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Editor's Note: Last October, day trader George Henel traced his encounters with the stock market in a special six-part Business Week Online series (see BW Online, 10/22/99, "barker.online: Diary of a Day Trader"). The former Internal Revenue Service attorney, who trades each day from an alcove off the kitchen of his Buffalo (N.Y.) home, returns today with an update on how he has navigated this spring's market sell-off, as well as what he sees ahead.
Without a doubt, the April-to-May fall in the Nasdaq was one of the most severe declines since the 1987 crash. I once saw George Soros speak on the pain involved in investing. Now, I, along with many others, have been reminded again about just what he was talking about. Chances are, the market will now be a safer and saner place to invest and trade. This does not mean, however, that things will be the way they were. High-momentum investing may be slow to return (see BW Online, 6/14/00, "Pity the Online Brokers -- or Invest in Them?").
Prior to the market decline, the trading atmosphere was like a giant party. Even my dentist was calling me with stock tips. Everyone was making easy money, drinking from a punch bowl spiked by Alan Greenspan's low interest rates. Now, the punch has gone flat. No momentum "fizz" in the rallies anymore. It makes me feel that a good number of people are either sidelined temporarily or out of the game altogether.
WELCOME DECLINES.
At the worst of the declines, I was very close to selling all of my stock holdings. I have witnessed declines such as this before and honestly believe that we were dangerously close to some sort of panic. When you see bids on the New York Stock Exchange shares first drop, then decline in size, and then disappear, you begin to reflect on where we might be going.
Many people fear market declines. I welcome them. Market corrections are like a giant clearance sale where all the goods are marked down and you can buy at reasonable prices. As the decline progressed, retailing stocks like Lands' End (LE) and Gap Stores (GPS) were hit very hard, bringing them down to attractive technical-support levels. The early part of a market decline can often be very profitable for a trader. It's at this point that people are still buying the dip and looking for bargains.
I had one of my most profitable one-day trades ever in the stock of PE Celera (CRA) on Apr. 5. That day, the market took a "breather" from its decline. I made 30 points in less than two hours. Had I retrieved my mail from the mailman before selling, I would have seen a Newsweek cover story on the human genome mentioning PE Celera and made an additional 50 points by holding the stock overnight.
TRADING FOR VALUE.
Ironically, this may well turn out to be my most profitable year as a trader. It's my belief that success in this business is more dependent on what you trade (or don't trade) than in how you trade. My "old friends" Anadarko Petroleum (APC) and Burlington Resources (BR) have "been there" for me throughout the decline. Very special friends -- always there when you need them -- producing nice gains for the bottom line. Both stocks, however, may be getting a little rich, as everyone discovers and recommends them.
In the end, it all comes down to trading the "right stuff" and in being set up in a manner so that you are aware of what is happening in the market around you.
I attribute much of my success to the fact that I trade value stocks. Last fall, I was trading oil and gas stocks and speaking of a turn in the energy sector. I'll always remember the analysts at Donaldson Lufkin & Jenrette and Prudential Securities, two large brokerage houses, appearing on CNBC and advising people to avoid oil stocks. It's only now, at much higher levels, that these brokerage houses are recommending the sector. Even as I'm writing this entry, crack energy analyst Charles Maxwell is on CNBC speaking about a natural-gas shortage next winter and prices going to the $7 level, from $2 a year ago -- food for thought.
Although I don't usually try to predict broad market moves, I feel that the summer is not the time for a strong rally. If the economy is set to slow down, analysts' earnings projections must also be revised downwards. The best news on inflation seems to be behind us, while higher oil prices seem here to stay, and it appears that we will soon get a jolt from costlier natural gas, too.
CABLE POWER.
Everyone seems to think that the Fed is through raising interest rates. But it may be that the Fed has targeted the stock market, and the recent snapback in stocks may be a bad omen. The statistics continue to show that the economy is still very strong, with UPS package deliveries, airline traffic, homebuilding, and computer-memory demand all still going at full throttle. That's why I believe the recent rally may be on thin ice.
True, some very positive market supports are in place. The strongest of these are the media and brokerage communities, which have declared that a market bottom is in place. In many ways, I believe CNBC is a more powerful market force even than the Fed in influencing and formulating investor opinions at almost every level. This cable channel, available in homes and financial institution across the country, continues to maintain a very positive market outlook, with all the necessary on-air guests to support it. In addition, an abundant supply of cash appears to be in money market accounts to fuel additional stock purchases.
The bottom line for me is that I intend to keep my stock positions light and try to complete my trades before the end of each day, so that I have minimal overnight positions. I will continue to trade only value stocks, such as Federated Department Stores (FD), Lands' End, and possibly Alcoa (AA). The first two stocks should move up as soon as investors see that the economy is not going into recession. Lands' End just seems cheap from many perspectives. It could be viewed as a profitable Internet merchandiser, as a nice acquisition, or possibly just as a "class act." As a mail-order company, it could even benefit from higher gasoline prices.
EYE OF THE BEHOLDER.
Alcoa, as well as some other basic-industry stocks such as paper makers, seems unusually cheap in view of the strength in the world economies. In any event, I'll let the market prove itself before I put on aggressive positions. We have already had a very healthy bounce. The upside from here could be slow. A good number of individuals and institutions are still trapped in tech stocks with large losses and will sell during a rally to get out even, or to minimize losses. Also, with trading volume so light, you might see some brokers encourage their clients to do some tax-loss selling early. To me, all of this spells caution.
The final lesson: Remember that a stock's value isn't fixed in stone. It's a subjective thing. Like beauty, value is all in the eye of the beholder. Because stocks are bought to be sold, don't overpay for something that one day you may have to resell cheap.
EDITED BY ROBERT BARKER
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