Thursday, April 14, 2005

Excerpts from a thread on the IBD forum

Since I'm keeping this blog as a trading journal for future reference, I want to post some excerpts from my side of a conversation on a thread in the IBD forum because they reflect my current thinking about the market and the way I'm trading in 2005. As a heads-up, "Klinv" is the screen name of one of the people on the forum. He was expressing his frustration with the indecision in the market lately and got me started rambling!

  • I'm up between 5 and 10% for the year. It doesn't sound fantastic, but I would be up about twice that if I hadn't gotten caught in RIMM's 20% gap up a few weeks ago. I've been doing my short sales in bursts this year, and they almost always come when both the QQQQ and my short candidates start to crest from a rally. I usually don't act on one alone, I sell them both: my candidates and the qqqq's. This has kept me out of a lot of trouble. Many times I get stopped out of a short, but I never risk more than 3-4%.

    Klinv you're reminding me of when Larry Livingston talked about how he didn't make as much as he figured he should have when he was right about the market. This is because he was swinging in and out too much. He went on to say that the big money is in the big swing and your business in a bull market is to buy stocks and hold them until the bull is on its last legs. The reverse is true for a bear. I still have my winning shorts from January and I've pyramidded into some of them. I do get nervous every now and then. It's amazing how frequently my resolve has been tested by rallies in individual stocks and rallies in the market itself.

    I'll share a few ideas that have saved my skin this year:

    * When I get nervous about a short position, if the position is too big, I'll trim it down to a comfortable size regardless of its current price.

    * If one of my positions gaps up on earnings or some other news and the chart is still bearish, I will "double down" by adding to my position at the gap-up open. If the stock closes that day in the bottom half of its intra-day range then I know I was right to stay short. A weak stock will never revisit its high price at the open that day. NOTE: you have to have a position acting in your favor well in advance of the earnings announcement, this isn't an earnings-eve play!

    * If one of my positions rallies for a few days or a week and I'm feeling squeezed, I ask myself "would I be a buyer of the stock here?" and I look at the chart. Most of the time I would never even think of buying the stock there, so why would I buy to cover? Buying and covering are basically the same thing, in both cases you are a buyer of the stock. If the stock gets close to your stop but looks weak, it could be time to "double down" (but don't move your stop). You aren't "risking" much money since its price is so close to your stop anyway.

    * If you feel like closing out a short position during the middle of the trading day because it is moving up, wait until the close. You have a better perspective at the close, and frequently in bearish times conditions will have worsened as the day carried on. You will have also given yourself more time to think over your decision. Being in a hurry is a sure way to lose money.

    * Trade the QQQQ's. When you are buying and or short-covering Q's, buy and cover stocks. When you are selling and or shorting Q's, sell and short stocks. This keeps your portfolio in tune with what the market is doing at the time, and also acts to diversify your portfolio.

  • As I understand it, the reason Greenspan has to raise the rates is the twin deficits. You probably already know this, but the government spending is devaluing our currency. This is means we can export like crazy because our stuff isn't worth as much--we spent part of what it would fetch in the market already! The problem is that foreigners who already own US debt are seeing their inheritance shrink.. the US is spending their money. So they shake up the markets every now and then to remind Greenspan of his job. He responds with jawboning about how the government spending is under control and how the end is in sight and the local yokels buy it, temporarily boueying the market. But the foreign investors see the writing on the wall and if they walk (dumping US debt - bonds, tbills, $USD, etc) you see a repeat of October, 1987. In a sense, if Greenspan doesn't raise the rates, US debt starts asymptoting towards worthless. The rates aren't really up to him even though he is pulling the strings, his hand is forced. The reason the market tanks when he raises the rates is that he's directing money from US businesses to the owners of US debt and that is bad for corporate earnings, dividends, and growth.


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