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sponsored by: The Speculator Sweating out a trade with a nervous pro There’s nothing quite as lonely as finally putting your money where your mouth is -- no matter how glorious your trading past. By Victor Niederhoffer and Laurel Kenner He had gone 84 days now without taking a fish. -- Ernest Hemingway, "The Old Man and the Sea" New stock picks from market professionals every day on CNBC. It is just after the close on Thursday, Aug. 23, and I am long a line of many shares of Citigroup (C, news, msgs), Walt Disney (DIS, news, msgs), General Motors (GM, news, msgs), Intel (INTC, news, msgs), Microsoft (MSFT, news, msgs) and IBM (IBM, news, msgs). The market has been going down for 23 days, and I have not taken a profit from the long side during that time. The Nasdaq ($COMPX) is setting one new low after another, and the bears are becoming bolder and stronger. They are coming out of the mountains in New Mexico and eating the food of old people like me. This has happened to me before. I was long the market in Thailand, and it kept going down. I had to give up my hedge fund then. Why couldn't I have quit at the top, like the famous trader who is now a TV star? Then I could talk about how my partner, Laurel the market muse, is never wrong on her trades, and about the 10-day change when the market begins to shift direction. I could be bearish after the market went down and bullish after it went up. I could talk about the money I made when the big funds were trying to talk the market down and I stood against them. I bought my shares during the day today, after I told the readers that the market likes to go up on Friday after the last Friday was down ("Buy on Thursday, sell on Friday."). I picked up the five worst Dow stocks from the last Friday. If I had bought such stocks on the last 10 similar occasions, I would have made money each time. But I didn't buy them then. Now I have put money where my mouth is. I had bought IBM on Wednesday, because I told the readers it would be a good time to buy after a down Monday, a down Tuesday and an up Wednesday. To add trouble to the mix, I bought S&P 500 futures at Thursday's close. Too bullish too long I am waiting for John Chambers to announce what Cisco Systems (CSCO, news, msgs) is going to do. It all depends on him. Just last year, he was considered the greatest executive in the world. But now the market reacts to him like it once did to Reagan's top moneyman James Baker and now does to Paul O'Neill. Just an appearance by either one sends the Dow falling. Chambers' shave is very close now, and he wears his tie very tight. He is not proud of his West Virginia drawl any more. I hope he has learned his lesson and doesn't say, "Voice is free," or cast stones at the old companies in a caring tone. There is no vengeance like that of the old guard when you helped push them down the stairs, and now they can return the favor. I wonder how Jesse Livermore, who made and lost millions speculating in the 1910s, 1920s and 1930s, felt when he lost his stake the third time. The brokers lent him more money each time because they could count on him to pay them more in commissions and the bid-asked spread than what they gave him. But they will not do this for me, because I never buy at the market, and I pay only a few cents a share. I was too smart for my own good. I bought all the stocks during the trading on Thursday, and they closed against me. My editor, Jon Markman, is making fun of me because I have been bullish too long. Now I am out on a limb and not only will I lose, but my readers will also. I am also short puts on the stock market futures. And my credit line is getting tighter and tighter as the market sinks. I have not been able to sleep for three days. Nor have I been able to play tennis today, because I am afraid the market will fall while I am on the court. But Laurel is at the Topnotch Resort in Vermont perfecting her tennis game. I wish I were with her in Vermont now. I could play doubles with her instead of watching every tick in the S&P futures after the close. But I am alone, and there is no one to help August is always the hardest month for me. The shares I trade are down because many who own stocks are at the beach. The big hedge-fund boys spend entire weeks at their estates in the Hampton, and the market makers are in Rome or on the Riviera. When so few hands are at work, the food chain changes. Big moves occur. Little guys who go against the trend, like me, can get killed. In 1996, Trader Bob from the Hamptons took the dollar up. In 1997, they took the Asians. In 1998, Long-Term Capital unraveled. In 1999, the Nasdaq was up and away. In 2000, the Nasdaq was up and away again, but in September, all the gains went away. And then came the crash. This year, practically every market is underwater. Only 12 of the 65 biggest world stock indexes are up. Argentina and Brazil are ready to go under. Japan is at a 17-year low. Hong Kong and Germany are already down 20% year to date. One more crisis, one more bad earnings report, and the whole thing could topple like dominoes in a row. Timing is ticklish Now the headlines on Chambers are coming over fast on my monitor. When I first saw Chambers, I thought I was seeing a preacher or a vitamin salesman. But this time, he has it right. He is king of the hill again. He sees signs that sales are stable. He doesn't pretend this time that he walks on water. He says he can't predict the future and that orders in the first weeks of this quarter are in line with forecasts. We both could have died had he said it wrong. But the market likes what he says, and now Cisco is up a point and the futures are trading up 5 points in the night session. This is the time for me to sell the S&P futures. If I get it right, I might be able to take out a profit the way I did before I went under, and my editor will stop making fun of me for giving readers bullish calls last August. I will offer them at 1,170.90 and 1,171.40 and 50 points above that all the way up, and see if I can make a profit so I can live for another day. Good, they are taking them. But they are taking too much. Now I am short, and if the market stays up or goes higher I will be in danger again. I did not get any sleep Wednesday night as I waited for the market to go down. The five stocks I bought have not gone up much in the night session. I am now down on my