This article was originally published Tuesday, February 9, 2016.
I'm sitting here at my Lake Tahoe waterfront home watching the Dow average (NYSEARCA:DIA) open down 700 points from its Friday intraday high.
It is one of those perfect, picture-postcard days, with a blue sky and cobalt lake. The fields outside are covered with snow crystals sparkling in the sunshine. After the close, I'm going to have to shovel off my outside decks to keep the weight of the ice from collapsing them.
Those April $182 puts on the SPY are looking pretty good this morning, up 50%. They're hedging all of my remaining long side positions.
In these heart-stopping trading conditions, it is more important for me to teach you how to avoid doing the wrong thing than how to pursue the right thing.
I am therefore going to outline my 13 Rules for Trading in 2016. Tape them to the top of your computer monitor, commit them to memory, and maintain iron discipline. They will save your wealth, if not your health.
Here they are:
- Dump all hubris, pretensions, and stubbornness. It will only cost you money.
- The market is always right, even if all the prices appear wrong.
- Only buy the puke outs and sell the euphoria. Do anything in the middle, and you will get whipsawed.
- Outright calls and puts are offering a far better risk/reward right now than vertical bull and bear call and put spreads, which have a built in short volatility element. It is also better to buy stocks and ETF's outright with a tight stop loss. This won't last forever.
- If you do trade spreads, you can no longer run them into expiration. If you have a nice profit, take it — don't hang on to the last 30 basis points — even if it means paying more commission. The world could end three times, and then recover three times, before the monthly expiration date rolls around.
- Tighten up your stop loss limits. Not losing money is the key to winning in this market. There is nothing worse than having to dig yourself out of a hole. Don't run hemorrhaging losses, like the TBT from $57.56 down to $37. It will get easy again some day.
- Buy every foreign crisis and sell every recovery. It really makes no difference to assets here in the US.
- Several asset classes are becoming untradeable for long periods (bonds, oil, ags). Stay away and stick to the asset classes that are working (stocks and gold).
- Keep positions small enough to sleep well at night. The doubled volatility will make up for your reduced risk. This is not the time to get greedy and bet the ranch.
- Turn off the TV and just look at your screens and data. Public entertainers have no idea what the market is going to do, especially if their last job was sports reporting. Their job is to get you to watch the ads for General Motors (NYSE:GM) and TD Ameritrade (NASDAQ:AMTD).
- As the bull market in stocks enters its seventh year, too many traders, analysts, and strategists have become complacent. You are going to have to work for your crust of bread this year. This is an earnings, technology, and cash flow driven bull, not a QE driven momentum one.
- It is clear that more money was allocated to high frequency traders this year. That is driving the new, breakneck volatility, increasing stop outs. A sneeze now generates a 500-point intraday move.
- It is no accident these tempestuous conditions are occurring in an election year. Some $8 billion will be spent on media convincing you how terrible this is.
Only the meanest and toughest are prospering in this market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.