Stop the losses (or - keep the profits!)

The stock market has recovered from the Sep 2008 - Mar 2009 brutal bear market.  General consensus is that 2011 will bring positive returns for 'long' traders.  As always, if you invest in individual stocks, some will do well and others...may drive you to drink. :(

So how do you prevent a loss from getting out of control? OR - even better - how can you lock in some of your gains?

You have a choice of three strategies:

1. Continuously watch your stock and sell when it gets too low.  Well most of us don't quite have the time to do that. Also, if the market gets volatile, even your best efforts may cost you a few percent.
2. Use options.  That's a good strategy if you are comfortable trading options.  I'll revisit this some other time.
3. Stop orders.  Simple strategy and very easy to implement.

A 'stop order' is a trade request, placed by you, saying "please execute a sell order if the stock gets to this price (assuming you are long on the stock).

There are two main variants of a stop order.  The difference is important.

1. Stop order.  This means that you are placing a market order when the stock reaches the stop price.
2. Stop limit order.  This means you are placing a limit order when the stock reaches the stop price.

Let's say you bought 100 shares of XYZ  at 55 a share.  If you place a 100 share stop order at 50 and the stock hits 50, your order will be executed as soon as possible at the current market price.  That means your order may be executed at 50, or 49.95, or 50.02 - you get the idea. If you place a stop limit order and the stock hits 50, your order will only be executed at 50 (or above). 

Put simply, the stop order guarantees execution, the stop limit order guarantees price.  Either action is sometimes referred to as 'getting stopped out of a position.'

We are approaching "Earnings Season", which means companies will be announcing CY Q4 earnings.  If you are long a stock that either has disappointing earnings or disappointing guidance, that stock may "gap" down 5%, 10%, or more at the open of the next trading day.  Yikes!  Be aware that in this situation, if you have a stop order and the stock gaps below your stop order price, you will get stopped out at market open, but at a price lower than your stop price.  If you have a stop limit order and the stock gaps below your stop limit order price, you won't get stopped out, and you will have to reissue your stop limit order (or just sell at market).

The only 'drawback' to having a stop order is you run the risk of getting stopped out of a stock that you think
has long term potential.  If that's the case, always remember two things about investing:

1. If you like an equity and you got stopped out of it, you can always invest in it again in the future.  Just make sure to consult your friendly tax accountant for the tax impacts of what you are doing.
2. Noone ever went bankrupt locking in profits.

You can use stop orders on any equity, including ETFs; however your broker may have restrictions on using stop orders on so-called 'penny stocks.'  You cannot use stop orders on mutual funds since they settle at day's end. You can use stop orders on any amount of shares you own for a given equity.  Stop orders are executed only during normal US market hours (9:30a to 4p ET). Check with your broker if your stop order is "good until canceled" or if it expires within a certain time period if not executed. You can always cancel your stop order and open a new one at a different price.

How you choose to use stop orders is based on your investment goals and how volatile the equity is.  There is no simple 'rule of thumb' on how to use stop orders.  Correction.  The 'rule of thumb' of stop orders is: use them!

Speaking of Investing...

MarketWatch has an interesting trading game that permits you to trade in companies that are announcing earnings for that week.  You have to enter your 'trades' before US market open on Monday.  You can go long or short.  You can invest in as many or as few of the eligible companies as you wish.  Your position gets closed out at US market close on Friday.  You then have new stocks to pick from for the following week.

I played this game in Q4 and had some fun.  Didn't come close to winning any week, but was profitable 3 of the 4 weeks. If you really want to win a week, you need to go "all-in" on one stock, either long or short, and hope your choice is correct.  Correction:  They now make you pick three (3) stocks,  and any one of them cannot exceed 80% of your portfolio. Anyway, go here Fantasy Earnings Trader , have some fun, and learn if trading equities of companies when they announce earnings makes sense for your 'real' portfolio.  The game starts Monday Jan 10, 2011.


The contents in this blog are my own and in no way represent official positions of any current, past, or future employers. I am not responsible for the accuracy nor the contents of links to any external sites. Financial topics are presented for educational purposes only and never represent a recommendation for an investment or strategy. Always consult with an investment adviser prior to making any investments. Past performance is never indicative of future results.

The 112th Congress

Today the 112th United States Congress will commence work. This Congress was elected on November 2, 2010. An election in which the American people decided that the nearly unopposed agenda of President "Not Bush" Obama was inherently dangerous to the future of the United States. They therefore elected the "Not Obama" party into the majority rule of the House of Representatives. The "Not Bush" party managed to maintain majority control of the senate, only because there were a handful of "Not Obama" Senate candidates that could not even win while riding the "Not Obama" coattails.

