StockTwits for Idiot Retail Investors: Week #1

Okay, one week into my StockTwits experiment and two trades closed out.

Closed out about half of $NDAQ exposure

First, despite @alphatrends‘ chastisement expression of concern (see my mea culpa for why chastisement was mischaracterization) in last week’s comment thread about not paying close enough attention to his reportage, I managed to turn that failed trade into a good trade by selling all my $NDAQ put options on Thursday’s drop for a ~24% gain. In at cost basis of $2.47, out at 3.10.

The funny story here: I got props from @howardlindzon for the trade, but he said it was too early, teenager:

Only I spent half the day incorrectly thinking he was calling me a teenager. I prefer grasshopper. Or idiot retail investor. I was chagrined. Damn, I missed the insult @howardlindzon day earlier, when I wanted to give him crap about his inability to use apostrophes appropriately in his tweets, and here he was, bagging on me bailing out too soon. Schvitz-behavior-critiquing mofo.

Then I realized about lunchtime that he was talking about $NDAQ as being a teenager (meaning: eventually trading in the teens).

God, I’m a dork.

So I’m still sitting on my $NDAQ short with a cost basis of 23.50. I tried closing it out Friday at a $21 bid, but it didn’t hit. I’ll let this one ride, teenagers.

Sold Some $SRS Premium

Okay, this one worked out—sorta. I sold calls on half my $SRS position. The half (lol) with the $60 cost basis. $70 calls at $1.95 premium. My overall cost basis is $86, so if this gets called, I’m okay (although my cost basis will rise on the overall position to $101 counting these profits.) Not a huge position, so not a lot of premium, and not a lot to write home about.

The one thing I heard this week that intrigued me (on NPR’s Marketplace): commercial property owners are proactively giving retail tenants lease discounts in order to keep them as viable lessors. One example was a top-down mandate to a commercial real estate concern to slash in-progress negotiated leases by 20% to try to keep the retailers from folding. I’m not smart enough to know the best way to play this. It seems like there’s some long-term arbitrage opportunity here. It feels like this is a case of “we all go down together” and the play is to short $RTH and go long $SRS, but I haven’t thought through the game theoretical issues here. Intuition says that it is $SRS that gets hosed no matter what. They lose either way. They give concessions, and margins go down; they don’t, and retailers bail and close stores and they hurt. So despite being way underwater on my $SRS position, I’m liking my 5-6 month chances on turning this one around. The commercial real estate industry is panicking, and they’re counting on retailers of all people to save them. Show me some consumer sentiment and I’ll cover.

In other news: $COST, $AAPL

I just about covered my $COST (Costco) puts this week. They’re good to the tune of about 22% on paper, after Wal-Mart’s fade on Thursday. I’m letting these run a little bit more. While I haven’t disclosed position size yet on any of these trades (waiting for some of last year’s trades to close out before setting that up), if $COST drops to around $48 this upcoming week, I will bank a 45% gain on the puts and the profit will be roughly equal to my $NDAQ put sale this week. This is about 11% of my trading account (and the trading account is in turn is about 16% of my overall brokerage position), so you get the sense of how I view a lot of these trades as tuition in my learning process. In the big picture, I’m trying to stay too small to fail.

I’m still negative on $AAPL with the puts (April 80s at 16.86 cost basis) despite my household buying four $AAPL products over the holidays to the tune of about four grand. Win or lose, I’m going to need to close out this position soon due to the time factor. Right now, I’m down about 6%. While in the long-long term I’m bullish on $AAPL, in the short term I believe it is range bound between $80 and $100, with all the trends pointing to it hitting $65-$70 before it hits $110 (based on lack of transparency around Jobs’ health status). If you’re buying stock for your kids’ college fund, go long. If you’ve got a 12-month time frame, short it north of $90. They have quality management, they have an incredible coherent strategy and management team (second only to $AMZN), but they have the problem in 2009 of a down economy (which will cause them to hold back major innovations) and the doubt around Jobs health. At some point this year, all the bad news will be out (it’s not yet) and AAPL stock will fall and then you can safely load up. Just not at $90. (I expressed similar sentiment in the comments over on Fred Wilson’s blog, with additional info on $GOOG. Great post and comments all around.)

On this trade, the time factor is getting me, so I will look to cover soon and will take whatever profits I can find should it drop to the $85-$86 this week. Hoping for lots of volatility prior to expiration.

