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Don’t Take Losses, JD is a full-time investor and trader of primarily common stocks and ETFs, in taxable trading, trust and retirement accounts. He uses technical and fundamental top down analysis based on a modified Dow Theory Trend analysis. . He is founder of the... More
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  • $DJI down 772 for week, Down 998 in 20 minutes intraday, What Happened and What to do Monday: 2 comments
    May 8, 2010 1:08 PM | about stocks: CLF, FLS

     

    $DJI down 772 for week, down 998 in  20 minutes intraday:  What the _ell happened this week?
    1)  A Financial Times blog explains crux of the core problem:  
    “Ignorant European elites fume at financial markets” May 6, 2010 9:54am by Tony Barber : One reason why the eurozone is sliding into ever deeper trouble is because its political and bureaucratic elites do not like, do not understand and have no wish to understand financial markets.  This is an attitude embedded in European history and culture.  Think of the 1793 Law of the General Maximum, an arbitrary attempt to fix prices at the height of the French Revolution.  Or think of the social status attached for the past 150 years to being a state-employed soldier, teacher, office clerk or railway worker rather than a banker in Germany.
    Since the world financial crisis started in summer 2007, the European Union’s authorities have tried to pin all the blame on “the markets” - often a codeword for the US and Britain, or at least their financial sectors.  No one doubts that subprime mortgages, exotic financial instruments, reckless risk-taking and the like caused the trouble - but the EU took matters further.  First, they said it was the fault of the hedge funds - all evidence to the contrary.  Then the EU fired its popguns at sovereign wealth funds -  although what they had to do with the crisis was a mystery to everyone outside Europe.  Now it’s the turn of the reviled credit ratings agencies.
    Consider a speech given on Wednesday by José Manuel Barroso, the European Commission president.  In a text prepared for delivery at the European Parliament, he said: “We are all familiar with the expression ‘markets are testing this, markets are testing that’.  Well, they are also testing regulatory authorities and democratic institutions.  They must know that all of this is ultimately a test for themselves.”
    Wow!  Markets undermine democracy!  Now there’s a headline.  I am happy to report that, at the last minute, Barroso cut this passage from his speech…”
    Guess what, aside from the fact the US is on track  through the current administration and liberal left to “become” the EU (which I expect to be derailed in November with a loud bang), “the market” (which as you know = The Truth in my view) understands this view and the uncertainly this prevailing attitude brings to the resolution of the issues with the Euro and the looming defaults or downgrades of many EU governments’ bonds.
    2) In a nutshell, if Greece and the rest of the PIIGS default on their bonds and/or they are downgraded by the reviled rating agencies, then the EU banks serially become effectively insolvent in a daisy chain that may roil all the way back to US banks. The EU Friday night pledged an emergency fund to support the EURO but not a TARP like Fund to buy and hold these government bonds which are soon to be downgraded further and call into question the whole banking system in Europe. The Greek riots (and the quote above)  display graphically what the EU is up against: a culture of entitlement, decayed values, lack of work ethic and bureaucratic elites who have no will and no commitment to impose austerity in the face of this embedded entitlement culture. Lop on top the 4 German professors seeking an injunction this weekend to the German approval of its $25B share of the $130B Greece bailout, as in violation of the EU Charter. want uncertainty? We got it.
    3) Uncertainty, Technical or Fundamental Correction? Yes we had a cascade of 998 Dow points, but we were down 772 points for week…that is the real point. This is suggested as a technical correction, 10% downdraft in light of our run since February. Maybe not. Fundamentally, if this daisy chain of events occurs due the ECB elite dithering while Athens burns, we’ll see a drop of another 2000 Dow points. Will we drop 2000 points? Dunno. Maybe the strong ECB statement last night from Europe (Reprinted at the end hereof), will “fix” the issue for now…or not. If not, we can expect more of what happened this week. It all depends on how the Big $$ views the actions of the ECB in reducing uncertainty.
    4) What about the 998 point cascade? Got stops? A market stop is to stop out at the next market price … but Thursday that might have been $.50,  $2,  $4  per share or even further below the stop price that triggered the stop. Why the vacuum of buyers and lack of liquidity? It sure as hell wasn’t a fat finger, I’ll tell you that.  First of all, I know sqwat. But I read and decide who I believe. My take is the HVT, HFT machines (high frequency and high velocity trading algorithms), which make 1000s of trades in milliseconds, once they saw the magnitude of the price drops, stopped buying, and so the “liquidity” they provide was pulled out from under us like a rug. The result: no or limited bids and we fell like a drunken sailor and hit our ‘eads on the concrete.
    5) Lessons to be learned:
    a. NO Margin. If you were on margin you got slaughtered unless you were short and covered at the bottom like the venerable Blake Morrow. http://tradingviews.com/expert/bmorrow.aspx Btw, if you’re not watching Blake and Nick Pirraglia live on TVN, you’re leaving money on the table. http://tradingviews.com/expert/npirraglia.aspx
    b. If you’re not using the TVN day trading techniques, be in CASH on sidelines until the pros sort this out and give us the all clear. I called this downdraft 10 days ago, called it scary the way the chart on SPX looked like late January. My actions: I went to 100% CASH twice this week (very smart), only to venture back in trying to catch the falling knife (very dumb). It HURT.
    I pulled my stops and just sold all when we hit SPX 1148. The I watched the cascade. I actually had the guts and bought like crazy with the DJI down 900 points (got AAPL @ 210.68 @ 14:46.51 Thursday), and was UP nicely on the 4% down day when this happened. I gave it ALL back the next day as the ECB dithered. Nick, Blake, Kevin Dixon, Jason Ramos and Harris Frankel told us to go small and loosen the stops due to the huge increase in volatility. I kept banging away, rookie mistake. Even an investor who trades needs to know he can’t hold while this kind of nonsense occurs. CASH does not go down. I could have made a LOT if I stayed out of the fray, by simply not losing. Risk management lessoned learned, again. Could have been a LOT worse. Not good enough.
    6) What to do now? We may pop on Monday based on this ECB Statement and the EURO Emergency Fund. I bought back at the close and am 55% long, 45% CASH in stuff like CLF, CMI, FLS, TER. AAPL. I’ll be selling and raising more cash if we rip higher unless there is a clarion call that ALL is clear. I expect other trapped longs to do the same. If we don’t pop. I’m all cash in one tick.
     
