A Smooth Sea Never Made A Skilled Sailor

stormyseas

It’s nice to be able to sail to destinations on calm waters, but you can’t control the seas. When not on shore and rough waters appear the best a sailor can do is navigate safely through them. Experience, skill and execution of the process needed to achieve that goal successfully are vital. The markets are no different for traders.

Times like these reinforce how much I love studying the stock market. Win, lose or draw, I always find myself eagerly looking to garner as much information and knowledge out of every experience I have, both trading and investing, to see how I can apply my ever-growing education to the future. Regardless of wins or losses, I invariably finish each day reflecting on events that have transpired, journaling or writing notes, then preparing to face the next day. Every lesson learned adds a tool to my toolbox. Hopefully each instance leads me one step closer to becoming a consistently good trader and investor.

If there is one thought that is paramount in my mind at this time it’s the importance of having a process in place to deal with any situation the market presents, and the extraordinary swings of the market during the past three months have certainly punctuated that. Drawing on the benefit of hindsight, think of how many instances in the market where if told the outcome in advance you would have said, “No way is that going to happen”. If anyone said yesterday that 48 points would be heaped on top of Wednesday’s 40 in the S&P who would believe it? Yet if you happened to be positioned improperly for it without a process to get you out of danger then there’s little left to do but be steamrolled. Being firmly long or short at any given wrong time under volatile conditions can be a recipe for a quick disastrous outcome.

I know I can forecast all I want, but I can never predict. The only real control I have is in how I act and react, and a process sets the parameters in which those decisions are defined. Having a process that defines risk and takes emotion out of the equation when navigating a stormy market is perhaps the best lesson I’ve learned to date.

Which Chapter Are You On?

I saw a poem referenced earlier today during my travels and instantly thought about how easily it can be applied in the context of trading. Every trader should be able to read this and benefit from some honest introspection afterwards.

An Autobiography in Five Chapters

by Portia Nelson

Chapter 1
I walk down the street.
There is a deep hole in the sidewalk.
I fall in. I am lost….I am helpless.
It isn’t my fault.
It takes forever to find a way out.

Chapter 2
I walk down the same street.
There is a deep hole in the side walk.
I pretend I don’t see it. I fall in again.
I can’t believe I am in the same place.
But it isn’t my fault.
It still takes a long time to get out.

Chapter 3
I walk down the same street.
There is a deep hole in the sidewalk.
I see it is there.
I fall in….it’s a habit…but my eyes are open.
I know where I am. It is my fault.
I get out immediately.

Chapter 4
I walk down the same street.
There is a deep hole in the sidewalk.
I walk around it.

Chapter 5
I walk down a different street.

Nice, huh?

5chaptersDo you keep falling into the same trading pitfalls? Are you blaming someone else for your misfortunes or are you holding yourself accountable for your own actions? What steps are you taking to learn to avoid those pitfalls and move on to the next chapter of your journey?

We’ve all been down that street and in that hole, probably many times. I’ve certainly been through Chapter’s 1, 2 and 3, but I think I often try to skip past Chapter 4 and go straight to Chapter 5; by that I mean when a trading strategy isn’t working for me and I fall into a hole I tend to get out and walk down a different street. The problem is every street can have a sidewalk with a hole in it, and if I haven’t figured out how to walk around those holes then I will always find myself stuck in Chapter 3 no matter what street I’m on.

Chapter 4 holds the key. Only by mastering the ability to recognize and avoid pitfalls will a trader be safe walking down any street they’re on.

 

Everyone Out of the Pool! Everyone Back In the Pool!

S&P 500 Index (SPX) Daily Chart - December 5, 2014

S&P 500 Index (SPX) Daily Chart – December 5, 2014

Remember learning to swim, having fun splashing around, then someone sneaks up behind you and dunks you for the first time? Down you go, then up you come in wide-eyed panic with arms flailing, coughing water and gasping for breath. That’s what October reminded me of as I imagined many a bullish trader taken by such surprise and starting down the path of becoming long-term investors. Wasn’t that nice of Miss Market to let them come up for air? If you were long and stayed the course you received a free lesson in the value of having a process.

