I'm in the mood to lecture tonight. (Barbara is excused since she has heard my lectures over the years/smile.)
Overview.
November burst forth with euphoria and now leaves some with buyer's remorse. Consider that every investor and trader who decided to buy at the November 5 high is now under water. The unknown commentator on CNBC who said "you ain't seen nothing yet" may well have been right but not in a good way. If there is one take away point for readers this evening, it would be that you must never buy giddiness. Odds are, you will regret the move. It is always better to buy fear.
The high for the month on the S&P 500 Index was 1227. Unfortunately, high speed computers were set to sell the Index at this level due to something called a 0.618 % retracement rule. In simple terms, professional hedge funds and institutions assume that down moves in the market will retrace part of the down move before moving down again. While the 0.618% retrace level of the October 2007 - March 2009 down move in the market was exactly @ 1228, I do not recall any warnings to the public on November 5 that it was a very, very bad time to buy stocks. There were no sober commentators on CNBC urging caution. I saw no newspaper headlines about peril ahead.
Some things never change.
Today was a bearish day. The market opened @ 1182.96. The low was 1174,14. The high was 1187.40. The market closed @ 1180.97. This was bearish for several reasons. The close was lower than the open. This condition is a sign that the pros were selling to the retail public throughout the day. The Relative Strength Index (RSI) closed at 45.97. This is not a good time to buy. Good times to buy are when the RSI readings dip below 30 on a daily chart. The MACD line continues to show a down trend in the market. Remember that the trend is your friend until the end. The MACD Histogram remains negative. The stochastic reading is not in unsustainable single digits. Instead, the readings are 24.79 and 30.08. Not a good time to buy. Most amazing to me would be the sheer percentage of bullish investors. The Bullish Percent Index reading for the S&P closed at 77.20. That's far from a good time for buying.
In short, lower prices are ahead.
Fundamentals.
I am concerned that the market is reacting to bad news. This reaction tells you that the character of the market has changed since August 25. Back then, no one cared in the least about Irish debt or Portuguese bonds or the Spanish debt crisis. Now investors are beginning to care. That is always your cue--when bad news came out and the market ignores the bad news, then buy stocks and load up on the C Fund. It is a Bull Market and a good time to be in stocks. But when the character of the market has changed and bad news matters, then you should step aside from the C Fund and seek the safe haven of the G Fund. Do not hope! Please! I have learned the hard way that hoping for the market to turn around will not make the market turn around. Just step aside for a while. There will always be a good time to buy in the future and, probably, at lower prices too!
The drop in the Euro Dollar matters as well. Its another sign of caution.
Our Philosophy.
In our investment club, we are 100% in the C Fund when the market goes up. We are 100% in the G Fund when the market is going down. Its as simple as that. If we were now in the C Fund, we would be stressing what the month of December might bring. Do you remember the May 2009 Flash Crash brought on by the Greek debt crisis? The October 2008 Crash brought on by Lehman Brothers? The March 2008 Crash brought on by Bear Stearns? The February 2007 Crash brought on by the Chinese stock market crash? Alot of investors lost alot of their retirement funds because of these events.
Well, we had had enough. Beginning in August 2008, we decided that it was more prudent to step up to the plate. We would actively watch the market and, when it was a good time to buy, we would go 100% into the C Fund. Why be shy when the market is poised to go up and you can profit from the best September in 79 years? From the best March since the Great Depression? Conversely, if the market is overbought and troubles are brewing in Europe, why stick around in the C Fund and face maximum exposure to loss when you can sleep like a babe 100% in the G Fund? You're not losing money while others are losing their minds, and, you have conserved your hard-earned cash so that you can take full advantage of the next good time to buy.
At the risk of repeating myself, that's how money is made. That's how winning is done. As my seven-year daughter just sang to me, "You've got to believe in something." Buy the fear. Sell the greed.
Good evening,
Wink
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Tuesday, November 30, 2010
Monday, November 29, 2010
Last Night's Drop in the Euro Dollar
I don't normally follow the Euro Dollar. But last night, I was reading a blog on Zero Hedge. The blogger seemed very excited about the drop of the Euro below support. I pulled up a chart and it was true that support had given way. The Euro bounced and then fell even more by morning time in San Diego. Interesting.
Why should you as a TSP investor care about the drop in the Euro?
Well, it seems that the U.S. Dollar is getting stronger as the Euro gets weaker. And a stronger U.S. Dollar has dampened stock prices this year. Global markets are an ever changing puzzle. I also noticed a plunge in the Portuguese market today. Why should you as an investor in TSP care? Well, the drop in the Portuguese stock market shows that the market is not happy about the bailout terms of Irish debt. Investors fear that Portugal (and Spain) might be next, so people are selling Portuguese stocks.
If one had pulled up a chart of the Portuguese stock market on April 29 of this year, you would have seen a stunning sharp drop in their market related to fears over the Greece debt crisis. A week later on May 6, we had the Flash Crash.
My point is that markets are intimately related in this global era of 24-hour markets. When the Euro drops by a sizable amount overnight,you should take note. When the Portuguese market is dropping like a stone because of fears about debt contagion, the fallout might reach our shores within days. It is always best to be prepared for down drafts in the market.
People shrug off problems in Bull Markets. They become fearful and sell problems in Bear Markets.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Why should you as a TSP investor care about the drop in the Euro?
