Click chart to enlargeThe above intraday chart of the Dow itself shows its nearly 500 point drop in the last 15 minutes of trading. This chart underscores what a casino Wall Street has become lately. There is no sense in trying to predict the market's next move, because odds are when it comes, it will not even have a catalyst.
We titled this post "maintaining sanity", because we feel that in times like this it is important to not let the market get the better of you. You should embrace the volatility and use it as a training tool to improve your trading. If you can navigate this market while remaining invested, the skills you learn will help you through any market conditions you may face in the future.
Learn this dance, and in time you'll be handsomely rewarded.
We can offer you 5 tips to help you maintain your sanity in this market:
1.) Avoid individual stocks. The main reason to do this is because it is psychologically easier to convince yourself to hold (and buy more of) an index during the really bad days than it is to convince yourself to hold(or buy more of) an individual stock. The index offers enough diversification that you don't have to doubt the future of the company you're invested in. With the stress this market brings to traders, one does not need the added stress of worrying about earnings reports, margins, etc.
2.) Don't buy your entire position at once. If you buy your entire position and the index goes against you, you are playing with scared money. Just at the time you should be adding to your position, instead you'll be frozen by fear because it has already moved so far against you. You always want to be in a position to add more if it goes against you, because if you do this repeatedly, you'll be able to break even or profit when the index eventually swings the other way.
3.) Always keep dry powder. The notion of getting all of your money in at the bottom is a fantasy. We would consider ourselves to be very successful if we were to get 70% of our money in near the bottom. The other 30% is an extremely valuable little insurance policy which makes it possible to cut your break even price in half if need be.
4.) Trade around your position. Scale in and out of your core position when the opportunity presents itself. Take small gains here and there as they present themselves. When you sell something, consider shorting it if it continues going higher. After all, you sold it because it just ran up. A further run is likely to fizzle out soon enough.
5.) Never lose sleep. If you're losing sleep over a trade, then you are trading outside your own comfort level. Everyone has a different tolerance for risk, and different investment goals. It is a very personal thing, and therefore all stock market advice should be taken with a grain of salt.
Don't listen to people like us. Make your own decisions and use CNBC, blogs, gurus as a way of gaining a net feel for the market rather than an "all or nothing" decisionmaker.
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Right now, we remain focused on trying to get as much of our capital invested in the indexes at the bottom. While your basic premise may be different than ours, you may still benefit from our method of achieving this, because the same approach applies to scaling in and out of positions during a bull market. The skills this current market can teach you will stay with you for life.
To meet our aggressive goal, we sold 1/7th of our longs today, which was a sale of DDM at 35.5.
We put 3% of our account in FXP yesterday at 114.6. Neither price was particularly great, but the net effect gets us one step closer to our goal of remaining invested by trading around a core long position in a severly oversold market in order to benefit from the eventual and unpredictable rapid snap back.
We are now in a position where if the market goes up, we profit because we remain net long. We have 10 times the capital in long positions as we do shorts. If instead the market drops, we revisit the lows in much better shape than last time. By shedding 1/7th of our longs, we'll lose less on this ride down than last time. The FXP will also help our bottom line if we return to the lows. Both of these savings will mean more capital to invest at the bottom. Rinse and repeat.
You will not make major headway doing this. In fact, we have been on either side of 0% for quite some time. But on each return to the lows, we wind up there with more shares than last time. At some point, trading around our core position in such a way as to maximize the number of shares we hold, and to constantly be working to lower our net buy-in price will result in a formidable gain. The market's recent volatility is a welcome event if you can remain positive about what it can do for you, and take advantage of it rather than fight it.
We remain focused on selling DDM and SSO while adding FXP if the market rallies, and adding DDM and SSO while selling FXP only on a return to the lows. If the market breaks its recent lows, then the dry powder, the other 65% of our account, will come into play.
Let's hope tomorrow is just like today!
32 comments:
Hong Kong just cut rates, too?
We're hoping overnight other countries follow suit. Does anyone know if today's rate cut was known to be a global coordinated effort again, or could overnight rate cuts in other countries come as a suprise?
Taiwan Central Bank follows suit
Ok, it makes sense now. It was coordinated but noy simultaneous. European Central Bank to cut next week.
Thanks for the trading method explained more fully.
snot,
so FXP a good entry point at mid-80 today?
