An Old Wall Street Secret to Making Easy Trades
By Brian Hunt, editor in chief, Stansberry Research
September 21, 2009
"Wall Street's graveyards are filled with men who were right too soon." – William Hamilton
I know... this quote sounds bizarre. But hear me out: It contains an incredible seed of trading knowledge.
Hamilton was one of the first editors of the Wall Street Journal... He was one of the country's most respected market analysts 80 years ago. And the legendary market advisor Richard Russell still recommends reading Hamilton's book The Stock Market Barometer, once a year.
So what does Hamilton mean by "right too soon"?
Well, as I detailed in this essay, many traders and investors have a strong "hero streak" in them. They have a lot of confidence in their ability to value assets and gauge investor sentiment. They love to "see what others don't," step into a runaway market, and bet on prices moving the other way.
It's an exciting way to trade. It's like being the only guy standing on the beach while a hurricane approaches. Problem is, the hurricane will usually blow you into the next state.
That hurricane hit a lot of traders in late 1999... Tech stocks had absolutely soared for five years, many companies were trading for 100 or 200 time earnings, and sentiment was overwhelmingly shifted to one side. It was an extreme situation – the kind you should always be hunting for.
Any experienced trader was looking to bet the other way. But any trader who actually made the bet was "right too soon." Take a look...
Even though the Nasdaq was overvalued at the time... even though the rally was long in the tooth... it was a bad move to short with the Nasdaq at 3,500 (circled in red). It was too early. The crazed public drove the index 30% higher over the coming months.
Now, have a look at the blue circle. What's so special about this area? This was the point at which the market started moving in the "direction of sanity." This was the point the bubble popped. This was the market getting started in the direction the bears believed it would. Traders call this "price confirmation."
Smart traders always wait for a bit of "price confirmation" before they back a trading thesis with big money.
They know the market can run far away from rational fundamental values. They know how easy it is to be "right too soon." So they wait for the price to move in their direction for five or 10 trading sessions... or they wait for the price to break through a moving average.
The point is, they let the market exhaust itself before they step in. So it's as easy as pushing over an exhausted runner (on the bear side)... or climbing aboard a gently moving freight train (on the bull side).
Wall Street's graveyards are filled with guys who got killed because they tried to step in front of runaway markets. So keep Hamilton's words in mind anytime you're considering being a "hero." Find market extremes... then wait to be right.
Good investing,
Brian Hunt |
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| • |
"Spending stocks" surging... new highs for Cheesecake Factory, American Eagle, Coca-Cola, P.F. Chang's, Polo Ralph Lauren, Starbucks, and Steven Madden. |
| • |
Virtual bank rally still on... Annaly Capital at a new 52-week high. |
| • |
Natural gas jumps 20% higher last week on lower-than-expected storage increase. |
| • |
Earnings today... Lennar, Diedrich Coffee. |
|
Last |
Change |
52-Wk |
| S&P 500 |
1070.19 |
+0.44% |
-11.30% |
| Oil (USO) |
37.44 |
-0.13% |
-52.71% |
| Gold (GLD) |
99.01 |
-0.33% |
+19.58% |
| Silver (SLV) |
16.74 |
-1.23% |
+40.81% |
| U.S. Dollar |
76.48 |
+0.38% |
-2.13% |
| Euro |
1.47 |
-0.16% |
+2.79% |
| VIX |
24.02 |
+1.56% |
-27.43% |
| HUI |
425.25 |
-1.53% |
+35.47% |
| 10-Year Yield |
3.45% |
0.05 |
0.01 |
|
|
| Company |
Sym |
Industry |
New Oriental Ed |
EDU |
for-profit ed |
Alexion Pharma |
ALXN |
pharma |
Ternium |
TX |
steel |
Banco Santander |
SAN |
bank |
Precision Castparts |
PCP |
metal fabrication |
eBay |
EBAY |
online auctions |
Sirona Dental |
SIRO |
medical devices |
Factset Research |
FDS |
research svcs |
Manpower |
MAN |
staffing |
Cerner |
CERN |
health IT |
ConAgra Foods |
CAG |
packaged foods |
Juniper Networks |
JNPR |
networks |
Nat'l Australia Bank |
NABZY |
bank |
Informatica |
INFA |
business svcs |
Sybase |
SY |
business software |
Advantest |
ATE |
semiconductors |
FMC Tech |
FTI |
oil & gas svcs |
Bed Bath & Beyond |
BBBY |
home furnishings |
TJX Companies |
TJX |
dept stores |
China Life |
LFC |
life insurance |
Mercadolibre |
MELI |
business svcs |
Dr Reddys Labs |
RDY |
pharma |
Makita |
MKTAY |
power tools |
Comp Brasileira |
CBD |
grocery stores |
Sociedad Quimica |
SQM |
chemicals |
Starbucks |
SBUX |
coffee |
Sanofi Aventis |
SNY |
Big Pharma |
VistaPrint |
VPRT |
online printing |
CGI Group |
GIB |
business software |
Red Hat |
RHT |
systems software |
Citrix Systems |
CTXS |
business software |
Coach |
COH |
accessories |
Kyocera |
KYO |
electronics |
Allscripts Misys |
MDRX |
health IT |
PepsiAmericas |
PAS |
soft drinks |
Mylan |
MYL |
pharma |
BMC Software |
BMC |
business software |
Cognizant |
CTSH |
outsourcing |
Talisman Energy |
TLM |
oil & gas drilling |
Buckeye Partners |
BPL |
pipelines |
Watson Pharma |
WPI |
pharma |
Scor |
SCRYY |
insurance |
N Bank of Canada |
NTIOF |
bank |
NIDEC |
NJ |
electrical equip |
CRH |
CRH |
cement |
|
|
| Company |
Sym |
Industry |
Volkswagen |
VLKAF |
German autos |
|
|
|
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