Wednesday, June 16, 2010

Day Trading Bubble Part 2? Buyer Beware

Somebody please wake me up when the market faces the music.

It looks like it's going to be a long hot summer. It's pretty hard to interpret anything when it comes to the stock market right now. The volume is light and the weather is getting warm.

There was no follow through on yesterday's rally. We continue to trade in a range, and I don't see too much conviction by either the bears or the bulls.

Things could get interesting later in the week as we near options expiration on Friday.

This will follow more than likely the gloomy news we will get on Thursday as jobless claims will probably show that we are still in the upper -400k range.

None of this matters for now of course. The bad news continues to be ignored by the market.

Folks, when the market starts trading like this I frankly have no interest in getting involved because there are no fundamentals behind it.

These are tough times for investors because on one the hand you have several potential catastrophic economic fuses that could take down the entire market at any time if any of them are lit.

On the other hand, you need to also respect the fact that the bulls are emboldened after a 70% move on the DOW since last March. We all know the saying: The market can stay irrational longer than you can stay solvent!
These are certainly unprecedented times for investing. We are currently living in an environment where you can't make any money in without taking enormous risk.

If you are a fundamental investor, these are the times where you simply must show a lot of patience and sit on the sidelines until the fundamentals matter.

It may be painful to watch if stocks move significantly higher(which I seriously doubt), however, they are only profits if you sell which most will fail to do.

If you were lucky enough to get out of the DOW near 14,000 like I was then the market is still chasing you. There is no need to jump into the tank and play with the sharks if you were lucky enough to avoid this meltdown.

If you got clobbered, you can try and daytrade yourself to fortunes but it rarely works. Please read the article below if you disagree.

"Delusions of Grandeur" are back in vogue according to Henry Blodget:

"Apparently, day trading is back.. The New York Times says so. So it must be.

And that's fine for those who understand that day trading is a nearly sure-fire way to do worse in the market than you would if you owned a low-cost tax-efficient index fund.

Because the vast majority of day traders will do worse than index funds. Even though they're spending all day trading.

Of course, a big chunk of those day traders won't know they're doing worse than index funds. Because they'll look only at their gross trading returns. In so doing, they will ignore:

Brokerage commissions

Taxes (~50% on short-term gains)

Research costs

The opportunity cost of the hours and hours they spend trading (which could be spent doing something else.

Academics like Brad Barber and Terrance Odean have studied the investment performance of day traders in detail. Not surprisingly, it's ghastly. Here's more from the NYT:

The great mass of studies point to the same conclusion: trading is hazardous to your wealth.... The losers far outnumber the winners...

The authors sifted through tens of millions of trades, from 1992 to 2006, and found that 80 percent of active traders lost money.

“More importantly, we found that if you were to look at the past performance of these traders, only 1 percent of them could be called predictably profitable,” says a co-author, Brad M. Barber, a finance professor at the University of California, Davis. Everyone else, it seems, was on a short-term winning streak. Even those who did modestly well found their that profits were wiped out, and then some, by transaction fees like commissions and taxes.

“It’s not impossible to make money actively trading,” Mr. Barber continues. “There are slivers of people out there who are quite good. And everyone thinks they will be in that group of 1 percent."

My Take:

Think about the data above and take a serious look at yourself and how you invest. For every 100 traders you see posting on trading websites, only 1 of them is making money.

This is a fools game folks. The only people making money on day trading are the so called "professionals" that sell their advice to you via newsletters and websites.

Before i continue don't get me wrong: Longer term technicals do matter and they must be paid attention to. However, trying to do this on a daily basis over the long term is virtually impossible.


Let me also be the first to admit admit that I love to gamble and play with a few trades as much as the next guy. However, I would never consider trading my retirement. Nest eggs are built to be protected not gambled!


The Bottom Line

Day trading should have been left to die with the remnants of the tech bubble. All of the speculators that are running into stocks right now are 90% long and they are once again making the market irrational.

In the end they will be the bagholders just like their predecessors were.

The "top" for day trading came during the E-Trade sponsored U2 Super Bowl concert that happened right as the NASDAQ was in the middle of crashing back in early 2002:



This fad needs to die the way bell bottoms did in the early '80's.

One more quick thing before I end the day:

We saw horrible earnings from Best Buy and Fed Ex this week and the market barely blinked. Two years ago earnings misses like this would have triggered a 300 point declines on the news.

Folks, these are two of the largest bell weather stocks when it comes to measuring the health of the consumer. Best Buy missed badly and Fed Ex's guidance was bleak compared to previous estimates. This news follows Friday's awful consumer spending report for May.

Needless to say: Things look bleak when it comes to the consumer and that's not good when 70% of our countries GDP is consumer based.

I will say this again: When it comes to the market you now need to ignore the "noise" and focus on the economic data and the fundamentals. the economy is rapidly detiorating and investors are not paying attention. This credit bubble will end with many in tears just like all other bubbles do.

I didn't even get a chance to get into Spain's deepening debt troubles today. I will save that one for a later post.

Until next time!

Disclosure: Now new positions at the time of publication.