Morning Market Thoughts
Good morning. Interesting news this morning about the production cap that OPEC is supposed to be engaged in. Iran is ignoring it and instead pumping as much oil as possible. Other OPEC nations see this, and they similarly increase their output. The culture over there is pretty well-known for the sophisticated way they do business. They tend to promise something, and get a promise in return. Then one party breaks their promise, prompting the counter party to claim “breach of contract!!!” The offending party then says, “What? You really believed that we’d honor that promise? LOL. It wasn’t a promise; it wasn’t an obligation. We were just spitballing. Well, you screwed up. You trusted us.”So with that as the prevailing business environment in the Middle East, any of these “agreements” among OPEC nations are worth nothing. Trust me — oil is going to continue to be pumped as high output, which will keep prices down. And that should cap the prices on these oil stocks that are trying to come out of their bases.
I covered several of them over the weekend. The charts are setting up; but be patient. If you jump the gun too soon, you’ll wind up holding stocks that are doing nothing. Wait for the move, don’t predict it.
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I was reading one of my favorite books about trading, “The Zurich Axioms” over the weekend. One of the concepts presented in the book is the importance of embracing worry. If you aren’t worried, then you are probably not risking enough. Now, there are several types of worries. You can worry about a trade that’s gotten away from you and is down 30% because you didn’t honor your stop. You can worry about the size of the trade because it is just huge, and it’s huge because you “had a feeling” about the trade and wanted to maximize your profits — of course, the trade didn’t work out and now you’re worried about your ability to get out of the position gracefully (you’re worried…and you SHOULD be worried). Another worry is about having too many positions to keep track of. You’re worried (and confused) about your trading portfolio because it’s just too “busy” for you. How did this happen? Diversity! How many times have you heard the expert on CNBC talking about how diversification is the only free lunch on Wall Street? [Frankly, nothing is given away on Wall Street. So if someone is hawking a free lunch on a sidewalk on Wall Street, you can bet that the meat is laden with e coli, the bread has mold, the lettuce is wilted and rotten, and mayonnaise is well past its “use by” date. The smart guys aren’t standing at that lunch cart because they have enough experience to know that anything that’s free is worth exactly what they pay for it. And they are too busy focusing on making money to pay any attention to some kind of freebie.]
The trick here is to be trading enough to have a “meaningful” position, without it generating excessive worry. (Any successful businessman will tell you that he worries about his business — he doesn’t let it paralyze him, but his worry is what keeps him focused. The time you look at your business and think, “Ah, everything is on autopilot. Nothing can go wrong. I’m going to relax and coast for a while.” is the time you spend right before your business blows up and you are blessed with a very humbling experience.
Don’t be that guy. Take a meaningful position (“meaningful position” is different for each person. One trader might find $1,000 to be a real white knuckler while another trader might find meaning only in a position that’s in 6 or 7 figures. Whatever your position is, make it meaningful. And then protect that position with a sound risk management plan. As I was discussing last night, you should have one of three outcomes — a small loss, a small gain, or a large gain. Any of those outcomes are acceptable. We’d prefer the latter, but we must accept the former.
Have some diversification — but don’t get too diluted. Trading is difficult. You should be able to give each position as much energy as that position demands,…and not one minute less. Positions that are ignored will cause you as much pain as a spouse when you ignore them for an extended period of time. First, you’re kinda wondering if something is wrong. Next, you KNOW something is wrong. Next, you wonder if you can ever fix it. And finally, you’re just trying to survive. And if you do manage to survive, you’re darned sure going to be paying more attention to your spouse in the future.
Hmmmm. I think my trading advice has just helped some of you clueless guys in your personal life. Don’t worry about it — you can thank me later. By the way, every trading lesson I’ve ever learned somehow applies to relationships. Stop losses are a big deal…but so is conviction. If you want the “portfolio that you can hold forever”, you’ve got to find a great investment that really speaks to you; an investment that really keeps your interest and inspires you, accept that there will be cycles and ebbs and flows on the chart. But if the underlying company (um, person) is sound and has solid management with strong character and principles, then it’s worth holding through the pullbacks. If you do that, then you’ll also find that the investment regularly increases dividends, which is also nice. (OK, I probably took the trading analogy a bit too far, but it’s early and I’m on cup #3.)
Bottom line for today: The market is extremely choppy and the risk is high. I wish it were otherwise, but that’s where we are right now. You can’t fight it; you have to accept it.
Fret not, this will pass. But it won’t pass today or this week or next week…etc. Earning season is upon us and I suspect that we’ll get a lot of true confessions that will roil the stocks. One bit of advice. Watch how stocks behave in response to their earnings numbers. Don’t listen to the talking heads on CNBC if they are taking the other side of the trade. You go with the trend unless the stock gaps down sooooo far that there is just no way it can’t bounce at least a bit.
Check out the forum. You’ll see conversations about these various trading dynamics every day. You’ll make money in the forum. I can tell you that I do.
See you there.
Dan
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