Morning Market Thoughts

by DAN Good morning. The market is higher this morning and the Nasdaq is again leading the charge. As most of you know, I live in California — I was born here and aside from a few short periods in my life, I’ve never left. A lot of my family resides in northern California — including the Oroville area.

Oroville is in the news these days because the dam that sits above the town — the tallest dam in the US — is in danger of collapsing. Why? Because all the winter storms have filled the dam to capacity. Now, the emergency spillway is in danger of collapsing (actually, it already has. They just don’t say it…yet). Why? Because the emergency spillway — that part of the dam that will only be used in emergencies — is nothing but dirt. Sure. That’s gonna hold when millions (or billions?) of gallons of water start flowing down the spillway.

Common sense dictates that massive flows of water over dirt, no matter how densely packed the dirt is, will ultimately erode the dirt. Think: Grand Canyon.

The state authorities were warned about this danger about 12 years ago by various organizations who monitor such things. Response? Meh. We know what we’re doing. The dam is fine. We’re the experts. Mind your own business.

Well now, the expertise of the California authorities is being revealed to be something other than expertise. And the end result may be cataclysmic. (Oh, and here’s a prediction — none of those “experts” who ignored warnings will be fired. Not one.).

When the market is rising and hitting new highs, your skill is unquestioned as long as you own stocks. Life is good. But dangers lurk all around you; they are just unseen. Most traders don’t think much about the future. If they are doing well, they just assume they will continue to prosper. But situations change. And they typically change without notice of any kind. That’s why they are called “emergencies”.

When you think of your trading habits — think of Oroville. Prepare for unexpected situations by at least considering what they might be. Unexpected moves in a stock that you’re overweight in. Do you have an exit plan, or are you just counting on the stock moving higher forever? If you are an option trader, how much risk does your position REALLY involve? Imagine the worst case scenario — your bullish trade is decimated by a massive move in the stock. Who much money can you lose? If the unthinkable happens, what is your REAL exposure? Good traders consider this possibility when they make decisions. No, the water is not likely to start spilling over the dam. But what if it does? Am I ready, or am I just an unknowing victim waiting for disaster to strike?

All is well right now — stocks are rising and bulls are fat and happy. Embrace the rally rather than being in constant doubt. But also consider the worst case scenario. If the worst happens, are you going to keep the lion’s share of your profits, or are they going to go down the emergency spillway while you look for a lifeboat?

See you in the forum.

–Dan

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