Well, it seems that the U.S. Dollar is getting stronger as the Euro gets weaker. And a stronger U.S. Dollar has dampened stock prices this year. Global markets are an ever changing puzzle. I also noticed a plunge in the Portuguese market today. Why should you as an investor in TSP care? Well, the drop in the Portuguese stock market shows that the market is not happy about the bailout terms of Irish debt. Investors fear that Portugal (and Spain) might be next, so people are selling Portuguese stocks.
If one had pulled up a chart of the Portuguese stock market on April 29 of this year, you would have seen a stunning sharp drop in their market related to fears over the Greece debt crisis. A week later on May 6, we had the Flash Crash.
My point is that markets are intimately related in this global era of 24-hour markets. When the Euro drops by a sizable amount overnight,you should take note. When the Portuguese market is dropping like a stone because of fears about debt contagion, the fallout might reach our shores within days. It is always best to be prepared for down drafts in the market.
People shrug off problems in Bull Markets. They become fearful and sell problems in Bear Markets.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Sunday, November 28, 2010
Sunday Homework
I use Sundays to review the market action from the previous week. I try out a number of alternative scenarios in my mind. What is a Bullish projection for the week? Suppose the market goes nowhere this week? What is a Bearish possibility for the week? I run through all of the "what ifs" in my mind, so that I am prepared should the time to buy be at hand.
I ran through these points about the S&P 500 Index in no particular order:
1. The S&P 500 Index closed below its 200-day moving average on a weekly chart. This is the first weekly close below the 200-day moving average since before the November 5 top. This point is bearish and supports the case for lower prices.
2. The Relative Strength Index (RSI) on a daily chart is around 49. It needs to be lower before its a good time to buy.
3. For an interesting twist on the strength of the trend, I looked at the ADX indicator. The ADX measures the strength of the trend. It doesn't tell you whether the trend is up or down. But it can tell you that are in the calm before serious price action. The reading was 17.50 or thereabouts. That is low. That is really low. It approximates the low readings we saw in early to mid-August. Now, the trick is that a low ADX reading can mean accumulation or distribution by Smart Money. No one can know for sure until the ADX turns back up and heads over 25. If it means accumulation by institutions on the sly like we saw in August, then a good time to buy will be here soon. This take on the low ADX reading makes sense to me. On the other hand, if the low ADX reading means distribution by Hedge Funds and Wealthy Individuals, then lower prices are ahead. The overly bullish sentiment by retail investors supports this interpretation.
4. I then note that the price of the S&P 500 Index is below the 13-day moving average. This is bearish. And the 13-day moving average is downward sloping. This is also bearish. Probabilities suggest that the 13-day moving average will halt any advance in the S&P 500 Index in the short run.
5. There is a gap from Wednesday's close @ 1198. I would not be surprised if the market filled this gap at some point.
6. The trin reading closed @ 2.1. This reading showed selling pressure on Friday. However, the selling was not at a capitulation level. Readings above 2.4 show capitulation. This point suggests that we will see more selling pressure.
7. The MACD line remains open and pointed down. This condition means the trend is down for now.
8. Interestingly enough, the MACD Histogram has flat-lined. This point has caught my eye. In my experience, the time to buy happens when there is positive divergence between the price action and the Histogram. In other words, the histogram has moved higher while the price of the S&P 500 Index has dropped lower. (For a wonderful read about positive divergence and the MACD histogram and how to make money in real time, see Dr. Elder's Come Into My Trading Room.) In simple terms, a good time to buy would be when the S&P 500 Index drops below 1173, sell stops are hit by investors and traders hoping that 1173 would hold as support and the MACD histogram moves higher. That is the sweet spot in time. That is the real time opportunity to buy and add to the C Fund.
9. The full stochastics has not dropped into oversold conditions below 20 on stockcharts.com. So, this point suggests that any thought of a good time to buy is premature at this time. That could change. Market conditions are always changing. But this afternoon, I want to see lower readings. Similarly, the reading on clearstation.com has hit the oversold line once since November 5. I want to see a second or third hit. Then, it will be a good time to buy.
10. CONTRARY OPINION - I have read the Sunday newspaper. I have scanned the headlines. I have watched CNN and Fox News and the local tv stations this weekend. There have been no fearful references to the stock market. None. So, the absence of fear in the media tells me that now is not a good time to buy. Should that change, then I will act accordingly.
Conclusion. Successful investing and trading requires daily homework. Global markets are open 24 hours a day. Sometimes, I think the process is like being a police officer. (My father-in-law was a NYC plains clothes policeman.) He would say that 99% of the time, policing the streets was dull and boring. It was like watching paint dry. But the other 1% of the time made up for it. Watching the market is comparable. There's nothing much going on much of the time. But you have to watch the markets every day so that you can catch the 1% day when it is a good time to buy.
That's how money is made. That's how winning is done. One day at a time.
Have a good Sunday!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
I ran through these points about the S&P 500 Index in no particular order:
1. The S&P 500 Index closed below its 200-day moving average on a weekly chart. This is the first weekly close below the 200-day moving average since before the November 5 top. This point is bearish and supports the case for lower prices.
