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DiggDare To Fail (Greatly)!
by OptionSage - June 8th, 2008 4:47 pm
"Only those who dare to fail greatly can ever achieve greatly" – Robert Kennedy
It seems fitting with so many tributes to Robert Kennedy this past week to include a quote from him that can easily be applied to stock market trading. Indeed the quotation may be considered analagous to Buffett’s famous adage: "Buy Fear and Sell Greed".
What is not so well known is that Buffett later revised his quote. Recognizing that few have the mental fortitude to trade bullishly in the midst of panic and bearishly in the midst of exuberance, he expanded upon his statement with this more recent remark:
"You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that’s too much to expect. Of course, you shouldn’t get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that."
Moreover, Buffett commented that
"Stocks are a better buy today than they were a year ago. Or three years ago."
But how many will have panicked following Friday’s move and failed Buffett’s ammended statement? The likelihood is fewer still will have dared consider any bullish position.
At Stock and Option Trades, we were fortunate to side-step both Thursday’s greed and Friday’s fear. Indeed, in Thursday’s blog, we stated:
"Factoring in the fickle nature of the markets recently, it only reinforces the fact that caution and patience are needed when trading. We have seen far too many attempted breakouts fail during an unstable market."
With that said, we have commented that more aggressive investors can start to dabble (buying the fear). And by dabble, we mean scale gently into the market. We expected conservative investors could start to dip their toes in the water in the middle of this month and commented hitherto that we would favor this course of action ourselves.
That doesn’t mean sitting on the sidelines. We’re still trading as evidenced by each week’s Trade Alerts, but we’re still holding heavy cash positions. And we’re selfishly hoping for more to the downside so we can swoop up bargains at the bottom.
Even if buying stocks proves too difficult, it is definitely worth considering option premiums on bull put spread trades when panic levels really skyrocket. You will find numerous stocks during selloffs like Friday’s that have great fundamentals and will be great long-term winners, and are already undervalued; we…
Sneak A Peak
by OptionSage - June 1st, 2008 3:13 am
This week we considered a position on the XLF, the Financial Select Sector SPDR. But before deciding whether to enter a trade, we needed to sneak a peak behind the XLF in order to view its consituent components and hence discover whether the reward to risk ratio might be attractive at this point in time.
The first step in uncovering the XLF is to discover the primary holdings for the Select SPDR. Yahoo! Finance reports that the top 10 holdings are:
American Express (AXP) – 2.48%
American International Group (AIG) – 5.95%
Bank of America (BAC) – 8.84%
Bank of New York Mellon (BK) – 2.5%
Citigroup (C) – 5.93%
Goldman Sachs (GS) – 3.38%
JP Morgan Chase (JPM) – 6.84%
US Bancorp (USB) – 2.77%
Wachovia (WB) – 3.03%
Wells Fargo (WFC) – 4.94%
Looking at some of the major holders in some more detail, we can find out even more about the XLF. Let’s start with American Express.
American Express started an uptrend in March and so far the uptrend has remained intact despite the most recent correction in the market and in financials on the whole. That’s a good start if we’re considering a bullish thesis on the XLF.
AIG has had its share of woes lately, but late in the week received an upgrade from Morgan Stanley citing the most recent correction as being ‘overdone’.
Certainly from a reward to risk perspective, AIG is looking attractive as a longer term play. 2-0 for the bulls.
If good companies trading at multi-year lows based on dismal sentiment constitutes good reward to risk ratios, then Bank of America is a contender for the prize ceremony.
Bank of America is now trading at 4-year lows. If ever there was a time to speculate on BAC, now might be it!
Next on the list is a top-performer in the group, Bank of New York Mellon, which has maintained tremendous chart strength in the face of what could be described as a sector collapse earlier in the year.
Nothing for the bears to grab hold of here, 4-0 to the bulls!
And onward to the famed Citigroup. Probably it’s best to let Phil and Meredith Whitney take this one to round 12. We side with Phil on this one, as well as some top-rated analysts who predict the probability of a rosy future is much greater than…
When Sloth Is Good!
by OptionSage - May 26th, 2008 3:03 pm
From a young age, many of us are conditioned to believe that the harder we work, the greater will be our successes. The advice stands up to scrutiny in most respects. Whether studying hard to graduate from school or working hard on the sports fields to ‘make the team’ and ‘beat the competition’, hard work pays off. And then we transition into the professional world and soon discover that promotion and increases in pay follow from going the ‘extra mile’. So, by the time we have amassed a level wealth with which we can trade or invest in the stock market, we our heavily conditioned to believe that hard work means greater success; the habit was formed through a lifetime of practice. The cause (hard work) and effect (greater success) relationship becomes so ingrained that we often consider it indisputable.
