Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Beaten

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Cough CLICK! Cough. Thanks.

Well, this is a market that has gone from free-falling (August, September) to unbreakable (October 2nd to the present). If there is good news, the market vaults skyward. If there is bad news, the market might be soft for a few hours, but then it will either dismiss the news or assess it through a more positive lens. The market wants to go up, and it is doing so.

The title of this post is "Beaten" not because I am in such a state – – hope springs eternal in the bearish breast! – – but because this market has made a lot of progress beating the bear out of me. That is a dangerous thing, because the market likewise did a sensational job torturing the bear out of me for the entire year through July, which resulted in capturing only a fraction of the long-awaited drop we enjoyed all-too-briefly this summer.

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Wonderful and Awful

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Well, right about the time there were folks yammering on about how 1400 was the next stop on the S&P, the market started to fall apart, and it hasn't stopped. I guess the moon just didn't feel like helping this time.

Even I – the Bear of Bears – was thinking yesterday that things were really (and here's that dangerous word again) "oversold". So I ended the day with 29 shorts – – very, very light for me – – and one large long with SPY.

I dumped the SPY at a nasty loss before the market opening this morning. Of my 29 longs, all 29 are profitable – – but I have 200 (literally) other stocks I wanted to short at good prices. I'm starting to wonder if "good" prices are ever going to happen at this point, since the bears seem to have finally – thank you, Jesus – wrenched control away from the Bull Criminal Scumbags.

In any event, I am vastly underperforming the market today (in other words, I'm up, but not nearly what I should be), so it's disappointing. Very disappointing. There are a breathtaking number of issues falling 20% in a single day from what I can see, including many old favorites of mine.

Maybe Satan Bernanke is just putting things together for his Jackson HOLE crime speech. I'm going to be shorting a few more carefully-selected issues, but I sure wish I was 200% committed instead of 35%. But at least I'm not positioned long. Sheesh.

0803-estarget

Betraying Myself

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It's a very rare day that I don't wish I had done some things better in my trading. I wish I had a little more of this, or a little less of that; I wish I hadn't set a stop quite so tight; I wish I had anticipated a broad direction better. But on the whole, I generally can give myself a "B" – sometimes a B-, sometimes a B+, but usually I'm pretty happy with how I handled myself.

Today isn't one of those days. I think a D+ is about the kindest grade I could offer. What happened? Did I lose money? Yes, about half a percent. Nothing horrible, certainly, but a loss nonetheless. But that isn't the reason I'm upset – – I've had plenty of occasions where I've lost more than that and didn't feel the way I feel right now.

The reason for my present self-loathing is that I acted in haste out of fear, and that rarely is wise in trading. Simply stated:

+ I was about 63% committed in my portfolio, entirely to short positions;

+ I was quite concerned that we would have a very strong up-move today, which would merely be the kick-off to a substantial countertrend rally that may have lasted weeks;

+ Since I'm profitable for this month as well as last, and profitable for the quarter in general, I am jealously guarding those profits and don't want them threatened.

Given the above mindset, I wanted to get out of my shorts and get into either cash or some long positions. The market opened a little strong, and it got a little stronger, and I fell all over myself closing out all my positions. I breathed a sigh of relief. And then the market started weakening.

If you read my Measuring post – which is quite important –  you'll recall that I keep a spreadsheet available which shows what my P/L would be if I had done nothing on a given day. In this instance, now that I was entirely in cash, I watched the day's loss get smaller……..and smaller……..and smaller…..

And then I watched it turn into a profit and get bigger…….and bigger……..and bigger.

You can imagine how I felt. Here I am, the bear of bears, and I had covered what turned out to be brilliantly-crafted positions that were doing precisely what they were supposed to do. I had, out of an abundance of fear and caution, covered at pretty much the high prices of the day and watched my former positions flourish.

It was really tortuous.

I did wind up re-entering a portion of these shorts (at worse prices, naturally), but the psychology behind these positions is wholly different now. The risk profile is different, and my attitude toward them is different. None of this is good.

Well, what if the market did blast off higher, and my covering positions preserved profits that I would have otherwise lost? Well, yeah, what if? While we're playing games, what if the Dow flash-crashed a thousand points today? Anything is possible. It's pointless to play these endless what-if games. The fact is that I need to work within the confines of a logical, rules-based framework, and my desire to protect profits, ironically, made me lose money.

So what to do now? I think having a poisoned mindset when trading is awful, and I am clearing my mind of these thoughts of regret and anger. Tomorrow is a new day, and I can simply re-commit myself to a more steadfast rules-based discipline and remember the pain of today. Pain can be instructive, and I must take value out of today to inform my decisions in the years to come.