2. The Relative Strength Index (RSI) on a daily chart is around 49. It needs to be lower before its a good time to buy.
3. For an interesting twist on the strength of the trend, I looked at the ADX indicator. The ADX measures the strength of the trend. It doesn't tell you whether the trend is up or down. But it can tell you that are in the calm before serious price action. The reading was 17.50 or thereabouts. That is low. That is really low. It approximates the low readings we saw in early to mid-August. Now, the trick is that a low ADX reading can mean accumulation or distribution by Smart Money. No one can know for sure until the ADX turns back up and heads over 25. If it means accumulation by institutions on the sly like we saw in August, then a good time to buy will be here soon. This take on the low ADX reading makes sense to me. On the other hand, if the low ADX reading means distribution by Hedge Funds and Wealthy Individuals, then lower prices are ahead. The overly bullish sentiment by retail investors supports this interpretation.
4. I then note that the price of the S&P 500 Index is below the 13-day moving average. This is bearish. And the 13-day moving average is downward sloping. This is also bearish. Probabilities suggest that the 13-day moving average will halt any advance in the S&P 500 Index in the short run.
5. There is a gap from Wednesday's close @ 1198. I would not be surprised if the market filled this gap at some point.
6. The trin reading closed @ 2.1. This reading showed selling pressure on Friday. However, the selling was not at a capitulation level. Readings above 2.4 show capitulation. This point suggests that we will see more selling pressure.
7. The MACD line remains open and pointed down. This condition means the trend is down for now.
8. Interestingly enough, the MACD Histogram has flat-lined. This point has caught my eye. In my experience, the time to buy happens when there is positive divergence between the price action and the Histogram. In other words, the histogram has moved higher while the price of the S&P 500 Index has dropped lower. (For a wonderful read about positive divergence and the MACD histogram and how to make money in real time, see Dr. Elder's Come Into My Trading Room.) In simple terms, a good time to buy would be when the S&P 500 Index drops below 1173, sell stops are hit by investors and traders hoping that 1173 would hold as support and the MACD histogram moves higher. That is the sweet spot in time. That is the real time opportunity to buy and add to the C Fund.
9. The full stochastics has not dropped into oversold conditions below 20 on stockcharts.com. So, this point suggests that any thought of a good time to buy is premature at this time. That could change. Market conditions are always changing. But this afternoon, I want to see lower readings. Similarly, the reading on clearstation.com has hit the oversold line once since November 5. I want to see a second or third hit. Then, it will be a good time to buy.
10. CONTRARY OPINION - I have read the Sunday newspaper. I have scanned the headlines. I have watched CNN and Fox News and the local tv stations this weekend. There have been no fearful references to the stock market. None. So, the absence of fear in the media tells me that now is not a good time to buy. Should that change, then I will act accordingly.
Conclusion. Successful investing and trading requires daily homework. Global markets are open 24 hours a day. Sometimes, I think the process is like being a police officer. (My father-in-law was a NYC plains clothes policeman.) He would say that 99% of the time, policing the streets was dull and boring. It was like watching paint dry. But the other 1% of the time made up for it. Watching the market is comparable. There's nothing much going on much of the time. But you have to watch the markets every day so that you can catch the 1% day when it is a good time to buy.
That's how money is made. That's how winning is done. One day at a time.
Have a good Sunday!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Saturday, November 27, 2010
An Interview with "Shelby Aldrich" - Part II
Its Saturday morning in Las Vegas. I am being interviewed again by our fictional reporter, "Shelby Aldrich," for the Summerlin Gazette. The Reading Room is warm and cozy, a stark contrast to the bitter chill in the air outside. The kids have scattered to the winds, so I have time for a leisurely interview session.
Shelby: Wink, thank you again for your time this morning. Where are your lovely kids?
Wink: The oldest is helping a friend with a move. My middle child is transfixed by Cartoon Network. And the youngest is skating at the ice rink.
Shelby: I see. Well, let's see where we left off. I wanted to ask you about your most memorable failures. Failure seems to be a precondition for success in many areas of life.
Wink: That's right, Shelby, particularly in investing and trading. Three bozo moves come to mind right off the bat. When the market started to crash in 2000, I didn't step back and stop investing. I just assumed that we were in a rolling correction and that higher prices were dead ahead. I would come to this library and read the Investor's Business Daily (IBD) every Saturday morning. Right over there, you see where they keep the newspapers? I just pored over IBD looking for the next Yahoo, the next Juniper Networks, the next Internet Capital Group. I didn't appreciate that a Bear Market is different in character from a Bull Market.
Shelby: Did you have stops in place?
Wink: Sure. But it didn't matter. The trend is your friend. If the trend is down, you're going to lose your money by buying stocks and hoping for a turn around. So, that whole IBD period in 2000 was a setback.
Shelby: And you used those lessons to protect yourself later?
Wink: Exactly. When August 2008 rolled around, I knew what to do when the trend turned down. Get out of stocks!
Shelby: What was your second hall of fame bozo move?
Wink: This is an interesting bozo move drenched in greed, pure unmitigated greed and emotion. When 9-11 happened, I was no longer actively investing and trading. I just assumed the long trend was bullish and I would profit in the end. The stock market closed for a week after 9-11. When the market opened again, I was curious to see what would happen. Well, the market dropped for 5 days in a row. I knew we were near a bottom but I wanted to see what would happen. I was like, you, Shelby, just observing and taking notes and thinking about things.
