Don't Let Fear Get in the Driver's Seat

Yesterday was a classic example of how bear markets can cause you to make mistakes even when you’re right. Let me elaborate and I hope that everyone can learn from my error.

Coming into this week I was very bullish on the short term for a number of reasons I’ve blogged about already, feeling that we could have one of those explosive rallies that we experienced a few weeks ago or at the very least have a nice trading rally.

I began buying ETFs that tracked the markets mid week last week, and near the close Friday I started adding individual stocks such as Costco (COST) and Johnson & Johnson (JNJ) to name a few. Sunday night the Asian markets collapsed and fear was so prevalent, that it was almost a guarantee that our markets were going to pull off another Black Monday.

I was already counting my losses, and when the big drop never materialized, it only reinforced my stance, and I even added 3M (MMM) during the lunch hour Monday. For some reason at the close I got spooked by how the markets just dumped out and I closed out all of my stocks, keeping only my ETFs so I had some exposure to the long side because I still believed a rally was in the works, but at the same time chances for a crash seemed to be rising.

Then, yesterday brought a big rally out of the gates, the usual collapse and I thought, “Here we go again”, so I hedged my ETFs with puts in the event we sold off. The rest is history as we had the 2nd biggest point move in the history of the Dow and I basically missed out on the move, even though I believed we were moving higher.

The market tricked me out of my positions then left me in the dust. The moral of the story is stay true to your indicators and don’t let fear ever get in the driver’s seat. My mistakes didn’t cause me to suffer huge financial losses, but it did cost me in potential gains and mental frustration. Keeping your head in the game is vitally important because it allows you to remain open to other opportunities.

Where we go now is anybody’s guess with the Fed meeting today, probably to lower rates. I’m inclined to exit my longs if we pop in the morning as I’m not too crazy about these enormous moves because I think investors will be looking to unload shares, take profits, and enter new shorts.

I find it hard to believe that the Dow is worth 11% more today than it was yesterday, especially since there was absolutely no news to support the move.

Comments

[fg144331:]

I think most of us are doing about the same thing. I think a good deal of this up and down is by computers doing the trading, so how do you compete with that?
I'm going to wait til the dust starts to settle a bit. I'm sure the END of the election will cause a jump no matter who wins, both being bad in my book, more spending so we can count on inflation for sure. I don't think the boys in DC really know what is going on either, hoping some will not get re-elected.

2008 Oct 30 09:40 AM