Stocks traded in a narrow band yesterday, with little news — either corporate or economic — to influence trading. The only feature during the entire day that caught investors’ attention was a late afternoon sell-off, and it was totally reversed by the close.
Technology stocks were the leading group with Apple Inc. (NASDAQ: AAPL) and International Business Machines Corp. (NYSE: IBM) making intraday highs.
And energy stocks were in demand, led by Chesapeake Energy Corporation (NYSE: CHK), which gained 1.1% as CNOOC Limited (NYSE: CEO) agreed to buy a stake in Chesapeake’s oil shale and gas reserves. This marks the first time that a Chinese state-run company has invested in onshore energy in the United States, according to the Wall Street Journal.
Trading was light in all markets as a result of the Columbus Day holiday. The U.S. Treasury market and bond desks were closed.
At the close of stock trading, the Dow Jones Industrial Average was up 4 at 11,010, the S&P 500 was unchanged at 1,165, as the Nasdaq was unchanged at 2,402. The NYSE traded 627 million shares with advancers over decliners by 1.2-to-1. And the Nasdaq crossed 393 million shares with decliners slightly ahead of advancers.
November crude oil fell 45 cents to $82.21 a barrel, and the Energy Select Sector SPDR (NYSE: XLE) rose 16 cents to $58.25. December gold gained $9.10 to settle at $1,354.40 an ounce. The PHLX Gold/Silver Sector Index (NASDAQ: XAU) gained 0.12 points to 204.94.
What the Markets Are Saying
Even though the markets started the week with a flat day, a 50-point sell-off that started at about 2:25 p.m. was completely erased by buyers in the final minutes of trading. The rally went almost unnoticed by the press but illustrates that there are buyers waiting in the wings ready to leap on any weakness.
I am constantly preaching the virtues of a disciplined approach to investing and trading (there is a difference), so the question of the management of stop losses is asked often.
A recent publication of quotes from famous investors addressed this issue with one from Bernard Baruch. In addition to being an adviser to several presidents, he started the Council on Foreign Relations along with the Rockefellers, Morgans, etc., and he was known as an ardent investor and speculator. Before World War I he was said to be worth over a million dollars, and by the end of the war, it was said that he was worth over $200 million.
He said that he would research a stock, buy it, and then each time the stock rose 10% from his purchase price, he would buy an additional amount equal to his first purchase. If the stock began declining he would sell everything he had bought when the drop equaled 10% of its top price.
And Jesse Livermore, the legendary speculator, is primarily known not for the enormous wealth that he accumulated in the 1920s, but for quickly changing from bull to bear in late 1929 — not only saving his fortune, but being flexible enough to go to the short side of the market and add to that fortune. Livermore had three basic rules of investment:
1. Sensitivity to mob psychology.
2. Willingness to take a loss.
3. Liquidity, meaning that stock positions should not be taken that cannot be sold in 15 minutes “at the market.”
Finally, there is Addison Cammack, a stockbroker from Kentucky who swore by the 2-point stop-loss rule. “If you’re wrong,” he said, “you might as well be wrong by 2 points as 10.” He followed this method successfully and was one of the few bears to make a fortune on Wall Street and keep it.
Thanks to Jeffrey D. Staut of Raymond James for the quotes: Jeffrey goes on to say, “Interestingly, all of these disciplines have one thing in common. They all adhere to Benjamin Graham’s mantra, ‘The essence of portfolio management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.'”
While most market historians think of Graham as an advocate of holding stocks and never selling, he actually supported technical analysis and its ability to cut losses. And Staut points out correctly that many investors who hung in there during the bear market of October 2007 to March 2009 took a loss of over 50%. “Had they ‘listened’ to the cautionary signals that the market was flashing in November 2007, and at least hedged their positions, the loss would have been less than 10%.”
And they could have saved over 45% if they had been flexible enough to act on our March 7, 2008, Daily Market Outlook when the Dow was at 12,040, which said, “The overall chart picture is a breakdown from triple- to quad-bottoms with some charts breaking lower from a triangle. But the exact chart pattern is unimportant. What is important is that new closing lows were established. And so, for the few remaining doubters, the bear market is confirmed.”
Almost without exception, the successful investor follows a disciplined approach that includes a strategy to keep losses small, which protects him against disaster. And the application of an inflexible stop-loss strategy is the most important tool available to keep losses small.
And finally, this bit of advice from Will Rogers: “Don’t gamble, take all your savings and buy some good stocks. If they go up, sell them; if they don’t go up, don’t buy them!”
For one good stock to buy, see the Trade of the Day.
Today’s Trading Landscape
Earnings to be reported before the opening include: Fastenal.
Earnings to be reported after the close include: ADTRAN, CSX, EXFO, Intel and Linear Technology.
Economic reports due: NFIB Small Business Optimism Index, ICSC-Goldman Sachs store sales, Redbook and FOMC minutes.
If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.
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