On options expiration day in October, 2001, I read a post on my favorite website, clearstation.com, about the performance of Juniper Networks (JNPR). Remember, last week I had said that I flirted around with Juniper? Juniper was one of my momentum stocks that I had seized upon after reading Forbes and Fortune. It must have had a price earnings ratio of 340 to 1! LOL. I didn't care during my predator stage. I just wanted price movement.
Anyway, I read a posting that caught my attention. October 20 calls on Juniper had increased from 0.05 on September 24, I think, to 3.5 by the third Friday in October. Even though the underlying price of Juniper had increased from $8.94 to $23.50, the options had increased 70-fold. A hypothetical $5,000 would have increased to $350,000 in 4 weeks! That little price move stuck in my mind. I mulled it over and thought about why this abnormal price event had happened. I eventually decided that I would bide my time and wait for another comparable opportunity in JNPR call options.
Shelby: But you can't depend upon those opportunities happening again? I mean, the market could have kept dropping after 9-11. In that case, those October 20 options would have expired worthless. Or, the price of JNPR might have risen but only up to say, 12 or 16 or even 20. It seems like a roll of the dice to me. Then again, we are in Las Vegas. LOL!
Wink: You're absolutely right. Today, I would chalk it up to a low probability, Black Swan event. But I was still in grade school as a trader and investor. The early years had been too easy. I had to learn to respect risk.
Shelby: So, did you get an opportunity to turn a hypothetical $5,000 into $350,000?
Wink: Well, yes and no. That's why this trade is my Second Worst trade ever. 2001 came and went. I was surprised at how strong the market bounce was. My handle on technical analysis told me that the bounce was about to end due to negative divergences. I remember feeling a sense of satisfaction as the market topped in early 2002. I wasn't making money in my retirement account but I was happy because I had anticipated a top in the market and I was right. It is very important for an investor and trader to reach a place where market tops can be anticipated. Once you reach that stage in your growth, you will have more confidence when its time to sell. When its time to sell, the herd will be very bullish. When its time to sell, the media cheerleaders on CNBC will be giddy. Commentators will be beside themselves with glee. "There's no way this market is going down!" You ain't seen nothing yet!" Those are psychological signs of a market top.
Shelby: So, the market was topping. Why were you still thinking about that October 2001 move in JNPR call options?
Wink: Because I now knew that the market moved in clear cycles from high to low. When the next low came, that would be a good time to buy stock. It would be a good time to buy call options in JNPR.
I remember one of my best investments happened in 2002. Should I mention it now or later?
Shelby: Well, to keep my notes clear, let's stick with your failures for now. Later, we can touch upon your greatest hits. It might surprise you but I think readers will learn more from your struggles and flops.
Wink: You're probably right. So, the year 2002 came and went. I focused on my day job. 2003 came and I noticed that the character of the market had changed.
Shelby: What do you mean "the character of the market had changed?"
Wink: Stocks were going up more than down. Investors were buying the dips, not selling the rallies. I could see the change in the charts. The market had changed from Bear to Bull. I did some research on the market. I remember reading the Stock Almanac and noting that a dip in mid-December was oftentimes followed by a Santa Claus rally. I saw that the market had made a higher low in March of 2003 and a higher low in late August of 2003. Might this pattern of higher highs and higher lows be a setup for a Santa Claus rally? And, if so, might this not be a splendid opportunity to buy underpriced and undervalued JNPR call options?
I put two and two together and decided the opportunity was at hand. It was in front of me. I opened up an options account with a brokerage firm in New York. I deposited my money. I waited patiently for the mid-December 2003 dip in the price of JNPR. One thing I had remembered from September 2001 was that the price of JNPR had dipped below a psychologically important level of 9 before bouncing. In early December 2003, JNPR was trading around 19/18. I could see that it was declining but it was a gentle decline, as if the stock did not want to fall further. I knew from prior readings that a muffled fall is a sign of impending strength. The days ticked by, December 11, December 12, December 13. I waited with patience worthy of the famous trader, Jesse Livermore. December 14....
JPNR began to drop below 18, below 17. I placed a limit order to buy as many JNPR Jan 20 calls @ 0.05 as I could. I believe it was December 17, 2003 when the price of JNPR dropped to 16.84. I knew, I just knew that this was the time to buy! Weak hands would be removed by the running of stops. I pulled up Yahoo.Finance. I typed in "JNPR", "options", and scrolled down to the January 20 calls. The last traded price was 0.05!!!
Yes!! Yes!! Yes!! The price had hit 0.05. I was so happy! I was dancing on air. You would have thought that I was Reginald Lewis who had just closed the deal on Beatrice. I was happy and counting my money/smile. LOL
Shelby: What a build up! This seems like a very skillful move, one you had plotted and planned for over two years. That's a long time to stalk your prey. What happened? Why is this your second biggest failure as a trader?
Wink: If it seems too good to be true, it probably is too good to be true. I met a fisherman the other day in La Jolla that said the same thing.
Here's what happened.
So, I'm happy as a clam. I nailed the absolute bottom of the move into mid-December 2003. 3 days later, my calls were quoted at 0.20. That's a 400% increase in 3 days. Of course, I'm expecting a 70 to 1 return because of the October 2001 JNPR call experience. To hear the cash register ring, I called my options broker (name not revealed). I asked for a price quote on the balance in my account. The broker said, "You have x funds in your account, Mr. Twyman." I was stunned. I was speechless. The grin on my face was gone. I said, "But how can that be? I purchased the January 20 call options 3 days ago at 0.05. The last quoted price was 0.20." The emotionless broker replied, "That right, Mr. Twyman. The last quoted price was 0.20. However, your limit order to buy at 0.05 was never filled. Only 5 contacts traded at that point. Those 5 contacts were all purchased by specialists."
