Beware Of The Obvious Trade

Back in the 90’s you didn’t need to work hard to make a lot of money.  All you had to do was buy a cool URL ahead of the crowd and then just wait for some conglomerate who was caught up in the dot.com mania to come along and buy it, making you a multi-millionaire.

It happened time and time again.  Drugs.com went for $830,000.  Men.com for $1.3 million. Casino.com for $5.5 million.  And Business.com for a whopping $7.5 million.

I was a little late to the craze, but I’m pretty smart, and I figured I could find grab a URL nobody had thought about yet and then sit back and wait for my payday.  I went through a number of different ideas, but they all seemed to be taken.  Then for some reason, the idea of Star Trek came into my head.

Personally I’m not a fan of Star Trek, but I knew there were a lot of dorks out there that loved it and maybe that would make a URL related to the show valuable.  So I started checking the names I knew.

“Enterprise.com”…nope.  “StarTrek.com”….of course not.  I began to go through the crew members names.  “MrSpock.com”…..nah.  “MrSulu.com”……no.  “MrChekov.com”……taken.  “HanSolo.com”……damn, they were all taken.  Then I hit pay dirt.

I could not believe it.  A chill went down my spine.  How could this name have been missed?

I seriously thought that in the time between when I discovered it and when I completed my transaction somebody would swoop in and grab it.  My credit card even slipped out of my hands as I was trying to buy it because they were so sweaty, but I finally locked it down.  It was mine.

“CaptianKirk.com.”      Woot!

I was so excited that I emailed my best friend, who was in fact a Star Trek geek, to tell him of my coup.  His return reply a few minutes later brought me crashing down to Earth.  Perhaps I should have spell checked my URL before I bought it, he not so gently suggested.

But spell checking was unnecessary.  The fact that a URL with the name of Star Trek’s main character was NOT taken, while URL’s of lesser characters were, should have been a red flag that this score was not what I thought it was.

This same phenomenon has happened to me in the past with trading.  I have bought a stock because everyone “knew” a buyout was coming, only to see it tank.  I have bought an option that I thought was phenomenally mis-priced, only to realize after the trade executed that it was the wrong expiration.  It has taught me that if a trade is too obvious, there is probably something I am missing.

We recently saw a perfect example of this with the $FB IPO.

When $LNKD went public, nobody from the retail side (at least relatively speaking) was interested in it.  It was viewed with some amount of scorn and scepticism, often being talked about like a “second tier” social company.

I remember a number of non-traders in my office watching the first day’s action, who were utterly shocked when the price ran as high as $122 intra-day after going out the gate at $83.00.

They kept watching it saying, “I would have sold some here, up 10 points.  I would have sold some more here up 20 points.  I would have sold the rest of it here up 30 points.  Man, I wish I had bought this at the open.”

Fast forward to the $FB IPO, and they were all chomping at the bit to buy the first tick.  To them the trade was so “obvious.”  If $LNKD, which was the red-haired stepchild of social, rocketed up on its IPO, it just went without saying that the gold standard of social would do even better.  It was also “obvious” to half of America that they could make a fortune flipping this IPO.

Of course we all know how this story has played out since.  $FB may in fact come back and surpass it’s IPO price one day, but a lot of these neophyte traders have become investors on this “obvious” play.

Eventually, with time and experience, you will quickly be able to identify why a trade is too obvious, and discard it.  But if you are not at that level yet, a good rule is to re-check your trade, then re-check it again.  And if it still seems too obvious, ask one of your fellow trading friends to check you, just to make sure you are not missing something.

I Will Kill Myself If Apple Doesn’t Go Up Tomorrow – Tales From A Margin Clerk.

[Last week a reader who had recently come my posts on suicide trades and deadly sins of trading wrote me a very interesting email regarding his job as a Margin Clerk.  He was kind enough to allow me to use it here, though he requested anonymity.]

I’ve been a Margin Clerk for a long time with various discount brokerages and I see Suicide Trades everyday.

I was a call center rep in 2001, who was told he was now a Margin Clerk. The Margin Clerks couldn’t keep up with the volume, and I was sent over to help out. They handed me a list of about 250 accounts with calls under $25,000 and told me to start dialing in order to clear as many as I could before Clerks started selling.

During my first week, I had a college guy tell me he would kill himself if $AAPL didn’t go up tomorrow. He was a 22-year-old college guy who had bet all the tuition money his parents gave him on $AAPL. I immediately told the Supervisor, who looked at me and said, “You think I care? Worse case, it becomes an Estate account. Now, keep calling.”

