Lessons of the Bear
Kendall Harmon
www.realmoney.com Trading Diary
8/02/02 11:27 AM ET
"The Israelites made a golden calf because they didn't have enough gold to make a cow."
-- Actual Sunday school paper
The last 28 months of this brutal bear market have been tough on everyone's nerves. People have lost money, sleep, and some feel barely alive. But amid all the suffering, it is worth pausing to note some of the lessons we have been taught.
Whether last week's rally is a meaningful turn of the market, or more pain lies ahead, these lessons will endure. I am keeping a record of some of the things I have learned. Are you?
1. I underestimated the virulence of the later stage of the bear. Early on in 2002, many small-caps in particular did well. If your portfolio consisted of the right stocks, to some extent you were shielded from some of the damage of the market in its earlier stages. This led me, at least, to be lulled into forgetting the overall market backdrop. I should have stayed more cautious in terms of taking long positions in general.
2. I underestimated the significance of the breakdown in the Russell 2000. A three-month chart of the Russell really bears close examination in retrospect. Once it topped out in early April up near 525, it really got taken apart (reaching a 30%-plus decline in two months to its intraday July low). When the Russell 2000 first broke its 200-day moving average line, it was a key tell. Not only should I have been cautious to be holding longs in general, but I should have been more careful about holding small-caps once the key small-cap index broke down. This led me to keep winners like TCHC and TENT too long. One by one they went through the various industry groups and the bear clawed them; they eventually crushed insurers and restaurants too.
3. I should have done a better job shorting. I don't know about you, but I struggle on the short side. Maybe it is because I began in the market in the late 1980's and it was the side to be on (mostly). Maybe because it is because I have failed to learn to turn charts upside down and think in terms of a stock breaking resistance to the downside as a short candidate, instead of a stock breaking resistance to the upside as a long candidate (it's the same principle). In any event, I should have been more focused on the value of shorts throughout this bear more consistently.
I did one thing right, however, and that was to stick to three key sell disciplines. I always took partial profits on a rising stock -- a gain is a gain. Also on long-side entries I kept a predetermined mental stop before I entered a trade, and I sold any stock that broke its 50-day moving average to the downside no matter what. It is one thing to be wrong, but it is another to stay wrong -- remember the market always knows more than you do and needs to be deferred to.
Yes, in answer to some emails, I am up for the year. Also, in answer to some others, I gave too much of it back in the May-June period. While I may have less of a gain, I have greater knowledge. You do too. Make sure to store up the lessons of the bear because they will be valuable in the future.
No positions |
