OptionSage submits:
“Some days are better than others” Bono, U2
Scanning articles in the media over previous weekends, these were a sampling of the headlines:
“Fears Intensify on Economy” – Wall Street Journal
“Bear Market Warning Flags” – Forbes
“Earnings Loom After Painful Week” – CNN Money
“Dow’s worst week in almost 5 years” – Fox News
“Forecast of Stronger Growth is Under Threat by Market Turmoil” – Bloomberg
“Stocks End Sharply Lower as S&P Sees Worst Week Since 2002” – CNBC
“Coming Week: Fear in Charge” – TheStreet.com
The doom-mongering was widespread. The VIX closed in on 30 this week. Cramer appeared to be predicting recession: "We will have a recession" and Happy….well Happy is batting 100% on closed trades since going private!! Excellent work Happy!
It’s quite incredible how the media coverage can change on a dime from boom to bust. Just a few weeks earlier we had headlines such as:
“Goldilocks Economy”, “Double-Digit Earnings Growth”, “Global Bull Market”, “Liquidity Galore”, “Dow 14 points from Record Close”.
Personally I was disappointed to see the European Central Bank inject liquidity this week. During the past two days, the European Central Bank (ECB) injected €155.85 billion ($214.56B) into the system, the U.S. Federal Reserve injected $59 billion, and other central banks around the world added billions, too. It did cause an almost immediate strengthening of the dollar when the Europeans acted. But they had led us all to believe that they would increase rates again next month so this seems like a U-turn. As one CNBC commentator put it "You can’t tell everybody that black is black and then tell them that black is white and still have them trust you!" .
The calls for Fed rate cuts in the US seem to be more pervasive and if the Europeans were to raise rates I think it’s time to pack up and move to Europe because the US dollar will really start to take a tumble. Some European analysts I spoke with predict the dollar will slide to 1.50 against the euro over the next few months. Say it ain’t so Hank Paulson!
Mission Impossible: Your challenge – should you choose to accept it – is to trade the stock market cognizant of the sentiment shifts that will inevitably occur yet with the conviction to trust your own judgment. If you get pulled from pillar to post by the media injecting fear on the down days and complacency on the up days, you will be trading on emotion with little certainty as to what action to take, when to take it or why to take it.
So, take charge of your decisions and remain alert and flexible to the shifts in sentiment. And, when sentiment shifts occur, whatever you do, don’t just stand there!
Phil quoted our member chubby in the wrap-up a couple of weeks ago “I get what Phil’s talking about with hedging, I get what Sage explains with changing trade structures to rescue bad situations”.
The reference to changing trade structures is critical in markets like these where the winds stop blowing in one-direction and start howling in the other. It means if you were lulled into the complacency and had an inordinate number of long call options then at the very least it is worth considering some long put options to hedge against further declines. It means if you have stocks without hedging, consider some short calls or long puts to reduce the exposure to a degree. It means adding some bearish trades like long puts, bear puts, bear calls, ratio put backspreads and so forth if none are in place. Above all it means don’t just stand there in shock as the calamity occurs but focus on each perceived problem as an opportunity to take advantage of the new trend that is surprising everybody else.
This is a game of psychology as much as anything else and it’s easy to beat yourself up about losing money in a down market. This only depletes emotional capital so try to avoid it if at all possible. By losing in a down market you were almost certainly biased bullish and that is the natural tendency of the market over time so in the long run your outlook is probably very prudent indeed!
However, in the short-term during these declines your goal is at the very least to not lose money during the market decline. It’s okay if you didn’t foresee this correction like Phil and move to cash. He’s really really good and it takes practice and lots of experience to get there!
If your virtual portfolio is down recently you can look at it one of two ways. The first is to beat yourself up about it, which is not at all productive! And the second is to learn from it. Spend time evaluating what positions you had open and what you would do next time to hedge better and mitigate risk. Phil started his blog to keep a record of market events as well as his own trading decisions. It would be a great idea for you to keep a journal too of your thought processes throughout this last week and at the end of each section add a line item: Key points of learning. You can amalgamate these over time into a rule set that works for you.
As Phil said “our goal is to make this the best EDUCATIONAL investing site on the web”. We want you to be successful and it’s hugely gratifying for all of us to see how many of you performed like superstars this last week. For those of you whose performance was less than stellar, we encourage you to view it as a challenge to join the ranks of the elite traders on the site and make sure to learn from past mistakes. As always we are here to help you!
Be SAFE out there!
OptionSage
