Patience is the hardest trade

Need a little patience, yeah
Just a little patience, yeah
Some more patience, yeah (I’ve been walking the streets at night, just trying to get it right)
A little patience, yeah (Its hard to see with so many around
You know I don’t like being stuck in the crowd)
Could use some patience, yeah (And the streets don’t change but maybe the names) – Patience by Guns n’ Roses

The hardest trade to make is often the right one. That’s one of the most important words of advice that anybody ever gave me. It was hard to buy Apple when it was trading below cash per share. It was hard to reverse what I’d said on CNBC three days before Google’s IPO and to step in and buy it. It was hard to buy Facebook after its post-IPO crash when I was betting my career and reputation and money on it by writing articles like “”. It was hard to call out Blackberry when it was over $100 and I bet my career and reputation that Blackberry was doomed. It was hard to turn from bear to bull when the DJIA hit 6000 in 2008.

It’s hard to be a bull right now. It’s hard to step in and add to our stocks. The fear that the markets were fully bubbled and have topped and are now on their way to a 50% crash is palpable. Everybody remembers the pain they felt in 2002 when the Nasdaq was down 75% over an 18-month period and they remember the 50% crash in the DJIA in 2008 over just a few months’ period finally bottoming the same day that I wrote that article I linked to above about not freaking out. Here’s a typical article out there today. “Today’s market looks like 2000 and 2007: Technical analyst”

http://www.cnbc.com/2015/09/28…

I took this chartist’s marked up 12 month moving average S&P 500 chart and added a couple more circles where you could have made the same argument about how it looked like stock markets were about to crash, but instead went up a bunch more for several more years. That’s the biggest problem with technical analysis — you can always find parallels and rhymes with the past prices as shown on a chart that you can manipulate in all kinds of ways. Here’s my more realistic mock-up of it.

Now all that said, maybe the lows that the markets found back a few weeks ago on that DJIA -1000 morning are still there and almost seem to be magnets for the markets again.

Here are some wise words from an old friend of mine, Rev Shark about those recent lows and what happens if the markets hit them:

“The August lows are important because they are so obvious to everyone. In theory it’s a support level which if breached would solidify the fact that the market is in a downtrend. In reality that level produces a slew of complex strategies from folks that are trying to game other traders. For many the failure of that level would be a buy signal because that is the contrary thinking. However the trading strategies go far deeper than that.

Any level as obvious as the August lows isn’t just simple support or resistance. It is the trigger for a wide variety of trading tactics that are trying to anticipate the reaction of other traders.

A breach is neither good nor bad. It is just the next chapter in the never ending market game.”

So much of the market action right now is being driven by algorithms and technical analysis. And those same drivers will take individual stocks and/or sectors higher and lower than most anybody thinks possible.

Perhaps it’s just that we are we in no-man’s land right now. Maybe the hardest trade of all is to just sit tight and let the markets do what they will for a bit. One of the reasons so many of you subscribe to this service is the value you get out of me reminding you to be patient. To use market euphoria to your advantage by reducing your exposure in the good times. And to use market pain/panic to your advantage by increasing your exposure in the bad times. I don’t have to catch every nuanced move. We just need to stick with our playbook and that includes being patient when others are hurried.

If stocks do breach their August lows, I’m ready to scale into more long exposure and I might even get aggressive by using some longer-dated call options in some of our favorite stocks as you’ve seen me do several times with Google, Apple, Facebook and others over the years when the opportunity has offered itself. I’m almost hope they do crash one more time in the next few weeks.

On the other hand, you guys know that I think Biotech has been about to crash for the last few months and I just missed nailing the top with my puts in the IBB. I’m ready to buy some more puts on biotech as a hedge to our longs in case the markets take everything lower again. It’s important to remember that technology and/or individual stocks themselves can have huge rallies over time even as other sectors like biotech or the financials themselves pullback hard.

Will Apple see $95 a share again like it did that morning and if so, does that mean, as everybody seems to believe, that it would be headed lower from there? We’re prepared no matter what the answer to those questions.