so this is what being in cash feels like

I don't hardly believe it, but I'm all cash right now. I've never been all cash. Maybe this means I'm learning, finally. After all, I pissed money away all last summer during the correction trying to stay in and find winners. Or maybe it means I panicked and sold out too soon on Tuesday. Of course, that's easy to say in retrospect. I was hoping that getting out of the market would give me some new perspective, and it has. I've come to realize the value of the saying that you need to plan for every occurrence. Before you get in a trade, you need to have the whole thing figured out. Entry, exit, and what ifs. Yesterday was a big "what if" that I hadn't considered fully. If you come upon something you don't know how to deal with, chances are good you'll do the wrong thing. I'm still not sure if my reaction was wrong, yet, but the fact that I didn't know what to do was wrong.

Tuesday's crash caught me totally off guard, like most, I suppose. I think everyone expected that a downturn or correction was coming, but I thought we'd get more warning. My plan was: as the distribution days start to show up, phase out. But before Tuesday the IBD distribution count was 1 day, the market's making new highs, the NASDAQ's leading, etc. Turns out the bears with their oversold indicators were right. I still don't like the idea that we were "due" for a correction. That just sounds too much like the gambler's fallacy to me, but I suppose it's not a fair comparison. You're not measuring a roll of the dice, you're talking about market psychology--the old saying "there's nothing new in the market." Anyway, apparently there have been a few other big sell-offs like this with no warning before. Maybe the absence of volatility has led up to this surprise.

Anyway, after it hit, I don't think there was anything I could have done. Any stop orders would have been gapped before they filled at market. The mistake was just being overextended at that point. At least I did get out of a few of my China stocks like AOB on Friday and CHINA on Monday. Of course, then I picked up MR, which got spanked at open. That was the first thing I did after I got online. I saw that pretty much everything had bounced up from the low at open, except MR, my remaining Chinese stock, so I dumped it and then sat back to assess the situation.

Now, of course, my rule #1 is Don't Buy or Sell during the day. I even thought about this, but couldn't convince myself to stick to that. I also got email alerts from a newsletter I sub to and they'd gone to cash first thing. Not knowing where this thing could go, but clearly the trend was broken, I decided to bail out of anything that was down more than 6% from its highest close price since the rally started. This was all of them, of course. But I tried to sell out with limit orders for that 6% number. Some of them filled on spikes up, and some I had to tone back later on. That left me with ICE, SYX, and AB--my 3 biggest winners in mid-afternoon. Then the slide happened and I got out of them too.

Over the next day or two, my longer-term stocks in my IRA stopped out too. First GS, then SHLD and finally TM today.

So, I'm not going to beat myself up over it, but if I had more experience with panic sells and big downdays, maybe I would have handled this differently. Blogs I've been reading seem to indicate that vets know that a panic sell is usually followed by a rebound where you can get out at a better price. But then again, Wednesday could have just as easily continued on down, and then I'd be screwed. Also, Tuesday was enough of a shock that IBD just went straight from Confirmed Rally to Market in Correction in one day. That to me indicates that the trend was broken as soon as the market opened that far down and the correct thing to do was get out.

I even thought about the saying "the problem is that people fear when they should hope, and hope when they should fear." I think this was a case where instead of hoping (that the market recovers), you should fear (that you will lose your capital).

So, now the challenge is to be disciplined enough to stay out until we get a confirmation. There will be shake-outs and false rallies and bounces, but until I get a follow-through day, I'm not buying stocks.

rode this week out

After options expiration day and seeing down futures this morning, I'm surprised that the market basically closed break-even today. Actually, a little better than that, as all the indices found some support and came back a little in the afternoon, though the nasdaq was on lower volume.

Some of my stocks made new highs today: ICE on slightly higher volume closed at a new high, PAY on low volume, and SHLD on avg volume. SYX was an honorable mention at 0.13 off a new high, but still up almost 3%.

I actually got up and watched the market open this morning. I don't usually do this because nothing good ever comes of it. It's too easy to get caught up in it and break your rules, and today was no exception. But I wanted to put a couple of orders in before open. I started watching and my account and the market began slipping. I was down over 1% and started to panic and looked to see which of my stocks I should liquidate to get off margin and raise cash. I looked at a couple, but they weren't technically breaking down past my sell rules. I realized (and I've never formalized this thought before) that if I let my sell rules take me out, by the time I'm 100% cash, my acct is going to be 7-8% off its highs. So, my account balance is actually just like a stock price. I've been focusing on it a lot trying to look for an indication that I'm improving. I've been getting really overjoyed when it climbed higher and bummed when it fell back down towards where I started this rally. But seeing it as just an aggregate of my stocks' actions allowed me to see that it will have fluctuations as each of my stocks do and I found that a little comforting. I've been trying to teach myself not to panic when one of my stocks has a pullback, but I've been thinking of the portfolio itself as a different animal.

I know, this seems like a very simplistic realization--obviously a portfolio reacts just as its holdings do, but it was my frame of mind that needed adjustment. This allowed me to calm down a little and realize that there was no reason to panic and, besides, my rule is not to do anything during the day, especially not first thing in the morning when I'm sleep deprived.