Your strategy makes sense. Thanks for the insights.
While the US market may have another leg down, China market is currently 1/3 of its peak. I think China is near its bottom. As we have witnessed before, when China rallies, it rallies hard.
Thus, FXP may not be a good hedge for US equities.
Instead of FXP, how about using SRS as a hedge? I think the SRS may be the new SKF. The malls should be the most severely punished on market weakness.
Lightsource
It doesnt really matter that China is down 66%, while the US is only down 40%. In the solar sector, FSLR is only down 66%, while STP is down over 80%. (As of yesterday morning anyway.) That doesnt mean that STP has more likely found a bottom. It just means there's more money holding up US stocks. If FSLR falls another 66%, rest assured, STP will fall another 80%.
Snot, your trading approach makes sense. It should allow one to check the market a couple of times a day and not have to live in front of the computer. Question: I understand the pressure of some to have to sell something like FXP, even at a huge loss, when it plummets well below $100. It may be panic or a margin call. At those levels there will always be buyers. When FXP runs up to $180 on a market drop, I understand that sellers will want to take dramatic profits. What I don't understand is this: Who is buying at those levels and why? The upside potential is minimal compared to the huge downside risk -- especially if someone looks at the charts on Snotwheel's blog, right?
If you think we're at a bottom, then DXO is the way to go! When all this inflation hits, a 500% gain in DXO is likely. That's 500% in just a couple months. We're talking about 3000%+ annualized gains!
Well,,
I am going to start adding some FXP in my portfolio, which is still 100% cash.
Good luck to all.
Did anyone buy MTL when it was under $4?
I've done some straight line calculations for FXI/FXP. FXI has bounced pretty reliably off its 20dma. That should happen around 6.75. I am planning on hoarding FXP when FXI goes over 6.50
It looks that the market is closing higher. Window dressing? Any idea?
No one trusts any rally now, there always seems to be some profit taking during the last half hour. I think that 10% rally on the DOW will be erased soon.
Good luck.
FXI up 10%, but FXP down 20%. Are not they supposed to be in propotion?
Snot,
did you add fxp position today?
Damn it I am so pissed, I bought fxp at 93 and in 10 it crashed to 87 F U F U
hi snot,
Well FXP is at that magic area you consider a good entry point are you gonna kick up your%..I would also like to know your opinion on DXO, looks pretty good to me!
I believe Snot said "Don't listen to people like us. Make your own decisions..." Although this prodding is good for the ego, I imagine Snot is sincere when he/she says to plot your own course. This last blog was quite detailed in the larger investing philosophy. Thanks for that. Now I think I'll go and put all of my portfolio in one stock that is beaten down about 85%. Gotta be a winner, that.
With the market where it is, we still look at FXP as a hedge for our longs, not as a viable trade in and of itself. At some point, the scales will tip, and we'll turn our attention away from DDM and SSO and onto FXP. But the market remains severely oversold.
Let's talk theoretically here... if the Dow rallied 2,300 points from here to 11,500, it would still be below its downtrending 200 day moving average, and we would still be in a bear market. That gives you some idea of just how incredibly oversold the market has gotten on a short term basis. If 7900 is support and 11500 is resistance, then the midline is 9700. That means we are still in buying territory. That doesn't mean you should go out and dump your entire account into long positions at 9200. It just means for us that FXP at these levels remains a hedge and not a core position. At Dow 10200, we would see FXP as a core position, anticipating the next leg down in the market, and would start scaling into it in greater layers. Right now, FXP is 3% of our account, and in the low 80's it will move to 6%, if the opportunity presents itself. If you are buying FXP as a core position, you should go into it with the mindset that it will bottom at 50. This will help you avoid having too high of a break even price, which will prevent you from averaging down effectively if it does hit 50 because you'll be on scared money.
After all, FXP is a depreciating asset, so is only for short term trading. Because the market indexes are so far below their moving averages, they have many months to move around without ever having to break resistance (200dma at 11500+), or support (7900). They could theoretically move around below the average and above support for well into 2009.
If we were trading FXP as a core position, we'd start light now, and trade around the position until FXI got closer to its 200dma. At that point, you could take the trade more seriously. Don't worry, this does not mean a rally for FXI back to 43.84. As FXI moves higher, the average is dropping at about 3 points per month. If this rally has legs, FXI should meet up with its average at approx 34. However you trade FXP, you should position yourself that you have dry powder when FXI reaches 34.