Shelby: Oh, no! (hand over mouth).
Wink: It had never occurred to me to confirm that my limit order was filled. If I had phoned in for a fill confirmation on December 17, 2003, I would have raised my limit order to 0.10. I was mad. I was angry. I was fit to be tied. And this is why this missed trade is my second biggest failure. It was not a failure because I didn't get filled at 0.05. I could have still gotten in a very good price at 0.20. My failure was that I became emotional. I allowed my disapointment to color my judgment.
Had I not been angry at those "floor specialists" who got my 0.05 calls, I would have gotten in at 0.20. Instead, I refused to play a rigged game.
Shelby: And what happened?
Wink: It was a very sad outcome. Rather than be flexible, I sulked. I watched as the price of JNPR leaped from 16.84 to 18.50 and 18.20 to 20 and from 20 to 22.5 and from 22.5 to 30 by the third Friday in January 2004. Had I picked up the phone to confirm the fill and been flexible enough to buy at 0.10 rather than insist on 0.05, I would have earned a 100 to 1 return on my January 20 JNPR calls in 4 weeks. That would have been my George Soros trade, my John Paulson trade, my best trade ever!
Shelby: I now see why you consider it such a failure. You failed to be flexible, to stay with a well-defined situation that you had been stalking for two years, and to heed the trend.
Wink: That's right. Opportunities like December 17, 2003 don't come around every day. I knew that at the time. I remember moping about the missed opportunity that I had foreseen. If you are right on the opportunity and right on the trend, don't quibble over 5 cents. You will regret squandered opportunities that you have sized up for two years more than a flat out losing trade.
Shelby: I fear that we are once again going over our time limitation. I lost track of time. I want to hear about your third biggest failure. Can we return next week and have you talk about your later years when you have made shrewd moves in your retirement account?
Wink: Of course, but the third time will be the charm. I don't want to reinvent the wheel and many of my thoughts are on my blog.
Shelby: I understand. So, you crashed in 2000 like most investors. You then waited for a rare options opportunity for over two years. When the time came to execute, you quibbled over 5 cents and became emotional about special access afforded to floor specialists. In doing so, you passed up a 100 to 1 rate of return. What would the third most notable mistake be?
Wink: By 2007, I was in the swing of things. I understood the ways of floor specialists and market makers. I had removed emotion from my decision making. I was well on my way to becoming a contrarian. Then, I allowed success to go to my head. After a successful campaign where I grew $700 to $20,000 within 6 weeks, I foolishly assumed that I was now King Kong. I could do no wrong. Traders like Larry Williams and Marty Schwartz have talked about losses after outstanding successes. It happened to me in October 2007. After reaching $20,000, I gave it all back on an ill-considered options play on Countrywide. I didn't have the patience to wait for a well-defined situation. As a result, I learned to value patience over greed, discipline over past triumphs. Nowadays, I am quick to sell hysteria after nailing a market bottom. Gains are fleeting when euphoria reigns. Its been an important lesson.
I would have to say, in all frankness, that my failures have taught me more than my gains. Patience, discipline, the clearly defined situation--I've put all of these lessons to good use with the Las Vegas Thrift Savings Plan Investment Club.
(Glances at my watch) Shelby, where did the time go?
Shelby: I know. Have a good day. I look forward to finishing up the interview series next week.
Wink: Me too.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Shelby: Wink, thank you again for your time this morning. Where are your lovely kids?
Wink: The oldest is helping a friend with a move. My middle child is transfixed by Cartoon Network. And the youngest is skating at the ice rink.
Shelby: I see. Well, let's see where we left off. I wanted to ask you about your most memorable failures. Failure seems to be a precondition for success in many areas of life.
Wink: That's right, Shelby, particularly in investing and trading. Three bozo moves come to mind right off the bat. When the market started to crash in 2000, I didn't step back and stop investing. I just assumed that we were in a rolling correction and that higher prices were dead ahead. I would come to this library and read the Investor's Business Daily (IBD) every Saturday morning. Right over there, you see where they keep the newspapers? I just pored over IBD looking for the next Yahoo, the next Juniper Networks, the next Internet Capital Group. I didn't appreciate that a Bear Market is different in character from a Bull Market.
Shelby: Did you have stops in place?
Wink: Sure. But it didn't matter. The trend is your friend. If the trend is down, you're going to lose your money by buying stocks and hoping for a turn around. So, that whole IBD period in 2000 was a setback.
Shelby: And you used those lessons to protect yourself later?
Wink: Exactly. When August 2008 rolled around, I knew what to do when the trend turned down. Get out of stocks!
Shelby: What was your second hall of fame bozo move?
Wink: This is an interesting bozo move drenched in greed, pure unmitigated greed and emotion. When 9-11 happened, I was no longer actively investing and trading. I just assumed the long trend was bullish and I would profit in the end. The stock market closed for a week after 9-11. When the market opened again, I was curious to see what would happen. Well, the market dropped for 5 days in a row. I knew we were near a bottom but I wanted to see what would happen. I was like, you, Shelby, just observing and taking notes and thinking about things.
