Morning Market Thoughts
Good morning. We’re looking at yet another higher open this morning, with the S&P, DJ-30, and the Nasdaq Composite all set to open at all-time highs…again. We are in “melt up” mode, with the indexes hitting all-time highs, but lacking anything resembling “momentum.” This is, I believe a result of an absence of aggressive selling activity. The summer months are always defined by low volume, as investors/traders take vacations, spend time with their kids, etc. It takes volume to generate momentum, so we won’t really have a sense of whether stocks are truly going to start another leg higher for another couple of months. For now, this is truly a stock picker’s market rather than a sector driven market. Don’t try to make it something that it is not.Some thoughts on trading stocks and options
I’m sure you are familiar with the description of a person as being “a jack of all trades but a master of none.” Well, in everyday life, that trait comes in handy in many different circumstances. If you’re stranded on a deserted island, it’s nice to be able to tie knots, build a fire, and try to put a broken radio back together with twine and bailing wire. If you buy a fixer-upper, knowing a bit about electricity, plumbing, wood working, and landscape architecture will save you a lot of money because you don’t need to hire others to do tasks that you can do.
In trading, truly being a jack of all “trades” can just get you into trouble. Because you have such a wide array of trading skills and knowledge, you see countless opportunities every day. You see day trading opportunities every morning, and you see really attractive companies with strong fundamentals in the afternoon. You recognize buying opportunities in multi-year charts, and swing trading opportunities on daily charts. You see trading channels that you can exploit by buying at support and selling at resistance – again and again.
If you trade options, you sell front-month puts; buy long duration calls; and write credit spreads. The list is endless.
I suggest that you throw 90% of your “skill” away. It’s not serving you! If you are a “Jack of all Trades” and a master of none, then you will consistently lose money to the guy who is a “Master of ONE” – the one trading tactic that you are using right now.
Don’t be that guy! Instead, look at your recent trades for indications of your psychological tendencies. How long do you keep trades open? Do you intend to hold a stock for months, but end up selling it 3 days later because it’s up 3%…or down 10%? Are you constantly enticed by declining stocks to try and catch the bottom? Do you buy at the top of a range because you sense that the stock is breaking out because your last trade involved shorting a stock that was at the top of the range…just before it broke out?
Here’s what’s happening. You aren’t concentrating on mastering one specific type of trade. Instead, you’re scurrying around with a lot of enthusiasm, but no real plan.
Relax. Decide what you’re good at and just leave the rest for someone else. For example, if you like to buy support and sell resistance in channeling stocks, then just do that. Look for stocks like Whole Foods Market (WFM). That stock has been spitting out 15-20% gains for the past 8 months as it oscillates between $30-$35. Don’t bother with stocks that are doing anything other than trading in predictable sideways channels. If you are attracted to volatility squeezes (my personal favorite), then focus on understanding the difference between a chart like YELP and HAIN. Both have been in squeezes, but the dynamics are completely different! If this stuff turns you on, then don’t waste your time with WFM. Just decide on the one thing that interests you the most, and then focus ONLY on that. If you can do that, then you’ll be the “Master of One” that takes the money from the “Jack of all Trades.”
See you in the forum.
–Dan
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