    Brussels, 7 May 2010
    STATEMENT OF THE HEADS OF STATE OR GOVERNMENT OF THE EURO AREA
    (1) Implementation of the support package for Greece
    In February and in March, we committed to take determined and coordinated action to safeguard financial stability in the euro area as a whole.
    Following the request by the Greek government on April 23 and the agreement reached by the Eurogroup on May 2, we will provide Greece with EUR80 billion in a joint package with the IMF of EUR110 billion. Greece will receive a first disbursement in the coming days, before May 19.
    The program adopted by the Greek government is ambitious and realistic. It addresses the grave fiscal imbalances, will make the economy more competitive, and will create the basis for stronger and more sustainable growth and job creation.
    The Greek Prime Minister has reiterated the total commitment of the Greek government to the full implementation of these vital reforms.
    The decisions we are taking reflect the principles of responsibility and solidarity, enshrined in the Lisbon Treaty, which are at the core of the monetary union.
    (2) Response to the current crisis
    In the current crisis, we reaffirm our commitment to ensure the stability, unity and integrity of the euro area. All the institutions of the euro area (Council, Commission, ECB), as well as all euro area Member States agree to use the full range of means available to ensure the stability of the euro area.  
     
    Today, we agreed on the following:
    First, consolidation of public finances is a priority for all of us and we will take all measures needed to meet our fiscal targets this year and in the years ahead in line with excessive deficit procedures. Each one of us is ready, depending on the situation of his country, to take the necessary measures to accelerate consolidation and to ensure the sustainability of public finances. The situation will be reviewed by the Ecofin Council on the basis of a Commission assessment by the end of June at the latest. We have asked the Commission and the Council to strictly enforce the recommendations addressed to Member States under the Stability and Growth Pact.
    Second, we fully support the ECB in its action to ensure the stability of the euro area.
    Third, taking into account the exceptional circumstances, the Commission will propose a European stabilization mechanism to preserve financial stability in Europe. It will be submitted for decision to an extraordinary ECOFIN meeting that the Spanish presidency will convene this Sunday May 9th.
    (3) Strengthening economic governance
    We have decided to strengthen the governance of the euro area. In the context of the Task Force headed by the President of the European Council, we are prepared to:
     broaden and strengthen economic surveillance and policy coordination in the euro area, including by paying close attention to debt levels and competitiveness developments;
     reinforce the rules and procedures for surveillance of euro area Member States, including through a strengthening of the Stability and Growth Pact and more effective sanctions;
     create a robust framework for crisis management, respecting the principle of Member States' own budgetary responsibility.
    The President of the European Council decided to accelerate the work of the Task Force. The Commission will present its proposals next week on May 12.
    (4) Regulation of the financial markets and the fight against speculation
    Finally, we agreed that the current market turmoil highlights the need to make rapid progress on financial-markets regulation and supervision. Increasing transparency and supervision in derivatives markets and dealing with the role of rating agencies are among the key priorities for the EU. We also agreed on intensifying the work on crisis management and resolution in the financial sector and on a fair and substantial contribution of the financial sector to the costs of crises. The work on assessing whether more steps are necessary in view of recent speculation against sovereign debtors should be sped up. The President of the European Council therefore intends to discuss these issues at the June European Council, on the basis, where needed, of Commission proposals.
     
     


    Disclosure: Long all disclosed
    Stocks: CLF, FLS
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  • alibeamish
    , contributor
    Comments (342) | Send Message
     
    don't feel bad as no one could have predicted this
    limiting losses is all we can expect..that is sucess now
    9 May 2010, 02:35 AM Reply Like
  • Don't Take Losses
    , contributor
    Comments (16) | Send Message
     
    Author’s reply » Agree. Stop loss orders are de rigueur.

     

    Best, Patrick
    23 May 2010, 02:57 PM Reply Like
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