Selling is a Liberating Experience

So, this (past) week and some of the prior weeks saw a bout of selling occur that has pretty much clobbered many high beta names that were huge winners in 2013.  Rotation is now on.  But the indices continue to flirt with new all time highs and some have tagged them – the Dow Industrials and the SPX 500 were there early Friday before some nasty selling ensued.  For its part, the Nasdaq is well below all time highs reached in 2000 and requires some more time and effort to get there.  However, markets had reached overbought on some metrics so it made sense to see some selling – if you’re long, a big drop like Friday can be unnerving – unless you are prepared.

The recent chatter has been about the bludgeoning of the high beta names – stocks in social media, biotech, some financials, consumer stocks, retail and restaurants.  These were the big stars of last year and now the trend seems to have turned quickly (for now).  But let’s understand something about markets – sentiment changes very quickly as money moves from sector to sector, and just when you think about throwing in the towel on a name or two – voila!  it becomes loved again.  Is this just ‘garden variety’ selling?  Certainly doesn’t feel this way, but we’ll just see how things shake out.

A theme I base my trend/swing trading on is about liquidity, the Fed and sentiment.  As long as money flows into markets it will find its way into stocks.  If the Fed continues to be in accommodation mode then sentiment will generally be bullish.  I don’t make these things up, they have been proven by the actions and activity of the markets over time.  The big money is flowing when the conditions are ripe.  However, nothing lasts forever and the current ‘ripe’ conditions may change at a moments notice.  In that case, taking something off the table when you can is the right thing to do.

I have always said there are a million reasons to sell but only one reason to buy.  Do we worry about the recent selling?  I don’t want to paint a rosy picture here because some of the damage under the hood is quite bad.  Markets need leaders to step up, perform and bring others up.  Selling is the great liberator, freeing your mind from anguish, pain, hope and desire.  Markets are a difficult place to manage, and nobody rings a bell at the top.  Therefore, taking the initiative and selling when YOU want to do it is what I recommend.  It certainly helps on days when plays are not working in your favor.

This past Thursday we had a position on in APC, the May 85 call, purchased a month ago at 4.25.  The position was mildly lower but then some news hit Thursday and it soared, so much in fact that we cashed out at 13 bucks, a 205% winner.  I didn’t really care where it went after, but we still wanted to stay on the trade so we rolled into another higher strike.  But the point here is that we sold when WE wanted to do it – not forced out by the market.  It felt good as some other plays were not doing well, and I’ll never apologize to anyone for taking a profit.

When there is momentum and liquidity combined markets can run, but it’s a double-edged sword as well.  When the buyers are absent we find stocks retain gravity and pull back to areas of previous support, mean reversion.  Some have said the SPX 500 being above the 200 MA for 15 straight months is an astonishing anomaly that has to end, and some day it will.  But we’re not about trying to time those moments, rather just playing the game within the parameters.

As I talk with traders I often find there is a hesitancy to sell a winner or a loser, many are looking for guidance (sometimes an ‘urging’ from me!) because they don’t know what to do or don’t want the accountability of the decision.  I have yet to find a good reason why so many struggle with this.  If your first instinct is to sell then it is probably right.  Liberate your mind, move onto the next idea and you’ll find yourself in a much better place.