The Contrarian Trader

Stock market, economic and political analysis for the intermediate term stock, commodity and equity option trader.

Bad Luck that saves you money…a Trader’s Tale

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A couple of weeks ago a I received an email from a great member John who I frequently email during the day. He had asked me to take a look at Biovail (BVF). Normally I would take a look at the chart and do a review of the key fundamental statistics and give my honest opinion. But on this day I didn’t due much of a due diligence. I respectfully replied to him NEVER! I was blunt and short for a reason. The main reason being that I had hoped to persuade him not to trade the stock. Why you might ask?  Well, a number of  years ago I was long Biovail. I owned quite a bit of it. As I do each morning I sit with great anticipation watching for my Level II screen to light up with the red and green colors that greet me each day. On this particular day however one stock sat white in color. You see this normally with thinly traded stocks, it may take a minute to catch a bid. But (BVF) was no thinly traded stock. I did my research and my worst fears came true. Biovail did not open that morning because of a ” truck accident the previous night that was carrying a large batch of their product Wellbutrin. It would have a material impact on earnings. Around 11am, (BVF) opened for trade. It opened sharply lower then it’s previous nights close. Long story short…in the blink of an eye I lost $20,000.00. Bad luck? Perhaps, but just because you were burned by bad luck doesn’t mean you shouldn’t learn a lesson from it. To rationalize what the event I decided to evaluate what had happened and to perhaps learn a lesson so that I may avoid a repeat situation in the future. “Turn Chicken Sh__t into Chicken Salad” as my Dad would say. Here is what I had learned. Biovail’s management was suspect by the Wall Street analysts for being lets shall we say slick. Isn’t that the pot calling the kettle black you might ask? Lesson 1: It pays to listen to rumors of bad management. Avoid these managers like the plague. If the street thinks you are a dishonest then you must be bad.  There are plenty of other companies to trade. Lesson 2:Trust your gut instinct. Your gut instinct doesn’t reveal itself to be correct until after the fact. If your gut tells you to get out then, get out while the markets are open to you. Lesson 3: Use money management techniques. Short term traders by necessity are less diversified in a speculative portfolio.But, by simply being a speculator doesn’t give you the right to exist for any length of time without having some diversification in your portfolio. Lesson 4: First out best out. That’s why I lost only$20,000. I acceptted my loss only a few seconds of the stock being open. It was the longest market order ever.  Had I waited for a counter trend rally the loss would have been staggering, I got off lucky. The reason why I brought this story up was because of Daystar Technologies (DSTI). I love sell offs, that’s how I have made what I have made. I am very good at buying stocks during  times and conditions when very few people are willing to offer a bid. Daystar was getting hammered by big sellers these past few days. The $5.30 support level was the bottom of it’s trading range, it should have rallied off of it. What happened? Nothing..it sliced right through it. This happens sometimes, then late in the day you get the buyers coming in to make it close over support… a key reversal day. This morning it was so oversold it felt like re -entering the trade was like taking candy from a baby. After I re-entered however what bothered me was the reason why I had entered. Taking candy from a baby? There are no free meals on the street. As the stock began to slip again to new intra day lows I got that Biovail feeling again. After I hung up the phone with investor relations at Daystar I had drawn two  conclusions from my conversation. 1)Daystar was up for sale 2) There were no bidders. I sold not two seconds after I hung up the phone using a market order. As I was carrying a very large line the last thing I wanted to be doing one weekday morning was sitting at my Level II screen with my coffee in hand waiting and hoping for Daystar to open up. We no longer have Daystar Technologies as a Buy Watch. To the markets, listen, you can expect this game playing to go on for the next couple of weeks. They are going to hold the market here by doing what they did this morning. The spiked the market by squeezing the short on the back of the retail numbers. It’s the same old thing. They’ll keep upgrading earnings forecasts, sectors and individual companies through to New Year. Watch the Banking Index (BKX) it was up all day. Why? Here is how it goes. Morgan Stanley will call down to the floor when they see the S&P 500start to slip and begin to buy back their own stock. As it’s the Holiday Season and all the wing tipped jackals await their bonuses the good ole’ boy club the boys over at Citi, and Goldman Sachs will lend a hand and buy back a few shares as well. This keeps the markets from selling off. As I have always said, the Banks, Brokers and Insurance companies make up almost a quarter of the S&P 500. That’s huge. So, if the financial sector heads higher nobody panics. You just watch when the BKX heads south, that’s when this market comes apart at the seams. So, obviously we are out of DSTI. We no longer hold this position nor do we intend upon trading it again as it’s soundness as an ongoing concern becomes an issue that we need not be involved with. Stop losses are tight across the board. We will keep them open so long as they hold above support. I am still gradually purchasing the SPY March 139 Puts and will do that to average into the trade. We have a very large VIX May 25 call position as well. If this market corrects we will be in a fantastic position to take advantage of it. When the correction is over there will be some really great stocks on sale.

Robert Desmond

President & Chief Investment Strategest

TheContrarianTrader

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