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What To Do Behind The Woodshed
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If you've been trading this market at all, you've probably been taken behind the woodshed once or twice. I certainly have. Today, for example, Nintendo (NTDOY) is my woodshed buddy, and we are feeling the pain of a 10% drop. At least we're in it together. Most often this happens after an earnings report or a piece of big news, and there's nothing you can do about it. Sometimes the news isn't even that bad (NTDOY had a solid quarter). Doesn't matter. The stock gaps down and you are helpless. You've woken up on the wrong side of the shed. WOODSHED REACTIONS You have 3 options when reacting to the pain. You can: 1. Sell (some of your shares, or all of them) Your response will depend on your personal style and your relationship with the stock. With Sohu.com (SOHU), I sold immediately because I bought the stock for a trade only. With NTDOY, I do not plan on selling because it's an investment. One is much more patient with a girlfriend than a blind date. WOODSHED PROTECTION Of course, you can try to be more proactive by preparing ahead of time for the bad days. If you see the earnings report on the calendar (Yahoo and Google both provide the dates), you can sell some of your position ahead of time. I did this recently with THQ (THQI) and Electronic Arts (ERTS), and I'm glad I did. You could also buy a put option on the stock for protection, but options can be complex if you're not used to them (I have no expertise whatsoever in options). In both strategies, you will lose money on something (either the stock or the hedge) no matter which way the stock moves. There's nothing you can do to avoid the anguish altogether. Sometimes you'll see an unlucky victim behind the woodshed, and if you are a benevolent soul--or even if you are a conflicted and reluctant hero like the Dark Knight--you can try to rescue the battered stock. This should be done with care, lest you get hurt "catching a falling knife." But with a sensible stop-loss, this can also be a great opportunity. Last year I picked up some cheap Take-Two (TTWO) after the delay of Grand Theft Auto. Some folks I actually like to see out back are small to mid-sized biotech stocks. When one of these companies has bad news regarding a drug, they get absolutely whacked. But if you pull up 6-month charts of REGN, ISIS, ONXX, MYGN, BIIB, and ALNY, you'll see big moves down on big volume (a.k.a. capitulation) followed by nice recoveries. Here's an example--notice the drop, the volume, and the recovery in ISIS (click for chart). Yesterday, it was Elan (ELN), a stock I was eager to buy for months, down 40%. Ouch. This was more than woodshed, this was the final scene in Braveheart. Mercy, William! Mercy!! But am I thinking of a rescue attempt? To the Batcave! Disclosure: Long NTDOY, ISIS, ALNY | ||
