STCTBMTROOFST (Short term counter-trend bear market trading rally opportunity only for sophisticated traders)
THE FINAL GRADE (Taken from a David Korn Newsletter)
(Modified Slightly Since Original)
I have studied Bob Brinker's market timing model and enjoy listening to him analyze the markets. Believe me, I wouldn't be spending my entire weekend analyzing and interpreting his viewpoints if I didn't think he had something important to offer. With that said, I think it is important to objectively analyze Bob's recommendations. Why? Well, many people base their investment decisions based on his recommendation. If we can't be honest with his ability, then we risk hurting our own financial well being. So, here it goes. I have decided to grade different aspects of the STCTBMTROOFST which will cumulate in a final grade on what Bob previously referred to as a short term trading "experiment."
Identifying the Opportunity: Grade A. Bob gets the highest marks for identifying the beginning of the bear market rally in May, 2000. Some will say he did it after the fact, but given that he announced it on the first Saturday after it occurred, he gets an A in my book. The truth is Bob announced that he bought QQQ in the mid-70s on the Saturday following his purchase which was made on the previous Wednesday - just three days earlier. People who wanted to take advantage of his recommendation, however, based solely on the radio discussion, were left out in the cold if they followed Bob's advice to the letter.
Notifying Listeners of the Opportunity: Grade B minus. While Bob did provide listeners with some parameters over when the bear market rally would start, there were some short falls to his advice. First, although he did tell listeners that the bear market rally would begin on lower volume than the previous highs, he made it clear that this would occur in conjunction with positive divergences in the market. There were many calls into the show asking for additional explanations on what Bob meant by positive divergences. In my opinion, Bob was relatively vague on this issue, although he did mention advance decline lines, new highs vs. new lows and the like. Unfortunately, in my opinion, Bob fell short of explaining how he would find these positive divergences, how he would apply them and the weighting he would put on these types of technical indicators. Many of the regular posters on bobbrinker.com were posting questions about this, and Brinker, who believe me used to post there, did not provide any additional specific advice, despite the clear desire to have more information.
When the bear market rally was triggered after the closing low on lower volume on May 27th, I thought the positive divergences were present that Bob was talking about, although frankly I wasn't certain. This led me to buy some speculative call options instead of dumping a ton of money into the QQQs. Although it worked out well later, I remember searching the Internet that night and the following two days to see if anyone else had agreed with me. I went to bobbrinker.com and this site and the consensus was pretty much that the positive divergences weren't there. Bob Brinker or even Bob Brinker Jr. could have posted that Bob believed the counter-trend rally had begun. Even a Brinker alias could have. Instead, there was nothing said. It may have been because Bob himself needed a few more days to see if that low would be breached before he could determine if it was right.
What might be of particular interest to investors now, is the fact that the same market internals that Bob relied on in May, I didn't see present this fall when Bob was suggesting another counter-trend rally. In fact, I posted the market internal analysis I did on January 2nd and later on April 4th which suggested a near term bottom was at hand (and so far has held). I do not know if Bob relied on something else this time around when making his predictions in the fall. Here is the link to my market internal analysis I posted on April 4th:
http://www.siliconinvestor.com/stocktalk/msg.gsp?msgid=15617038
Staying Consistent: Grade C plus. When the QQQ trade was going great, Bob was emphasizing to the audience that many of his listeners bought QQQs at the market's open on the following Tuesday at $80s recognizing that a 20-25% upside meant they still were going to do well in the trade. However, once the trade went somewhat sour, Bob changed his emphasis to pointing out that he only recommended that you purchase the QQQs in the mid-$70s. One other point relating to this is that I bet most retail traders who decided to buy Tuesday morning did not get QQQ at $80. The QQQs shot up that day and when I purchased them that morning around one hour into the trading day, I was filled at $82 a share. In fact, the rapid rise in the QQQs that day was attributed in part to the "Brinker effect" by James Cramer of the Street.com at the following link:
http://www.thestreet.com/comment/wrongrear/949670.html
Entertainment Value: Grade. A. Almost every week, we hear a new caller get through who just discovered Moneytalk. However, I imagine that most of his listeners are like my subscribers -- seasoned Moneytalk trekkies. Bob has been doing this for 15 years and realizes that his listeners have become more sophisticated and don't want to hear about Ginnie Maes on every show. In addition, I am sure Bob gets bored talking about the same things. This discussion of STCTBMTROOFST provided an opportunity for a new topic that provoked heated debate in many circles. Of course, it also made for some great radio -- something that is lacking these days.
Predicting the Range of the STCTBMTROOFST Opportunity: Grade A+. Bob was almost uncanny in his identification of the buy point of the QQQ and his prediction that the QQQ would peak in the 4200-4400 range. It did exactly that. It was frankly astounding that he predicted the range and you can't take that away from daBrink.
Exit Strategy: Grade D. Although traders made a profit, Bob's selection of $84 as the sell price if it was reached was pretty much the worst exit point traders could have gotten during this entire bear market rally. Indeed, an analysis of the QQQ chart on the day QQQ reached $84 reveals that it only traded below $84 for a short while before shooting up and closing the day incredibly strong above $90 a share. Check out this chart that shows QQQs activity on the day the sell order was activated:
http://www.suite101.com/discussion.cfm/investing/17453/81
Now of course anyone participating in this trade could have taken profits at any juncture along the way. However, I am grading Bob, not anyone else. And Bob told listeners to stay with him and wait until he gave the green light on a weekend broadcast. For that, he received a D in this category.