So, those 22-year-old college guys blowing up their 5k accounts at Charles Schwab-like firms do kill themselves. To be honest, I don’t know if the college guy killed himself. There were so many Margin Calls back then you didn’t remember names. I do remember $AAPL went down further the next day.

I do remember some names, though.

I remember the farmer’s wife who called crying, when she figured out her husband had cash advanced any credit cards he could get to cover his margin calls. He had also leveraged the farm. She was in her late 50s and a stay at home mom whose husband took care of the finances.

She figured it out when the collection agencies started calling and she took the pile of mail her husband had started ignoring to her bank account manager. She was desperate to get her husband to stop trading, but knew if she confronted him it would mean divorce.

I remember the guy who killed himself over a 50k account. It was his life savings that he’d put into “safe” mortgage-backed product in 2007. Ironically, the bank paid out his Estate a year or so later and his widow got all the money bank.

There are others, but I’ll move on. You asked about rules, so I’ve got some.

1) Unless you drive your car with your eyes closed, don’t enter market orders outside of market hours. You know how many $FB trades I saw on IPO at MKT? Nuts…

2) Triple-leveraged ETFs are not buy and hold. Learn how percentages work. 10% down doesn’t equal 10% up. I’ve watched a lot of clients lose their life savings trying to hold things like $FAS & $FAZ when they went against them.

3) Don’t trade “size”. Size does matter – it’ll blow you up really fast. I watch people on Twitter talking about trading “size” all day and I shake my head. They talk about it like it’s a badge of courage, when it’s the badge of the fool. Size = concentration. That’s great when you are going up, but when you go down – you will die.

4) Don’t change your investment plan on the fly. I see people all the time start with an investment plan, only to change it for the worse. A) They decide they are a Trading God, because their account is going up, so everything they buy must go up; or B) They are losing money and get desperate to make it back. Usually, it’s A then B. As time goes on, they take on greater and greater “size” and greater risk.

I cannot count the number of accounts I’ve watched blow up doing this. Look through your transactions. If last year you were trading a diversified blue chip account, and now you’re concentrated in a few “sure-thing” OTC bets – think about it.

5) The money you lose is real – it’s not just numbers. If you actually had to hand me $100 bills instead of keystrokes, would you make that trade? If you were down that much at a casino, would you walk away? Think about it before you press verify on the next order.

6) I’m not your friend and I don’t know you. But, I might be the only reason you stay solvent. Lots of people bitch about that stock that the Margin Clerk sold at the 52Week low, only to watch it rebound the next day. What they don’t talk about are the positions we force people out of all the time that continue to deteriorate. If I’m calling you regularly, you are doing something wrong.

 

How A World War II Vet Helped My Trading.

I’ve written a lot about keeping perspective when it comes to trading.  For me this is crucial because it keeps each trade in context, thus not allowing any particular one seem like a “make or break” trade.

Any time I feel overwhelmed in the markets, I make it a point to think about Donald Rudolph. When I am doing “battle” on a trade I think about the real battles he fought in.  I think about the courage and bravery he showed.  I think about about the people who are walking the Earth right now only because of the fact that he saved their grandfather from death.

This acts as a cold dose of reality, reminding me that I am playing with numbers, not dodging bullets.  It’s a humbling thought that immediately embarasses me back into perspective.

I first read about Mr. Rudolph and his heroic feats back in 2006.  I was still reading actual newspapers back then and one day came across his obituary.  It made such an impact on me that I cut it out and taped it on the wall above my computer screen.  It is still there to this day.


“At the first pillbox, he tore open the wood-and-tin covering with his bare hands and dropped a grenade through the opening…..”

Jesus Christ, I’m just trying to catch a buck on $AAPL.

This guy accomplished more in one day that I probably will in my whole lifetime, and it reminds me that I have no business being “stressed,” “angry,” or “pissed off” at the markets.

It also reminds me that there are thousands of other “Donald Rudolph’s” who never made it home, and perhaps I should just shut up and be glad that I have the “luxury” of trading and of never having had to go to war myself thanks to guys and gals like them.

 

Smoke ‘Em Up Johnny.

Last night I attended my grandmother’s 85th birthday.  The theme was “The Roaring 20’s” and let me tell you, it was the bomb.

And not just because my grandmother, at the age of eighty five, still has the stones not only to throw a party, but to dress up like a “flapper,” as well as throw back gin martinis like prohibition was starting on Monday.

