Losing Money In A Bull Market

Before we look at how this week ended, let’s take a look at how it began.

At the close on Monday, Amazon was up almost 8% for the day.

To put that in perspective, in one day, the company gained $117B in market cap.

  • That’s more than IBM’s total market cap.

  • That’s more than the market cap of 90% of the S&P 500’s component stocks.

  • The move contributed 87 bps of performance to the NDX (29% of the total return) and 37 bps to the SPX (44% of the total return).

But wait, it gets even crazier.

At the close on Monday, Amazon accounted for 263% of the S&P 500’s performance year-to-date.

These are the types of insane stats you see at tops – at least short-term ones – because they’re just unsustainable. This is why it was no surprise to see AMZN give all its gains back by the close on Friday.

Amazon (AMZN)

Weekly: 1.58% YTD: 62.83%

AMZN finished the week with a pretty serious double-top in place, a change in character, the type of which we’ll see later in the charts of a lot of tech stocks.

Earnings: July 30th, after the bell.

So, how are you doing with your trading and/or active investing since the Covid crisis hit?

Because according to everything you read on Twitter and Reddit, everybody is crushing it.

But are they really?

I’m sure there are some people who have done fantastically during pandemic-a-palooza, but from the emails I regularly receive, there are a lot of people who – despite the bullish sentiment – are struggling.

Just this week I received three emails from people who are having a tough go of it.

These emails contained words like “failure,” “loser,” “blow up,” and even “suicide.”

And it’s no fucking joke.

If you’ve been struggling in this bull market, I’m going to give you some tips on how to right the ship, but first, stick with me for a moment while I tell you a story.

I promise it will be worth it.

I got an invaluable piece of advice from my first trading boss. He said, “BK, the first time you get a big bonus, pay your mortgage off. Just pay it off.” He said, “I don’t care what anyone tells you about the economics of a mortgage, this business is up and down, and you never know. But as long as you own your house - only own what you can pay for with cash - you’ll have peace of mind.”

Brynne Kelly, Energy Trader

As I read these emails this week I was reminded of something a friend of mine told me a few years back.

For many years he’d been a margin clerk with various discount brokerages and had seen many “suicide trades.”

Here’s a story he told me.  

I was a call center rep in 2001, who was told he was now promoted to “Margin Clerk.”

The regular margin clerks couldn’t keep up with the volume that was hitting our firm, and I was sent over to help out.

They handed me a list of about 250 accounts with calls under $25,000 [minimum day trade margin equity] and told me to start contacting them in order to clear as many positions out as I could before clerks began forced selling.

During my first week, I had a college guy tell me he would kill himself if Apple didn’t go up tomorrow.

He was a 22-year-old kid who had bet all the tuition money his parents gave him on the stock

I immediately told my supervisor, who looked at me and said, “You think I care? Worse case, it becomes an estate account. Now, keep calling.”

So, those 22-year-old college guys blowing up their 5k accounts at Charles Schwab-like firms do kill themselves.

To be honest, I don’t know if the college guy killed himself. There were so many margin calls back then that you didn’t remember names. I do remember that Apple went down further the next day.

And I do remember some names.

I remember Francis, who killed himself over a 50k account.

It was his life savings, that he’d put into a “safe” mortgage-backed product in 2007, which tanked during the Financial Crisis.

Ironically, the bank paid out his estate a year or so later and his widow got all the money back.

I remember the name of the farmer’s wife who called crying when she figured out her husband had cash advanced all the credit cards he could get to cover his margin calls.

It was Cherise.

And unbeknownst to her, her husband Dan had also leveraged the farm.

Cherise was in her late ‘50s, a stay at home mom, who trusted Dan to take care of the finances.

She started to figure out what was happening when the collection agencies began calling.

A pile of mail Dan had been ignoring confirmed what was happening when their bank account manager decoded it.

Cherise was desperate to get her husband to stop trading, but loved him, and knew if that she confronted him it would mean divorce.

So she didn’t.

I couldn’t make out the words she was saying for the first ten minutes of the call.

Senior clerks were screaming at me to “wrap it up” and move on to other accounts, but I couldn’t hang up on her.

On Cherise.

I heard “Dan.”

I heard “gone.”

I heard “my children.”

I heard “I am lost.”

And then I heard myself crying.

I remember the folks who didn’t understand that triple-leveraged ETFs are not for buy and hold.

I remember the people who didn’t understand how percentages work. That 10% down doesn’t equal 10% up.

I remember the newbie traders who talked about trading “size” like it’s a badge of courage when it’s really the badge of a fool.

I remember the clients who changed their investment plans on the fly.

Those who decided they were trading gods because their account was going up - so everything they bought must go up.

And once they started losing money, were so desperate to make it back, that they doubled, tripled, even quadrupled their size.

I cannot count the number of accounts I’ve watched blow up doing this.

Off the record, I told those I called, “I’m not your friend and I don’t know you. But, I might be the only reason you stay solvent.”