I likewise hope that, as I hopefully learn from my own experience, you likewise can take something away from it. Everyone has their own style. My style is very focused on large quantities of individual equities. Those equities have to stand or fall on their own merits, and keeping their stops up to date is the only task I need to manage well. Making sweeping conjectures about market direction can be a fool's game, and in my style of trading, I can't let macro speculations ruin individual decisions.

0613-selffoot

Big, Fat, Stupid Mistake

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I feel rotten this morning about my trading.

Why? Simple. There seemed to be a mass consensus that there would be a powerful bounce this week, and shorts were far too stretched to the downside to be safe anymore. Some of the smartest people I know – and some of the most bearish people I know! – were quite clear that they were going to switch to the long side.

Well, I decided it was time to take profits and get out of my shorts, so I did so. And after a brief bit of strength this morning, the bears once again showed that they -not the bulls – are in charge now, and I've been watching my former portfolio do sensationally well. It's very, very painful to watch.

After carefully examining my former positions, I decided about half of them were worth re-entering. It doesn't feel good to re-enter positions at worse prices than you had in the first place, but the fact is that these are still good charts. I feel like a total bozo for letting (a) fear and (b) opinion overcome cold logic. Markets sometimes can fall farther than you think and can sometimes rise higher than you think. The bounce might happen, but it's not happening now.

I am only one-third committed at this point, but entirely short, and I continue to feel that GDX has incredible potential. Anyway, I'm going to be quiet the rest of the day as I try to get my head screwed on right again.

0613-bear

A Missed Opportunity (by Dave Pinsen)

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In a post here last week (Revisiting a Losing Market-Neutral Trade), I mentioned a market neutral trade where I got stopped out of the short side for a loss. I got stopped out of the short side of a more recent market neutral trade (Short TRGL, Long IMO) for a gain, but I missed an opportunity in not buying puts on TRGL after getting stopped out.

TRGL versus IMO

The chart below shows the performance of TRGL and IMO from when I entered the trade on 3/31/2011 until when I exited on 4/21/2011. I started out with 24% trailing stops on both sides of this trade, but as I noted on Short Screen at the time, I tightened those trailing stops on both sides (to 8%) on 4/19. So I got stopped out of TRGL early on 4/21 — at $7.58, instead of $8.85, which is where it closed that day. Once I got stopped out of TRGL, I sold my long position in IMO. Overall, it wasn't a bad trade: I made 3% on the long side and 30% on the short side, for a combined return of 16.5% on the combined trade.

IMO, TRGL

Why TRGL popped on 4/21

The company, an oil & gas E&P with its operations in the Paris Basin, had been under a cloud as the French government considered banning shale exploration for environmental reasons. On 4/21, the company commented on an interim report about shale exploration by a French government agency, but there was nothing conclusive about that report; the pop on 4/21 looks like it was a simply a short squeeze.

Performance of TRGL from 4/21 until this week

The chart below shows how TRGL shares have done since I got stopped out on 4/21.

  TRGL

Why this was a missed opportunity

Because the bearish case against TRGL hadn't materially changed on 4/21, so I should have taken advantage of the bounce and bought in-the-money puts on it then. I didn't think of that at the time.

Buying puts on a stock after getting stopped out of a short position

The odd thing is that I did do that when I got stopped out of the short side of another market neutral trade (Short JOE, Long GTY) for a loss earlier this year. Since I thought the bearish case against JOE remained intact, I bought long-dated, in-the-money puts on it (which I'm still holding). It's something I'll consider going forward when I get stopped out for gains as well.

A reminder about hedging versus betting

Those puts on JOE were a speculative bet against  the stock; because of that, I bought in the money puts on it, consistent with Tim's guidelines about buying options in Chart Your Way to Profits. That makes sense for directional bets (when you are willing to pay more to reduce the odds against your bet) but would be sub-optimal in most cases for hedging (when you want to get a certain level of protection at the lowest possible cost).

If I were hedging, I would enter the symbol of the stock or ETF I was looking to hedge in the “symbol” field of Portfolio Armor (available as a web app and as an Apple iOS app), enter the number of shares in the “shares owned” field, and then enter the maximum decline I was willing to risk in the “threshold” field. Then Portfolio Armor would use its algorithm to scan for the optimal puts to give me that level of protection at the lowest cost.

On rare occasions (I’ve seen it happen once, so far) the optimal puts Portfolio Armor presents might be in-the-money; in most cases however they will be out-of-the-money.

My most recent market neutral trade

I entered another market neutral trade last Friday, long ALB, short ADES. More details on that at the link.