Monday, March 2, 2009

State of the Market - 3/2/09

More bad news brought more heavy selling today on Wall Street, as futures were down pre-market and stocks opened sharply lower on news of the largest quarterly loss in history from AIG (great investment, government!). The market tried to bounce quickly after the open, but couldn't, and from 10:00 - 2:00, they did nothing but fall steadily. Another attempt at a bounce was put in around 2:00, but that didn't last either, and the selling resumed into the close, with stocks closing at their lows for the day and with heavy losses. Volume was lighter than Friday but above average nonetheless.

Technically, not much to say other than "yuck". We clearly broke down out of the descending channels I showed in the video this weekend and that should lead to lower prices. The November lows are a distant memory for the S&P, and the Nasdaq has only about 30 points before it tests those levels itself around 1295. About the only good thing I can say is that we are getting closer to extreme levels in terms of overbought, both in my numbers and on my oscillators. However, we are not there yet. That means we could still see more downside over the next few days. Heck, the VIX hasn't even made higher highs yet for the year. We could always bounce, but I am getting the sense that people are starting to realize that there is nothing the government can do to save the day. That's why I think we could continue to fall here much like October 2008 even though we are oversold. Eventually, we will get to a point where buyers come in, but I don't know if we will get one of those government-induced spikes anytime soon. (Probably jinxed it, right?)

About the only positive coming from this steady selling is it is likely getting us closer to a true bottom from which we could put in a strong intermediate rally. I am not saying it is right around the corner, but I get the sense that finally, people are starting to throw in the towel. I hear a lot of people talking about a crash and virtually no one talking about a bounce. I have read that bear markets end when EVERYONE has given up and stocks are the very last thing that anyone wants to talk about. I think we might be getting close to that point. We still have yet to have a true capitulation event in my opinion throughout this bear market - government induced spikes don't count from my perspective - and maybe that's what we need. I've said this before several times in the past year or so, but I get the feeling that type of event may be setting up here. Hopefully this time will be a TRUE capitulation without outside interference. We shall see.

I did make some trades today based on the ideas I showed in the video. The first one was not good - I covered my ITRI short at $42.90. I say "not good" because there was absolutely no reason to do so - I just wanted to protect a profit. I ended up with a gain of over 8% on the short, but I still should have held on longer - I showed a great lack of patience here. I guess I expected a bigger selloff at the open and when it didn't happen, I feared another bounce. I should know better. After that, I redeemed myself a bit by entering SDS at $102.50 and QID at $63.52. These were both large positions. I also entered a short in DLR at $28.60 - also rather large. So far, these look good.

Although today was good, I still feel overall that I am not trading as well as I should be or can be. I can't place my finger on exactly why, but something just isn't right. I should be up way more than I am right now as my reads on the overall market have been pretty good. Psychology plays such an important role in trading. When I was writing about having our second child back in December and how it may affect the blog and my trading, another blogger who I respect and is a very good trader gave me a tip that he suffered a big drawdown after having his second child due to time demands and such. I don't know if this subconsciously affected me, but I keep thinking about that. Even today, I passed on a number of trades (SYNA short stands out) that worked out perfectly. Hopefully, over time, I will get my groove back. Maybe today is the start of that happening. Anyway, back to the market.

I will try to post some charts and numbers tonight to show you where we may be at in terms of this selloff. Just like in October, this thing could stretch longer than most think. I would not be thinking of trying to catch a bounce yet here, although taking partial profits on some shorts may soon be wise. I think the best thing that can happen tomorrow is for another awful day to occur. That will get us closer to that capitulation event. If we bounce tomorrow, then we are just extending the pain for a longer period of time. We'll see what happens. Good luck.


pikkles said...

I think you try to be too precise with your stops. The market is too volatile right now and can run your stops before reversing. I know you are sticking to your discipline but I was doing the same thing all last year. Just my two cents from reading your posts every day.

Nathan said...

Hi Mac
My portfolio is slightly negative YTD. I had hit some home runs, but many small losses couldn't make up for that. I got stopped out a lot given the volatility.
Would appreciate if you could share your experience last year when you made around 90% return ( that was an outstanding performance given how bad the market was). Was that because the market last year was much better to handle?
I just started trading stocks towards the end of last year and found your blog very helpful : you are great in reading the market. What I like it more is that you are honest and humble.
Keep up the good work.
Thanks a lot

Mac said...

Thanks Nathan. Don't feel bad - my portfolio is slightly negative for the year as well. I am almost back to break even but we'll see what tomorrow brings.

I think one reason I had success last year is that I finally realized that there was nothing wrong with cutting my losses very quickly. I had some really big winners on the short side (20-30% gains) and those were really the ones that allowed me to get a nice return. I missed on a lot of trades, but the misses were always so small my wins more than made up for it. I also think I did a better job of sitting out from time to time last year when I knew things weren't good. The rally we had in May last year was also much better than any bounce we've had since and there were quite a few longs that setup and acted well. We haven't had anything like that since. Maybe we will in a few days.

Good luck and remember that becoming a good trader takes a long time and you must make a lot of mistakes (to learn from) before you stop making those mistakes. I still make mistakes and am still learning myself.

Mac said...

Pikkles - I have to stick with my discipline although it is not working out that great. The ITRI position was just me getting impatient and selling out too early - I didn't have a stop set that was hit. If I would have followed my stop, I would have had a bigger gain.

Nathan said...

Thanks Mac for your insights. GBU