What I’m Watching This Week

If you want my play of the upcoming week, it’s going to be this: let’s assume that $PALM ascends another 10-20% Monday/Tuesday based on the announcement of its new Pre platform. And let’s say that $AAPL falls 5% because folks think it’s a zero-sum game and the iPhone is hurt because of this. Then then trade is to cover your $AAPL short on the dip and immediately flip into a $PALM short (or put) situation. I know jack about technical analysis, so I can’t tell you about support, but I sure like $AAPL’s management over $PALM’s, and it should be pretty straightforward to know who the platform winners are going to be. $AAPL and $RIMM we still talk about in a few years; $PALM is just delaying the inevitable. There’s maybe only a 1 in 5 chance this will happen or that I’ll actually go through with the trade, but it’s one thing I’m watching. I like to trade overreactions and irrational exuberance, and any love of $PALM to me oozes irrationality.

What I Owe

I really need to give you the blow-by-blow of my September through December experiences in the market (including my schooling in $SPY and $USO calls), as well as the long-term history of my trading experience and use of online intelligence sources. I’ll sneak those in as posts over the next couple of weeks. It’s important background if you’re trying to judge whether I’m a voice worthy of catching in your filter. And since my day job makes being a day trader (with the requisite attention span needed) impossible, I’ll detail how I trade with a limited attention span and time.

Who I’m Tuning Into

This week I’ve begun to follow @alphatrends blog more carefully, as well as @fortune8 (appreciate the rationality of another part-timer) and @BuyOnTheDip (because I’m bearish as well). Haven’t decided yet on @mandelbrot though—love the art but not sure I can read the correlations between free text tweets and stock prices.

I mentioned before that I love StockTwits. But has it helped me this year?

Sadly, the short term monetary answer is “not yet”.

However, the long term answer from an educational perspective is “yes”. Because as obvious as it sounds, while StockTwits is great for idea generation, ideas are $0.008333333 each, and ideas are no substitute for doing your homework.

Case in point: I buy the premise of most of the folks I follow on StockTwits that commercial real estate is hosed in 2009. And the ticker that is most mentioned when determining how to play the plunge in commercial real estate next year is $SRS. Makes sense. Go UltraShort Real Estate if you want to dial in profits, right? All the cool kids are doing it.

Wrong. $SRS is one of the inverse ETFs that is only really useful to hedge for a day, and it exhibits the fundamentally broken tomfoolery that TraderMark highlights, with the added negative of being susceptible to the sawtooth effect for eroding gains over any period of time that that Fortune8 demonstrates.

The short version: these are horrible vehicles to hold for any kind of intraday trade, let alone as part of any kind of buy and hold hedging strategy. Go read those posts before investing in any double or triple ETF, or in any inverse ETF. As TraderMark puts it bluntly:

I am beginning to wonder if due to the structure if all these ETFs are destined for a near $0 price in the “long term”.

But is my use of StockTwits to blame here? Absolutely not. I plunged into $SRS trusting a premise and voices I agreed with, and even had one good short term trade on $SRS. I was the one who didn’t fully understand what I was investing in before jumping in. I was the one who didn’t read the prospectus. I’ve learned my lesson (and I’m stubbornly still long $SRS at cost basis of $97 and change). But here’s the happy ending. The very insightful blog posts above (TraderMark’s and Fortune8’s) came to me through StockTwits participants including Fortune8 and TradeFast. So I wouldn’t have learned my lesson without getting references to their more detailed analysis that explained what was going on.

My only regret is that they didn’t tweet that stuff in the beginning of December rather than at the end. The good news is that I’m up enough from my $AAPL and $AMZN trades this year that I can tolerate this $SRS pain as I look for an exit (take it now and treat it as tuition? Or hold it and hope for more irrational exuberance to take hold?) and look for a more suitable proxy for a commercial real estate collapse.

So in the end, I paid for a couple of lessons this year. In this one, I not only got reinforcement on doing homework, I also traded up voices I’ll listen to: Fortune8, TradeFast and possibly TraderMark (if this silent twitterer is the same TraderMark from the blog.)

My observation over the course of December is that StockTwits currently holds much more value for the daytrader than it does for the buy-and-hold investor, or for the casual intra-day trader. In fact, I’d say 95% of the value of StockTwits accrues to day traders. There was money to be made in $SRS this week by through the use of StockTwits, but to make that money required a day trader’s level of attention. One of my goals for 2009 (which I’ll detail later this week in a kick-ass post for the ages) is to learn how to exploit StockTwits in 2009 as a tool for someone who isn’t a day trader, someone with periodic, limited attention span. In short, A StockTwits User Guide for the Idiot Retail Investor.

Stay tuned.