On options expiration day in October, 2001, I read a post on my favorite website, clearstation.com, about the performance of Juniper Networks (JNPR). Remember, last week I had said that I flirted around with Juniper? Juniper was one of my momentum stocks that I had seized upon after reading Forbes and Fortune. It must have had a price earnings ratio of 340 to 1! LOL. I didn't care during my predator stage. I just wanted price movement.
Anyway, I read a posting that caught my attention. October 20 calls on Juniper had increased from 0.05 on September 24, I think, to 3.5 by the third Friday in October. Even though the underlying price of Juniper had increased from $8.94 to $23.50, the options had increased 70-fold. A hypothetical $5,000 would have increased to $350,000 in 4 weeks! That little price move stuck in my mind. I mulled it over and thought about why this abnormal price event had happened. I eventually decided that I would bide my time and wait for another comparable opportunity in JNPR call options.
Shelby: But you can't depend upon those opportunities happening again? I mean, the market could have kept dropping after 9-11. In that case, those October 20 options would have expired worthless. Or, the price of JNPR might have risen but only up to say, 12 or 16 or even 20. It seems like a roll of the dice to me. Then again, we are in Las Vegas. LOL!
Wink: You're absolutely right. Today, I would chalk it up to a low probability, Black Swan event. But I was still in grade school as a trader and investor. The early years had been too easy. I had to learn to respect risk.
Shelby: So, did you get an opportunity to turn a hypothetical $5,000 into $350,000?
Wink: Well, yes and no. That's why this trade is my Second Worst trade ever. 2001 came and went. I was surprised at how strong the market bounce was. My handle on technical analysis told me that the bounce was about to end due to negative divergences. I remember feeling a sense of satisfaction as the market topped in early 2002. I wasn't making money in my retirement account but I was happy because I had anticipated a top in the market and I was right. It is very important for an investor and trader to reach a place where market tops can be anticipated. Once you reach that stage in your growth, you will have more confidence when its time to sell. When its time to sell, the herd will be very bullish. When its time to sell, the media cheerleaders on CNBC will be giddy. Commentators will be beside themselves with glee. "There's no way this market is going down!" You ain't seen nothing yet!" Those are psychological signs of a market top.
Shelby: So, the market was topping. Why were you still thinking about that October 2001 move in JNPR call options?
Wink: Because I now knew that the market moved in clear cycles from high to low. When the next low came, that would be a good time to buy stock. It would be a good time to buy call options in JNPR.
I remember one of my best investments happened in 2002. Should I mention it now or later?
Shelby: Well, to keep my notes clear, let's stick with your failures for now. Later, we can touch upon your greatest hits. It might surprise you but I think readers will learn more from your struggles and flops.
Wink: You're probably right. So, the year 2002 came and went. I focused on my day job. 2003 came and I noticed that the character of the market had changed.
Shelby: What do you mean "the character of the market had changed?"
Wink: Stocks were going up more than down. Investors were buying the dips, not selling the rallies. I could see the change in the charts. The market had changed from Bear to Bull. I did some research on the market. I remember reading the Stock Almanac and noting that a dip in mid-December was oftentimes followed by a Santa Claus rally. I saw that the market had made a higher low in March of 2003 and a higher low in late August of 2003. Might this pattern of higher highs and higher lows be a setup for a Santa Claus rally? And, if so, might this not be a splendid opportunity to buy underpriced and undervalued JNPR call options?
I put two and two together and decided the opportunity was at hand. It was in front of me. I opened up an options account with a brokerage firm in New York. I deposited my money. I waited patiently for the mid-December 2003 dip in the price of JNPR. One thing I had remembered from September 2001 was that the price of JNPR had dipped below a psychologically important level of 9 before bouncing. In early December 2003, JNPR was trading around 19/18. I could see that it was declining but it was a gentle decline, as if the stock did not want to fall further. I knew from prior readings that a muffled fall is a sign of impending strength. The days ticked by, December 11, December 12, December 13. I waited with patience worthy of the famous trader, Jesse Livermore. December 14....
JPNR began to drop below 18, below 17. I placed a limit order to buy as many JNPR Jan 20 calls @ 0.05 as I could. I believe it was December 17, 2003 when the price of JNPR dropped to 16.84. I knew, I just knew that this was the time to buy! Weak hands would be removed by the running of stops. I pulled up Yahoo.Finance. I typed in "JNPR", "options", and scrolled down to the January 20 calls. The last traded price was 0.05!!!
Yes!! Yes!! Yes!! The price had hit 0.05. I was so happy! I was dancing on air. You would have thought that I was Reginald Lewis who had just closed the deal on Beatrice. I was happy and counting my money/smile. LOL
Shelby: What a build up! This seems like a very skillful move, one you had plotted and planned for over two years. That's a long time to stalk your prey. What happened? Why is this your second biggest failure as a trader?
Wink: If it seems too good to be true, it probably is too good to be true. I met a fisherman the other day in La Jolla that said the same thing.
Here's what happened.
