FREE ACCESS June 18, 2020

MorningWord 6/18/20: Those Aren’t Pillows

by Dan

Back in olden times, when market-moving information was a lot harder to come by (ie not in a moments notice on your iPhone), many stock market investors leaned on technical analysis as much as they did the fundamental analysis, grasping to any perceived information edge about future price action in an underlying stock or index.

When I started in the business in 1997 I worked for a guy who worshiped at the altar of price, using momentum as one of his main strategies and technical set-ups as his most important input. Aside from companies whose products or services that he used he rarely knew what the other stocks he was trading did to earn the “e” in their “eps”.

Over the course of the late 1990s, he evolved as a trader to add a great understanding of fundamentals into his repertoire and hired lots of very smart analysts to help identify fundamental catalysts that he would include in his technical/momentum strategy, and for a short time, he was the “IT” guy for that market. My job as his execution trader was to be Johnny on the Spot with the perceived fundamental catalyst like earnings announcements, product launches, analyst meetings, etc, but also not to ever miss one of his classic technical set-ups, thus I looked at hundreds of charts a day. I drank and dined nearly every weeknight with Wall Street salesman and analysts looking to get any information edge, IM’d all day with other traders and withstood a non-stop barrage of yelling and harassment when things did not go as planned. It was exhausting, but I was in my 20s, and this was the business that I chose, and I loved it all.

We had a top-down macro view on markets that included sentiment and momentum indicators, a bottoms-up fundamental view on individual stocks, and then we would meet in the middle and trade away.

There is little doubt in my mind that 2020 has been a great environment for that style, especially for those who can easily change their minds when it comes to markets or individual securities. But if the current environment and its most fervent active participants are telling me anything it’s that short-term swing trading is a young man’s game, for the highly emotional, where less knowledge leads to more confidence. I am not knocking these guys, that was me in 1998-99, but I can tell you that I am still in the business some 24 years later because I had to evolve, markets change and if the participants don’t adapt, they go the way of the dodo. I have no problems with Davy Day Trader aka Dave Portnoy, what he’s doing is pure gold (gold Jerry!), and a genius stroke from a media company founder whose product has been shelved for the time being. I suspect his ability to keep his audience engaged at a time where they had nothing but time on their hands with little content will be written about and lectured on in marketing classes for years to come.

But let’s not mistake entertainment for a way to make a living. For years I have discouraged the so-called home-gamer to go all-in on day-trading as a sole source of income. The odds are just too stacked against those with scant resources. I have no shortage of enthusiasm for those who consider trading a hobby, with a small portion of their investable capital, much like someone who enjoys poker and creates a budget that he is willing to lose, or invests in equipment and travel for their kite-surfing fetish or trains and travels to Kili intent on summiting. Most hobbies involve an interest in learning, time commitment, and money, most also involve sound risk management decisions. I see trading as no different, I just wouldn’t bet your financial future on it, but as I like to say on CNBC’s Fast Money...”have at it.

I suspect Davy Day Trader is going to drop the mic as soon as the NBA restarts in July and his timing of riding the momentum of the hardest hit “pandemic stocks” off of the March lows will allow him to claim the title as the “new captain” until the next time he is either bored with sports coverage or gets the trading itch again. Maybe I am one of those suits he rails against on Wall Street (I only have two and only wear them at Weddings and Funerals), the old school guys who are missing out on the fabulous gains to be reaped on a daily basis in the planes, trains and automobiles trade, but as someone who has traded through three massive bull markets, and three subsequent crashes in less than 25 years I am here to tell you that the last few months of money-filled pillows are not what you think they are, and this environment is not likely to last too much longer.