When the DJIA fell over the last couple of months from 14000 into the 7000s, one thing you didn’t see on CNBC was the “Curbs In” graphic, an indicator that NYSE had halted program trading temporarily due to excessive volatility. Why didn’t you see it?

Two reasons. First, in November 2007, the NYSE did away with the NYSE Collar (Rule 80A), the curb on program trading that kicked in when the NYSE Composite Index rose or fell 2% from the previous close. The NYSE cited the curb as ineffective in stemming volatility. Most of the time when you saw “curbs in” on CNBC, Rule 80A triggered the curb. As the curb applied to moves both up and down, you were most likely seeing it more often due to rallies than due to declines over the past several years.

The second reason you didn’t see the curbs in graphic is that the NYSE circuit breaker (Rule 80B) is far more difficult to trigger. In the event of a 10%, 20% or 30% decline in the DJIA, the rule goes into effect, halting trading based on the magnitude of the decline and the time of day the index crosses a threshold. If, for instance, a 10% decline occurs late in the day, trading continues. Other triggers can close the market entirely. And unlike Rule 80A, there are no curbs on the upside.

The rub is that the 10%, 20% and 30% declines aren’t dependent on the previous close—they’re dependent on the average closing value of the DJIA for the month prior to the beginning of the quarter. For Q4 2008, that was 11000, meaning that curbs won’t kick in this quarter unless we hit losses of 1100, 2200 or 3350 points.

So when the DJIA was scraping 7550, the market could have declined 14% and still not have triggered the curb.

Looking forward, let’s say that over the course of December, the average close of the DJIA ends up at 7500 due to more bad news and more de-leveraging. When the curbs are set for Q1 2009, the 10% curb will be at 750. Most of the huge daily drops over the last month have been in the range of 7% to 8%. If the DJIA gets to its 7500 average by lurking for most of December in the low 7000s and finishes strong at the end of the year at say, 8500, then rises a little more on New Year’s optimism to 9500, we could be in a situation where the same volatility we’ve been seeing (8-11% positive or negative days) could make it more likely to see curbs kicking into effect early next year, particularly if there are the kind of inter-week swings like we were seeing in October.

What will be the psychological effect of seeing a 750 point drop combined with a one-hour market halt to the average idiot retail investor?

UpsideTrader and Howard Lindzon see the CNBC Octabox respectively as a joke and a contrarian signal. The idiot retail investor, after a few months of routine 300-700 point changes sees a 750 point drop as old news. But trading halted, combined with a Deca-box of CNBC tools opining, AND a Curbs In graphic?

Chaos.

What I haven’t found a good source for is an estimate of the amount of de-leveraging that funds still have to accomplish, and whether or not the bulk of that is already done (or will be done) before the end of the year. From what I’ve read on the topic, it used to be common for program trading to take into account the effect of curbs going into effect, and adjust strategy accordingly; a number of times this fall, we seemed headed for 10% drops only to pull back at the last minute. Luck? Or could it be that no one really wanted a “markets halted” headline when they were sitting on piles of assets they couldn’t unload?

Regardless, most scenarios I can envision involve a negative feedback loop that involves continued high volatility and rallies that can’t be sustained. For the market to unwind in an orderly fashion, a buffer is needed. Since I’m a self-proclaimed idiot retail investor, I can make ridiculous predictions and look back at them and laugh. So my predictions:

• DJIA curbs for December based on 8900 average (890 points)
• Major January 2009 and February 2009 sell-off continues, finishing February at 7400
• Minor March rally back into the 8000s, with a Q2 set of curbs set at around 790

If the conventional wisdom is that you wait until hundreds of stocks are hitting 52-week highs before getting back in for the next bull rally (figuring you can afford to miss the first 6-9 months of a true bull market and save yourself getting burned by these false recoveries in the meantime), then I think the earliest one can safely jump back in will be sometime in November of 2009, and very likely it could be February 2010 if the scenarios above play out. For instance, AAPL hasn’t closed above $100 since November 3; for most of September it was above $120, and barring any rallies this spring, it’s 52-week high will be $107 on October 1, 2009, but only $91.86 come November 15, 2009. And it will very likely be a leader in the rally.

Is this just a retail investor’s capitulation, and the rally’s already begun? Possibly. Meanwhile, I’ll be making quick in-and-out hits and keeping most of my powder dry until I see some real strength.

And the PETS shall lead them

A long time since the last update—very busy with work and the vacation days and weekends have been spent trying to salvage some alpha by putting cash to work in very aggressive daytrading behaviors which have netted around 110% return on a very small amount of cash, mainly through a combination of swing trading AAPL and hedging the rest of my shredded long portfolio with SPY puts.  More details on my foray into trading in a future post.

