When No Trade is the Best Trade of All
Friday, May 1, 2009 | Ethan Roberts
There is an old saying in baseball, that sometimes the best trades are the ones that aren't made. Teams love to speculate and dangle players in possible trades at the baseball winter meetings. But, more often than not, sanity prevails and the trades are never made.
The same holds true in the markets, as I recently learned.
A few days ago, I was sitting in front of my computer screen, watching the intraday chart of a short position I had just taken at $27.70 (my thanks to Teeka Tiwari and another great Sector Hunter sell alert). This morning, following a terrible earnings report by the company I'd shorted and a cut in its dividend, the stock gapped down almost 9% to $25.47 on the opening, and eventually reached a low of $25.19.
Ethan enjoys the first few moments of the trading day...
I was really close to covering my short position near the low, and I just wanted the price to go a tiny bit lower in order to reach my trading goal. But the stock market never does what YOU want it to; it always does what IT wants to do!
The Waiting Game
The stock was tremendously oversold and suddenly the buying began, sending the price gradually higher. With each leg up, I kept expecting it would reverse course and return to test the low, but it was not meant to be. I was being piggish and it kept me from taking a large profit in a short period of time.
So, I called upon the divine "god of stocks." You know what I mean. You've all been there before.
"Come on, God -- give me the retest," I called out more than once. But the god of stocks was either not listening, or else (s)he was busy helping all the traders who were long this stock and praying to the same deity just to get back to even. And as I watched the price climb from $25.19 to to $26.80, my mouse just inches away from pushing the sell button, I wondered whether I should take the smaller profit and just move on.
So, I rechecked the charts. It looked like the Moving Average Convergence Divergence (MACD) indicator was inching close to a sell signal. The Relative Strength Index and stochastic indicators had already turned down. This particular sector was overextended after a big run-up from the March low. And then there's that big ugly gap. So, I decided it was time to have a little conversation with myself:
"Come on, Ethan. You know a gap like that will usually lead to further downside. Don't be impatient. You know you're on the right side of the trade; take your mind off it and go do something else!"
So I got up, fed my two cats, and then I made my own breakfast. I reminded myself that the swine flu pandemic is probably going to get worse, and that this would be really bad for the general market, as well as the industry I'd shorted.
U.S. traveler wears a health mask after returning from Mexico...
After that pep talk, I was feeling much more relaxed, and for the moment I decided to hold my position and make no trade.
Preserve Well-Deserved Profits
In the meantime, I reduced my original stop-loss order to slightly above a previous resistance level that was close to my entry point. I took comfort in the thought that the absolute worst that could happen at that point would be to break even.
However, given the low that the stock reached this morning, breaking even felt highly unacceptable on this trade. There's nothing worse than giving back a good profit.
But I hung in there, and forced myself to go out and run some errands. And guess what -- when I returned home at the end of the trading day, I was heartened to see the stock had fallen to $26.15.
My patience has been rewarded. Once again, no trade may have turned out to be the best trade of all!
The underlying stock's five-day chart. Notice the steep gap down on heavy volume on Tuesday morning.
But stocks are not the only investment where doing nothing is sometimes the best recourse. I recently spent five days on another cross-state journey to buy real estate. Once again my destination was the Florida Gulf Coast, where I had purchased two foreclosure properties between July and December 2008.
I was hoping to find another good one on this trip. But things did not go as planned.
Know When to Walk Away ...
Most of the homes that I saw were problematic. Many were located on desolate roads with few other homes around them. This is a negative when trying to rent or later resell a property. Some of the homes had bad floor plans. Others needed too much work for the listed price.
After looking at about two dozen homes, I finally found one that I liked. In fact, it was very similar to one of the properties that I bought last year, and at a great price.
But a larger negative loomed no further than 200 yards down the road. It was a huge, two-story home that had never been completed. The builder had just walked away from it, unfinished. It was an eyesore and a potential magnet for rodents, vandalism or squatters.
This would turn off potential renters for sure. So, I walked away.
An abandoned building is the kiss of death for nearby home sales
But there were even more reasons to refrain from buying on this trip. As I wrote in last week's article, high and/or rising unemployment rates are not good for home values. And the area of my search is now seeing those figures in the double digits, which makes it more difficult to find stable, paying tenants.
Adding fuel to the fire was a report in the local newspaper about rising property-tax delinquents. Apparently a large number of homeowners have decided to forestall payment of their homeowner taxes for the maximum two years that is allowable before one's home can be taken. Of course, they will have to pay double-digit interest penalties for doing this, as well as risking the loss of their homes. But with no jobs and high debt loads, they feel it is worth the risk.
With some 25,000 homeowners behind in their taxes countywide, and 10,000 within the city of my search, that adds up to major trouble. City or county services may have to be curtailed, or perhaps even the tax millage rate will be raised to cover the difference.
... and When to Return
What is more appealing to me is that, in June, this county will be auctioning off tax liens on thousands of properties. Investors can get sometimes get double-digit returns annually on their investments and, once in a while, can even take possession of a home if the homeowner does not pay their delinquent taxes within two years.
So, on this trip, I made no purchase. I will either wait for prices to come down some more, or for the economy of the area to improve -- whichever comes first.
I am in no hurry. Whether it's stocks, gold or real estate, an investor needs to be patient, select the best opportunities and know when walking away becomes the best type of investment that one can make.
Sometimes it's the absolute best decision...
See you next week!
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Ethan Roberts
Chief Investment Officer
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