Trade Alert: Trade against the panic

So I finally take a couple days off and all hell breaks lose? It seems like the markets want to crash every time I happen to take a rare couple of days off. And last Thursday and Friday followed that strange pattern.

When the markets were at their highs in early Spring, I wrote a few articles about how that was the time to be “panicking” about Greece and Spain and the entire EU crisis that, once again, now that the markets are down 5-10% from their highs, is being pushed by the mainstream media as a reason to panic. I’d talked about the strong possibility of a 5-10% pullback in the major indices as we headed into earnings when expectations and bullish complacency were high. We’re now 8% into a pullback in the S&P 500.

When the markets had just barely topped back in March and the S&P 500 was down 2-3% from its highs, I’d talked about how I didn’t think there was much if any panic out there among the bulls and in the broader markets:

Sure wish I sensed more panic out there so I’d feel more comfortable making a stand right here. Alas, as is so often the case when it comes to your money, the best trades are often the ones we don’t make. I’ve nibbled some on the long side in the last few days and I’m letting the portfolio sit for now. One more whoosh down and I’d likely be aggressive on the long side like we were back at the bottoms last summer and fall. Patience, patience.

Having patience during this sell off has indeed been key and we can now continue to scale and more aggressively than we have been, into some long side exposure that we’d trimmed when prices were so much higher and we were preparing for the possibility of this very sell-off that we are now obviously in the midst of. Is it panicky yet?

Three weeks ago, you guys read this in one of our weekly transcripts:

Q. Cody, in your post today you mentioned you were hoping for more signs of panic before buying aggressively. What are your top 3 or 4 signs of a panic vs. a non-panicked dip?
A. That is a great question! Top 3 signs that the market’s in a panicky sell off: 3. The headlines are all dominated with gloom and doom and explanations and reasons that you should be panicking. 2. The bears I talk to are gloating and the bulls I talk to aren’t just selling, but selling their key holdings into the downturn and are sick to their stomachs. 1. The sell-off, even at just 5%, is so straight down and so clearly full of panicky selling, that you can’t miss it. That doesn’t mean it will be easy to buy and that it won’t be hard not to follow the panicky bulls and sell, but you’ll know the panic is there when it’s so hard to buy you can’t believe you’re pulling the trigger.
Let me ask you and everybody else…even as our stocks have come down from their highs and there’s some pain and fear in buying/holding our longs, are you truly terrified to buy right now? Probably not.

Read those Top 3 criteria again right now and you’ll see that the current set up indeed meets those three criteria. And answer that question that I ask  at the end there — are you truly terrified to buy right now? Some of you probably are, and as I’ll often remind you — emotions are the enemy of the trader, so get past the terror of buying in a panic and the hardest trade to make is usually the right one, so you want to buy when it’s terrifying to do so.

You guys know that early last week, I’d added some more capital to my portfolio in anticipation of getting to buy when everybody else starts panicking. I won’t deploy all my capital yet, but I’m going to step up and do some buying today in the following names:

• Apple (8)
• Fusion-IO (8)
• Level 3 (7)
• Sandisk (8)

I’ll add to my common stock in each of them for now and I’ll also bid on some out-of-the-money calls in Apple and Sandisk. So I’ll bid for some Apple calls with strike prices near $600 that will expire in January and I’ll bid for some Sandisk calls with strike prices near $40 that expire out in January of 2014 — more than 18 months away.