Premature Celebration

Random Thoughts

The media was quick to announce that the Quack (Nasdaq) had its biggest up day of the year on Tuesday. Should we start popping the corks? Settle down Beavis. Markets often have their biggest up days in bear markets. So, let’s not start kissing each other just yet.

The market has been dropping like a stone. A kneejerk back up is actually a fairly common event.

Keep in mind that a market’s job is to frustrate the most, to create the most pain. It’ll often do the obvious but in an un-obvious manner (I borrowed that line from Raschke). If it’s going to implode, it will have one last big rally suggesting that the “the water’s fine, come on in!”

If it were easy, everybody would be doing it.

Way back in the late 20’s, (I know I’m showing my age) the market (basis the Dow) rallied 18% in two days after the 29 top. It then lost 85% of its value over the next few years.

Study history when you get a chance and you’ll see a lot of impressive one or two day wonders.

You have to look under the hood. In going through 2-3 thousand stocks each day, I see what’s really going on. It’s ugly. The damage has been done. Now, this doesn’t mean that the market can’t turn right back up. It can do whatever it wants. It doesn’t care about you, me, or the guy that screams on TV.

What if I’m wrong? Well, so what. It won’t be the first time and it won’t be the last. This is a very humbling business. The market has handed me my ass on more occasions that I’m willing to admit. It doesn’t matter if I’m wrong or right. Using the model portfolio as an example, stops will take me out of my shorts and my last long could just become the outlier of the year. And, I might even start buying stocks. If I’m right then my shorts go back to making money and lonely long will likely get stopped out. It’s that easy. Well, it’s never easy but it’s not nearly as difficult as most try to make it.

The reason that trading is hard for so many is that they are not used to being wrong. Trust me, in this business, you have learn to live with the fact that you’re going to be wrong quite often.

Setups, entries, taking partial profits, and stops are the secret. If you are seeing a plethora of potential shorts, then short. If you seeing a plethora of buys, the buy. “If you get hungry, eat something.” And, if you can’t find a setup to save your life, then sit on your hands. Do make sure that you wait for entries and use stops. Also, you want to take partial profits on a short-term moves just in case the longer-term move doesn’t materialize. We recently were able to take partial profits on a short and it then stopped out as a scratch on the remainder. Better than a poke in the eye is what I say.

Don’t get too obsessed with the overall market direction. It is much harder to predict the overall market than it is to predict the direction in individual issues. As I preach, let the ebb and flow control your portfolio. In last week’s chart show I mentioned that a multi-billion dollar fund had gone to cash. They did this because their stops got hit and they honored them. No special sauce was use. They simply followed their plan. Wow, what a concept? Planning your trades and trading your plan. I should write that down.

Let the ebb and flow control your portfolio.

Tell me something good Big Dave. Well, Biotech actually made new highs yesterday. That’s where we have the aforementioned leftover long (oh, Big Dave, you are such a tease, what is it? Watch last week’s chart show, free on Youtube to find out). We could actually start seeing new buy signals here soon.

Other than that, I’m not seeing much, other than a “plethora of piñatas,” (Youtube it) I mean shorts.

So what do we do? Again, the sharp selloff followed by a sharp retrace has created a plethora of shorts setting up. Therefore, look to load/reload on the short side. As usual, wait for entries though. If the market continues to defy gravity then you’ll avoid some potential losers. And, if you do get triggered, as always, honor your stops. He who fights and runs away, lives to fight another day. Do not get caught up in the celebration. Follow your plan.

Best of luck with your trading today!

Dave