Trading The Trend - Is This A Sucker's Rally?

27th Mar '20 by Michael Taylor

18 comments 4826 reads

Two weeks ago, Saudi Arabia and Russia decided they were no longer chums. The result sent shockwaves across the planet. Whilst that sounds dramatic, for many people the drama was real.

An instrument that typically moves a few percent in a day, then has a gap down of around ten times the average volatility.

How do you prepare for that? It blew up trading accounts globally and quite possibly brought down some institutions, as was the case when the Swiss National Bank unpegged the franc from the euro. I remember a trading story of two traders – both who had the same position – one who had their stop miraculously hit and the other didn’t and blew up. Through sheer luck, one was able to continue trading. And one ended up in sizable debt.

This is why risk management is so important. I recall a quote “risk is what you don’t” see – which is exactly right. In most cases, assessing what will go wrong will cover all the bases. But how many have been broadsided in this latest market crash, despite everyone knowing that stocks were overvalued and we’d had the greatest bull market of all time?

It’s a nice idea to think that stocks move according to the value of their future cash flows but in reality it’s people like you and I bidding and jostling on small caps, and algos and hedge funds doing battle on the larger caps.

Last week, we looked at stocks that could bounce sharply. In particular, we looked at William Hill, Dart Group, and Restaurant Group, all of which did 100% from the lows. Sadly, I only caught William Hill, as I missed Dart due to the WMH auction, and then completely took my eye off the ball on RTN. A costly mistake, but at least I generated the idea. If I can’t generate any ideas, that’s when I need to be worried. Converting ideas into tangible profits is what trading is, and no ideas means no money.

I use Twitter to monitor sentiment, and now that we have seen a big rally nobody is calling for the market to be suspended anymore. In fact, stock prices only ever seem to be irrational when they’re falling! But is this a suckers’ rally?

Here’s a quote from Mark Minervini. I like Mark, and his…

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SalvorHardin

27th Mar '20

Developments in antiviral drugs will have a bigger impact on the markets in the short-term, because these can be brought to market faster than vaccines. There's a huge amount of research going on, testing existing antivirals against the Coronavirus. The FT has a nice summary (not behind its firewall).

https://www.ft.com/content/91b...

My money is on Gilead Sciences. Its anti-ebola drug Remdesivir is showing great promise in trials.

maillotàpoisrouges

Suckers rally. New lows to come.

Terry Dickens

Michael, you are truly a wise man, you make a lot of sense. Keep up the good work and please keep safe

AnonymousUser226237

Also on the sucker rally camp, this has much further to fall but first suck in more punters.

Tonysaparito

Michael...great article but several things stand out to me....I come to the party with over 30 years of experience of making money from betting on horses...very few make money long term but somehow I have managed it because I avoid as much of the risk as I can , by trying to cover all bases and looking at every other horse running against the horse I and my clients bet on .

I analyse the form of the horse I want to bet on , in as much detail as the horses that are running against my horse, trying to beat it.....but only when I know my bet has all the qualities I look for in a winner , and it’s competitors , in their entirety, do not posses the required qualities my potential winner has, will I step in and make the bet..

The is as you can imagine a time consuming process and in a season where there are over 10,000 races run , I only bet in no more than 30 races....that specialisation is totally necessary and it’s what has allowed me to prosper for so long ...but my profits have been invested outside of racing in equities and residential property.

Over 30 years, about 6 out of every 10 bets win but the losing sequence has never to date exceeded 3 and the winning sequence has never exceeded 4...however, it’s statistically certain both of these sequences will be broken ....if I break my own rules.

Consequently, as soon as get to 2 losers on the trot , I tighten my rules and become even more cautious .

You interestingly state you are not a gambler but you go long and short , so how can you write you are not a gambler.?..anyone who goes long or short on shares is a gambler.

Everyone at present who buys shares from this point has to acknowledge the dangers ahead, that does not mean we cannot evaluate all of the dangers but we can evaluate most of the dangers.

The current prices for some first class companies are compelling right now but I do believe this is a suckers really.

I have lived through many crisis , including the 70’s, 80’s, 90,s 2000 and 2008 and I can tell you this for free...life will recover but not as we know it and for those of us with cash , who do their homework , will hopefully invest in great companies, whose share price will be battered , not because these great companies are all of sudden bad but because most who look of these companies have gone nuts, panicked and fear the end of the world is nigh.