And what about me….?  Well, I was the cat’s meow.

Petty good for dropping $25 cash at the Goodwill the day before the event.

The were also other flapper girls there.

And of course there were angry, Irish-Vietnamese golfers.

But the thing that I loved about this party was the “F.U.” to political correctness.  There was a “cigarette girl” going around “selling” cigarettes.  Sure they were candy cigarettes….

Also there were a bunch of those extended cigarette holders with amazingly realistic cigarettes in them.  When you blow into them, they glow red and emitted something that at least looked like smoke.

My six year old was running around with one in her mouth all night.

Nobody was worried that we were “sending a bad message” to the youth.  Because guess what? That’s the way it was back in the 20’s…..people smoked their fucking ass off.  Remember FDR?  He smoked like a friggin’ chimney, and he kicked Hitler’s ass.  Yes, I know he took office in the thirties, but you know he was smoking extra-long, unfiltered, double nicotine cigs in the 20’s.

As I have written about before, I have never smoked a cigarette in my life.  It’s just not my thing.  But I am not an anti-smoking Nazi.  As long as it is not in an airplane or restaurant where I can’t get away from it, then go ahead, “smoke ,em up Johnny,” it’s your funeral, not mine.  But I still feel that you have the right to make that decision without me or the government sticking our nose in it.

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An Apology To My Young Son

My wife was down the hall crying.  There was a lot of blood.  And my young son was screaming at the top of his lungs.

If there was any way I could have switched places with him at that moment I would have. Uh…maybe.

I talk a lot about risk/reward on this blog.  It is the basis for success in trading, and if you can’t quantify it, you might as well quit.

Life is full of similar situations.  Sometimes you cut down the alley way and risk getting your head kicked in by some outcast OWS protesters for the reward of shaving 5 minutes off of your commute.

I did something that at the time did not seem too risky, but in retrospect probably was; and my poor son had to indirectly suffer the consequences.

It was three years ago yesterday that my eight month pregnant wife and I flew out to Vegas for the weekend.  My sister lives out there and I figured it would be the last time we could see her for a while until after the baby was born.  Besides I had heard that prego ladies were lucky for shooting craps.

Flying wasn’t the risk.

Despite popular belief, flying while pregnant is not necessarily a risk.  The cabin pressure and the altitude don’t affect the baby, nor will they induce labor.  Trust me, I Googled it.  The issue with a flight is the length of the flight; just in case you happened to go into labor, it’s not the best place to be.  Fourteen hour flight to Sydney….out.  Fifty minute flight to Vegas….no sweat.

We got into town, settled in at my sister’s place, had a nice meal and went to bed early.  The next day we got up and began to discuss what we would do for the day.  I suggested the Hoover Dam.

Risk On…!!!

Actually there were three bad risk decisions I made here.

1.  Hoover Dam is in a pretty isolated part of an already isolated area.

2.  Is was going to clock in at about 108 °F that day.

3.  It was a walking tour.

At any one of those points I should have called it.  I kept asking my wife if she was up for it, and of course, like the trooper she is, she said she was.

We were only at the dam for about 10 minutes before I got the, “I think we might need to go” look from my wife.  Her water had broken.  Game on.

Fortunately my sister was familiar with the area, and my brother-in-law is a physician, so she knew which was the closest hospital, and he called ahead to alert them to our impending arrival.

Things proceeded so fast, and so unexpectedly that we still had only narrowed his name choices to three.

I literally had “Cameron,” “Camden,” and “Campbell” written on the nurses whiteboard in the room and my wife was “sounding them out” with me as the epidural was going in.

“Campbell Lund” she would say to me.  “No, too Scottish,” I would reply.

We quickly eliminated “Cameron” too as I hated “Titanic” and Camden it was; though my writing was so messy the nurse thought is was “Clamden.”  Clamden….really?

Anyway, though he was a month early, and a bit light, he was healthy and seemingly happy, and it looked like we dodged a bullet.  I gave myself a pass, figuring “no harm, no foul.”

Then we inquired about when they would be doing the circumcision, and that is when we first found out that in Nevada they don’t do circumcisions in the hospital.  In fact, the hospitals in Nevada don’t even stock circumcision kits.  In “The Silver State” a circumcision is performed at the first pediatrician visit a few days after leaving the hospital.  No problem we figured, we will just have it done when we visit our pediatrician back home in Cali.

