Writing this column is helpful to me in many ways, but one thing now clear to me is writing this column makes me look more deeply at my trading. The current example is my trade with SBUX. Yesterday, I said, “And then, boom, the unexpected poor rating arrived, erasing a good portion of my gains.” Yesterday, I believed that the reason for the sudden drop in price was the rating downgrade, and, frankly, it irritated me, as you might have guessed.
Anyway, after writing about it, I decided to do some work around it. I wanted to know if, in fact, the rating downgrade really was the reason for the drop. What I found out is this – on the surface, the rating change did cause the price drop, but looking a bit deeper, I can now see why, and the reason is much larger in scope.
When trading, one has to keep in mind so many variables, particularly those that relate to the big picture. As you know, I preach all the time that you must understand the big picture to be successful at trading. Yet, understanding the big picture can be burdensome; it requires some effort, as so many things influence the big picture.
One of those influences is the general sensibility of professional money managers (PMs). This industry includes mutual fund managers, hedge fund managers, investment-bank portfolio managers, etc. The point is this profession has A LOT of influence over the markets.
Simply, PMs have a responsibility to make money for their clients. If they don’t provide a decent return on investment (ROI) for their clients, they will lose their clients. Now, to make a decent return, they must book profits on a regular basis, quarter to quarter to be precise. What happened to both SBUX and the market in general yesterday (and today for that matter) is profit taking in the markets. As we approach the end of March, PMs are looking for any reason to book profits. Yesterday, the Greece debt issue, housing data, and the continued rally in the markets all provided reasons for taking profit. The downgrade for SBUX provided a reason to sell, especially since, like the overall bull rally, SBUX has enjoyed a nice run up for some time now, so my guess is there is lots of profit to book.
So what does understanding this do for my trade? Well, it reinforces my decision not to panic, to sit tight, and to let the market settle. It surely will, as the good news is coming more frequently now, and as it does, the PMs will sell to book profit, but, and more importantly for my trade, as the new quarter begins, PMs will buy strong stocks that are undervalued. In my book, this means be patient and let the market do its own work.
Trade in the day; invest in your life …
