Decent reading on last weeks rally:
Wait Until You Deserve the Hors D'oeuvres
By Victor Niederhoffer and Laurel Kenner
04/12/2001 10:00 AM EST
The temptation to buy after big rises in the market can be overwhelming. It seems safe, almost festive, to be buying with other buyers. The urge is particularly strong when a trader is down and wants to make it back.
Exercising restraint on such days gives no immediate reward. To the contrary, it feels like not being invited to a great party where nobody's checking the invitations. Why not just look cool and crash it?
Unfortunately, big rallies are the worst time to buy, quantitatively and anecdotally.
A case study came to us in the form of a letter from a reader, who told a story at once heartrending and illustrative of Murphy's Law.
This reader has lost so much money in the market that he is about to lose his home. His losses brought on severe health problems, but a life-saving operation is out of reach because he can't afford the necessary drugs. If ever a person needed to "make it back" in the market, it is this reader.
We received this note from him as the Nasdaq soared on Tuesday:
As I watch the markets fly this morning, and everything on my buy list up anywhere from 8% to 15% today (and up 20%-35% from last week), I feel almost ill because I'm still sitting on the little cash that I have left. The pressure to get back on my feet is immense.
This causes me to wonder: 1) how many people out there are in a similar situation, where they continue to be paralyzed by fear; and 2) how do they plan to resolve the situation effectively and move forward?
For now, we advise this reader to stay away from the market. He is too shell-shocked to be trading.
Saving by Not Buying?
As reader Jack Tierney put it:
This is the "A Penny Saved is a Penny Earned" dilemma. Do the results of inaction count the same as the results of action? Today I can look at a stock I considered purchasing last week only to discover by not doing so "cost" me $3,000. Similarly, I passed up purchasing Motorola (MOT) on that same day; had I purchased it, I would have lost $6,000.
Am I $3,000 poorer due to my inaction in the first example or $6,000 richer due to my inaction in the second? Obviously the answer is no to both parts; my cash statement shows my funds unchanged. If the pain of watching is as great as the pain of playing, this is a game you shouldn't play.
Dr. Brett Steenbarger, a SUNY psychology professor, said he suspects a lot of people are kicking themselves in this way:
The problem is not being out of the market; the problem is the "ill" feeling that comes from regret and self-recrimination. People use negative outcomes as opportunities for attacking themselves, talking to themselves in ways that they would never talk to another person in the same situation. If fear is the problem, developing confidence in a trading methodology is the answer. But bashing oneself for missing a couple days' rise can only have the opposite impact.
After all, even the most successful veterans are wary now. "I don't trust this rally," we were told yesterday by Irving Redel, the former head of the New York Commodities Exchange.
Good Ending, but Middle's Middling
Mark McNabb, the aesthetic Virginia Tech finance professor, put it this way: "Watching the watching the turn toward risk and the Nasdaq is like seeing a really soapy movie where the two former lovers run into each other arms as if neither had cheated."
"Of course," McNabb added, "the ending is always good."
We agree that the ending is likely to be good. We're keeping in mind those millions-of-percent-a-century returns. But we're not sappy buyers today, with the Nasdaq 100 having risen 20% in the past five trading days and tax day coming up.
After April 15, we expect to be bullish again through the end of the month.
We have put much thought into what approach should be taken to a market that has broken all the rules. The buy-and-hold and buy-in-panics strategies that we like haven't worked for the past year. Growth investing, value investing, low P/E investing, small-cap investing, IPO investing -- all have failed.
The only rule that applies is the meta-rule of the ever-changing cycles.
Chess for Success
What's needed, we think, is an entirely new approach to the market: one that begins with defenses. We found it in the strategy of David Bronstein, probably the greatest chess player who ever lived.
We write about Bronstein's approach in detail in our column today on MSN MoneyCentral Investor (www.moneycentral.msn.com).
In brief, Bronstein advises us not to go immediately for the big win. Instead, begin by building a shelter for our king. In the market, that means making sure you have enough cash to protect yourself and your family, setting aside reserves for health, home and college education.
Once the defense is in place, Bronstein would send out his infantry, the pawns. For the investor, this would be making swing trades of a few days of duration. Once you have built up some speculative capital, then you can send out your long-range pieces" -- bishops, rooks, knights and queen -- by taking long-term positions.
Simple, but exactly the opposite of what many of us have been doing.
Speculator's Scorecard
Days Up/Days Down Ratio (YTD)
# Days in Latest Streak (YTD)
% Change YTD
% Change (last 10 days)
Dow
0.95
Down 1
-7.2
2.3
S&P 500
0.90
Down 1
-12
1.1
Nasdaq
0.90
Up 3
-23
2.4
Europe STOXX-50
0.83
Up 3
-8.8
4.5
Dollar/euro
0.90
Down 3
-6.0
0.0
Nikkei
0.85
Up 1
-4.4
-4.3
Dollar/yen
0.92
Down 1
-9.5
-2.1
Gold
0.90
Up 1
-5.0
-0.5
Oil
0.92
Down 1
9.4
7.1
Bond Futures
0.84
Up 1
-1.7
-1.4
2-Yr Note Futures
1.30
Down 3
1.2
0.08
Bund Futures
0.90
Down 3
0.04
-1.3
Victor Niederhoffer is a private speculator specializing in futures and options trading. His positions often change during the day based on shifting market expectations and volatilities. He is the author of the best-selling The Education of a Speculator, which is available here.
Laurel Kenner is a financial writer in New York City. Formerly head of US stock market coverage at Bloomberg News, she previously reported on police, politics and aerospace during her 17-year news career. |
