There's some good advice in Alan Farley's latest article to help "home gamers" (Cramer's phrase) survive the current extra-volatile market. The whole article is worth reading but here are the four bits of advice:
I have four pieces of cautionary advice for my at-home brethren. Listen up, because it's no longer a question of whether you want to take real money out of the market, or just add a few bucks to the weekly shopping budget. These remedial steps must be taken if you want to survive long enough to take advantage of the real opportunity.
- Wait for the Market Volatility Index (VIX) to drop below 40 and stay there for a week. Massive price swings require equally massive stop losses, which rarely justify the intended positions. Your only alternative is to stand aside and do nothing, no matter how much it hurts to watch others playing those big rallies and selloffs.
- Forget overnight positions until the index futures stop gapping 2% or more every morning. These price jolts are great news when you're on the right side of the trade, but total devastation if you're on the wrong side. And guess what? You're not smart enough to predict overnight direction from day to day. Neither am I.
- End your love affair with popular stocks that made you money during the last bull market. In November 2008, these are the issues that will trigger the most painful and unexpected reversals, which happen right after you're absolutely convinced your position is the right play. The bottom line: They see you coming, sucker.
- Get control of the time element in your market strategy. You're getting killed because you have no patience and forgot how to sit on your hands when your trading edge isn't in play. Realistically, it could be months before the market works for you again. Would you rather wait it out and survive, or stay busy and get crushed?
My thoughts:
- I like that part about watching the VIX. A few weeks ago I decided to cut my risk per trade (R) in half (from 1% to 0.5% of my equity) until the VIX breaks that top it's trying to put in. That means a close below 44. (Dr. Brett recently wrote about when traders should cut their risk.)
- Tough to argue with what he said about overnight holds. This is certainly a market for intraday trades.
- Reminds me of what I said about AAPL and GOOG back in July. Add DRYS and its ilk to the list too. It's better to just have an open mind and grab on to whichever stocks become the new leaders.
- Yep, preservation of capital must be the top priority. If you can't sit out at least lower your risk.
Hello Mike,
You always enlighten me with your commentary and insight... Regarding the point 3 and looking at the AAPL (and GOOG) cash position(24billion and 18b resp/no debt), and their fundamentals remaining strong do you think that they are not going to be part of the next bull? I think they have the strongest balance sheet and brand to survive the downturn... Am just curious and have no position in them but i do had a good help from your earlier posting on them at the peak..
Thanks
Prab
They probably will be part of the next bull but my question is will the be the leaders. Those companies are mega-caps and will require a lot of money to push them significantly higher. And many of the highly leveraged funds which sent them into orbit in the past are no longer around or don't have the leverage they once had.
I think following the IBD playbook makes a lot of sense -- look for stocks that are breaking out to new highs to find the new leaders. I think some small & mid-cap stocks are much more likely to have huge percentage gains than either GOOG or AAPL.