Wednesday, September 2, 2009
(Not) Picking Peaks and Troughs
I am now approximately 30/70 equities/treasuries in these three portfolios (the fourth portfolio is a smaller spec portfolio that I am starting to churn a lot).
It was very pleasing to lock in the capital gains that I have picked up in the last six months.
I still think the market will soften now for reasons stated in my last blog and I haven’t changed my mind about any of that.
But it doesn’t really matter to me.
Good swing investors know that they can’t precisely pick peaks and troughs (no one can do that). You have to be content to be in what I have called in lectures “fuzzy vicinities.” Somewhere down near the river when you buy, at least in the foothills when you sell. You don’t have to be at the base of the falls when you buy nor tip-toeing on the peak when you sell. Such vanity if you think you can do this.
In fact, turning point anxiety screws up immature and inexperienced traders, even of they really have a flair for market conditions. How many times have I seen young traders take a 40% short-term gain then, rather than celebrate such sterling performance, grieve over the fact that the stock continues to rise. The lamentations are endless and vexing: “I could have made 50%! 60!” Then they buy back in and you know the rest.
When this happens I always say, “Are you so vain that, for a stock that has been rising for months, you think that you can pick the turning point to the day?? Because if you don’t think you are that good because you know no one is that good, then logically the stock will continue to rise for awhile after you have sold it, so just live with it!”
The reason is essentially the same if you sell a stock after it has peaked and has come down. If you end up netting 40%, of what relevance is it that, had you sold it on the day it peaked (because you are such a mastermind that you knew it was the peak?!?) you would have netted 45%?
That kind of thinking is the sign of an muddle-headed immature trader.
Why do you think it is called uncertainty?
Friday, August 21, 2009
Selling stocks at DJIA 9780.
If and when the DJIA hits 9780 I am going to start selling equities on a fairly large scale. If the DJIA does not hit 9780 by September 6, I will sell equities anyway.
Am I predicting a turning point at 9780, or an end to the summer rally?
- The earnings growth implied by the recent market rally are simply not there and won’t be there any time soon. Although businesses have succeeded at cutting costs, stabilizing their earnings somewhat, consumer demand will be tepid for years to come. It’s partly the wealth effect – consumer perceptions of their own wealth has plunged because of the destruction of home equity and investment account values. High levels of debt continue to be a problem. A very high percentage of U.S. households are in serious financial trouble. Job losses continue and employment will not stabilize for months.
- Rallys from large market drops usually have setbacks at some point. For example, in the dot com crash, between January 14, 2000 and September 20, 2001 (an interval that included the 911 attacks), the DJIA declined from 11,723 to 8,236 (see the graph). Then there was a strong rally until the next March 12, a period of about six months, that lifted the DJIA 30% to 10,633. Then the real collapse happened, pulling the market down over the next nine months to its low of 7,423. History doesn’t always repeat itself, but for larger cycles, most of the early recoveries have relapses.
- I have warned in my classes that the kind of volatility that we have witnessed in commodities, and not just oil, will be ubiquitous in all financial markets for years to come. It is easier than ever to speculate (witness the explosion of ETFs and ETNs including leveraged shorts and commodity ETFs and ETNs) and there is much more of it, and traders these days are myopic, fickle and suffer sentiment swings with a single Reuter’s release. High volatility implies momentum moves in both market directions, up and down.
So why 9780? It is not a magic number or a precise forecast. I simply must have a cardinal strategy to force myself to make a planned move. Otherwise I procrastinate or use the excuse of uncertainty to not take action. If 9780 gets here I’m selling, no matter what the immediate news or moment of excitement.
After all. I bought most of this stock when the DJIA was in the high sixes to high sevens, using a strategy in two steps exactly like this. So I will be taking nice profits and that is sufficient for me.