Markets Find Buyers, Traders Regroup

Wednesday, August 18, 2010

Global stock market boardBuyers step in to hold the bid this week

After some crushing blows to the market last week as the jobs report to end the first week of the month created negative tones running into the FOMC meeting. Stocks gapped down into the meeting but strangely rallied after the FOMC announcement even after no plans for QE 2.0 were mentioned. Credit for the rally was given to the language stating that the Fed would roll over maturing Treasury holdings.

Yet, all was lost on Wednesday and Thursday as stocks gapped lower and traded down erasing nearly half of July's record monthly gain. After a couple days in the doldrums, buyers stepped in yesterday and followed through again today to buy up companies on sale. I am still unsure what the next move in the market is in the short-term so I'm staying out of ETFs. But I am picking up some individual holdings of companies I consider excellent on a valuation basis and where I think the risk/reward is attractive on a chart basis whether or not my timing is correct.

Rebuilding after some tough losses

I experienced some big losses last week easily wiping out my gains for August made in the first week. It was a terrible week to be on jury duty and while I'm sure I still would have lost money, I may have lost less had I been able to watch my portfolio much more closely.

My losses included a big pull-in in Goldman Sachs (GS). While I had great prices from below $150 I gave back a huge chunk of my trade by not taking enough off the table around $156-157. My target was and is still over $160 but the momentum I was looking for never kicked in. I was probably a bit foolish to expect a move so quick in a stock with a good deal of overhang. After puking the position around $151, I am back in buying today against recent lows of $147.

I also held far too big of a position into A123 System's (AONE) earnings announcement and suffered the consequences. I have been in the stock for a long time so the earnings date didn't bother me but I was just too levered into an unknown catalyst. I was accumulating for months and had stock with an average price around $9 and took nothing off the table on the move and flag above $10. Those losses quickly evaporated and I've returned to just a small feeler just to keep track of the company. I like the story but Q2 earnings proved it may be quite a while before profitability becomes a reality.

I also booked Cree, Inc (CREE) and VMWare (VMW). I had a great, profitable trade in VMW but also managed to take a hit on CREE's earnings. While I only had about 10% of my position left from the beginning of July, the huge gap down was a painful blow.

Overall, some good lessons learned. I have no business holding stocks into earnings when I have a swing trade timeframe and I have not done nearly enough research to model out my expectations for the quarter. I also need to be willing to take more off the table when stocks move well into my favor or be fully willing to understand and accept the pain of pull-ins. I think it is just always so shocking how quickly stocks fall relative to how fast they rise: "they go up on an escalator, down on a elevator". When weeks of hard work are wiped out in just a few days, strong mental rigidity is required to maintain conviction.

Averaging into the credit cards

My most recent trade idea is long the credit card stocks as I outlined in my post "Give Visa (V) and Mastercard (MA) Some Credit". These two stocks showed relative strength in the recent move lower in the market and the consolidation bases offer good risk/reward. I am very impressed with the value in both these stocks and I believe the fears lately have knocked shares down to levels that provide a good margin of safety. I have averaged into more of both this week and will be looking for an upside move in the near future.

Long Apple (AAPL) through calls

I have been reading Cramer's Getting Back to Even and have just read a great chapter on options strategy. (Yes, I realize everyone hates the guy but until I've made $50-100 million compounding for 14 years at 24%, I'll listen to the guy on strategy.) Cramer argues that after years of trying different strategies and hundreds of trades, he has found that buying deep-in-the-money calls has been by far his most profitable and most conservative method of trading options. This strategy offers the ability to leverage an account while paying very little for time value as the calls basically trade like the stock.

I am a relative novice with options and I have found that most of my trades have resulted in losses as I have tried to anticipate larger moves by buying out-of-the-money strikes that have eventually expired worthless more often than not. So, this is a new strategy and one that could be great should Apple (AAPL) find a friend. I would be very surprised to see AAPL continue to trade in such a tight range. Seriously, AAPL was trading in a ~10-point range (<5%) for about 3 weeks there. A high flying technology stock will likely not stay so rangebound for very long.

Disclosure: Long V, MA, AONE shares and AAPL calls.
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