shorts of the futures and on my longs on the individual stocks. This is just what the market devils love to do during August. Laurel calls from Vermont. "Vic, I could come back to help," she says. "No," I say. "Stay. Enjoy yourself." "But remember how we went 87 days without a rally and then we caught big ones every day for three weeks?" she asks. "Go out and play tennis," I answer. "I can still trade." The floggings continue Asleep Thursday night, I dream of the rodeos I used to attend when I had a mergers and acquisitions business and how the riders would mount the bulls in the dusty corrals and fight to keep their seats. Smokey the cowboy is tipping his hat to me, and the pretty girls are putting my check in the bank. Friday morning. I awake early and check the overnight prices. Perhaps near the open, housing starts will help my longs, or the wholesale numbers. But I may not be able to wait that long, because when the market opens up on the Friday after a down Thursday, then it is bearish so I will have to sell more futures. If I sell my stocks and short more futures, and the market goes up, then I will lose both ways. I always feel like a little boy when I put a trade on, but by the time the market mistress starts flogging me, I feel like an old man. I am wearing a black T-shirt shirt my wife bought me that reads, "The floggings will continue until morale improves." During the Middle Ages, the serfs were treated this way, and now the market is treating me even worse. I bought GM at 56-half on Thursday, and now it's near 56. I wonder if Ty Cobb would have bought GM. He was the only ballplayer in Detroit in the good old days (Cobb was a Detroit Tiger from 1905 to 1926) to buy Coca-Cola (KO, news, msgs) rather than GM. Larry Ritter told me that the best ballplayer was Ruth, not Cobb, but Cobb was the richest. Now Larry's in the hospital after a stroke, and I hope he gets better. Most fans think Larry's book, "The Glory of Their Times," is the single best baseball book of all time. Larry's good friend Paul Volcker (who was Federal Reserve chairman from 1979 to 1987) was there when I went to visit Larry in the hospital recently, and I wished him good luck, too. But Volcker won't read this because he has no computer. I wanted to ask him about Doc Greenspan, but I did not think it right. Cobb and Volcker would not own GM. I went too far buying GM at a 56-half. Now GM and I are both being killed. The market opens up just a little. I place limit orders to sell my five stocks at a small profit. Before I know it, the market has gone through my limits. I have a small profit on the individual stocks, but what a trade it could have been if I had just hit the offers at the close on Thursday and the bids on Friday's close. The Endgame Trade How Vic's trades worked 5 Worst Dow Stocks of Friday, Aug. 17 Shares Thurs. Aug. 23 Buy Price Fri., Aug. 24 Sell Price Profit/Loss Intel (INTC, news, msgs) 1,100 $27.82 $28.14 $352 Walt Disney (DIS, news, msgs) 1,100 $26.06 $26.49 $473 Microsoft (MSFT, news, msgs) 1,500 $60.26 $60.23 -$45 Citigroup (C, news, msgs) 1,500 $46.73 $47.41 $1,020 General Motors (GM, news, msgs) 1,500 $56.64 $57.05 $615 IBM (IBM, news, msgs) 5,000 *$102.25 $104.75 $12,500 Profit **$14,915 *Shares purchased on Wednesday **Before commissions of about $200 The S&P 500 futures I bought at 1,162.25 on Thursday I sold at 1,172.75, for a profit of $2,625 per contract (10.50 times $250 a point). But they closed at 1,187.50, and if I had held to the close I would have made $6,312.50 a contract. If I had just done what I told the readers to do -- buy and sell at the close -- my profits on the stock trades would have been two times as great. There was hardly enough meat on four of those six stocks to cover the cost of getting them to market. The market is very big, and my line was very small because I was short puts on S&P futures. I am not lucky anymore. Now, to tempt fate I tell Laurel, when she calls, how I missed the bigger profit, and she says how sorry she is. I receive a message from a reader: "You made me lots of money. I followed your advice -- bought on Thursday and sold on Friday and made 3% in a day. You are the best." If he only knew how tired I am and how small my profits were, he would not be so nice. Another reader writes to tell me that even the small profit I had was just luck, that it was data mining, that it wouldn't have worked before April and that I will never have a lucky trade like that again and should quit now. But I won't quit. Last Friday was up. The last 11 times the market was up on Friday, the next Friday was down on 10 of them. If I had shorted the best five Dow stocks from the up Friday at the next Thursday's close and bought them back at the close the next day, I would have made money on 10 of those 11 occasions, with an average profit of 0.9%. Only 12 of the 55 stocks that I would have shorted under that scenario rose, and 95% of the time, the move fell between 0.5% and 1.3%. But I don't like to short. So I'll only sell a line half as big as the line I bought. By then Laurel will be back, and perhaps they won't beat me so bad. She calls me Monday night from the airport. "Let's get our column ready for the readers," she said. "Yes," I said. "At Thursday's close (Aug. 30), we'll sell last Friday's five best stocks in the Dow. We'll buy them back at tomorrow's close." "The five best stocks last Friday were Intel (5.1%), Microsoft (5.0%), Hewlett-Packard (HWP, news, msgs) (4.7%) and Home Depot (HD, news, msgs) (4.1%)," she said. "Funny. You were long two of those last Friday. How much did you suffer?" "Plenty," I said. (Editor’s note: Because of Thursday’s market’s big sell off, Vic and Laurel did not try the short strategy listed above.) End Note We have a workout of the Thursday-Friday short trade described above, and we will be happy to send this to all readers who write to dciocca@bloomberg.net. We welcome reader e-mail and will respond to all queries. If we haven't answered yours, or if your computer can't read any of our workouts, kindly write to the above e-mail. We are particularly interested in hearing from chemists this week, as we are working on a periodic table of elements for stocks and would like to consider its relation to the market. As of this writing, neither Victor Niederhoffer nor Laurel Kenner owns any of the stocks mentioned in the column. MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.