Therefore, I completely agree with you Michael , in the weeks and months ahead , the opportunities presented to all of us will define us as an investors and if we all do our detailed analysis diligently and professionally, using the information available from Stockopedia and other sources, we all should set ourselves up for life and allow ourselves to leave an endowment for our children, grandchildren and family....as it’s our children who unfortunately will end up paying for the cost of fighting this war on humanity.

Humanity, and it’s spirit when challenged can never be defeated and once Covid -19 has been defeated, it’s benefit to us will only then be revealed by the brilliant scientists , medical professionals , technology and individuals , who battled on the front line to save every single life .

Like you, I am bullish for the future of our society and equities....the bounce back though cannot start until we reach the bottom,...my view is , we will only reach the bottom when the virus and the death toll has peaked and that could be sometime yet.

Until,then, resist the temptation to invest too much of your cash too soon.

Keep well and thank you for your article

SaarfLondon

Thought provoking response. You have mastered risk management in your day job with very narrow time frames - and utilised other asset classes with a longer time frame.Your breed is rare.

Michael Seidel

I like your article! I want to add a third scenario:

people do not accept a lock down for a longer time than, lets say 4 or 5 weeks (actually people an politicians in germany discuss after-lock-down scenarios, and some people force the government to end lock-down asap). to cope with the virus without lockdown we need to track the people via apps (technical solution) and we need to test lots of people. so kind of normal life and the economy could go on, with local quarantine.
This is the scenario we‘ve seen in China and South-Corea. And I think we will see this in germany as well.

My conclusion: without a vaccine or treatment we will find technical solutions to get back to normal life an normal economy: So its a sideway-market (with high volatility) followed by a bull-market.

as soon as there is news of a breakthrough in vaccine-research, we’ll have a bull market (this is no rocket-sience).

and thats why I‘m buying good shares step by step.

Michael Taylor

28th Mar '20

Thanks a lot for taking the time to respond Tony.

I write that I'm not a gambler in the typical stereotype of a gambler - someone with no edge who is just chucking money around for fun. That doesn't represent me in my profession and it doesn't represent you either - you clearly have an edge in what you do and gambling on horses is a methodical process done with precision and diligence. Well done for succeeding in something so difficult!

Of course, trading stocks long and short is still betting on an uncertain outcome - so yes, in that sense, it is gambling. There is a whole debate that could be had on the semantics of trading and gambling but I think we can agree there is a difference between a punter lumping in on red or black and the way we bet on horses and stocks. I know what I'm doing is gambling, but unlike gamblers, I have an edge. It's calculated risk-taking.

You are right in that there is serious money to be made in the next few months - we need to keep calm and execute appropriately.

My view is also that it could be sometime away, but I'll let the charts tell me when to go long and when to go short. That will stop me from going heavy into a downtrending market.

Thanks again Tony and stay safe!

Meldrew

The economy and share prices ain't seen nothing yet. The road ahead is set to become very rocky.

The USA health system is totally unprepared to cope with Covid-19 and the POTUS is following the wrong policies for dealing with the situation. He is treating it as an economic problem rather than the medical problem that it is, so watch it rip through the country as cases of infection and deaths increase exponentially, risking bringing the US economy to a halt. If that happens, there will inevitably be a hugely damaging effect on the world economy. The UK is not far behind. Known infections are doubling every three to four days. No one is immune, not even children and, although most of them should survive it, they will spread it, the same as everyone else. Because most countries, including the UK, ignored WHO advice in the early stages, the disease is now everywhere. The lack of testing means that no one knows who is infected. It will now carry on spreading in most countries until either it runs out of new hosts or a vaccine is produced in about 18 months or so. Even then there could be a delay in treatment for many, as richer countries and the countries, such as India, that will probably produce most of the vaccine, might grab the first batches for their own people. I do not know where the UK stands in that pecking order.

There will be an inevitable effect on economic activity world wide. We are in uncharted territory so forecasts or projections based on past patterns cannot be relied upon.

The good news is that most people should survive and economies should eventually recover, even if at a reduced level.

In the meantime, I'm staying in cash.

Mnomis

Great comments thanks. I too am cautious and expecting much lower lows.

HumourMe

I did some modelling involving current death rates, lag, implied historic 'true' infected (based on S Korea), exponential growth, implied current infected and future deaths under conditions of 'sufficient resources' (South Korea) and 'overwhelmed' (Italy).

Got depressing numbers, however, I looked at it.

Very bearish.

