“Genius is an infinite capacity for taking pains”. This old quote came to mind today as I was formulating a response to a friend who buys and sells stocks, but who isn’t a professional trader. He is long AAPL, and suggested that the little dip that has occurred in the past few days might be the consequence of tax selling. That didn’t seem particularly plausible to me. Â Since I had just been stopped out of a trade that I managed poorly – yes, it certainly happens, and I know better than to trade when seriously fatigued – I had the time to explore.
Instead of “genius”, let’s substitute “professionalism” while omitting”infinite”. That makes the statement “Professionalism is a capacity for taking pains”, which should perhaps be modified further to read “necessary pains” as in putting in the effort required to arrive at a knowledgeable, well thought out, solid response to a problem. We know that the markets are inherently unfair, and that even the most carefully constructed plans can still lead to losses. By the same token, there will always be some people who, in effect, put all of their money on black six times in a row and emerge winners. Nonetheless, my decades as a professional in capital markets, primarily as a trader on bank FX desks, lead me to believe that people who work hard to succeed, without attempting to cut corners, will generally significantly outperform those who don’t, even if the correlation isn’t a perfect one. It helps, a lot, if people learn under the direction of more senior traders who are good both at what they do, and in training others. I would certainly count Todd Mitchell among that elite group, and he has assembled a terrific team at TradingConcepts, Inc.
But let’s talk about AAPL for a bit. Since reaching a high of 575.14 on Dec 5, the stock has retreated roughly 2.5%. That doesn’t seem like a particularly big deal, but of course it’s a fairly nasty hit in dollar terms, around $15/share. At the same time, the SPX has retreated about 2.1% from its recent high. I then took a look at the Volume Profile for AAPL for the year to date; this is a histogram showing the volume done at each price interval. The area between the yellow lines illustrates the range within which 70% of all volume was executed.
Â This is a fairly busy chart, but the key point is that more than 70% of the volume transacted in AAPL thus far this year was done below 500. With the price currently around 560, that means that a large majority of the shares purchased this year are showing substantial gains. People with taxable accounts don’t sell shares in stocks that are performing well at the end of the year; if anything, they sell early in the New Year, so as to put off the time when taxes have to be paid on the capital gains.
Institutional investors might, however, have other reasons to lighten up on their holdings of AAPL. It may seem surprising, but this has been a tough year for large cap equity managers. There is a growing trend for asset owners (pension plans, sovereign wealth funds, and the like) to cut expenses by managing all but a few types of assets in-house, in many cases by utilizing ETFs. There may be some areas where external managers can add expertise, but there aren’t many secrets for large cap domestic stocks like AAPL. Performance pressure is thus extreme, and managers who fail to match their benchmarks, typically the SPX, are highly likely to find their contracts terminated. With the SPX up 27% for the year, that’s quite a hurdle. Retail investors who get their statements in January and find themselves with gains of 21% after fees might be happy enough, but that won’t be true of institutions.
For those managers who are having a good year, the reality is that next week features the FOMC meeting, with rate and, possibly, tapering announcements due on Wednesday. The following week brings Christmas, and the Â week after that is largely devoted to year-end maneuvers. In short, the year really is just about over, and taking profits, rather than risking a substantial selloff in the wake of the FOMC announcement, might seem the better part of valor. Stocks that have underperformed are likely to be sold in the year’s final week, but now ’tis the season for taking profits on winners.Â
I’ve had a pretty good year, although I haven’t been able to devote full attention to trading. I spent several months writing an FX training curriculum for a large bank; it was an interesting project, and it enabled me to catch up on some aspects of technology and algorithmic trading, in particular, where my knowledge had become outdated. Professionalism requires an ongoing effort; as one of my professors always used to say, it’s a process, not an event. One of Â my annual undertakings is to go through Todd Mitchell’s E-mini trading courses. Any trader, regardless of experience level, can benefit, it seems to me, by looking at solid instructional materials with the benefit of an additional year of practice.Â
The FOMC announcement may be positive, negative, or neutral for the markets. Volatility will likely increase until the event is out of the way, and while I will continue to trade the E-minis utilizing the 3-minute chart, my other activity, selling option spreads, will likely go on the back burner. After Wednesday, the coming holidays should create opportunities to take advantage of time decay by selling weekly options. Parenthetically, I don’t see anything in AAPL’s chart to suggest that it can’t be bought. Something around 544 looks like a promising long entry based on the daily chart, but volatility (implied volatility is currently only in the 20th percentile) is likely to pick up sharply as the holiday quarter’s earnings report (expected around January 22) approaches.Â
I’ve been posting infrequently, but certainly hope that everyone here is thriving personally and professionally. Â As always, please let me know if something here isn’t clear, or needs to be expressed differently. And, as always, best of luck!
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