It has been a while since my last two posts on October 20th and 24th when the market was plunging, then rebounding. As we see now in early December with the benefit of hindsight, that rebound should have been spelled with a capital “R”. My time since then has been spent analyzing my own choices much more than the market itself.

Taking into consideration aspects such as technical analysis, breadth divergence, market sentiment and every other tidbit that can be categorized under the heading of “information overload” I opted to take my 457 fund chips off the table and redeploy my allocations to a defensive position on October 2nd at SPX 1946. Just days later from the safety of the sidelines I observed the vicious selling that plunged the SPX for a 7.5% loss in just five trading days. To be free and clear from being tangled in that fray was both a tremendous relief and validation for my decision to step away from risk. To see that type of selling and not be caught up in it was a pure pleasure.

And now we sit at SPX 2075, 6.6% above my October 2nd exit point, and I’m still on the sidelines. The pleasure of avoiding what could have proven to be the start of an even more brutal correction, if not an all out bear market, has gradually been supplemented with the knowledge that I have missed out on these further gains. I ask myself, “Without knowing what the future holds, how do I make the right choices with my investments?”

From the initiation of my 457 plan in 1991 at a time when I was mostly financially illiterate my thinking from that point on has largely been “pour money into the plan and retire rich” because everyone who invests in the stock market makes money, right? I carried that simplistic philosophy through two bear markets, and as luck would have it the market’s overall propensity for growth has bailed me out over the duration of that time. Only after taking an interest in the stock market and educating myself on money matters did I come to realized how much better off I would be right now had I been able to find some way to avoid those bear markets. That’s when I started to get fancy about trying to figure out when to stay and when to go.

Not so easy though. Not at all, as the past few months have proven.

Currently I don’t feel I have a process developed which I’m confident enough in to implement successful entries and exits for fund allocations. I thought I did, but that’s a topic for another blog entry. Ultimately, I determined for now the best choice to be made depends on what my personal situation is at any given time. If I were 20 years old again with decades of investing ahead of me I might have kept pouring money into the market during the October correction without even giving it much thought, but the reality is that I’m close enough to retirement to taste it, and close enough to know that the prospect of enduring another bear market could damage my portfolio without sufficient time left to recover from it. I have a high tolerance for risk, but if I must be honest with myself then I must acknowledge that age changes that to a degree, as does lack of having a proven process.

You can’t pick market tops and bottoms, you can only choose entries and exits. Choose them both wisely.

V is for V-Bottom and Volatility

My previous post last week occurred when the SPX reversed from its hideous 10% plunge with the next move presumably being a backtest of the 200 DMA. The SPX, in fact, blew right through the 200 DMA and rallied on to finish this week just under the 50 DMA at 1964.58. That’s 18 points above the price where I opted to fully switch to a defensive position with my retirement funds.

S&P 500 Index (SPX) Daily Chart - October 24, 2014

S&P 500 Index (SPX) Daily Chart – October 24, 2014

I’m OK with that though, because those 18 points were well worth giving up to not be caught in the fray of the brutal selling down to 1820 two weeks ago. I was able to comfortably sit that out without being damaged financially or emotionally, and at the stage I’m in nearer to retirement than I am farther, that was a nice feeling. Locking in gains when the market correction demonstrated itself was prudent for my situation.

With the market spending the majority of October going either straight down or straight up, volatility is still king. For that reason, I plan to hold off on considering any reallocation of funds until the market settles and proves itself again in one direction or the other.

 

Eggs Safe in the Nest

image-goldnesteggs

Is this market correction over, just taking a breather, or setting up for another leg lower?

Here is a brief summary of recent market events.

The S&P 500’s (SPX) recent peak occurred on September 2 at 2019.26. From there it began a decline which led it to break below it’s 200 day moving average for the first time since November 2012 on strong volume. The recent bottom arrived eighteen trading days later on October 15 with a low on the day of 1820.66. That one month span of declines wiped out six months worth of gains going back to April in a market correction that has reached a maximum of 9.84%. SPX rebounded last week to close Friday at 1886.76, however it is still below the flattened out 200 day moving average, presently at 1906.

