WASHINGTON, October 13, 2014 – We’re offering this column after the market close today as we sum up the lazy, miserable trading action that weighed down Wall Street Monday.
Columbus Day Indigenous Peoples’ Day is one of those semi-holidays for traders, with stocks and options open for business but with the government, banks and bonds on holiday, more or less. For that reason, long-frustrated bears took advantage of today’s low-volume non-action, crouching and waiting to spring the moment Monday’s morning rally started to poop out, circa 10 a.m. or so, EDT. At that point, it was only a matter of time before we had another Wile E. Coyote-style catastrophe, which indeed we did, with the Dow down 223 points for a 1.3% loss; the S&P 500 off a whopping 31.4, or 1.46%; and the tech-heavy NASDAQ waterfalling a big 62.58% to the negative, getting that average close to a 10% correction over a matter of a few trading days.
When you take a look at all the extraneous negative nonsense that’s begun driving this market down—ISIS, Ebola and other viral outbreaks largely resulting from official Washington’s casual attitude toward our borders; and the spineless, outright lying bag of crap today’s political order has become—you get a sinking feeling someone like Batman’s old nemesis, the Riddler, is at it again, peppering us with diabolical questions no one can answer, at least not forthrightly, while delighting in our anger and frustration.
Evil cackling and super-villainousness aside, he Maven’s portfolio suffered damage along with everyone else’s, with a bit too much money in RYT, the equal-weight ETF representing tech stocks and assorted other blunders that we can all now see in hindsight.
RYT and tech stocks in general suffered another sickening drop today and we were forced to pare back some of that position for a loss. Tragic, really, as we hate to lose money just like the next guy. But you have to limit losses to percentages or you’ll get killed over all—even though these same stocks and RYT are likely to bounce in a day or two.
The funny thing about today was watching the BTFD (buy the effing dip) “pros” on CNBC smack their lips and rub their hands with glee, proclaiming the market’s latest downward cascade is a major buying opportunity, so let’s buy lots of stocks, shall we?
Never listen to these clowns. They’re talking their own book. They want you to buy so they can dump what they own, leaving you holding the bag.
Most of these Brooks Brothers-suited snake oil salesmen should be behind bars. But it’ll never happen as they always contribute generously to the PACs that support the legion of corrupt Democrats they own.
Today’s downward squall was actually a bit overdone, with the negative action likely exaggerated by the light holiday trading levels. Volume was just not there, and few bids were in evidence as the day advanced. Tomorrow’s trading should give us more of a “tell” on this frustrating, whipsawing market.
Trading tips for a bear market
We actually expect a decent bounced in stocks on Tuesday or Wednesday, mainly because things are getting a little overdone on the downside.
But rather than BTFD as CNBC’s “pros” would have us do, we’ll probably keep lightening up on our portfolio, taking a few hits and there that we hadn’t planned to. One must keep the discipline. You don’t always make money in the market. You sometimes lose, although none of your friends will ever admit their losses. It’s human nature.
Don’t believe your friends’ tales of unsurpassed trading brilliance, worried that, compared to them, you’re such a dunce. Everyone makes mistakes in the market. To claim otherwise is pure hubris (pride).
The gods inevitably punish those who indulge in hubris sooner or later. If your pals were as good as they claim they are, they’d be issuing their buy and sell orders from an iPad somewhere in the Caribbean and would have forgotten they even knew a plebian like you a long time ago.
In any event, if you decide in advance just how much of a haircut you’re prepared to take before selling an investment for a loss, that’s a good thing. It limits the possibility that you’ll overindulge in something just as bad as hubris. You may instead find yourself greedily quaffing a fragrant, enticing, mind-numbing draft of that mysterious element known as “hopium.”
Under hopium’s evil influence, many an investor has watched a beloved but failing investment sink into nothingness because “it’ll come back.” No it won’t. Or at least it won’t when you need the money. So best to set a stop-loss point, mental or actual, at about 5-8% below where you buy a given stock. And leave the hopium all stoppered up in its attractive little bottle at home. In the market, there is no room for hope. Ever. Just discipline and a little bit of common sense.
If the stop you’ve set is hit (unless you’ve already entered it as a good-til-canceled order), bail out of the hapless stock and don’t look back. Consign the loss to what the Maven calls the “’Oh, Well’ Department.”
The fact is, it’s easy to make money in a bull market and hard to make money in a bear market if you’re an average investor. If you get aggressive in an obvious bull situation, but then pull in your metaphorical horns when the market takes a nasty bearish turn, you will, at least in theory, balance your nice gains on the upside with firmly limited and minimal losses on the downside over time.
That’s both the truth and the real deal. You will likely make money in a bull market, which is fine. But in a bear market, unless you’re an experienced, courageous short seller, holding on to a full portfolio of stocks will keep you working full time at your day job until you’re about 90 just to make up for your losses.
So set a loss limit on each stock. And when it’s hit, just get the hell out. It won’t come back, at least not when you need it to, so fuhgeddabouddit.
The Maven has done a good bit of that fuhgeddabouddit stuff over the last few trading days, and it ain’t pleasant, but you have to do it. He’s cushioned this current minor disaster, however, with a huge (for him) short position consisting of three short ETFs: SH, the ETF that gains when the S&P 500 goes down; HDGE, which more or less does the same thing SH does, except that it’s about half the price (so you can buy more and get more points when things are going your way); and SDS, the ETF that also does the same thing as SH does, except that, via the wonders of leverage and derivatives, SDS moves twice as fast and twice as hard both up and down. So be careful with SDS.
Deploying the above combo of short ETFs saved us from losing a good deal of money both last Friday and today. We bought them late last week because we’re reluctant to part with certain big-dividend producers we hold, such as our mini-portfolio of preferred stocks.
Using these ETFs as a hedge balances against negatives to a great extent, allowing us to hold those dividend payers even in a down market. The short ETFs go up when even the best common and preferred stocks go down, effectively negating an ongoing market correction, more or less. It’s an imprecise science, but it works most of the time.
Meanwhile, let’s grab some dinner, watch some mindless, commercial-overloaded trash on cable TV, and wait and see what fresh hell tomorrow’s market may bring us.Click here for reuse options!
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