Trading Savvy: Grade D Minus: Bob had multiple opportunities to advise listeners to sell the QQQs over 16 points higher than where they got out of at $84 a share. I think even Bob was shocked when the QQQs took out $84. I sent out a Special Alert that day saying I was not going to sell my QQQs. I didn't sell simply because the Nasdaq seemed to be oversold at that point and you would be selling into weakness. I assume that Bob felt the need to protect the trade with profits and so the $84 stop was necessary.
The other component to Bob's trading savvy is the fact that he waited way to long to institute a stop or base level from which traders could take profits. For example, I still don't know why Bob didn't simply set higher and higher stops each weekend as the trade went higher, although Bob did say on this weekend's broadcast that he never uses stops in his own personal trading. Nevertheless, he could have discussed this possibility on his show so that others could take advantage of it if they so desired. Did Bob learn from this mistake? I think we all know the answer to that.
I sent out an e-mail to my subscribers on July 14th saying you could sell the QQQs that day for $100 a share. That weekend, Bob could have set the stop at $99 and when traders sold the following week, he would have looked like a genius. Instead, I looked smart, and believe me I ain't that smart!
Discussion of Exit Strategy on Radio: Grade D. Bob lost big marks in this category in my opinion when he clammed up about the QQQ trade. Bob's excuse was that too many people were misinterpreting what he was saying about the QQQs and, therefore, he decided he would just tell people when to exit. I think this began when several posters on his website who appeared pretty unsophisticated, were insisting that Bob had said the QQQs were going to $120, when Bob had never made that statement. Remember the caller to Monetyalk who had $500,000 in the QQQs and was leaving the country and wanted to know what to do? Bob refused to give her any guidance, or to recommend that she exit the trade immediately (which would have yielded her a much higher price assuming she got out at $84). Instead, Bob told her to go visit bobbrinker.com where she could read an announcement of the sell signal when it occurred. Obviously, at that juncture, Bob still believed that he was going to be able to get people out at the right time. Bob's decision to avoid discussion of any exit strategy to me displayed some arrogance on behalf of Mr. Brinker. Moreover, many listeners were interested in learning more about technical analysis and wanted a better understanding from Bob as to what he was looking for in an exit strategy. Personally, I think Bob was looking for a classic "double top" in the Nasdaq composite where we retest the highs on lower volume. Unfortunately, the extreme volatility and dramatic downturn caught even Bob off guard and to protect profits in the trade, he had to institute the $84 stop. Just imagine if the QQQ had never recovered from that point -- Bob felt that had to take some action.
Educational: Grade D. I imagine this will be my most controversial grade and it was tough giving Bob a "D" in this category, so let me explain my reasons. I was going to give Bob an A for this category simply because he opened up an entire area of investing that many people were not familiar with; namely, trading. For example, the constant monitoring of the market, the pitfalls of dramatic moves, analyzing technical indicators, using stop losses were all issues that relate to trading. Unfortunately, Bob failed to discuss or acknowledge the two most important lessons of all that every trader learns. The first lesson you probably starts with the letter "G" and was made famous by Michael Douglas in the movie WallStreet. Yup, GREED. It is a lesson that I feel I am still learning and I have been a victim to my own greed in my trading experiences. During the weekend of July 14th, QQQ had already broken through and closed at $100 a share! Bob did not even acknowledge that fact and during that weekend's broadcast, Bob avoided callers questions about the QQQ trade, even screening out callers (according to posts on the net) who wanted to discuss the trade. Listen to that weekend's broadcast and you will here Bob snip at callers saying he would tell them when to exit the trade. This brings up the second most important lesson of trading: OVERCONFIDENCE. Trading is a humbling experience. Those who believe that they can accurately predict short term moves quickly learn not to take anything for granted. Bob's identification of the exact bottom of the bear market rally, the unbelievable rise immediately following that call, probably caused Bob to react as many of us do -- he got cocky and overconfident. So confident that he simply told callers the Nasdaq would return to the 4200-4400 level and he would be able to tell them when to exit the trade. To analogize to baseball, I think Bob was looking for the ultimate grand slam with this trade. In reality, if he had simply told callers to put a market stop sell order (or a mental stop) at QQQ 100 that weekend, he would have hit a home run. Greed and Overconfidence. Two of the most important lessons to learn from short term trading and Bob didn't acknowledge either of them. Finally, Bob scored low on another important lesson - RISK. Early on, Bob emphasized that the trade was only for sophisticated traders. Once the trade was going well, Bob implicitly approved of people who sounded like they had no business trading. How did he do this? Well, Bob told callers to simply wait for him to tell them what to do. Sophisticated traders would know better. The lady with about 1/2 million in QQQs going out of the country was wondering what she should do. Bob told her to listen to the radio, and if not, she could check his posted summary of the show to see what he advised. This type of caller seemed the norm after a while and rather than encourage this type of person against participating in the trade, Bob seemed to relish the roll of starship commander in charge of the trade. I imagine similar complaints could be made at present about Bob identifying the risks of current opportunities.
FINAL GRADE C. I am sure some would argue the grade should be higher, some would argue it should be lower. The fact is Bob helped listeners turn a profit (albeit a small one) on a short term trading opportunity which is an extraordinarily hard thing to do even for a Market Savant like daBrink. Fortunately, or unfortunately, Bob may not have learned from his own trading lessons. Perhaps his Achilles heal -- his ego -- got in the way as he could have hit a grand slam if he had simply not become overconfident and greedy with his own prescient abilities.
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