Friday, May 07, 2010

May 6, The Night They Drove Ole Dixie Down

As a small investor myself, one of my first reactions to the wild swings in the market of May 6 was to start singing the song, The Night They Drove Ole Dixie Down
Virgil Caine is the name and I served on the Denver train
Stoneman's cavalry came and tore up the tracks again
In the winter of '65 we was hungry, just barely alive
By May 10, Richmond had fell, it was a time I remember, oh so well

The night they drove ole Dixie down, all the bells were ringing
The night they drove ole Dixie down, all the people were singing
Na, na na na na na na, na na na na na na, na na na na na na

It's May 10th and "Richmond" in this case did not fall but it most definitely is a time to take stock of the situation and see if any lessons may be learned.

No matter what the dramatic swings, in the markets at around 2:45 to 3:00 pm, was caused by, that is: automatic trading programs, E-Minis Trade Snafu, Trading glitches, market manipulators or some cyber-attack, the fact remains that market participants can be adversely affected by market gyrations especially if they do lose their cool and react against sound trading strategies.

What way forward?
With so many computer generated orders in the market, it is easy to see why someone would question the efficient market theories as Dan Caplinger does in his Motley Fool piece titled What You Should Learn From Yesterday's Crash. Some of those generated orders come from market participants entering in stop loss orders. Under normal times this creates a market order and gets executed within a fairly narrow range. But if the momentum is such then there is no market below the stop and will drop until it finds someone willing to buy at that exact moment.

This can create a vicious cycle in the short term as stop loss orders get in the queue which drives prices down which then in turn creates more stop loss orders until you get equities trading at pennies. According to TradeStation, the Claymore/Sabrient Insider ETF (AMEX: NFO) which tracks our The Sabrient Insider Sentiment Index (AMEX: SBRIN) dropped to at least 11 cents before rebounding to the normal market price of around $27.80. Also, "iShares Russell 1000 Value Index Fund (IWD), which dropped from close to $60.00 to 7.5 cents." Of course the underlying securities did not drop that low on either case so it was mathematically incorrect. Not to say that no stock also took the rocket nose dive as Accenture went to a penny.

Caplinger does advise to use stop limit orders if your broker offers them as a way to avoid these problems. Overall, limit orders are a better way to ensure the price you want is what you get even if it is below the bid price to ensure your order gets executed. But stop limit orders does pose another question as to what price to set on the limit. It can even be set up above the stop price but this is wishful thinking that the dead cat bounce provides some relief from the falling prices. The possible scenarios for a stop limit order on May 6 would be either the limit was sufficiently below the stop so that the market caught it on the way down or that shortly after the market regained consciousness it trades at the limit. Either case it would be reasonable to expect it to execute at the limit price if it all. Trailing stop orders provide another way of ratcheting up profits as a stock increases in value, but again this will generate a market order that may be "chasing the rocket" to who knows where?

Another important piece of advice that Caplinger provides is to take advantage of volatility and market gyrations like what happened on May 6th. Quoting that portion:
Better yet, a limit order can help you take advantage of situations like this. If you enter an order well below the market, you may get a chance on days like this to buy shares on the cheap -- and you don't even have to be at your computer. Most of the time, those orders will never execute -- but when they do, they can be extremely lucrative.

Yes indeed, every one of my limit orders that executed on May 6th are above what I paid for them or I took some shot term profits from the swings at the time. But this also needs to be taken with caution because if something that changes the direction of the economy, can most certainly leave you in a bad situation. Take for example after 9-11 as the prices of everything was dropping like a rock and no white knight was going to change the market sentiment.

On May 6th the only news that could affect the market as drastically as what happened was about the PIIGS that I already looked at and found no reason that the market would react to problems in Greece even if CNBC was covering it in depth. Thus I was happy with the limit orders as a way to pick up on the dips (or some dives in this case).

What does this mean to Sabrient?

In the near future, we at Sabrient plan to launch another portfolio for our Platinum Subscribers based on the MyStockFinder search tool of "Rock Solid Yields". Be sure to watch this blog category for more information about this exciting new product. This category is to give some insights into how the portfolio will be directed and what strategies we plan to use to achieve high rates of return while generating a cash flow through dividend paying stocks.

We at Sabrient believe that equity markets will provide the best returns on your investment over the long run. While it may seem the market is not nice to the small investor, the small investor can beat the market especially when others (or computers) lose their cool. So we reject Jim Cramer's advice that small investors should stay out of the market on days like May 6th. They just need to have a solid trading strategy and take advantages when opportunities present themselves.



Assessing the May 6 Fallout on the 5 Cross-Market ETFs

What the Heck Just Happened?


Nasdaq cancels trades made over 20-min. period



Links:
arbitr

The Night They Drove Old Dixie Down - Wikipedia, the free encyclopedia

House panel to hold hearing on stock market plunge

3 Reasons Dividend Stocks Are a "Must-Own"

Japan's Nikkei down more than 3% in early trade

SEC agrees to framework to boost circuit breakers

Small investors spooked by market swings With nowhere else to go, many are 'hanging in there'

5 Reasons to Sell a Dividend Stock

6 Secrets to Finding Dividend Money Machines That Keep Your Portfolio Growing In Any Type of Market

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