So, I'm happy as a clam. I nailed the absolute bottom of the move into mid-December 2003. 3 days later, my calls were quoted at 0.20. That's a 400% increase in 3 days. Of course, I'm expecting a 70 to 1 return because of the October 2001 JNPR call experience. To hear the cash register ring, I called my options broker (name not revealed). I asked for a price quote on the balance in my account. The broker said, "You have x funds in your account, Mr. Twyman." I was stunned. I was speechless. The grin on my face was gone. I said, "But how can that be? I purchased the January 20 call options 3 days ago at 0.05. The last quoted price was 0.20." The emotionless broker replied, "That right, Mr. Twyman. The last quoted price was 0.20. However, your limit order to buy at 0.05 was never filled. Only 5 contacts traded at that point. Those 5 contacts were all purchased by specialists."
Shelby: Oh, no! (hand over mouth).
Wink: It had never occurred to me to confirm that my limit order was filled. If I had phoned in for a fill confirmation on December 17, 2003, I would have raised my limit order to 0.10. I was mad. I was angry. I was fit to be tied. And this is why this missed trade is my second biggest failure. It was not a failure because I didn't get filled at 0.05. I could have still gotten in a very good price at 0.20. My failure was that I became emotional. I allowed my disapointment to color my judgment.
Had I not been angry at those "floor specialists" who got my 0.05 calls, I would have gotten in at 0.20. Instead, I refused to play a rigged game.
Shelby: And what happened?
Wink: It was a very sad outcome. Rather than be flexible, I sulked. I watched as the price of JNPR leaped from 16.84 to 18.50 and 18.20 to 20 and from 20 to 22.5 and from 22.5 to 30 by the third Friday in January 2004. Had I picked up the phone to confirm the fill and been flexible enough to buy at 0.10 rather than insist on 0.05, I would have earned a 100 to 1 return on my January 20 JNPR calls in 4 weeks. That would have been my George Soros trade, my John Paulson trade, my best trade ever!
Shelby: I now see why you consider it such a failure. You failed to be flexible, to stay with a well-defined situation that you had been stalking for two years, and to heed the trend.
Wink: That's right. Opportunities like December 17, 2003 don't come around every day. I knew that at the time. I remember moping about the missed opportunity that I had foreseen. If you are right on the opportunity and right on the trend, don't quibble over 5 cents. You will regret squandered opportunities that you have sized up for two years more than a flat out losing trade.
Shelby: I fear that we are once again going over our time limitation. I lost track of time. I want to hear about your third biggest failure. Can we return next week and have you talk about your later years when you have made shrewd moves in your retirement account?
Wink: Of course, but the third time will be the charm. I don't want to reinvent the wheel and many of my thoughts are on my blog.
Shelby: I understand. So, you crashed in 2000 like most investors. You then waited for a rare options opportunity for over two years. When the time came to execute, you quibbled over 5 cents and became emotional about special access afforded to floor specialists. In doing so, you passed up a 100 to 1 rate of return. What would the third most notable mistake be?
Wink: By 2007, I was in the swing of things. I understood the ways of floor specialists and market makers. I had removed emotion from my decision making. I was well on my way to becoming a contrarian. Then, I allowed success to go to my head. After a successful campaign where I grew $700 to $20,000 within 6 weeks, I foolishly assumed that I was now King Kong. I could do no wrong. Traders like Larry Williams and Marty Schwartz have talked about losses after outstanding successes. It happened to me in October 2007. After reaching $20,000, I gave it all back on an ill-considered options play on Countrywide. I didn't have the patience to wait for a well-defined situation. As a result, I learned to value patience over greed, discipline over past triumphs. Nowadays, I am quick to sell hysteria after nailing a market bottom. Gains are fleeting when euphoria reigns. Its been an important lesson.
I would have to say, in all frankness, that my failures have taught me more than my gains. Patience, discipline, the clearly defined situation--I've put all of these lessons to good use with the Las Vegas Thrift Savings Plan Investment Club.
(Glances at my watch) Shelby, where did the time go?
Shelby: I know. Have a good day. I look forward to finishing up the interview series next week.
Wink: Me too.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Friday, November 26, 2010
Contrary Opinion and the Fisherman
Yesterday morning, I took a stroll along the water's edge in La Jolla. Every now and then, I would take a break and read a few passages from Market Wizards for inspiration. Market Wizards is a summary of interviews with top traders. The interviews are very rich portrayals of how a few traders made it to the top. Interestingly enough, attitude and discipline seemed more important then whether the individual was a fundamentalist or a technical analyst.
While resting on a bench, a gentleman walked up to me and said in jest, "Are you enjoying your front yard?" I replied, "Simply splendid." He asked me about the book that I was reading. I gave a short overview of the book's premise; i.e. to share the life stories and winning traits of top investors and traders.
"What main lessons did you take away from the book," he asked? I was intrigued by his question. It showed interest and curiosity and, possibly, experience with investing.
Because I have read the book countless times over the years, I quickly rattled off three key points: (1) The trend is your friend, (2)You have to be greedy when others are fearful and fearful when others are greedy, (3) Always have the patience to wait for a clearly defined situation.
To my delight, he replied that he was an investor. He had recently invested in a coal mining stock and another stock that produced good dividends. (As you know by now, I do not think it is a good time to be in stocks but I kept my thoughts to myself.) He seemed joyful on Thanksgiving morning. He talked about how he was anticipating a Santa Claus rally into the year's end. He said that "those boys on Wall Street want their year end bonuses. And you know that Goldman Sachs is crooked." I saw his point but, more importantly, I sized him up as the man on the street giving me a honest feel for street sentiment. And his sentiment was strongly bullish yesterday morning.
