Jul

23

There are often blessings in disguise for the market that seem quite fateful in retrospect. One has to be last week's action. The Dow hit 14,000, closing above it in the last seconds of Thursday's session, but then dropping 200 points to its low on Friday.

During the week, every bad omen was greeted by terrible declines of 2% or so, whether an Intel report, a hedgefund loss in subprime, an earnings warning, or fear of a terrorist incident in Grand Central. Each decline was followed by an immediate rally towards the fateful Thursday round number Dow close.

Finally, on Friday it was Google's turn, and it had a fateful decline like the other days, but this time, after looking like it was going to turn exactly as the others had, it went down to the lows at the close, only to be visited by fateful buying in the last minutes.

It was a beautiful performance. But the fateful, blessing in disguise aspect of it was the the 10 year bond yield fell below 5%, to 4.95%, and closed at its lowest level wince June 04. The main prop of the bears is gone, the Fed Model forecast is intact, the two up weeks in stocks have been reversed with a down week, a big decline in stocks occurred in conjunction with a big rise in bonds.

In short, it was guaranteed to happen, and a blessing in disguise.

What are some other blessings in disguise? These come to mind –

When the stock market goes down sharply before a Fed meeting, because then the Fed is less prone to do something to cool the economy on their mistaken belief that the stronger the economy, the worse it is for inflation.

When the transparency of financial reporting is increased because of oversight as in the Yukos case or Sarbanes-Oxley, investors are more willing to pay up for earnings.

When a better-half forces a trader to get out of a position when he's in over his head, before a total disaster ensues.

When real estate price increases slow down, making home prices, rents and business costs cheaper, then profits can increase and stocks follow their normal inverse quarterly correlation with real estate prices.

When an octogenarian CEO shuffles off the mortal coil, thereby increasing the chances that the new CEO will be less rigid, or that the company will be bought out for estate purposes, as with Beatrice Foods and Occidental Petroleum.

When the stock market goes down before an earnings report, it's discounting the headline number to be reported and surprises on the guidance are likely to change expectations for the better.

When at the start of his trading career a speculator realizes a string of losses, thereby discouraging himself from pyramiding for the rest of his life, and giving him an understanding of risk management.

When a speculator loses money on a short, thereby reminding him of the long-term upward drift and the possibility of short squeezes.

When you aren't admitted to your pet university, like the Sage's rejection by Harvard, which put him in the class of the Founder of value and fundamental analysis, and gave him the opportunity to buy GEICO from him, the only company the Founder made more than a market return on in his investment career.

When you are forced to work in industry during your college years, thereby learning how hard it is to make money and how competitive the real world is.

When stocks are so weak that they force bonds to a one or two month high, thereby making the allocators move money into stocks, with Joe Public then realizing it's better to make 10% in stocks than 5% in bonds.

Steve Bal offers a few examples:

1) Investors pile into gold and start talking of the immanent demise of the US dollar as the standard world currency, and that the Euro is about to replace it. (It may but not in the timeframe of these traders).

2) Selloffs take place in small cap securities as the larger caps remain calmer.

3) During selling the bids keep getting taken out as market-makers know investors will eventually have one final sale all together.

4) Investors are only too happy to pay for volatility (hoping this is the big one).

5) Talk that a rally in the US dollar is bad for stocks or that a decline in the US dollar is bad for stocks (these things just happen to fluctuate).

James Lackey writes:

Seventy percent of nothing is nothing. A blessing in disguise was the first time I left one trading firm for another. It was a total disaster. Payout and buying power is far less important than restrictions. Many firms have so many rules to reduce risk and generate commissions that a double payout can be useless.

Professional short-sellers are to be avoided. The blessing in disguise is we were first trained by big short-sellers. From the owner of the firm to the office manager, everyone made his big money shorting. We were taught that if you didn't short some days of the week or keep a balanced position you were not a real trader. It was so difficult for any trader to know, yet for a newbie to know when to be short vs. long is near impossible.

After the fact we noticed the big sellers made big money only once a year or so. They had a ton of small losses and a single huge profit for a good year. Conversely I noticed we had a ton of small losses from cutting losers and a few decent profits. Many small losses will add up to a huge loss. Everyone runs around saying how if he didn't have that one huge loss per year he would be profitable. The end result –in avoiding a loss you become risk adverse and do not make the zillions of small profits when it's seemingly too risky out there.

