On the Third Day

I hold strong opinions about what is happening in Cyprus and I plan on keeping them to myself. While this blog is my soapbox, it's not intended for me to pontificate my belief system other than it applies to trading stocks. I don't think it's appropriate to blur that distinction at this juncture, but on the other hand it's nearly possible to personally avoid what my thoughts are regarding this situation and my ensuing trading in lieu of.

I prepared myself last night for a panic situation and how I would react and what I would do that was in my best interest as a trader. My focus first and foremost was to preserve as much profits as possible on open positions that had some, and preserve as much capital as possible on positions that were flat or underwater. I had little interest in trading the volatility or looking for potential profit opportunities that present themselves during such catalyst driven events. I wasn't interested in buying the dip or looking for shorts, I simply wanted to avoid panicking and stampeding with the herd.

When I went to sleep last night the futures looked bleak, and when I awoke there was some improvement but not significantly so. I reread the notes I made and my plan of action, knew where all the stops on my positions were and knew where I would take profits if possible. I also sequestered myself by making sure my browsers were closed and that I didn't read any news or opining on twitter. I avoided poisoning my well with undue influence of what others were doing or thought. I was mentally prepared to hear my alerts go off like a church bell at noon on the open but then a funny thing happened, the church bell struck two. One alert was to take profit on a position I held for a month, and the other was to exit flat a position I've held for 9 days now, and that was the extent of it. Nothing happened as I expected it to.

There's nothing in my trading plan that specifically says what to do in a situation such as Cyprus. I suppose I could draw up a generic sub-heading on headline risk and what to do as a result of market shock, or perhaps better yet go through major market shocks and note the subsequent reaction, but I suspect this would simply create more complications than maintaining a more simplified approach of if my stops are hit exit. If I make caveats that if my stops are hit due to an event specific catalyst and therefor I'll hold expecting a rebound, what's to stop me from doing so again should my stop get hit by any other randomness? If I have gauged my appetite for market risk accordingly and wisely it should merely be accepted exposure.

Phil Pealman of StockTwits wrote a blog piece today "Panicking About Cyprus? Here's What to do First..." that I believe is well worth reading and a through exercise well wroth doing. He begins “If you were panicky last night or this morning because of Cyprus, take some minutes today to write yourself a letter describing in detail your experience.” In part, this is what my post is accomplishing and later tonight I'll flesh out some more personal thoughts in my journal, but I think this is an excellent way work through the anticipation, expectation, and experience from a day like today.

From this process I've decided to frame the experience through a few references.

First is an informative tweet yesterday on StockTwits by Jon Boorman : “So no-one predicts the bailout and 'deposit tax', but now everyone thinks they can predict exactly what markets will do tomorrow #Cyprus”

The next day we go the news of the San Francisco earthquake. It was an awful disaster. But the market opened down only a couple of points and the public never is independently responsive to news. You see that all the time. If there is a solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish. It is all in the state of sentiment at the time. In this case the Street did not appraise the extent of the catastrophe because it didn't wish to. Before the day was over prices came back.

… The Street paid no attention to the earthquake the first day or two. They'll tell you that it was because the first dispatches were not so alarming, but I think it was because it took so long to change the point of view of the public toward the securities markets. Even the professional traders for the most part were slow and shortsighted. Reminiscences of a Stock Operator

I can’t think of a time in nearly 20 years of playing this game that I haven’t looked back on a macro inspired gap and wished I would have reacted FASTER. It has nearly always been the case that observing would have paid better dividends than simply reacting. ZenPenny

Many years ago I heard of a remarkably successful speculator who lived in the California mountains and received quotations three days old...

…I like to be away where I can think. You see. I keep a record of what has happened, after it has happened, and it gives me a rather clear picture of what markets are doing. Real movements do not end the day they start. It takes time to complete the end of a genuine movement. By being up in the mountains I am in position to give these movements all the time they need. How To Trade in Stocks -Jesse Livermore

I imagine Nicholas Darvas off in some remote Asian city dancing while this news flow hit and think what would he be doing. Well, dancing obviously. The events that transpired would not be known to him for a couple more days and the ensuing result for a few more thereafter. Essentially it wouldn't matter because his stops take care of the business end of the transaction from such events. The old man in the mountain which was obviously the influence of this aspect of Darvas' system the same. Livermore himself notes that it takes a few days for the information to filter and gain perspective.

The valuable lesson that I wish to carry forward from this day is to avoid as much as possible my immediate gut reaction that such news driven catalyst can have upon my decision making process and instead submit to acceptance of the reasons my stops are in place to begin with. At times I differentiate between reasons why I get stopped out and feel that some are more valid and acceptable than others. I despise getting stopped out of a position the same day I enter but am more accepting if it happens a week later, but the end result is being stopped out and it shouldn't matter how I arrived there.

Another lesson is when news like this hits, it's better to stick to the program with the additional caution of avoiding news sources as much as possible in order to avoid being persuaded to alter my plan of action when I entered a stock in the first place. Regardless of what my personal opinions are on the subject it is of no relevance to the market. The market does what it does and I can only control what I can control and try as best as possible to be open the the information the market gives off and try to be as impartial as possible. How I as an individual might react due to such news is not indicative of how the collective market as a group will react.

One more I take from this is to attempt to hold off for a couple of days making decisions after a news driven catalyst of significance. The outcome closest to the event may be 180 degrees different from the results of the event a few days down the road. It's perfectly fine to hold off making a decision until the news has time to settle.