Yet, for many new traders and indeed many experienced ones, translating the habit of working hard into stock market trading does not lead to the expected level of reward. The attraction for so many is to confuse working hard with trading actively. Working hard in the stock market is necessary for long-term success. It means conducting due diligence: fundamental, technical, sentimental, and economic. However, trading frequently should not be so easily equated to working hard. While many outstanding traders engage in active, short-term day-trades, a great many others engage in trading excessively because it offers a level of excitement. Indeed, Tony Robbins contends that two of the six primary needs of humans are certainty and uncertainty. As humans, we need to be excited on a regular basis in order for our interest levels to be maintained.
Examining aspects of our lives, we can quickly see that this contention may be very accurate. Why is it that we like to go to see a new movie? Is it not because there is a degree of uncertainty attached to the series of events throughout the movie? And further is not because we have been conditioned by the movie industry to trust that overwhelmingly the final outcome will be positive; we have a certainty that this will be the case. If we are internally wired to NEED uncertainty and excitement, is it not eminently feasible that we create this uncertainty and excitement in our stock market trading also?
If we assume that most traders are unaware of their…
k1 Project – New Members Entry Point
by k1 - May 26th, 2008 2:28 pm
Here’s an easy link to the front page for the k1 project, which gets buried in the archives thanks to the way WordPress (the software engine underneath PSW) manages articles
Possible Education Play From the ISM Data?
by Phil - February 6th, 2008 4:28 pm
The market had a field day with the DOW dropping 370 points yesterday. All of this because the Institute of Supply Management released the non-manufacturing (services) report indicating a contraction in the service sector’s business activity to 41.9% in January from 54.4% in December.
My first gut reaction was quite a shock. When you look at magnitude of such a drop you wonder if we really are heading into a recession. Maybe we are in one already. But what does 41.9% really mean? Are the investment powerhouses reacting off the gun, selling off their positions, protect their assets, and asking questions later? What does 54.4% really mean? What specific areas of the service sector contributes to this number and how is it calculated?
Don’t Touch That Dial! $25KP Lesson
by Phil - December 2nd, 2007 5:43 am
Wow, what a day!
The Dow flew up right at the open 169 points to 13,570 and fell all the way to 13,225 (345 points) by 3:10 bouncing back to up 59 for the day.
Earlier this week I reminded you guys to reread my article from August (back when 300-point intraday moves were considered rare!) called "Don’t Just Do Something, Stand There" and today was such a good example I thought I’d hammer the point home.
At the time I said: " When you think about all the effort (and cost) that is involved in changing course, it is no wonder that we should be willing to sacrifice, to take a few blows, to let the FEAR pass over us, before we commit to a new action. If we are properly hedged, a few moves against us may sting, but they shouldn’t wound. This gives us time to calmly assess the changing market, understand the new paradigm and gage our own preparedness (our investment mix) to deal with it and to choose the course that will best get us to our goals."
Since I happened to post the $25KP in the morning I thought it would be a good idea to run the updated numbers on the untouched set. It is very easy to panic and rush to buy out your callers into a spike but, as I often say, a spike at the open in either direction carries little weight and it’s the last thing you should be reacting to. If your virtual portfolio is decently balanced, you should be able to ignore the individual losses (PAPER LOSSES) on a few callers and focus on the fact that, on the whole, you’re even for the day so THERE IS NOTHING TO PANIC OVER.
Rule #1 is: Always sell into the initial excitement. Anyone who reads me regularly knows I am no fan of absolutes, YET THIS IS MY #1 (of 2!) RULE. There is NOT a rule 1.a that says "Never buy into the initial excitement" even though it would seem to follow rule #1 but that’s because I would not say never. Sometimes a stock is going higher and higher so perhaps buying Google at $120 on IPO day makes sense or perhaps buying out an XMSR caller when they announce a deal with SIRI is prudent, even if you are taking a bath.
Rule #1…
k1 Project – Earnings – Dragon’s Story
by k1 - November 25th, 2007 11:38 pm
When Napoleon was asked which generals to take to war Napoleon answered "Give me the Lucky ones." – optiondragon
For the past 4 years I have been perfecting the Earnings 3 ways method. One of my specialties is event catalyst volatility plays. – optiondragon
One of my best friends Dad didn’t believe that I made $200,000 strangling GOOG earnings back in 2005 2nd Q earnings. I run into these people everday. I just shrug my shoulders and move on when they don’t take my ($1000)bet that i did. What are u gonna do? – optiondragon
k1 Project – Core Strategy III – Advanced Topics
by k1 - November 18th, 2007 11:21 pm
The LTP strategy is the core of Phil’s approach. Though the minute-to-minute action through comments might lead you to think otherwise, the central elements of the LTP strategy are fundamental to any understanding of Phil’s approach:
The k1 Project
by k1 - November 18th, 2007 12:55 pm
I have come to doubt the veracity of Phil’s professed performance returns, as well as the usefulness of his strategy. Caveat Emptor – k1
"The will to win means nothing without the will to prepare." – Juma Ikangaa
Welcome friends to a journey I began this past summer, to understand how a trader and blogger who kept coming up in my Quicken news source (by way of SeekingAlpha) was consistently producing the kinds of returns I had been taught to believe could only be snake oil.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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coordinator for PSW. She manages the Favorites backup site
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