It’s said that everybody is a genius in a bull market. If that’s still true, we must not be in a bull market (the geniuses are dwindling).
A few days ago, the bull market genius gene by-passed me and put me on a waiting list, but it’s more fun to write about the blunders of others, so we’ll start there (more about my search for the genius gene later).
If you don’t feel like an investing genius all the time, you’ll enjoy these three tales of bad timing (one of them on my expense).
Airlines on Fire
Airline stocks have been on fire. Below is a chart of Delta Air Lines. We have to show an individual airline stock chart, because there are barely any airline mutual funds and no airline ETFs.
In fact, the last airline ETF (Guggenheim Airline ETF – FAA) was closed not too long ago. Since we are talking about timing, bad timing in particular, if you had to point out what month the Guggenheim’s airline ETF got canned, which would it be?
The announcement to close the airline ETF went out on February 19, 2013 (see arrow on chart), just before Delta and other airlines stocks started to soar.
The Pros Get it Wrong
The week of February 5, which is when the S&P 500 (SNP: ^GSPC) bottomed at 1,737, professional investment managers slashed their equity exposure a whopping 50%.
The chart below plots the S&P 500 against the long exposure of money managers polled by NAAIM (National Association of Active Investment Managers).
Their decision to dump stocks around February 5 was the worst timing ever, and it’s not the first time that’s happened. Now it kind of makes sense why some 80% of actively managed mutual funds underperform broad index ETFs like the SPDR S&P 500 ETF (NYSEArca: SPY).
My Worst Trade in Years
I’m a terrible liar, so I’m just going to come out and say it: “I did not expect this week’s rally after seeing Monday’s sell off.”
Unlike the NAAIM Pros, who sold around S&P 1,740, I (as expressed in the Profit Radar Report) expected a strong rally from 1,732, with an initial target at 1,830.
The February 19 Profit Radar Report upgraded the target to 1,870 +/-.
Up until Monday, the forecast played out beautifully, as the S&P 500 topped at 1,868 and dropped 40+ points on Monday.
To make matters worse, I recommended a tiny short position at 1,840 with a stop-loss at 1,851. To add more insult to injury, the S&P 500 gapped past our stop-loss at 1,851 on Tuesday right after the bell.
We already got rid of half this short position at a better price, but are still stuck with the second half and, at this point, the largest paper loss in years.
Our worst loss of all trades in 2013 was 1.01% (compared to an annualized gain of 59%). If it wasn’t for the gap up open, the position would have been closed out for a small 0.5% loss.
What’s the lesson? No matter your track record, the stock market can turn you into a fool (or genius) within a matter of hours.
Why are we still holding on to the second portion of this terrible short trade? Because the S&P 500 is at an inflection point that may bring our short position back into the green.
What and where is the inflection point? Here’s my take:
Is it Too Late to Jump into Stocks? Watch S&P 500 Reaction to This Inflection Point
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.
Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.