Two days later we rented a car and drove back home with 6 lbs, 8 oz of extra baggage.  We called our pediatrician and set an appointment up for a few days later.

It was at that appointment that we learned that most Californian pediatricians (including ours) did not do circumcisions out of the hospital anymore.  In fact, none of the pediatricians we called or were refered to did them out of the hospital anymore.  One top of that, our insurance company told us that since we left the hospital without having the procedure done, we were no longer covered for it.

So because we left the hospital, which didn’t offer the procedure, without having the procedure done, we were no longer covered. Okay, fine I thought.  I will just pay for it out of pocket.  I mean what could it cost to snip off a bit of foreskin, right?  Try $2,500.00….!!!

Hi-fucking-yooooo……!!!

I just had a very tough year in the market and we had laid out a lot of cash in the “creation” process of our son; if I could avoid paying that $2,500.00 I would rather not.  Also, we still didn’t even have a doctor who would do the procedure.

After a lot of back and forth with the insurance company, I finally got them to acknowledge being the assholes that they were, and they approved payment for the procedure.  And after an extensive search, I found one of the only pediatricians left in Cali who did circumcisions in his office, which was about an hour away from our house.

But by now my son was six months old.  It was a totally different ballgame.

By now he had gotten a chance to be aware of his mini “manhood” and wasn’t numbed in that semi-haze that a freshly popped out babies are for the first few days.  How was he going to react to this procedure?  I winced myself at the thought of it.

Once I saw this in the doctor’s office, I winced a lot more.

Why did I suggest a trip to Vegas?  Why the Hoover Dam?  Why didn’t I just call a mohel, drop a nice donation off to his local synagogue, and get this thing done back in hospital in Nevada?  All these thoughts were running through my head as I imagined what my son was about to go through thanks to my bad risk analysis.

At this point my wife had to leave the room.  It was now up to me to deal with this procedure that I was sure would cause my son to have night terrors well in to his 60’s.  And all of it was my fault.

They strapped him on to the “board” and he laughed and smiled at me with his angelic face, and if at that moment Satan himself had appeared and indicated that I deserved a couple of eternities in Hell for being such an A-hole, I would not have protested.

They swabbed a gel on the “area” to numb it, and then came out a needle with which to inject a local anesthetic.

There are certain things in life that just should never be next to each other.  “Needle” and “Penis” are pretty much at the top of that list.

He let out a small squeak, and I thought “just maybe” we could get out of this thing relatively pain-free.   But then came the clamp, and the cutting, and the blood…….

After all was said and done, it worked out okay.  The doctor and his nurses were great. Once he got a bottle in his mouth he calmed down pretty fast and actually fell asleep on the drive home.

Over the next few weeks we had to change the dressing a few times and I have to say it caused me a little bit of stress.  The initial aftermath of a circumcision at that age looks a bit “rough.” I worried, “What if he cut too much off?”  Or “What if he did it wrong and it mutated like one of those two-headed snakes,” which come to think of it might not have been such a bad thing.

But it turned out fine.  A few months later, at his regular check up, his pediatrician, who happens to be a very attractive Latin woman actually remarked, “wow, the doctor really did a good job, it’s beautiful.”  “Like father, like son,” I said (in my mind).

My son turned three yesterday.  He is no longer a baby, or a toddler, but is turning into a little man.  I love him and his sister with all my heart and still cannot figure out what I did to deserve the blessing that they have become in my life.

I’m pretty sure that he doesn’t remember any of the events I described, and that there will not be any residual mental effect from it.  But even so, I just wanted to say to him that I am sorry that he had to go through it all just because of my bad judgement.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

I’m Sorry, But Your Child Has 18 Months To Live

Stay with me here for a bit, I want to introduce you to some heroes.

“Your child has cancer,” is a phrase no parent wants to hear, but it’s not the worst thing they can hear.

“Your child has cancer, there is no cure, and at best you can expect them to live nine to eighteen months,” is the worst thing they can hear.

Those are the words that were told to my high school friends, Dave and Kristine Wetzel, about their seven-year old daughter, McKenna, or “Macky.”

Like most seven-year olds, Macky was energetic, enthusiastic, and full of life, but if you asked those who knew and loved her, she also had something else.  Something special.

She possessed a big heart, loved fairies, and had a joie de vivre that brought joy to all those around her.  She was also wise beyond her years and could be described as an “old soul.”