In 1998 finding times to short seemed easy. In 1999 it was too difficult, yet playing both sides made for much less of a long profit. That was a blessing as in 2000 I clearly got the joke. I made money shorting tech and day trading. Yet the trader who sat behind me did just as well trading a third of the time, long only. I was caught in some fantastic squeezes, only to cover on the next small down for even, then the market would drop much more.

On those squeezes the long traders would press and squeeze, laughing all the way into the close. They would drive the Nazz up huge, 200 points. I would just shake my head, thinking how easy it was to squeeze the market. Today the blessing is the exact same thing, only on the occasional big down day. I might have gotten this joke late for the past year, yet perhaps it will work for a few more years.

At a funeral in 2001, guys were discussing the impending doom for day traders. My comment was that at least we all had a chance to make some good money. We felt sorry for all those guys who started trading much earlier than 1997 and were always scared to buy because the markets were up so much. An old friend scowled at me, stated he had been through the crash of 1987 and this is why everyone would fail we were in a bear market.

That blessing is for times when the markets goes up seven days in a row and all our friends are screaming bearish, losing, and saying how stupid this market is acting. It was a blessing as I can picture the guy scowling at me because he didn't make much for years. At first the comment was, at least I am not short. Yet, we are just starting to get the joke, perhaps we could find a way participate a bit more in the bullishness as the no-fear-newbie traders do.

Blessing in disguise was when my clearing firm went bust and took out 200 traders. There were so many blessing from that disaster. One was I was still shorting 100% of my line on any given day. So from Jan 1 to Mar 15 2000 I was essentially out of the markets, shopping for a deal and planning to move across Florida. I can't imagine the losses I would have had from that melt up in the Nazz. At best I would have been a weak short on the break in March. My first day back trading full time, I was sitting next to my brother. He said "see, you just can't short this thing." The next day the President made a speech on biotech and the rest was history. My brother got smashed buying limit down, where I covered. The second limit down came on. He got out on a bounce and looked at me and said "well, at least we are together at the top."

My brother thought it was a blessing that I was now his partner in a room where no one sold short. The real blessing is my brother backed me. The lessons learned from my clearing firm's disaster in the huge up market saved me in the down. All the bravado and mumbo I heard during Jan-Feb 2000 from trading shops was over by May 2000. I ended back where I started in 1997. The firm rule was they never hire back anyone who quit.

That was a blessing is disguise because they were willing to hire me back but at the worst possible deal. This was such a blessing because it upset my brother, who took out a big loan to back me. We did a 50-50 deal on the first $100,000 and I paid him back in the first month. I made 5x for my family what I would have trading for the firm.

What a blessing it is to have friends and family. I have had many more blessing is disguise since July 2002 when so many disasters hit at once I gave up trading stocks and moved to the futures. Many of them are meals for a lifetime given to me by Vic and Laurel.

On the site, Vic and Laurel tore day traders apart one meme at a time. It was a blessing because the markets became too difficult to overcome vig. The only way to make it was collecting fees or trading very low fee futures.

Yet the cycle has changed and stocks are definitely back. A good example is AAPL on Friday vs. the broad market. A stock's strength and weakness vs. the index is how we played it. It must be obvious to get the slow movers in, and the stock's move must have follow-through to profit, since the costs of business are 400% higher to day trade stocks vs. the S&P futures. But the level of competition trading futures is much higher than stocks.

The last blessing in disguise is my wife, who realized years before that never being happy with your trading performance leads to higher profits. She has two comments, "you'll make it back" after a disaster, and "good!" after my complaints. I need to be at such a high state of focus to perform at a high level, even to be profitable at all. For whatever reason over the years, a big loss, a disaster, a business problem, tax time, a family feud, when things are not right, let me take it easy so we don't lose. Thee result is, we never make much profit or at all.

I guess the joke is if you're not all fired up and focused you might as well not trade. The markets will always be there. The markets are far too competitive to let those who are taking it easy profit much.

Jay Pasch offers:

Vic said: 'When the stock market goes down before an earnings report, it usually is discounting the headline number to be reported and surprises on the guidance have more of a likelihood of changing expectations for the better…' The following chart shows NVLS when the company guided lower and then 'miraculously' beat its lowered guidance. The red arrow shows when the company guided lower, and the green arrow is when it then beat its new guidelines.


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