He volunteered that he was a fisherman up North. He caught wonderful salmon and would gladly share a catch with me if I were interested in the future. I thanked him and gave him my business card.
And as the Bullish fisherman walked away, I felt reassured in my Bearish position.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
While resting on a bench, a gentleman walked up to me and said in jest, "Are you enjoying your front yard?" I replied, "Simply splendid." He asked me about the book that I was reading. I gave a short overview of the book's premise; i.e. to share the life stories and winning traits of top investors and traders.
"What main lessons did you take away from the book," he asked? I was intrigued by his question. It showed interest and curiosity and, possibly, experience with investing.
Because I have read the book countless times over the years, I quickly rattled off three key points: (1) The trend is your friend, (2)You have to be greedy when others are fearful and fearful when others are greedy, (3) Always have the patience to wait for a clearly defined situation.
To my delight, he replied that he was an investor. He had recently invested in a coal mining stock and another stock that produced good dividends. (As you know by now, I do not think it is a good time to be in stocks but I kept my thoughts to myself.) He seemed joyful on Thanksgiving morning. He talked about how he was anticipating a Santa Claus rally into the year's end. He said that "those boys on Wall Street want their year end bonuses. And you know that Goldman Sachs is crooked." I saw his point but, more importantly, I sized him up as the man on the street giving me a honest feel for street sentiment. And his sentiment was strongly bullish yesterday morning.
He volunteered that he was a fisherman up North. He caught wonderful salmon and would gladly share a catch with me if I were interested in the future. I thanked him and gave him my business card.
And as the Bullish fisherman walked away, I felt reassured in my Bearish position.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Wednesday, November 24, 2010
Rules for Investing and Trading
To play the game of investing and trading, you have to know the rules. Otherwise, you will give your hard-earned money to others who do know the rules. I've read many financial books but Market Wizards: Interviews with Top Traders by Jack D. Schwager and Reminiscences of a Stock Operator by Edwin Lefevre remain my best playbooks on how the game is played.
Commit these rules to heart and you should benefit over the long run:
1. "There is nothing new in Wall Street." Lefevre at page 10
2. The trend is your friend.
3. "I wasn't patient enough to wait for a clearly defined situation." Schwager at page 18
4. "I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game--that is, to play the market only when I was satisfied that precedents favored my play." Lefevre at page 21
5. Stay in markets with major trends. Schwager at page 23
6. "Whenever I read the tape by the light of experience I made money, but when I made a plain fool play I had to lose." Lefevre at page 21
7. "Ed Seykota would never get out of anything unless the trend changed." Schwager at page 24
8. "Of course, I let the craving for excitement get the better of my judgment." Lefevre at page 22
9. "When news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news." Schwager at page 27
10."The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages." Lefevre at page 22
11. "I knew that the big money was going to be made on the trades that met my criteria. There will always be trades that meet those requirements, but there may be fewer of them, so you have to be much more patient." Schwager at page 28
12. "There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." Lefevre at page 36
Have a Happy Thanksgiving!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Commit these rules to heart and you should benefit over the long run:
1. "There is nothing new in Wall Street." Lefevre at page 10
2. The trend is your friend.
3. "I wasn't patient enough to wait for a clearly defined situation." Schwager at page 18
4. "I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game--that is, to play the market only when I was satisfied that precedents favored my play." Lefevre at page 21
5. Stay in markets with major trends. Schwager at page 23
6. "Whenever I read the tape by the light of experience I made money, but when I made a plain fool play I had to lose." Lefevre at page 21
7. "Ed Seykota would never get out of anything unless the trend changed." Schwager at page 24
8. "Of course, I let the craving for excitement get the better of my judgment." Lefevre at page 22
9. "When news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news." Schwager at page 27
10."The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages." Lefevre at page 22
11. "I knew that the big money was going to be made on the trades that met my criteria. There will always be trades that meet those requirements, but there may be fewer of them, so you have to be much more patient." Schwager at page 28
12. "There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." Lefevre at page 36
Have a Happy Thanksgiving!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Tuesday, November 23, 2010
The Trend is Your Friend
There is an old saying that the trend is your friend. Certainly, the trend has been down in the S&P 500 Index since November 5, 2010. We are now re-testing the lows of 1173 made last Tuesday, November 16. The news from Korea this morning rattled the markets. Notice that the market did not shrug off or ignore the bad news. It reacted severely to bad news by dropping to a low of 1176. The path of least resistance is now down in a down trend. So, the take away point this evening is that the market's reaction to bad news confirmed that the market is weak. We also had a market that closed down more than 1%. When a market closes down more than 1%, it is considered a true selling day. These days are generally bad times to hold stocks. There are always exceptions but the vast majority of stocks will follow the general trend of the market.
Should the market breach 1173, last Tuesday's low, we should see an acceleration in selling pressure.
Traditionally, investors and traders are conditioned to anticipate calm and peaceful trading days around Thanksgiving. The market's behavior today is another example of how contrary opinion can prove profitable.
Have a good evening!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Should the market breach 1173, last Tuesday's low, we should see an acceleration in selling pressure.
Traditionally, investors and traders are conditioned to anticipate calm and peaceful trading days around Thanksgiving. The market's behavior today is another example of how contrary opinion can prove profitable.
Have a good evening!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
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