Lower Retail Sales & JP Morgan’s Missed Earnings Trip Investors

The markets continue to test lower and intraday tested the next level of support at 1992 on the S&P 500 index. Like Tuesday buyers stepped in at support, but failed to make it back to positive territory to complete an intraday reversal. The earnings from JP Morgan were a huge disappointment for the financial sector. Throw in the December sales report showing a drop of 0.9% and you had the making of a negative open for stocks. The sales data reflected the price drop in gasoline, but sales still fell 0.3% ex auto and gasoline. Thus far the December economic data has not impressed and if anything, it has been been disappointing. While I would like to yell ‘FIRE’ and evacuate the building, it is still not as bad as it looks and some of the selling starting to look overdone short term. Regardless of what I think… the markets still have to validate on the directional side. For now we remain in the trading range and volatility remains elevated. Patience is the key ingredient at this point in time and we will move forward looking for the trend to confirm… up or down.

Uncertainty remains the key issue facing investors currently. We can label all the issues, but they all add up to uncertainty about the growth of the economy and earnings. It is easy to get caught up in the emotions of the moment and make poor trading and investing decisions in the process. Those emotions can make us money psychos… my affectionate term for making yourself crazy by allowing the market to determine your actions versus the defined strategy or discipline you should use in making decisions to buy or sell a position in your portfolio. In light of the current trading environment I thought it would be a good time for a quick refresher course in establishing your trading plan every day prior to the market opening. The following steps are a good habit to get into daily to keep you out of the emotional trading game or from becoming a money psycho.

First, determine the market environment and establish a defined reason for each buying or selling decision. The ‘WHY’ factor is vital to making good decision daily about your portfolio. All good trading and investing strategies follow a define rationale for owning or selling stocks. Answering the ‘why’ question now will help in making the appropriate adjustments (fifth step below) as you go forward. Simply put, if the ‘why’ no longer is true, you should look for the nearest exit as the strategy or belief looking forward is not confirming and in turn the risk of the position is rising. Know why you are buying or selling the position and you will make better trading decisions devoid of emotions.

Second, WRITE IT DOWN!Define your entry point based on the strategy you are implementing. Are there any restrictions to the entry process? Example: Buy SPY at $204. If it gaps more than $1.50 above the entry or $205.50 I will wait for the test of the move higher. I use this example because if you buy above the defined entry point you will squeeze your profit potential based on the target, and in turn increase the risk of the handwriteittrading position. Thus, don’t chase the entries, define them and respect the increased risk above that point.

Third, WRITE IT DOWN! Define the EXIT point based on the strategy you are implementing. This breaks down into two key points… 1)  The trade is wrong… defined stop or maximum loss based on the strategy implemented and risk management principles. 2)  The trade is right… defined target or profit desired from the position taken. You will also need to determine what you will do if the target is achieved. Sell all, half or none of the position… key is to let the profit run while protecting the gains against the risk of the future market action.

Fourth, don’t make trading decision during moving markets, that is why you have stops in place defined by your strategy and plan. I would go so far as to say don’t make trading decision during market hours that are not part of your daily trading plan. Too often traders and investors hear, see, or stumble on interesting opportunities during the day and trade it without the proper research or due diligence.  Or, worse yet, trade it without a defined plan or strategy. That usually ends poorly as emotions are not good decision markers.

Fifth, Review your plan daily (after hours). When the markets are closed review your positions in accordance with the plan, strategy and objective. Make adjustments to stops and targets based on non-emotional research and prepare your plan for the next trading day and follow it appropriately. Maker revised decisions while the markets are open and volatility is high tends to be poor decision making. Let you plan play out and then make adjustments after-hours.

Remember one key ingredient… It is YOUR money and managing it is process defined by a strategy built on discipline. Implementing that strategy is best achieved through a daily written plan that you can implement without emotions. Respect the risk of the market and find ways to manage your money in light of your goals and objectives. Anything less is likely to turn you into a money psycho!