As the market advances, our longs get more risky. We will add to FXP as a hedge in the low 80's if the opportunity presents itself.
We do not want to go in too heavily just yet because too much FXP will kill the performance of our longs. Just a sliver of it is enough to protect our account from a hedge fund blow-up, as FXP is now in a position to double if things heat up again.
For the guy who bought FXP late and had it crash $6 at the close, futures are down 75 points right now. If that holds until the open, that should be worth $8 or 9 dollars on FXP and you'll be up $2 or $3 at the open, my friend. I hope you get it and everyone else who has a short gets it and then maybe we can add a little to our longs and then may the DOW rally 150 points and make everybody happy. :)
Now, how about buying options in FXP as a hedge as oppose to buying fxp itself? I know you have time value to worry about, but doubling up gets a lot easier when the option drops 80% in value if the market goes on a run and a major fall will lead to a really dramatic rise in the call value. For short term volatility like this it seem to me that options coudl provide a better hedge than they normally would..
Hey whos the guy who just mentioned MTL? I just looked at it and damn. 110% in 4 days. I though i was doing well with Yingli and a puny 40%...
I'm thinking that that run is based on hopes the worldwide recession will be averted due to rate cuts etc and the price of steel will recover as a result.. Crazy talk bred from over-exuberance if you could ever point to an example. If i start hearing talk like that on CNBC etc MTL could be a great buy to get in and trade the sentiment. Of course its total rubbish. Whatever the chances of the markets turning around (40/60 in my book) there is no way a recession will be avoided, especially on the world stage... It could be a great long and short trade though as the will it / wont it talk causes wild swings in steel pricing...
What do you think?
Sniper
Conor,
You probably have a good idea with the FXP options, we just don't trade them in general so can't help you with that. As for MTL, its move is 10% about steel pricing and 90% about the general market. Even the Wall Street pros admit they'd rather be lucky than smart when it comes to market timing.
October 31st is a big window dressing day. If October was bad, which of course this one was, the last days of October are typically strong because the 31st marks the end of the fiscal year for many mutual funds. Here is an article on the subject...
http://www.cnbc.com/id/17689937/
Of course any window dressing rally we may have tomorrow could fizzle because it's Friday, and traders won't make large bets ahead of the weekend.
Link for window dressing article
http://www.247wallst.com/2007/10/mutual-fund-yea.html
Snot
Regarding the SPY chart about the descending triangle (which looks to me like a wedge), have we broken out of the top as of yesterday's close of 96.3? Don't have those cool charts you have, so can only extrapolate. If we have, what does that mean? Also, have any of the other triangles shown the same behavior? If we haven't broken out, do you think we are heading for the mother-of-all wedgies? (Sorry, couldn't help it)
I only mentioned MTL because it was the stock that signaled the big breakdown in May. It is logical to assume the the stock that signals the top would also signal the bottom.
sbbuilder, we did break out of the triangle. We're likely headed to the moving averages, but if you're not already long, it's a little late to be buying now. Right now, you're either long and riding the wave, or starting to build a short position. It doesn't matter at which point the market decides to turn down again as long as you keep shorting as it rallies. We see 9700 as the midpoint of the range, so going heavily short now is too risky in our opinion. Ideally, the market (or in this case FXI) reaches its 200dma, at which point it is ripe to be shorted.
As for the triangles, the more horizontal a support or resistance line is, the more significant a break of it is. Therefore, a break of the support line of that triangle would have been far more dramatic than a break of its sloping resistance line. Needless to say, the longer a support or resistance line takes to form, the more significant a break of it is. These little triangles and lines are just a fun way to try to guess the market's next move, but they aren't nearly as important nor reliable as the long term trend channels we like to trade during bull markets.
Looking to add FXP in the mid to low 80's as our next "investment", even though we think it could go a lot lower. The election next week will relieve the market of much of its uncertainty.
Just unloaded another 1/7th of the longs, a sale of DDM at 38
Thanks somebody for the DXO suggestions. Just pocketed $544 on it and should have been more but I was too cheap in trying to double my position this morning before it popped. I'll have to try that one some more. Wish I could buy you a cup of coffee.
Finally got up enough gumption and bought a snippet of FXP at 87.2 Man, is that one spooky stock.
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