As In Life and Trading, Timing Is Everything

Buy the dips, sell the rallys.

I became a proprietary equity trader back in 1987. At the time, one of the most volatile stocks on the NYSE was MMM with moves that could be a full point or more. These moves were not that remarkable, given the fact that it also had a price above $100 a share. My first trade in the business was with this stock, and I think I made something like 3/4 on 1000 shares. Funny how you remember things.

Trading on the New York back then was grinding for 1/8's and 1/4's and finding the sectors that were in play at any given time. I remember the country funds that began to be issued and that would be exrtremely volatile, with the best exit strategy for weeks being a market on close trade because the final print would usually be up at least $1. Different stocks had their own distinct personalities that you learned from the experience of watching, trading and studying. Back then the biggest action was in the OTC market, where a system called SOES (small order execution system) allowed traders to sit in front of a machine and bang away at market makers that might be a little slow or asleep at the switch. You could only use SOES for 1000 shares, but if a news story came out and a trader on that stock at a market maker was in the bathroom, they would get pounded as the market was moving up or down and their market was not being adjusted.

The Markets Changed

In 1999 and 2000 when the tech boom hit the country the nature of trading changed from focusing on New York stocks to the wild wild west of the OTC market. What had been grinding for 1/8's and 1/4's turned into the boom times of trading for 5, 10 and even 20 points at a clip. Four dollar stocks could have moves of $3. The controls and disciplines of cutting losses and timing into trades lost meaning as the bull rally let traders sit with large losses on positions knowing that they would more likely than not get bailed out. Momentum trading became the vogue as we would trade stocks in companies that no one had ever heard of or any idea of what they did or the industry that they were in. Most of these companies had no earnings, some had no sales and had multiples and prices that were impossible to justify. Analysts became famous by falling over each other putting price targets on stocks that they seemed to pull out of the air. One, Henry Blodget, made a huge name for himself in just this way, and fell from grace just as fast. Traders made fortunes during this time, and it looked like it was never going to end. To use a phrase made famous today, this time it was different. But it wasn't.

As the tech bubble cracked, the lack of controls and disciplines in trading would come back to bite many traders, as they were no longer getting bailed out on bad buys. They were just bad buys that kept going lower. The market tanked, and for a while volatility, a traders best friend, was just not there.

What Is The Point Of The Title

I left the business a few years ago, but the goings on the past year or so brought back the memories of volatility, and then some. The VIX which normally fluctuated between 15 and 25 almost hit 90 earlier this year. The financial stocks did their best imitation of the tech stocks, only in reverse as stocks like Bear Stearns and Lehman completely disappeared, Fannie Mae and Freddie Mac fell to under a dollar, AIG is under $2 and the list just goes on and on. Traders have probably had their best year since the tech boom almost 10 years ago, although the economy is in shambles. Is it different this time as well? Time will tell.



Unfortunately for the rest of us, this money made by the few is due to the fact that the global economy and financial systems are riding along the precipice of collapse. At least someone is making money.

The Senate is debating the bailout bill for the auto industry tonight (Thursday), and we may have a vote on Friday. Round and round she goes.



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