McKenna Claire Wetzel

McKenna began to exhibit flu-like symptoms in January of 2011, and though the doctors thought it was nothing serious, Kristine’s mother’s intuition sensed it was something more. After a third trip to the doctor, they were sent to get a CT scan, and that is when the devastating diagnoses became known.

Macky was found to have DIGP (Diffuse Intrinsic Pontine Glioma), a particularly aggressive and incurable type of brain tumor.  This is when the Weztel’s were told that their time with McKenna was severely limited.

The Wetzel’s were fortunate to have a large and caring community of friends and family around them, and an event was planned to help build a war chest of funds to help with the medical expenses that would be coming their way as they tried to extend the quantity and quality of Macky’s like as much as possible.

This event was called the “Party with a Purpose” and was an old school type block party where people gathered to show their support.  There was no admission charge, all the food and entertainment was donated, and attendees were just asked to contribute what they could.  Almost a thousand people showed up, and by all accounts it was a tremendous success.

Unfortunately Macky’s condition took a turn for the worse.  There were no medical bills to pay because she died just six months to the day of her initial diagnosis.  She was two weeks shy of her eighth birthday.

Look at your child.  Imagine if you can, that in six months and one day from today they will be taken from your life forever.  It is a thought almost too devastating to comprehend.

And this is where the “hero” part comes in.

If this type of tragedy happened to me, or I imagine to most people, it would have just been “check out” time.  I don’t know that I would have the strength or will to continue on.  But the Wetzel’s did more than just carry on, they decided to fight.

The money that was supposed to help with Macky’s medical bills became the seed funds for the McKenna Claire Foundation, a Huntington Beach and Coronado Island California-based charity.  The foundation’s mandate is not broad and generalized, its laser focused…..to find a cure for DIPG.

DIPG is a rare type of cancer that effects “only” about 350 children each year, which means there is not much of a profit motive for finding a cure, and thus research into it is severely limited.  The foundation’s aim is to become the funding engine that drives DIPG research, and though that may seem like a noble but unrealistic goal, in its short existence, the foundation has already made an impact.

Enter Dr. Michelle Monje, a Stanford based pediatric neurologist.  Dr. Monje has made finding a cure for DIPG her life’s work and her ground breaking research has already begun to dispel long-held belief about the “rules” of how cancer works.  Even more importantly, her work has shown that DIPG may be a “gateway” type of cancer, whose cure may lead to cures in a number of other related and more widely known cancers.

Because there is no cure for DIPG, biopsies are not taken on living patients, and most parents, after watching their child succumb to this disease, are loath to allow the donation of their brain and tumor tissue.  But that is what the Wetzel’s did.

Much of Dr. Monje’s research has come from the four viable cell lines she has developed. These cell lines came from the actual tumor that killed Macky, which is kept “alive” in Dr. Monje’s lab, and have been sent out to more than twenty research labs around the world in order to try to “reverse engineer” the cause of the disease.

Recently the foundation presented Dr. Monje with a sizable donation which will allow her to hire a full-time lab assistant who will work exclusively on creating more cell lines from McKenna’s tumor, which will continue to be made available to the best medical minds in the world.

What the Wetzel’s are doing is not only crowdsourcing the funds to do research into DIPG, but through Dr. Monje, they are crowdsourcing a cure.

Their work is only made more heroic by the knowledge that no matter how much money is raised, no matter how much research is done, and when the cure itself is found, there is no happy ending for them.  None of that can bring back Macky.  Knowing this fact and yet still fighting on shows a type of courage that is rarely seen these days.

I was fortunate enough to join the foundation’s board earlier this year and this past weekend we had our 2nd annual “Party with a Purpose.”  This time it was held at a formal location, with corporate sponsorship, and a silent and live auction, but it still retained the same spirit of community and friendship as the original.  And I am happy to say it was a great success as well..

Being a part of the foundation is one of the most enlightening and humbling things that has happened to me in my life, second only to having children of my own.  I am proud to be a part of this group, and although I would not dare rationalize Macky’s death being for a greater good, I will say this…

The fact that Macky lived is a blessing.  There is somebody out there right now.  You know this person.  They are a friend, a family member, a colleague.  Or maybe they are you?

They may not yet have met their soul mate.  The anxiety of those nine months wondering if their child will be healthy are years away.  They haven’t yet held their child for the first time or spent the first few months of its life sneaking in to the nursery in the middle of the night just to make sure they are “okay.”

