Dodged a Bullet

The US market experienced a mild correction and was down 94 points yesterday. Intraday, it went as low as 160+ points due to so-so economic data (initial claims, leading indicators), but it rallied because of the statement of Steve Ballmer that Windows 7 is performing well beyond expectations. The shipping stocks, which we have been following very closely the past few days, went down hard and formed 2 day reversals.

Thus, I'm actually feeling good right now given that I sold my shipping stock (HK:2866) at the close yesterday. Yes, I dodged a bullet - which easily could have killed my confidence. However, I don't expect the Hang Seng to go down too much today since it has already been down for 3 days. Nevertheless, I will be very cautious as this may just be start of a deep correction.

Philippine Market

I've decided that I will also share some of my trading experiences in the Philippine market. As of today, I'm already up 80% year-to-date. This is in spark contrast to my very large drawdown of 46% in my Hong Kong account. Why the large discrepancy? Well, in our company (HK market), we're basically discouraged to buy and hold for more than a couple of days. We are being groomed to be day/swing traders that get in and out quickly. This kind of style is very difficult especially in a market that is very volatile, as we are usually prone to constant whipsaws. On the other hand, for my personal account in the Philippines, I have the freedom to buy and hold a stock for more than a week or even a month (but my maximum is 2 weeks), which allows me to maximize gains and ignore market noise.

So there.

I'm currently holding CPM. I already made money in the stock, (I bought it at 4.15 and sold at 6) so I can buy it back at any price if there's a good set-up. As you can see from the chart below, after three days of profit taking from 6.3 to 5.1, the stock has stablized and volatility has lessened, so I bought at 5.5.

Crowd Psychology

Crowd psychology almost always works. In our office, we use the actions and the sentiment of the majority as critical indicators to the next move of the market. Here are some examples:

1. Market Top - After a furious rally to the top of a channel, the house account usually runs out of money. And, almost always, the market either retraces in the afternoon, losing all morning gains, or it crashes within the next few days. It's also the time when everyone is so bullish and complacent.

2. Market Bottom - When everyone is so bearish, then it's a sign that the market is about to turn to the upside. I usually ask my colleagues whether they're buying to the close or not. When no one is brave enough to buy, it's usually a good time to probe the leaders.

3. The Happy Meter - Whenever more than a handful are rejoicing and making unrealized profits in a single stock, it may be a good time to sell. Looking at it from a larger perspective, it may mean that there are no more buyers to push up the stock - which means that the upside has already been capped.

Just today, I experienced the happy meter. Everyone who had shipping stocks today was ecstatic in the afternoon due to the sudden acceleration of buying. One was already thinking of going to a club and celebrating, others were already computing profit targets, etc. At the back of my head, I was already wary of a sudden reversal and, thus, I planned a tight mental stop. Lo and behold, about 20 minutes into the close, the shipping stocks did reverse. But of course, I didn't sell right away. I froze for about 5 minutes and hoped that my stock would still go up, and I paid a few dear fluctuations for it. (ALWAYS FOLLOW YOUR PLAN!)

Here's a snap shot of the intraday chart of the stock almost everyone had today (click to enlarge):

In conclusion, one should always be wary of how his/her fellow traders (as a group) are acting. A trading firm is a good microcosm of all the market participants in the world. However, one should also put into mind that, though very important, crowd psychology is only supplementary to proper technical and fundamental analysis, and must not be used alone.

Lessons

My boss is right, change is constant in the market. Even if you excel in technicals or fundamentals, you still have to know when to use either one or both. Exceptional knowledge of the markets is useless if you're always one step behind. There are raging bull and bear markets, and there are also periods of consolidation. If you want to earn a living from trading, then you'd have to notice these constant shifts in environment, and adapt quickly. And so, in order to prepare myself for the future, from now on, whenever I pick up some valuable lessons from my own experiences, my boss' tidbits of wisdom, and even my colleagues' stories, I'd write them down here.

So here goes:

Period: From the March 2009 bear market trough.

1. Keep out of the laggards. Your chances of making a quick profit are slim when you hold on to these crappy issues. Use the index as your guide to identify laggards and leaders.
2. Never do the revenge trade intraday unless there is a valid set-up. And even so, only buy a portion of your original size.
3. If your stock is not trending, do not anticipate the moving average bounce. Wait for the first uptick.
4. Look at the big picture first, and then enter using an intraday set-up.
5. Candle sticks are very important. When you think something is wrong, get out and just enter the next day if possible.
6. In overbought markets, do not load up in one issue overnight. The chances of experiencing a "Black Swan" - or something extremely unexpected - are very high. (i.e. placements, profit warnings)
7. Avoid buying stocks in the first 30 mins.
8. Large and fast intraday moves accompanied by strong volume are signals to sell a bit of your position. On the other hand, small, gradual moves are hold signals. The latter are more sustainable.