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Four Tips for Survival
By Alan Farley
RealMoney.com Contributor
11/11/2008 12:15 PM EST
URL: http://www.thestreet.com/p/newsanalysis/technicalanalysis/10447223.html
A note from fellow contributor Tim Melvin caught my attention Thursday. He pointed out that discount brokerages reported a surge in new accounts
in October, as well as a notable spike in trading activity. I was
skeptical at first, but it appears this is right on target, pointing to
greater trading frequency by small retail players. This
is absolutely nuts, because October triggered the highest-risk market
conditions we've seen in several decades. To me, these numbers expose a
disturbing trend that doesn't bode well for this class of investors.
Simply stated, many of the little guys who lost their shirts in the
market crash are now trying to trade their way out of the big black
hole. Add in the unhealthy element of seduction that comes from
watching 400-, 500- and even 700-point swings in the Dow Industrials.
This is the type of phenomenon that puts dollar signs into the starry
eyes of underskilled folks who have no clue about the significant
danger in trading through historic volatility. The consequences of this
activity for the public investor are frightening. Consider the
extensive damage already done to their long- and short-term accounts
during the financial crisis. Rather than raising cash and waiting for a
better stock market, they're risking speculative capital and core
wealth trying to game an environment that's essentially ungameable. We
know there's just one outcome for this malignant behavior. Public
wealth destruction is being magnified well above the percentage losses
of the major indices, or popular funds that "couldn't go down" during
the selloff. Sadly, this damage will reduce the pool of capital
available to lift the market when it's finally time for a bona fide
recovery.
I've become a total gadfly in the Daily Swing Trade, my TSC
newsletter, pleading with subscribers to hold cash defensively and not
throw it away on phantom momentum. The latest trap was set last week
after the market printed a string of nominal recovery highs and then
broke down in two wide range selloff days. Look at the five sessions
after the huge Oct. 28 rally. The market posted three new highs during
that period, sucking in retail players expecting to cash in on another
big up day. Sadly, it's a strategy that worked well during the bull
market, but not any longer. Momentum faded after each high and buyers
were trapped when the market turned south. It's likely the majority of
public investors opened trades in those five bars, while smarter folks
took profits from long positions picked up deep in the big rally bar.
Same old story, isn't it? The crowd sat out the historic session,
waiting for their "buy signal," which came when the evening news told
the world what a great day it was on Wall Street. However, most of the
upside had already been posted by that time. Note how the five sessions
got dismantled by the first selloff day, which dropped prices down to
the close of the big rally bar. This efficient bear trap practically
ensures that by the time retail players tossed in the towel, their
accounts were in far worse shape than a month ago. I have four pieces
of cautionary advice for my at-home brethren. Listen up, because it's
no longer a question of whether you want to take real money out of the
market, or just add a few bucks to the weekly shopping budget. These
remedial steps must be taken if you want to survive long enough to take
advantage of the real opportunity.
- Wait for
the Market Volatility Index (VIX) to drop below 40 and stay there for a
week. Massive price swings require equally massive stop losses, which
rarely justify the intended positions. Your only alternative is to
stand aside and do nothing, no matter how much it hurts to watch others
playing those big rallies and selloffs.
- Forget
overnight positions until the index futures stop gapping 2% or more
every morning. These price jolts are great news when you're on the
right side of the trade, but total devastation if you're on the wrong
side. And guess what? You're not smart enough to predict overnight
direction from day to day. Neither am I.
- End your love
affair with popular stocks that made you money during the last bull
market. In November 2008, these are the issues that will trigger the
most painful and unexpected reversals, which happen right after you're
absolutely convinced your position is the right play. The bottom line:
They see you coming, sucker.
- Get control of the time
element in your market strategy. You're getting killed because you have
no patience and forgot how to sit on your hands when your trading edge
isn't in play. Realistically, it could be months before the market
works for you again. Would you rather wait it out and survive, or stay
busy and get crushed?
[ 本帖最后由 wsoperator 于 2008-11-11 12:56 编辑 ] |
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