Don’t Take Losses: That is the first and last message this weekend. This post will explain how I applied that rule this past week in the various IRA, trust and Trading accounts I hold, which is representative of the account structure of almost every one I know who has any capital of consequence.
We hit the SPX 50ma and careened back down. I went to 65% CASH when we hit SPX1100 , to 80% CASH when we did not hold SPX 1080 and 94% CASH within minutes after that. Our earlier posts reflect we had been 100% CASH @ 1010. Then Blake Morrow started to cover his shorts, and when we started to bounce, I went mostly long. A few hours later I was all in on keen analysis live from Nick Pirraglia who called a big up day mid morning. By Friday, I was 94% CASH all day until the close when I went 20% long.
Two lessons for me from this sequence of markets turns: First, we’re getting invaluable live, real time advice from seasoned traders on TVN that I have been able to take to the bank. Each day I have peppered them with e-mail questions and they answer live, ka ching. I then tweet my take and what I’m doing, all day long. (http://twitter.com/TVN_Patrick, and http://twitter.com/DontTakeLosses). Second, we continue to trade in a downtrending channel. We just bounced off the top of the channel. We have 4 data points at the top of the channel and 4 at the bottom. It’s a strong, defined downtrending channel, until its not. That is the technical takeaway for me.
My investing perspective: If you read my posts regularly, you know I am not a skilled day trader. I often highlight that, it self-effacing but warranted as the experts on this site are skilled day traders, at the highest level. However, day trading is not my primary goal, it is not what I bring to the table. (I have vastly improved my day trading skills with the daily live, real time tutorials from the TVN hosts, no doubt about…but I am a weed hopper by comparison). In my 3rd quarter Outlook
(http://tradingviews.com/b/blogs/archive/2010/07/05/07-05-10-2010-2nd-quarter-recap-and-outlook-updated.aspx) I outlined what my investing framework is. I basically invest long term money (5 years or more before its needed), but have two shorter term taxable accounts (technically more but they fall in these two categories). One is high yielders I just add to when these 15% yielders hit the bottom of their channel, and one is my Trading account in which I use some day trading techniques but am just protecting my capital as I invest in longer term stock positions. I don’t short much, except for an occasional inverse ETF.
My references to being currently 20% long refer to this Trading Account. I’m in for longs for as long as they trend up. 80% of stocks trade in the direction of the Indexes. When SPX hit the 50ma and failed; they all failed and I sold them with impunity, some on stops loss and half just to close out. The capital invested and the profits in the Trading account are my money, I don’t want to give it back especially when the trend is to trade back down to the bottom of the channel. My goal is to keep the account balance as near its highs as possible and ride uptrends. My high yielders I basically left alone, I did sell PSEC which had some odd press releases and added to WHX. Sold one position on an up day, bought the other down. So, I traded it, but very selectively.
Humility is the most important aspect to my #1 Trading Rule: Don’t Take Losses. Every stop loss that hits is an admonishment that I was wrong being long at that moment. My plan is to preserve capital in downtrends. At the Friday close, we hit SPX 1065 and seemed to hold…kind of. There have been many days we’ve closed down hard only to gap up the next day. This market, while downtrending, has had no memory intermittently. With 80% CASH I slept well over the weekend, I feel I’m trading from strength. With 20% long, I’m invested, I’m in the game and ready to add on a modest pullback and stop out with small losses if we push harder south. I like where I sit this Sunday am as I write, not knowing what Monday holds.
80% CASH beats the heck out of being an investor who stays long, sits the heat and is sweating how badly he’ll be beaten down on Monday. That is a bit how I feel in the IRA. I went to 45% CASH when we fell to about SPX 1080, around June 24, (some outright sales, some stops I moved up that hit); then went 95% long when we hit SPX 1010 around July1. But I didn’t enjoy the pounding the last two days. My stops are at or near the entry prices from a few weeks ago, but I may have taken a roundtrip to nowhere. That’s ok. It beats a one way elevator ride down. So, I “trade” the IRA too, but premised on long term investments, employing the Don’t Take Losses Rule and allow my stops to protect my capital. If we now run to SPX 1010, or 980 which was my downside target, or 943, I’ll take the stops again and will be basically even despite a pretty big downdraft from May. But I’ll be stalking the long term stocks I want, and will be familiar with how they are acting from my experience intraday with mostly the same stocks in my Trading account. In other words, I maintain a feel for when my favorites have bottomed for long term entries from my shorter term trading in them. My Trading account is, in part, my school for my IRA long term money. I wrote and explained in detail in several earlier articles why we must trade our IRAs, why buy and hold is dangerous (i.e., http://tradingviews.com/b/articles/archive/2010/05/21/ira-investing-is-buy-and-hold-a-good-idea-or-do-you-trade-it-are-you-kidding-me.aspx).
Looking forward: Sure looks like a Technical Analyst’s dream. $VIX heading up, stocks channeling down. I’ll defer to Blake on the Forex/Equities correlations. INTC beats and guides up, we sell off; just like the last 3 times. The battle is between earnings beats and fear of the Leading Indicators (even ECRI reported so) turning over into a possible double dip. But INTC guided UP. So did others. We will continue to watch for sell the news, but trends are only trends until they are broken. And they ALL get broken. The environment in DC has the incumbents on their heals, could they surprise with bullish policy flip flops (doubtful but possible)? Could the Big Gusher get capped, could China prove its landing is soft like a butterfly, could coming earnings and guidance both surprise and we rally hard? Possible.
Look, housing is horrible. Jobs are not being created. US companies are sitting collectively on about $2 Trillion…and they are waiting for something. Possibly an event in November? We could sit heat a long time, until October or next year. This could get real ugly. And nobody knows. So, Jack be nimble, Jack be quick, and be decisive in protecting capital, in every account. But if we can garner 80% of any coming upside, we’ll be happy. As long as we avoid 80% of any downdraft. Happy investing. And,
Don’t Take Losses