The stock market – free fall

Today’s [tag]trading[/tag] was exciting. I didn’t have much time watching it, I just briskly reviewed it in the morning when it opened about 130 points below yesterday’s closing and later I could check it when the market was already closed. A [tag]300-point loss[/tag] was amazing. [tag]Dow[/tag] seems to be heading to a [tag]4000-point level[/tag] as Jon Markman mentioned once in his post.

When looking to to a [tag]chart[/tag] of today’s trading, seeing the market pushing its low limit to a 1997 level, this proves the [tag]strategy[/tag] [tag]buy & hold[/tag] to be wrong. If you ever applied such strategy, during this [tag]crisis[/tag] you would loose all you have been building for 12 years! And if you have started recently you may experience a loss of 50% or more (such as my 401k) and there is no prediction of how long your heavy bleeding [tag]portfolio[/tag] would remain locked in those losses.

Dow Jones free fall
click to enlarge

I think this is a great example and a lesson to every [tag]investor[/tag], that it is necessary to perform timing and when such similar crisis comes to a play it is important unloading [tag]stocks[/tag] from portfolio and move to [tag]cash[/tag] or [tag]money market[/tag] vehicles and vice versa. This is the greatest lesson every investor got the chance to learn from.

Another great lesson I have learned is that we should strictly follow the market. If the market says: Do not trade, then stay away. Unless you are a [tag]day trader[/tag], very experienced or [tag]lucky investor[/tag] able to feel the market’s pulses and be able successfully trading on both sides (shorting as well as be long) of course. In the history I know of only one [tag]trader[/tag] who was able to trade on both sides of the market – [tag]Jesse Livermore[/tag]. However even he refers to some of his trading periods as [tag]choppy market[/tag] which is wise to avoid.

Couple months ago, when I started learning about investing into [tag]stock options[/tag] I was also decided to start investing real money into [tag]cheap stocks[/tag] and trade [tag]covered calls[/tag] on those stocks. What a fool! I considered [tag]Citi[/tag] (C) to be one of those cheap stocks. I though I would just buy some hundreds of [tag]shares[/tag] of that stock and generate [tag]monthly income[/tag] on stock options. I somehow forgot that the stock might drop. At that time Citi traded at $7 a share (December 2008). By today it is $1.2, which is 93% loss! On my [tag]virtual account[/tag] I made roughly $300, but lost $1200. Is this worth holding such stock? I am not convinced about it much. I would prefer unloading such stock when it shows a [tag]sell signal[/tag] and wait for the market to tell me when to buy back.

Another great example is Almost Family (AFAM). In May 2008 it traded between $24 – $25 range. In June 20th, 2008 it broke up and rocketed up even though the entire market went down like a rock. It doubled the price literary within two months. Today it is trading for $18.92. You could make nice [tag]profit[/tag], but if you applied a buy and hold strategy, today you would be losing money. I entered a position of this stock in August 2008 when the market entered in to a rally (short live however) and I was impatient to start the new strategy as quick as possible. Later I realized it was wrong, but I forced myself to stick to my rules. Soon after, AFAM was sold on my rules. Today I can sleep in peace watching the stock falling incredibly down and being happy I am out of it.

There is a lot more examples proving that every investor should be watching her positions and [tag]actively manage[/tag] her portfolio instead of sitting on losses and apologizing herself that she is an investor, not trader.


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One response to “The stock market – free fall”

  1. Very glad I dropped on your blog..This was just what I was looking for. Keep adding.

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