has not gone away completely (certainly in light of the Greece thing). But again…the risk is deemed less than it was 24 hours ago. You need to buy risk in order to make money. When risk seems nonexistent, you know the top is at hand. That is the lesson of 1999-2000. The future looked so bright that you had to wear welding goggles. So it’s important to understand that you will NEVER feel completely comfortable when you are buying.
5. I think Kass & Meisler are on the right side of the analysis. We are indeed setting up for a bounce. How strong will that bounce be? That’s the million dollar question, and you all know where I stand (they’ve been selling strength rather than buying weakness…so I’m not enthusiastic about a BIG rally. But I do think that the market is poised for one).
6. I think we’ve done a pretty good job of staying on the right side of risk…and of the exchange of stock for cash, and of cash for stock. Many did sell at much higher levels and now have the cash to put to work. Don’t fall down on that job.
7. I’d suggest that you revisit Wednesday night’s video about “decision” vs. “action”. Go back to the weekly charts. Look at which stocks you’re intending to buy. Make a decision — do you want to buy? <i>Then</i> look at the daily chart. My suspicion is that you’ll see a lot more charts that are <i>actionable</I> right now than they were yesterday.
8. Last point — someone mentioned earlier this morning that they looked at the Fast Money page and saw the disclosures of the desk traders, noting that they all owned a bunch of stuff. There is a BIG lesson here, gang. <u>You have got to stay involved.</u>
Here is a universal truth with respect to trading. When the market takes a dump like it has been doing the last few days, <i><b>everybody</i></b> loses money. That’s the nature of trading (if it were otherwise, we’d just be very rich laborers in the money fields, harvesting the crop every day with huge smiles on our faces).
If you are new to trading, my bet is that you fluctuate between being all in cash, and in being about halfway invested in stocks that you actually bought at the top…<i>after</i> you were panicking about being left out of the run. So you’re typically upside down on your stocks, and happy to be in cash on at least some of your account. Then the market pulls back and you sell the stocks you bought in a panic…but for a loss. Now you’re back in cash, only with less than you had before, right?
So the easy fix to that is quite simple: Always be involved in the market…and just adjust the <i>degree</i> to which you are involved. Embrace the fact that you will be losing value in your stocks when the market is weak. But you’ll also have put yourself in a position to put more money to work rather than grappling with the difficult question, “Is this a good time to go from 100% cash to some equity positions?”
What really matters is the value of your portfolio. Watch the bottom line of your entire portfolio. If it strays too far from your all-time high, then you really want to lighten up. You want to limit the losses…slow them down…so that you don’t get into a situation where you feel you must take on <i>EXTRA</i> risk just to get back to even.
If you are ever all in cash for any reason other than you have just been stopped out of all your positions (and setting stops is a long conversation for a different time), then you are in a position to pounce and exploit, but you are also at risk of getting it wrong and missing a great opportunity. (Again, remember the money harvesting thing).
So that observation about Fast Money is a good abject lesson for all — the pros are not daytraders. They are not “all in” or “all out”. They are <i>always</i> in…with varying degrees of risk.
So in the final analysis, we are back to the beginning and have completed the circle — we are all managing risk.
Be a risk manager — and know that there are two sides to risk.
Have a great day. I’m done for today — this has been a brutal week for me and my power meter is flashing red. I’ll have the Weekend Update out tomorrow.
Put some money to work. Buy some AAPL. Buy some POT (the ticker, thank you). Buy some ACI or MEE; buy some ASH. Buy some IBM, or HPQ. Look at some of the yield hogs. Are they giving you a chance to buy when prices are lower and yields are higher? Buy some Google — it ain’t going to zero. Buy some BIDU.
There is a lot to do…just don’t pile in. Manage risk, don’t just bet the entire stack of chips on red and let the roulette wheel fly. Put some diversification in your portfolio. I just threw out a lot of names that actually look like they are good buy points. But do your own assessment. If you pile in and go really big on one of those names and it then tanks and puts you in the hurt locker, please don’t send me an email with a plaintive cry for help and a question like “What did I do wrong?”
Here is what you do to ensure that you did nothing wrong (these points are all in the opening post this morning that my best friend Gary put up).
1. Buy near support.
2. Don’t go in too big.
3. Know where your stop is going to be, and make sure that being stopped out is an acceptable outcome for you.
4. Don’t trade solely because someone else told you to. That includes me. I’m a risk manager and “mentor”, I am not a fortune teller. Take what I say and put it together with what others are saying in the forum. That is “information”, not “direction”. Then make your own decision, and then take action based on that decision.
5. At this point in time, don’t violate any of those rules. Frankly, I think the “Know when it’s time to break the rules” doesn’t apply now at all. This is a market that penalizes rash trading.
Don’t be a trading addict. And stop “pivoting”! I.e., “I was short, then I thought you said it’s time to buy, so I closed my shorts and went long…all in the space of about 15 minutes.” Do that, and you reveal to yourself that you have no opinion — you are just slinging your money around based on the opinions of others. Guys, that’s not trading. I don’t know what it is,…but it’s certainly not trading.
Well, I guess this wasn’t just a quick note after all.
Have a good…afternoon.
–Dan
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