Trade Ideas for 9/10/08

Today, after the selling abated, there was... more selling! Major indices closed at their lows, and everything sold, including (and especially) commodities. Remember last Tuesday when oil fell hard and people (myself included) bought the open, thinking that the market was going to skyrocket? At the time I mentioned it was significant that the market defied that expectation by falling, and today proved why. The inverse relationship between oil and S&P is definitively broken.

As a net short, I had a good day today, but longs got killed. Some of you wrote me regarding holdings that are now way below your buy price, wondering what to do. Let me preface my response by saying that my perspective is that of a trader, not an investor. I do not hold losing positions with the hope that they will pay off in 2-5 years. I dump now and think later. In the world of trading, the difference between a competent trader and a bad trader is one thing and one thing only: good risk management. When entering a trade, think about where you are going to exit if the trade goes against you. If price falls below your exit price, you close out the trade. Simple—except that it goes against human nature. When you're underwater on a stock, it's human to think, I'll get out when I break even. You don't want to give up and have wasted the effort. But let's say 50% of such stocks go back to breakeven. The other half is headed to 0. Your overall portfolio return will be somewhere between 0% and -50%. Why not sell now and deploy that cash into trades that work, or failing that, at least have the luxury of standing aside until such time that the market favors your trading style? You'll be closer to breaking even when you're not holding a stock that no one wants. While it's illogical to hold stocks hoping to break even, it is the most natural way to think. It's just too bad that our natural instincts are geared to make us market losers—that's life.

Yesterday's idea DZZ gapped at open and ran. Finally, an exception to the gap-and-craps. Too bad for us; it didn't let us in. We got stopped out of LYV and BPOP. LYV is actually setting up as a nice short candidate (hint, hint). SDS had a great day, but until it completes the pivot by closing above 72.34, the bears cannot breathe a sigh of relief. This could be the last leg of the bear market for a bit (C of C of A, correcting '02-'07), and such a leg usually ends in utter capitulation: a sharp sudden drop of startling degree. If my read is right, yesterday smart money abandoned ship, and now we wait for the strong hands' spirits to be broken. Maybe their spirit was broken today, and tomorrow we'll see a rally. This market is bi-polar, and anything can happen. Nevertheless, downside is favored, and I'll be looking to add to my short position.

Current Holdings
Ticker	Basis	Closing Price	Perf.	Sell-Stop	Additional Exit Guideline	Chart
SDS	67.81	70.84	+4.5%	63.14	Consider selling on a close < 65.31	Chart

In addition to SDS, I did find a long that doesn't look half bad.

Trade Ideas for 9/10/08

Ticker	Entry	Exit A	Exit C	Chart
SDS (UltraShort S&P)	72.36	66.41		Chart
TV (Grupo Televisa)	24.01	23.35	22.63	Chart

If you add to SDS, move the stop on the original position to 66.41.

Please refer to "How To Trade The Ideas" (right-hand side) to read this table.