Sunday, February 13, 2005

The market is showing a lot of strength right now

Random Roger gives a rundown of the Big Picture
The market is showing a lot of strength right now. I am happy anytime I see client account balances working higher. I hope it continues. I've written a few times that turn arounds often happen for no real reason. Maybe we could piece together an explanation but I would say the market turned because it did, if you follow my sometimes fractured logic.

So many people seem to be changing there tune about bonds lately that it is almost contrarian, now, to call for higher rates this year. For a while I have been saying the next big move will be up for rates (I realize there is nothing insightful there) but I have given up trying to figure out when.

Lastly I had an email that followed up to my Grit your Teeth article earlier in the week. The reader asked about 8% stop orders recommended by William O'Neil. This was my answer.

The answer to your question, I think, depends on what you are doing strategically with your account. For someone that has a bunch of stocks and they are looking to trade out on a, for example, 10% rise then some sort of stop order makes sense. I have not read O'Neil's book so I'm not sure why 8% is as opposed to 7% or 9% but some sort of consistent exit strategy is right.

If you have a diversified portfolio where you are trying to capture all parts of the market I could see where an arbitrary stop order could be the wrong thing. For example lets say you decide that you want to own China through one of the oil stocks as a long term theme, say 5 years. Chances are your would research the names and buy the one you thought was best. Now lets say all of them go down exactly 8% and you get stopped out on your stock. What do you do next? Would you give up on a five year theme because of a bad couple of weeks? Would you then buy what your first research lead you to second best? What if it goes down 8%, you get stopped out and the next day it is up 3%.

Stop orders are not the be all end all. I am not a fan of arbitrarily putting the same stop under every stock. 8% is a lot different in a name like Ask Jeeves than in Proctor & Gamble. Why is 8% right for both names? It might make sense to have a tighter stop on PG and give ASKJ a little more room.
[Random Roger's Big Picture]

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