In the face of such utter annihilation of wealth, I dared to go long (The Contrarian)  

Posted by Book Eater in ,

In the face of such utter annihilation of wealth, I was a contrarian. I sold at market open all my shares and rebalanced my portfolio concentrating them in the only share that I know of. I bought TEL today at 2610. My cutloss is at 2580. If the market gaps down to me tomorrow. I respect it and sell them all. No emotion. Decisive and no long term pretensions for me. I know myself. You know yourself better.

The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.
- O Neil

Yes. I have heard all the news about Bear Stearns at a firesale price of $2. I have seen the USDJPY falling at 95.70. I have seen the EUR going to 1.58++. Add to the fact that I also saw the futures trading down to 300 at that point even before markets open in the US tonight. This is in the face of the FED cutting the discount rate of 25 bps, in the face of the March 18 FOMC meeting, and in the face of skyhigh gold and oil prices.

What was I thinking?

I have to say that the decision to catch that falling knife right there was a very tough thing to do for me. Here's what went through my head.

I read in the book of William O Neill's "How to Make Money in Stocks" the following paragraph.

Majority of people in the market can never be exactly right at exactly the right time.

After everyone that can be run in or run out throws in the towel and acts, there isn’t anyone left to take action in the same direction, so the market will finally turn and begin a whole new trend.

Also, I want to paste the following "prime selling pointer" discussed by O Neill in the same book. Had I read this book earlier, I would not have suffered losses the previous week. In any case, it's never too late to correct my mistakes. While reading his book, I swear I could sense it was like him lecturing me about all my trades. His book speaks straight, cuts through your heart, and knows the exact feeling of a loss. I know that a loss hurts when its too painful that it sticks to one's memory. I'm lucky to have read a few chapters last week insuring me of a total destruction of wealth.

1.) When it’s exciting and obvious to everyone that a stock is going higher, sell, because it is too late! Jack Dreyfus said, ‘Sell when there is an overabundance of optimism. When everyone is bubbling optimism and running around trying to get everyone else to buy, they are fully invested. At this point, all they can do is talk. They can’t push the market up anymore. It takes buying power to do that. Buy when you’re scared to death and others are unsure. Wait until you’re happy and tickled to death to sell.

2.) Try to avoid selling on shakeouts (below major price support areas).


Memorable Quote Applicable to the market today(All from O' Neil's book):

When you reach a point where numerous small investors conclude that the only way to make money is to sell short, you’re very late in the down cycle.


Looking at the chart of TEL, 2610 is actually a support of the trend line.

Am I aggressive? Am I brave? hell no! Here are the objective reasons why I bought and why I'm quick to cut my loss proven wrong by the market tomorrow.

Let your rules and the market decide and determine how long to hold each stock. Don't fool yourself telling you're there for the long haul. If you don't know how to cut losses. Don't enter the stock market.

I purposefully deleted the MACD and RSI because they will give false signals during a consolidation. That consolidation I think will hold. Now, I know that consolidation is subject to a lot of contesting especially since people in the news are saying that today signaled a bear market when PCOMP fell to 2790. Perhaps... however, based on this chart and based on TEL's market capitalization in the PSEI. I'm not pulling all my funds out of TEL.

Everyone's too smart today. Everyone says its a bear market. Everyone said it broke the trendline. Well, when everyone throws the towel. Who's left to sell tomorrow?

They say that 80% of the market loses while 20% smart money know when to stand back and wait on what the market is telling them. The market told me the following:

VIX is once again above 30 - this means real fear by the people (the masses)

Among the traders I consider smart enough to know and be objective with this market, they're biased either to stay on the long side or just be in the sidelines.

They are traderfeed,tradermike,quantifiableedges,vix and more. 100% or all of them are contrarian and just by reading their analyses. You've got a real reason to be bullish. Hell, I know I'd be squashed when its not but I know when to respect my support and cut when I know I'm dead.

Traders' comments in blogs I read:

Aug ’07 low was the initial market’s knee-jerk reaction to the ‘subprime mortgages disaster’-Trader Mike

In a bear market or volatile markets, opportunities lies in intra-days ‘swing trades’ (playing the 2-3 days market bounce) and ‘position trades’ or ‘break-out plays’ are absolutely not advisable at this time.

The double bottom will hold- (on financials)- by Traderfeed

That is the kind of panic that would give me great confidence to buy. As I have mentioned here in the past couple of weeks I am a die hard contrarian and just feel we need higher readings then normal this time to get a longer term bottom in. 1,200 has strong support from 2005 on th chart, but I don’t want to wait until it gets all the way to 1,200 to buy, as we might not get there. It should be an interesting week

Like most sentiment measures, this one should also be taken with a spoonful of contrarianism: up is down, down is up. Which means that when consumers are most pessimistic, we have the best opportunity to go long. And when consumers are on average jumping for joy, we have to batten down the hatches. - (here's a link)

- Nix

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