(yes, I have renamed the Democratic party as the "Not Bush" party since their platform since 2002 has effectively been "we're not Bush!". The Republican party was finally able to turn the table and become the "Not Obama" party in 2010. So yes, the Republican party has certainly earned the reputation of being the party of 'NO' - they are, after all, 'Not Obama').


The MSM (Main Stream Media) and the NB/NO blogosphere will pay attention to this Congress until the summer recess, after which point they will focus on who will be the official "Not Obama" candidate to run against President "I'm still not Bush" Obama in 2012.  While Congress is in the spotlight, there will be a lot of rhetoric around the word "jobs."  Even Nancy Pelosi, head of the NBs, wrote an opinion in today's USA Today saying they are ready to work with the NOs to focus on job creation.  That begs the obvious question "what exactly were you doing the last 2 years Ms. Pelosi" but I digress.

The S&P 500 Companies are holding cash reflecting approximately 10% of their value, compared to historically 6% of their value.  THAT IS A LOT OF CAPITAL NOT BEING PUT TO WORK.  Why do companies hoard cash?  Simple.  They don't know what the future holds.  Too much uncertainty over what exactly they will be mandated to do by Congress.  So in my humble opinion Congress needs to focus on 3 and only 3 things while they are in the spotlight:

1. Do something with health care.  Personally, the health care bill passed last year is a complete and total disaster.  Regardless of whether you agree with that statement or not, a lot of the cash corporate America is not using is because of so much uncertainty over government mandated health care.  Providing direction will help ease this uncertainty.
 
2. Rein in Federal Spending.  The annual deficit as a % of Gross Domestic Product is over 10%.  This is the highest since World War II.  Whether or not you agree the federal government should run a deficit, the fact is that this high of a deficit is not sustainable.  Provide us a roadmap on how the government plans to rein in spending.  Oh and implement it (remember the farce of Graham-Rudman-Hollings in the 80s?).  Corporate America is holding onto cash in case they become overtaxed.  Again, good information will help!
 
3. Remember Small Businesses.  The United States is the world's best country due to the the ingenuity from entrepreneurs that all start small.  The Not Bush administration generally seems to ignore small business since they are too small to unionize and turn into reliable NB members.  Seriously, is there any other reason for President Not Bush to ignore Small Business?  Congress should come up with good ideas to help kick start the economy from the ground up - by helping small businesses get access to capital.

Pretty simple.  Corporate America has the cash to do a lot more good than any "stimulus" will do.  So enable it!  And get out of the way.

One more request - please kill "Cap and Trade."  Please.  Trading Carbon Credits has nothing to do with the climate.  Really.


The contents in this blog are my own and in no way represent official positions of any current, past, or future employers. I am not responsible for the accuracy nor the contents of links to any external sites. Financial topics are presented for educational purposes only and never represent a recommendation for an investment or strategy. Always consult with an investment adviser prior to making any investments. Past performance is never indicative of future results.

Back again!

Back in December 2008 I decided to start this blog. I learned one thing:  

Blogging is time consuming!

At least if you want to put together a quality blog. It takes thought and research, which of course takes time, and I quickly learned that my own expectations of this blog was unrealistic! I did however enjoy it, so I decided to give it another go.I learn from my mistakes! So the goals of this blog will be:

• Post twice a week (generally Tuesday and Friday)
• Topics will be: Current Events and Financials
• Give "shout-outs" to good blogs

Yes I'm interpreting "Current Events" loosely. Sometimes it will be politics, sometimes sports, and on occasion just something "newsworthy." I don't pretend to be an expert, but when I offer an opinion I will have something to back it up other than "my gut." Well, mostly!

So this blog will evolve over time.

I will start by giving a "shout-out" to my favorite whiskey. I said whiskey, not bourbon or scotch or Irish whiskey. Hey, I'm nothing if not exact! If you like whiskey, put Stranahans Colorado Whiskey on your list. It sells for approximately $50 in midsized to larger liquor stores and is WORTH IT!

The contents in this blog are my own and in no way represent official positions of any current, past, or future employers. I am not responsible for the accuracy nor the contents of links to any external sites. Financial topics are presented for educational purposes only and never represent a recommendation for an investment or strategy.  Always consult with an investment adviser prior to making any investments. Past performance is never indicative of future results.