They haven’t held their toddler’s tiny hand in their own, as the first steps were attempted. They haven’t heard the first words, seen the first smiles, or dried the first tears of their future child.  There has been no gut wrenching first day of school nor any soft summer days, sitting on the porch, watching the sun slowly set while discussing the intricacies of Pokemon.

And because Macky lived.  Because she inspired such bravery in her parents.  Because she inspired a community.  That person you know will not have all the as yet unexperienced joys of their child’s life extinguished before they are eight years old.

They may someday hear “your child has cancer,” but I truly believe that because of the work of Macky’s foundation, it will be followed by, “but it is something that we can cure.”

I wrote this post to inspire you, as I have been inspired by Macky’s short life and by the tremendous work her parents have done.  Use that inspiration and find something in your community that you can be a part of.  Something you can contribute to.  And something that can make a difference in people’s life like Macky has and will.

The McKenna Claire Foundation For Pediatric Brain Cancer.

 

Have You Defined Your Blog Rules Of Engagement?

My good friend Jeffrey Ishmael has brought his blog CorpFinCafe back to life after a two-year self-imposed hiatus.  Jeff is a wicked smart CFO of a major retail apparel manufacturer as well as a kick-ass cyclist.

His blog is about the financial issues that public and private companies deal with from a compliance, investor, and social media standpoint.  His first “re-grand opening” post is entitled, “Have You Defined Your Blog Rules of Engagement.”  Here is a taste…

With a recalibration in mind, let’s take a look at some of the more basic ground rules that should be in place for a blog for a corporate finance professional:

  • Specific numbers should never be discussed, regardless of whether it is already in the public domain or not. Leave that to the reporters.
  • If you find yourself working for a public company, refrain from discussing, even generally, initiatives or change management, regardless if it might be in the past.
  • If working for a private company, make sure you have an understanding of the culture and how your writings might be viewed by management…as a liability or a signal of the value you bring to the company.
  • Even if you don’t work there, is it appropriate to discuss your efforts there and the initiatives/improvements you managed. There are a few companies in my resume that I simply don’t discuss in this forum.

And…

Great, so you’ve just taken away a lot of my day-to-day experience that I can write about…what do I have left? When it comes to strengthening your skills as a Finance professional there is no shortage of topics that you can choose that can continue contributing and impacting your personal growth.

  • While you’re going to be part of a larger “reporting” group, you can always choose new developments in accounting topics that are of particular interest to you.
  • Discuss situational experiences with colleagues at other companies, what they were challenged with, and the strategies they employed.
  • Are there any recent books related to your functional area to write a review on?
  • Are there any industry or professional summits that you attended which would be of interested to your readers?
  • What professional organizations do you regularly contribute to? I’ve been a member of FEI for 3-years and expanded my contribution to the Board last year, which has provided some great discussions and content.
  • Are there any recent magazine articles or interviews that you have an opposing view on.

Give it a look.

“Have You Defined Your Blog Rules Of Engagement?” via CorpFinCafe.

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What bclund is, is the intersection of markets, trading, and life (with some punk rock, pop culture, and off-beat humor mixed in).

How You’ll Know When A Tradable Bottom Is In Place

The talk for weeks now has been about this market and how oversold it is.  Everybody is looking for a bottom.  Let me rephrase that…everybody is looking for a tradable bottom. One has yet to arrive.

Will it come tomorrow?  Next week?  A month from now?  I don’t know Babs, but I do know this; it’s the wrong question to be asking anyway.  It’s not “when” will the bottom come that you should be asking yourself, but “how will I know it?” when it does come.

The short answer is “you won’t,” at least not with any quantifiable tool or indicator.  This is one of those times in trading when you can take your MACD’s, and oscillators, and overbought/oversold indicators and put them in a box with your bell bottom pants and Members Only jacket, because that is how out of touch and useless they will be.

The reason for this is because price action is not normative during the bottoming process, and thus (temporarily) changes the mechanics of a market, which skews most indicators. Oversold indicators can stay oversold for a long, long time.  Price can extend a long way away from moving averages.  Double bottoms, support levels, and other price regulators become irrelevant.

The only way you can recognize a market bottom when it’s happening in real-time is to feel it.

I know, can you believe that I actually just said that?  Mister “risk/reward ratio” guy.  Sir “quantify your trading” man. Mademoiselle “pretty boy”…wait, strike that last one.

But it’s true.  Take a look at this chart of the $COMPQ from yesterday and the tweets I made regarding finding a bottom.


