Don't Settle

  • Posted by
  • on July 30th, 2010

For awhile I was posting a weekly update showing my trend measures of global asset class.  Where did that go? First of all, asset class trends unfold in a slower motion than individual stocks, so a monthly list is more appropriate than a weekly.  Second, identifying trends is where the homework begins…from there, it’s measuring market climate, potential risk and reward, finding the right structure in which to enter, planning an exit, etc. While providing my analysis of ETF trends may be helpful, it won’t make anyone a profit without a plan of action.

So, I followed up with posts on tactics, but each week the ideas failed to set up to my standards.  Why? Because they weren’t exceptional.  Some were OK, some were not OK.  That’s not sufficient.  We operate in a field populated by the roughest, deepest funded, and most intelligent types in the world…an OK idea doesn’t cut it.  Why do we take those ideas?  Boredom?  A need to “work”?  Fear of missing out?

I suspect the latter is #1, but some combination of the 3 is probably more accurate.  I spend 2 hours each night organizing the day’s data.  Then 2 hours in the morning constructing a plan of attack for every scenario I can imagine.  That explains why it’s so hard to pass on the #1 idea of 800 stocks and 40 ETFs that I might find on a given day.

But #1 today might be a less attractive idea than any of  tomorrow’s Top 100.  Or next Tuesday.  Or mid-September.  The point is, we need to make exceptional ideas our sole reason for acting.  Value investor?  Don’t buy something that looks “decent” at 12x EPS…keep digging for the one with that “margin of safety“.  Growth investor?  Don’t buy #3 in the industry…figure out a way to own #1.  Like TraderFlorida says, “avoid the dogs, you’re not building a kennel.” VIX seems “kinda high” here?  Unless it’s “really high and showing these 3 signs of peaking”, find something else to do.

I’ve become pretty good at waiting for exceptional…I don’t get bored, and I know my hours of preparation won’t always lead to an opportunity.  I do fall victim to fear of missing out, though…the phase between idea generation and action known as stalking is one of the hardest parts of trading.  For a second, though, think about how many good and bad ideas you’ve had over the years.  There can be no doubt that “there will be another train right behind this one.”

What’s an exceptional idea for me? It should meet the following parameters:

1) Relative Strength or Weakness- there’s no reason for me to pick from the mushy middle, as the biggest movers come from the best and worst 5% of the market.

2) Abnormal Volume- it can be abnormally high or abnormally low, but I’m looking for stocks that are doing something different that they’ve done in recent days or weeks.

3) Abnormal Range- again, high or low tells me something…average tells me nothing.

4) Identifiable Support(Longs) or Resistance(Shorts)- I have no need to be the first, that’s for the really brave and really smart(maybe).  If the idea is that good, I’ll have days/weeks/months to milk it…in case you haven’t heard, the second mouse gets the cheese.

4) News Absorption- I like to participate AFTER news events…it gives me a good idea of the temperament of a stock’s owners. It may have broken out from a base.  It may have been crushed but then built a base.  It may have reacted poorly to a “great” report. In any case, I want to see how a stock reacted the last time there was real news, and position myself on the side that has taken control since then.

6) Doubt- this is a tricky one, but our ideas should not be SO obvious that our relatives and neighbors love the idea.  Buy worry, short hope.  Buy after panic, short after euphoria.  I’m not saying to ignore an idea because your Twitter stream agrees with you…haven’t we filtered our list to only those we respect?  But take a second to check your spot on this curve, and where you sit on this idea.

That may be a lot of requirements of an idea, or maybe it’s not. It certainly doesn’t prevent me from finding actionable ideas on a regular basis, so it must not be that stringent.  Potential long ideas include IACI, VMED, ECL, RVBD, CHRW, & Singapore(EWS).  Potential short ideas include XEC, ECA, ESI, EOG, CAG, AGN.  I also have a news absorption strategy that likes the way GPN responded after its big gap down.  But I don’t love any of them, so I’ll save my energy for those moments of exceptional opportunity…who knows, it may come today.  We can’t control the market climate, only our response to it.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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