Lots of people bitch about that stock that the margin clerk [or today, margin algorithms] sold at the 52-week low, only to see it rebound the next day.

But what they don’t talk about are the positions people were forced out of that continued to deteriorate. 

And the lives that this may have spared.

Brian here.

There is really no such thing as an “easy” market to make money in, however, some markets are more conducive to success than others, and over the past three months, we’ve been in one of those markets.

There’s no way to sugarcoat this, so I’m just going to Kinison it - if you’re not making money in this market, you need to seriously re-evaluate your trading.

And conversely, if you’re making money hand over fist right now, you need to make sure it’s because of your trading, not just because everything – okay, tech - is going straight up.

So, if your trading P/L is bleeding red, I’ve got 10 tips that will help put it back in the black.

Cut your position size – Everybody goes through losing streaks, and if you are in one right now, you should be progressively cutting your size down until you return to your winning ways. This ensures that you’re trading the smallest size during your worst periods. Think of it like an out of control night in Vegas; as it gets later in the evening, you should be drinking less, not reaching for the beer-bong.

Stop trying to short stocks – No matter what type of market we’re in, short selling is the hardest thing for a trader to do profitably on a consistent basis. Those that can are part of a very small and specialized group. It may seem “cool” to try and make your money selling short, but what is really cool is just making money. Besides, every time you short a stock, somewhere a kitten dies.

Trade less (make more) – Take it easy Racer X, you don’t have to go full bore all the time - besides, you’ll never catch the Mach 5. There’s no law that says you have to trade every day. If you’re consistently losing money, trading more often will just increase your rate of loss. Dial it back a bit and take that extra time to review your charts and find optimal setups. Then maybe Trixie will finally pay attention to you.

Stay away from low-priced stocks – Trading cheap stocks seems tempting, especially if you have a smaller account, but these stocks are often illiquid, with wide spreads relative to their price. Not unlike short selling, this is a specialized trading niche, and right now, there is no lack of well-capitalized and liquid stocks making big moves.

Pay attention to what the market is telling you – If, out of the blue, your wife starts going to the gym, getting “elective” procedures, and wearing high heel boots to work, you better pay attention - or find a good divorce lawyer. Each time the market takes a nosedive I see the streams come alive with traders closing out their longs, or going short. They are not paying attention. That is not what the market has been telling you. It has been telling you that this is a “buy on the dip” market, where you add to longs on support - and certainly don’t short. At some point, this will change, but until then, don’t fight the trend.

Trade the best sectors – Overall market tone is the most important factor in moving individual stocks, and right behind that is sector performance. If you’re not trading in sectors that are moving with the market, you are putting yourself at a disadvantage. Just look at pot stocks during this recent rally; they have been nothing but dogs. Make sure that you are trading stocks in sectors moving up with the broader market.

Check your methodology – Or more importantly, make sure you have a methodology.

Review your risk/reward ratios – Are you averaging larger losses on your losing trades that profits on your winning ones? If so, you need to adjust your risk/reward parameters when entering a trade. The minimum you should strive for is a 1:3 ratio, which means you can win on a smaller number of trades and still be profitable. Make sure to read my post, “The Most Important Concept For Successful Trading” to learn more.

Eliminate external distractions – One day, in 2005, I was battling a bad market, a bad Wi-Fi connection, and forcing bad trades. Even worse than that, my wife kept bugging me every three minutes or so. “Honey, can you come over here?” she said. “Yeah, yeah, just give me a minute,” I replied. Finally, she said, “honey, I think the baby is coming!” Out of deference to her, and the doctor, and the nurse, and the intern staring at me, I closed my laptop and stopped trading for the day. (Oh man, I wish I was kidding about this story). Point is, if there are distractions in your personal or professional life, they can cause you to lose your focus. If you can’t eliminate distractions, it might be best to hold off on trading until you can get a handle on them.

Subscribe to a legitimate trading service – As I have written about in the past, I am a big fan of quality subscription services. If you are a newbie trader, it’s like having an experienced mentor, and if you are a seasoned trader, it’s like having an extra pair of eyes on the market. The money you make from trading spends the same way no matter if you found the trade yourself or somebody else gave you the heads up, so put your ego aside and make good use of this tool.

In addition, find an interesting and informative newsletter that talks about the relationships between markets and life in a humorous and relatable way.

If only there were a $10/mo. newsletter like that? 🤔

*Bonus Tip*

Maybe trading isn’t for you? - Maybe you just think it is? Maybe you are using trading as a tool to make you happy, fulfilled, or to feel good about yourself? But maybe it’s the wrong tool? Maybe you should be doing something else? At least consider this idea.

And if you’re struggling, hit me up. I might be able to help

Okay, let’s get to the charts…

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Thanks for reading this week’s edition of The Lund Loop.

I want to hear your opinion on these or any other topics you see fit to pontificate on.

So drop me a line.

Talk to you soon.


P.S. It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.

Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.