Neither of those tweets were particularly heroic, nor were they really actionable.  But I did get a number of emails asking me what I was looking at in order to say what I did, when I did.

The best reply I could come up with was, “that was the way the market felt at the time.”  It sounds weak I know, but finding the actual bottom is not a quantifiable process in real-time, which is why it makes it one of the most dangerous times to be trading.

Feel is something that can’t be taught, it has to be learned, and not everybody learns it the same way.  It’s intangible.  It’s ethereal.  It’s The Jimi Hendrix Experience.  It’s taking a jazz drummer who plays behind the beat, combining that with a rock guitarist who plays ahead of the beat, and throwing in a first time bass player who plays right on the beat, and having it come out sounding like magic.

So in that context, I can tell you a few subjective things that I have found over the years that tell me when a bottom is near:

  • The streams and media will go from “we’re near a bottom” to “we will never find a bottom.”
  • Certain perma-bulls will go bearish, and certain perma-bears will crow that they are shorter than they have ever been.
  • Morning drive time DJ’s will spend the first 15 minutes of each show talking about the market.
  • Rumors of forced liquidations, margin calls, and heavy redemptions in big hedge funds will start circulating.
  • Lawmakers will start grandstanding, acting as if anything they can do will stop the market decline.
  • You will see a ton of “oh my God, look at (insert well-loved stock here)” tweets.  Think $AAPL.

There are also two relatively more objective things I look for when determining the actual real-time market bottom.

It’s almost impossible to hit a bottom without a massive price/volume spike down on a 5-min chart.  Some call this a “flush” but I like to call it a “puke” because people are literally “puking” out their positions, causing this market action.  Watch for it.

But the real nail in coffin for me is price action that makes all my charts “jump.”  Meaning that long red bar in the hard right hand bottom that moves so fast it re-scales all your charts simultaneously.  They literally seem to be “jumping” towards the bottom of your monitors. It’s hard to articulate, but it’s kinda in the vein of what Supreme Court Justice Potter Stewart said to describe his threshold test for pornography, “you’ll know it when you see it.”

If you keep these factors in mind and spend enough hours looking at the markets, anybody should be able to develop their own “feel” and have a reasonable chance of being able to tell when a tradable bottom is in place.

The 7 Deadly Sins Of Trading

Trading is wrought with all sorts of trading sins, any one of which can lead you down the path to making a suicide trade.  And although there are probably hundreds that I could come up with, these seven are perhaps the deadliest ones to avoid and help make my post title sound more liturgical.

Playing Earnings –  Holding into earnings is just begging to be hit over the head with a black swan.  Not unlike playing Russian roulette, even if you have the odds on your side, in the event that things go against you, the effects can be so devastating that your account may not be able to recover.

There are complex ways to play earnings with options that can limit your downside, or help protect the profit of an existing open position, but for the average trader it is just best to be flat or have a very small position going into an earnings call.

Pulling Stops – Every 5% loss starts with a 1% loss.  So does every 10%, 25%, 50% and 100% loss.  Just don’t do it.

Trading Tips – I have probably been give more than fifty “sure thing” tips since I began trading.  The thing about tips is that they always sound like they have rock solid provenance, yet the vast majority of them are a bust.  Don’t be fooled by the story or the storyteller, who may actually believe the info they are telling you.

Once I got a tip on Home Base, which a friend assured me was going to be bought out by Lowes.  His “source” actually saw the deal memo on the desk of the CEO’s secretary. They eventually went BK.

Another tip I once got was that Platinum Software was going to get bought out.  This tip came from the cousin of Platinum’s CEO, and it turned out to be true, they did get bought out.  Unfortunately it was a “takeunder” where the target company gets offered less per share than it is actually trading for.

Stay away from trading off of tips.  Remember that line in Wall Street where Gekko asks Bud Fox, “What are you, 12th man on the deal team?”  By the time you hear about a tip, Bud Fox (pre “I bagged the elephant Marv”) will look like an insider compared to you.

Technical Rationalization –  This is a sin that those who use technical analysis are often guilty of.  To better explain it, let me channel the spirit of my dinner guest from last Friday night.

“It’s not so bad.  It’s not so bad.  It’s not so bad.  It’s not so bad.  It’s not so bad.  Hey, why is that bclund guy ripping open my abdomen and pouring drawn butter all over me?”