Good morning Michael and thank you for taking the time to reply...Your comment 'I have an edge. Its calculated risk-taking '......is so very true...It took me many years of burning the midnight oil, absolute frustration, losses and profits but always in the wrong sequence before I decided I had to work so much harder...in an attempt to find an edge.

I was well aware of the following phrases...such as 'You never ever see a poor bookmaker,' to 'the odds are stacked against you'...However, whilst I believe in fate, what enabled me to start the process of finding my edge was a book written by a very successful professional punter..in the booked he detailed a methodology that initially worked but eventually was confined to 'Does not work in the long term'....these were his words not mine .but the logic of what he wrote was the beginning of another long journey...incidentally, I had bought the book some years before but like many of us who buy books we put on our bookshelves, my bookshelves eventually collapsed and that particular book made itself 'read me now please' very clearly.

Eventually, and after analysis of over 5 seasons of results, I found my edge and it was so simple, I was surprised I had not found it earlier, however, like the period we live in now, we will have to find new ways to analyse the way we evaluate company information but that might not be as complicated as we may believe.

My view is that there are some exceptionally smart people contributing to daily articles on Stockopedia and if we all share a little of what we know, collectively we will all learn a lot more, as the future for is going to be very different and even minute differences are going to be significant.

For example, in horse racing, a typical horse that races on the flat, weighs on average about 1100 pounds, with a lower weighted horse weighing 900 pounds and a heavier horse weighing 1300 pounds...However, what allowed me to get an edge was realising literally ONE POUND, could be enough to stop a horse winning but not necessarily one pound in extra weight but either more weight or an increase in class...

Accordingly, we have to look at small differences or USP's for the companies that are left after this war, because as I learnt when I read an excellent book about 18 months ago and have re read since...if you want to bag the big baggers, you need to read 100-1 in the stockmarket by Thomas W Phelps and 100 Baggers, stocks that return 100-To -1 and how to find them by Christopher Meyers....even before and after the 1929 crash fortunes were made by investing in companies that were set to become titans.

Thomas William Phelps (1902-1992)..spent over 40 years in the investing world working as a private investor, columnist, analyst, and financial advisor. His illustrious investing career began just before the stock market crash in 1929and lasted into the 1970s, In 1927, he began his career with The Wall Street Journal, where he was a reporter, news editor, and chief.

Beginning in 1936, he edited Baron's National Financial Weekly. From 1949 to 1960 he served as an assistant to the chairman and manager of the economics department at Socony Mobil Oil .

Following this venture, he was a partner in the investment firm of Scudder, Stevens & Clark until his retirement in 1970.

Please note though fortunes were not made overnight, in some cases those 100 baggers took years to develop but its the information Phelps shares with us that sowed the seeds of his future.

So, Michael, I will be following all your articles and particularly the words you wrote in your final sentence.

Keep safe and thank you again for your thought-provoking article.

RobJH

29th Mar '20

I've had the same view as you, Meldrew, for a long time. But not sure we can carry it out as well as China due to the privacy thing that so many people seem to be hung up about. Also it's 3 weeks from infection to dying (if you are going to die) so the worst hospital overload will come in two weeks time (which is 3 wks after lock down, which will have stiffled the spread somewhat). Where it goes from there depends on ICU capacity and how many of us have had it already and are now immune. Both are critical to the length of lockdown and hence UK market rebound

KevDewy

"despite everyone knowing that stocks were overvalued and we’d had the greatest bull market of all time?"

Great point - we all knew this but still got involved.

Gromley

That sounds like an excellent description of the dot.bomb. Personally I'm less sure that it applies in the case.

Both stocks being overvalued and the longest bull run ever are open to question, but the point that there is always unknown downside is well made.

Daniel Saddik

30th Mar '20

Anybody who thinks there is a vaccine around the corner is in la-la land. It is at least 12 months away.

Don't rely on this to give impetus to the markets!

23jez

31st Mar '20

Hi Tony
I agree with almost everything you say. I also spend a lot of time making money for my family not myself . Like you I do not use derivitives and I perform my own executions. Like my father before me I have never used a broker other than for executions, very last century.s
In 1990 when studying for an OU MBA in the finance module we came to study derivatives. I remember thinking this is going to end in tears and for a lot of people it has..
I also believe that the ability of the human spitit to defy authority is limitless albeit there are many casualties along the way.

dennis carr

16th Apr '20

I am loving the aricles written by Michael, i feel it it gives Stockopedia another dimension and me some more opportunities to consider on my trading and investing. Keep up the good work Michael!

Trading the Trend - is this a sucker's rally?

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Michael Taylor

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