But the family stock picking contest is in need of an update, just to humble all idiot retail investors like me who think that individual stock picking combined with a buy and hold strategy makes sense in the long run.  Of the 40 stocks selected by the 5 participants, only one is in the black: PetsMed Express (PETS +48.18%).

I happen to be in a close second in the contest now, with my eight picks (BRK.B, MR, PHO, BWLD, MWA, CEDC, CTSH, GRP) down only 37.88%; the worst participant, identified only as “The Nephew” is down a miserable 69.06% on the heels of his -5% performance last year.

The quick rundown from top to bottom:

In the lead

The Nephew’s Bride (pets fxi vlo nvs pep wfmi fpl ba) -37.79%.  PETS is up an amazing 48.18%, but this can’t offset FXI (China) being down 84.4%, and Whole Foods (WFMI)  down 74.07%.

Me: (stocks—see above) -37.88%.  I’m basically getting killed due to a combination of Buffet’s financial exposure and my global exposure (what I thought was a lesson learned last year).  Best stock: Buffalo Wild Wings (BWLD: -1.12%).  Grant Prideco was acquired for a combination of cash (yeehaw) and Valero stock (booooo!) in April; that didn’t help.

Berkshire Hatha Class B Ord Shs	-26.12%
Mindray Medical International Ltd	-57.92%
PowerShares Water Resource Portfolio	-36.54%
Buffalo Wild Wings Inc	-1.12%
Mueller Water Products Series A Ord Shs	-35.29%
Central European Distribution Corp	-59.30%
Cognizant Technology Solutions Corp	-43.43%
Grant Prideco Inc	-43.34%

Middle of the Pack

Mrs Firebones (down 40.15% with AET DE ARG CVS NTDOY AAPL COST GMCR) got creamed due to Aetna and Deere (each down around 62%).  Retail exposure hurt as well, although some of the quality stocks held up okay relative to the market.

Firebones Jr (down 51.48% with CERN ADDYY VIA.B PEP SNS TWX SCHL PIE) has one down 67% (PIE—picked solely because the ticker symbol was PIE).  I like his chances to improve before the end of the year through strength in Scholastic.

Bringing Up the Rear

The Nephew (down 69.06% on bidu isrg fwlt vip cmg stp nov rimm).  Suntech is down 89%; when your best stock (ISRG) is down 58.97%, it’s hard to dig yourself out of the hole.  Quick analysis is that this is overexposed to energy at the height of that market; looking at it another way, the double whammy of oil falling from $140/barrel and the falling dollar crushed him.

Overall

Overall the combined portfolios are down 47.17%, compared to a positive return of 15.82% last year.  There is not a single major index that the combined portfolio is beating.  My picks happen to be beating the S&P, the NYSE Composite and most of the international indices, but trailing the three Dow Jones averages (Industrial, Transportation and Utilities).

Roger Ehrenberg gives a great post-mortem on the demise of Monitor110, a startup focused on monitoring the web for early detection of investing trends.

I really liked the premise of Monitor110. I think there’s a large, untapped world of ideas out there involving the application of natural language processing to the voices of the masses.

Here were my 2008 stock picks for this year’s family stock contest. We take the closing price on 12/31/2007, so the current streak of eight straight losing days for the NASDAQ put us all in a big hole.

Stock	Starting Price	YTD
Berkshire Hatha Class B Ord Shs	4736.00	-6.78%
Mindray Medical International Ltd	42.97	-8.03%
PowerShares Water Resource Portfolio	21.40	-6.45%
Buffalo Wild Wings Inc	23.22	-7.97%
Mueller Water Products Series A Ord Shs	9.52	-10.82%
Central European Distribution Corp	58.08	-5.35%
Cognizant Technology Solutions Corp	33.94	-9.81%
Grant Prideco Inc	55.51	-1.44%

YTD: down 7.08%, and the family pickers are down 6.18%.

I picked these with a little less analysis than I normally do before making a trade, and perhaps relied a little too much on the Motley Fool community recommendations as a screening tool to find eight I liked. I had briefly considered ISRG, but passed on it as too pricey (turns out it is in fact down almost 16% YTD). I picked PHO based on Paul Kedrosky’s love of water (and predictions that “blue is the new green” for 2008, meaning that environmental talk will turn from global warming to the implications for water.

BRK.B appears to be a safe port in down years. The rest are just small to midcap stocks that I think have the potential to appreciate significantly if the market does turn around.