In trading terms it work like this…

“My stock failed a breakout, but it’s still in the upper end of the range.  It’s still holding the 5ema.  The 9ema.  The 20ema.  It’s still holding the trendline.  Still above a support level.  It’s below the bottom of the Bollinger Band.  Still above the 100sma.  The 200sma.  Still trades on an exchange.”

You can always find a technical reason to hold a losing stock if you want, which is why it is critical to use price action and money management techniques in tandem with technical analysis.  Don’t allow yourself to rationalize away your account equity bit by bit or you will end up in worse, and less delicious shape than my lobster friend.

Chasing – Very rarely does chasing in any aspect of life pay off.  You chase fashion and you look like a Project Runway reject.  You chased that girl around in college and now you’re married to her, so that didn’t work out too well (note to self, remember to duck when entering the house tonight).  It’s no different when trading.

Here is the thing about chasing; there is almost no way that you can chase a stock and still be able to use good risk/reward ratios on the trade.

By definition, if you are chasing a stock it means it is breaking out (or down) through a congestion zone,  a S/R level, or a pattern, all of which you key off of to set your risk ratio. The farther you have to chase a stock past those inflection points, the larger your risk factor becomes.  Even worse is the psychological aspect of chasing.

When chasing you often feel you are “missing out” on a move, which puts you not in a mental position of power and control, but of weakness and helplessness.  That is not a good mindset with which to enter and manage a trade.

Avoiding Decisions – A very good trader I know once told me that whenever he began cleaning his office, he knew he was in trouble in a position.  It was a defense mechanism and his way of avoiding having to make a decision about an open trade.

“I’ll just give this position some more room,” he would say, and then organize his desk, empty his wastebasket, and neaten up his bookshelf for 30 minutes or so, hoping that when he came back to his screen his position had righted itself.  More often than not, it didn’t.

I have heard of successful traders who put on trades and then turned off their computers or even left their offices until near the close of the markets, the most famous being Ed Seykota from the ‘Market Wizards” book.  But these traders had stops and often target orders live and in place before they “checked out.”

They were avoiding the markets in order to “take themselves out of the trade” and let it work, not to avoid dealing with a position that was going against them.

Bottom Picking – The problem with bottom picking is that it can work for a while.  Even if you don’t pick the exact bottom of a stock or the market, you can sometimes get in close enough to the bottom and then make some good money when the rebound comes.  This gives you a false sense of security that you know what you are doing and deceives you into thinking you have a sound methodology, even though you really have no methodology at all.

It always works until it doesn’t; and not unlike trying to play earnings, the losses when it doesn’t work are so devastating that they can end your trading career.

When the markets are imploding, the key is to wait until you think they have hit bottom, and then wait a little bit more.  When you think it’s getting bloody, wait for more blood.  When you think the financial structure of the markets is about to collapse, kick back and have a beer for a while.  But most traders don’t have the patience for this, nor to they have the discipline to take small initial positions, saving enough dry powder to add when the first “bottom” fails.

Hey, I said “seven deadly sins” but I am a giver, so here is a “bonus” sin.

Blaming – There has always been somewhat of a “blame game” in trading, but in recent years it seems to have reached epic proportions.  Brokers, market makers, HFT, algos, analysts, The Fed, Bush, Obama, Greece, hedge funds, the list is endless of who I see getting the blame for people losing money in the markets.

If you blame anybody but yourself for your losses you are destined to blow your account up and get washed out as a trader; it’s as simple as that.

Time Doesn’t Heal All Wounds In The Market

In 2001 I was “the bomb.”  I mean I was the big swinging dick, the axe in the markets, the “schnitizel.”  That’s what the cool kids say, right?

My god-daughter was born just two-years earlier and I was in love with her.  I decided that I would do the god-fatherly thing and guarantee that her college education was totally paid for.

It would be easy because I knew them markets baby, and I could trade them like a pro. There was this hot stock called $CSCO that was having a temporary pullback. Buying it at $30.00 was  friggin’ steal.  Besides, I had sixteen years until my god-daughter would be going to college and by that time $CSCO would be probably at $5,734 per share.

It didn’t quite work out for me like I had planned, which I was reminded of when John Chambers, or as I like to call him “The Spectre of Death,” announced earnings yesterday that will put $CSCO back to 1998 prices.

I have a lot of ground to make up in the next six years, but I think I can do it.  And now I have to focus on my own kids college education which is 12 and 15 years away respectively.  But I think I have that one clocked, as I just put some money in $NFLX and $GMCR.  By the time my kids are ready for college, well those stocks should be.