Oh, and my account ended up closing slightly positive on the day.

interesting week

My acct was up slightly, but less than 1%. Wednesday was such a big upday, but then Thursday gave it all back. I'm not sure I can just waive Thurs off, as IBD did, as a distro day because volume was slightly lower. If you were to count it, that would be 4 distribution days, instead of 3. But, part of being disciplined is following the rules.

I went to an IBD meetup meeting this week, and everyone there was very bearish (some said they were 100% cash). I don't know if I agree with that. We are in a confirmed rally. If you don't think that's a good time to be invested, when will you? At the beginning of the next rally? But if you're that gunshy, you might even wait it out a while after the follow-through. As a wise Mauitrader once said, listen to the market. Besides, Jeff had a good point that if everyone is that bearish, this thing might just have legs.

Anyway, I did get out of KPN this morning. It gapped down on huge volume today, but found very strong support above the 50dma. I did not follow my rule here. My rule was to sell it on a close below $14, but it wasn't even close. Basically, I got scared out of it by thinking too much about which way the market will go. I need to be careful and get out of stocks when they fail (lose 7-8%), but I'm not seeing that yet in my portfolio. OTOH, there are not a whole lot of stocks that are having runaway breakouts.

I'll have to think this weekend about where I want to be in this market. I've found quite a few nice charts today, but is this the week to be getting in? I don't know, but now earnings season is finally over.

Some things that caught my eye:

• COLM low EPS but nice high on big vol today
• VPRT saw this one a week or two ago on the movers & shakers and it's back again
• WFR formed a new high with big vol on a 7month cup w/o handle. Nice fundamentals.
• VSAT also saw this one yesterday. Nice cup&handle that started in May and just slightly above the buypoint.
• EMS breakout off 1wk flat base. Strong up/down ratio.
• SYK big vol breakout from 2 wk base.
• HMIN nice technicals and breakout. Some say the china sector has topped.

Buying more, but smaller stakes

Recently I've been reading Tharp's Trade Your Way to Financial Freedom and thinking about position sizing again.  I had decided that I had too many stocks and was going to have fewer, bigger stakes.  That might have been okay, except that it exposes you to a larger capital risk on one stock.  

So now, I'm writing down my stock purchases with a sell rule for the up and downside.

For example yesterday morning I bought some PAY at $37.98  My loss limit would be at the 50dma of $34.46, which is about 9%.  1R of my current portfolio is $75, so 75/0.09 is $822.  (Losing 9% of 822 is $75 lost.)  Divide that by the shareprice and I bought 20 shares, just to have a round number.

This can change the amount of your position size, depending on how much risk there is in the stock.  For example, other recent buys at the end of last week were CBG and KPN.  CBG had a breakout to a new high.  I bought it with a loss limit of 8.5% (close below 50dma) and got $860 worth.  KPN had a high volume upday and I bought it at 14.76 with a sell rule of 14, or 5% and bought $1460.  If you look at both loss limits, it's for the same dollar amount, but CBG is risking a larger percent, so it's for less total stake of my portfolio.

a test of will

After MIKR's big down day today, I considered selling my remaining half.
I'm still up 1%, but IBD says to not let your winners turn into losers.
On the other hand, it also says that if a stock climbs 20% in less than
8wks, you should hold it for the full 8 weeks. That would have been a
smart rule to follow with SIM and FTEK.

Also, some folks on IP have convinced me that it is a choppy stock in
general, this is par for the course, that it's still way above the
50dma, and that I'm being scared. All these are probably true.

So I'm going to hold it and be patient and do some sitting. Even though
I'm very tempted to cash out of that and get into LQDT today. That's
one of my problems that I've identified: I like buying new stocks. I
need to decide why I'm doing this. Is it for the thrill of getting
something new, or is it to make money? If it's the latter, I need to
learn some discipline.

My trading rules

I have amended some of these. The old rule is still there in red, the current one is 1a, 1b, etc.

1. Don't buy or sell anything during the day.
1a. Buy using limit orders after watching the opening range of the first 30mins or 1 hr after market open. Only buy if it's an up day for the market, and your stock is above the opening range.
2. Use a "mental stop" based on close prices. A tight physical stop will often
get shaken out during the day. A wider emergency stop might be a good
idea, though.
2a. Now when I buy, I put in a physical stop at 3 * ATR(14) below my buypoint.
3. My R is 1% (0.5% in a downtrend).
4. Don't go long during a downtrend.
5. Once you're up 10%, don't take a loss on that stock.
6. At 20% profit, sell half.
7. Stop shorting stuff until you can make money on longs.
8. NEVER AVERAGE DOWN
9. Only buy at a proper buypoint. Ones I will use are cup & handle, double bottom (with handle), 3 weeks tight, and bounce off the 50dma. All these should be accompanied with at least 50% greater than average volume on the breakout day.
10. Don't buy right before or after an earnings release.
11. If a stock does not break out the first day, sell half of it. You only want stocks that are going to go up immediately.
12. Only buy good-quality IBD stocks. They should be above the 50day, have a 50day above the 200day and trade more than 150k shares daily. And they should have a share price above $10.
13. Remember, there is always another stock.
14. Before you buy a stock, know where you want to get in, where you want to take profits, and where you will bail out.