Breaking the Shackles of the 9 to 5 | by The Time & Money Group

Last week, the week of the 400 point DOW meltdown, was the worst week I have had trading since the Internet collapse of 2000.  On Tuesday, I woke up to Bloomberg discussing China’s 9% fiasco and the concerns of it carrying over to our markets.  Certainly stops would be triggered, at the opening, which would set off a domino effect.  Where would the market stop for a breather?  It was anyone’s guess.  Not being a fan of hard stops – I thought that my mental stop strategy would work in my favor.  My preference is to set mental stops and close out positions at the close if triggered.  This is a technique that I use to take the intra-day emotions out of my trading strategy.

Since I trade primarily commodity stocks, I had one eye on the DOW – but my focus was on Gold.  As the markets gapped down at the open, GLD - the Gold ETF, followed suit down 1.5%.

Then it stabilized and started rising.  This was exciting.  Money was flowing out of the general market into Gold as a safe-haven.  However, as the DOW continued selling off Gold gave up ghost and followed suit.

The DOW’s 200 point freefall around 3PM was simply too much.  I couldn’t stand it anymore and I started selling.  Although most of my stops were triggered, I selectively sold off stocks.  That’s one of the problems with using mental stops.  Your emotions can still get in your way.  Obviously, I felt like a schmuck on Wednesday as the market bounced.  Thursday would be another down day and I would sell some more. 

After the market closed on Thursday, I reflected on a story that I shared with a wife a few years ago. In 1991, I started a video production company.  When I resigned from my job as an engineer, I left on positive note.  In the back of my mind, I knew that I could always go back if the business didn’t work out.  In less than a year, I would be back there working.  Several years later, while thinking back on my entrepreneurial experience - I would wonder if I had given it my all.  I would recall that some of the people in the business didn’t have a safety net; they seemed to work a little harder than I did. 

While reading Napoleon Hill’s book “Think and Grow Rich,” the demise of my business would become apparent.  In describing the power of a definite desire, he shared a story of Edwin Barnes - a man who desired to become a business associate of Thomas Edison.  According to Hill, “Barnes desire was not a hope! It was not a wish! It was a keen, pulsating DESIRE, which transcended everything else.  It was DEFINITE.”  Barnes described his desire as such, “There is but ONE thing in this world that I am determined to have, and that is a business association with Thomas A. Edison.  I will burn all bridges behind me, and stake my ENTIRE FUTURE on my ability to get what I want.”

When I started my video business, I didn’t burn any bridges behind me.  I conscientiously created an exit plan that was executed on cue.  Now in my current moment of self-doubt, I reminded myself that this time the bridges figuratively have been burnt.  Nearly one year ago, I left my 9 to 5 to trade full-time and I have absolutely no plans to go back. 

After the reflection / pep talk, I started devising a trading plan for next day. I considered a non-trade that had been haunting me for weeks.  I have been keeping tabs on the subprime industry and recently wrote an article “Subprime Lenders Gone Too Far – A Time Bomb Waiting to Happen.”  I made a few bucks shorting a couple subprime lenders last year, but have only been an observer lately.

On February 12, I half-heartily joked in a weekly email to my subscribers that I should short the subprime lenders.  This was after HSBC and New Century had imploded.  Since they had already taken a pounding, I really didn’t think they would continue in free-fall mode.  Best case it would be “dead money” for awhile.  However, I was quite certain that they were not going up anytime soon.  Here are their results since that email through March 1:

• Accredited Home Lenders (LEND)  -8.0% 
• Countrywide Financial (CFC)  -8.3% 
• H & R Block (HRB)  -8.4% 
• New Century Financial (NEW)  -7.9%

Obviously, shorting now after such moves would be asking for trouble. I pulled up their charts.  For the day, the group was up  on a bogus upgrade.  I decided that if it sells off tomorrow I am going short.

The subprime lenders gapped down on Friday.  So at 11:15, I went short NEW.  I added a LEND short at 12:30.  At 2:30, 3:40 and 3:50, I added more NEW shorts.  By the close, I had a nice short position that was already profitable.  Check out the headlines that were released after the close.  Each one gets progressively worse.

• Lender New Century lays off 4.4 pct of work force
• S&P cuts New Century deeper into junk on mortgages
• New Century says accounting errors being probed
• New Century says investigators are probing stock trades
• New Century faces probe, Fremont to quit subprime
• New Century says it won’t meet financial duty to banks
• New Century says it faces criminal probe, will breach covenant

On Monday, New Century gapped down at the opening and closed the day down nearly 70%.  Needless to say this turned out to be a great trade.

The market enjoys giving a body blow on occasions, but how you respond will determine your success.  I am not much of a fan of the Donald, but he is well known for saying the following: “Never, ever give up. Never quit. You can never be successful if you give up.”

Thanks Napoleon.  Thanks Donald.

Note:
I had a “friend” review this article before it was published.  Notice the quotes around friend.  I wanted to make sure that article did not come across as boastful. He said that it didn’t appear to be, but pointed out a couple of trading mistakes that I made early in the week.  After I calmed down, I admitted that he “may have” some valid points.  However, considering that the DOW was down 500 points intra-day and cratered 200 points in one minute.  Gold dropped like a brick - with two days of $20 declines. Silver completely buckled.  It’s surprising that I didn’t make more mistakes.

Going into the week a trading service that I use was 50% cash and 50% bonds.  However, I had a better idea.  Unfortunately, it went awry and put me into scramble mode.  Net-net I made money and now have this story to share.

I chose to publish this article in spite of my “trading mistakes” to hopefully communicate a larger message.  That is - how do you respond to adversity?  After Thursday, I could have crawled into a hole and relied on the good old “buy and hope” strategy.  However, instead I formulated a new plan and acted on it.