S&P 500 Index (SPX) Daily Chart - October 17, 2014

S&P 500 Index (SPX) Daily Chart – October 17, 2014

I made mention last week that it would be natural to see the SPX backtest the 200 DMA where it will either push through above to hold and demonstrate support, or fail to do so which would inspire a strong possibility of further selling. As it stands, a defined direction either way has yet to be determined.

Considering my personal timeframe, I’m far closer to retirement than I am further away from it, so under market circumstances such as these, after being aggressively invested for the past 5 1/2 years October 2 with the SPX at 1946 I shifted my Vanguard Total Stock Market (VITSX) allocation to the Chicago Blended Fixed Option Fund; I am now invested in that along with the Dodge & Cox Income Fund (DODIX). I took that position 3.6% below the peak and sat comfortably on the sidelines watching the market slide another 6.4% with gut wrenching volatility. Thus far to date, instead of sustaining a 3% loss of capital I have gained a half of one percent.

Financially that might not sound significant, but from an emotional and psychological standpoint it is of great value. The peace of mind I experienced knowing my money was protected while the market sustained days of gut wrenching volatility under heavy selling pressure was well worth the risk of stepping aside and potentially missing a rally back to new highs. No one knows where the top, bottom or next move is, but an array of factors projected the possibility of this recent action which warranted caution and holds true until the market proves itself.

All I need to do is ask myself if there are more reasons to buy stocks at these levels or sell stocks at these levels. Presently it seems like there are more reasons to sell, so I remain cautious and protected. If the facts change, then I’ll consider my options. Right now, though, I’m enjoying the comfort of the sidelines.

FTA 2.0

I’ve been tweaking the design of my humble little blog to provide a fresher, cleaner look. I decided to proceed with that after experimenting with Tumblr, which I think does a nice job of presentation. Editing options, however, are behind the curve compared to WordPress, so here is where I’m staying.

I also added a few more bits of wisdom to the “Compendium of Quotes” section, which I update on a regular basis. Many of these are short Twitter messages that aren’t found elsewhere, but I do also like to interject text from print and online publishing when I find something I would like to have available for quick reference. Whenever I feel like I need to improve my focus I skim through there for inspiration and insight. I always manage to find something that applies to any given situation I’m in.

Thanks to everyone for checking in on my blog.

Calling the Man From Mars

I wouldn’t normally do this, but the situation at hand is too perfect to just let it go. Pardon my indulgence.

Back in February I made two attempts at shorting GT Advanced Technologies (GTAT), both of which I stopped out of for 2.7% and 6% losses. I took an overview and realized I was fighting a losing battle with an overall uptrend, and sentiment and potential catalysts seemed to be adding fuel to the fire, so I gave up and looked for other trades.

During that time a troll took up the cause to tweet me from @PeterMars1976 sending a number of messages that were of a condescending and insulting nature, going so far as to call me “stupid”. @PeterMars1976 said he was a long-term investor who had bought GTAT in the low 3’s (of course he did), and I gathered from his tone that he was quite the fanboy of GTAT and had a likely holding time of forever on the stock. I called into question his risk management, to which he replied that he was in it for the “long haul”.

Although I went about my business and left it alone, it annoyed me to have some stranger initiate an unprovoked personal attack on me of this nature. I’ve never been known to be an instigator, but I have been known to hold grudges. I’m a firm believer that if someone dishes something out they better be able to take it, but in this case I didn’t have anything to dish back…..until October 6, 2014, that is.

What happened to GTAT is a bit mind-boggling to me, and I truly feel for those of you who put money into this company and suffered the fate of what unfolded on October 6th. There isn’t one of you that I wish ill will upon.

Except for you @PeterMars1976. I couldn’t have asked for a more perfect storm of disastrous proportions to whip in and dump a king-sized pile of karma on your ass. The delight I experienced thinking about you as GTAT crashed to .75 cents was immeasurable.

Not surprisingly, the Twitter account of @PeterMars1976 has been deleted. My only hope is that you’ve come out of your fetal position to assume another identity and will find this post searching for $GTAT. If so, let me leave you with the last tweets you ever sent to me, the ones you quickly deleted afterward, but not before I managed to capture them:

mars-1

mars-last

I wish I had taken your advice to “short all I can”. How did that superb risk management work out for you?