Stock Picking, It’s Mental

Time to talk about trimming again

Before we get to the main subject, I want to once again say it's time to start the process of trimming. Over the last few weeks, I expect that the lot of you have spent down most if not all of your cash hoard. At this point, if you are following along, you should be looking ahead to the Fed meeting. There might be bumps along the way too since this week marks the beginning of earnings season.

The Fed meeting is fixing to transfix the market from here on. The idea that if the market does not get the quarter-point cut all hell will break loose is the current narrative. Larry Kudlow was just quoted as stating that Powell "Should take back the December hike." As if that is all that there is, to quote the President, that prevents the "economy from taking off like a rocket ship." This is revisionist thinking, the market tanked and the economy wobbled because Powell said he was going to continue raising. If he would have said one and done, we would have been okay, IMHO.

That all said, it is very likely that whatever Powell does do on July 31, it's going to result in a sell-off. Why, might you ask if the market gets what it wants, would it sell? There are a few rules of the road in stock trading that is as close to a physical law as "Buy on the rumor sell on the fact." We are all buying in anticipation of this glorious news, the Fed is cutting! All is well! Buy, Buy, Buy! Everyone that believes that the cut will be sublime will have already be "All In" stocks by July 31.

The first cut is the deepest

So once there is a cut, out comes the second-guessing, why did the Fed cut, and why is there talk of more cuts? Look at the PMIs around the world and here in the US, they're bad. Recession! Recession! Recession! Oh, look at the flattened yield curve and what about that China trade war. Everyone knows that it's just a truce. On and on, on and on. Once Powell cuts, it will be the first cut in years, that has got to mean something more than an "insurance cut", or whatever nonsense they want to call it.

The media loves to scare everyone, and on top of that, there is the "Crash Committee" that gets trotted out every time. No matter that they are never right, or that they were right 12 years ago so let's have them come out again and tell us why the banks are about to fail. Scare people to get ad dollars, that is a natural fact.

Wait I am getting ahead of myself. Just let's start looking to trim some of our good gains. To me, trimming means 3% of a position, maybe 5% as we get closer to the end of the month. Trim a few times this week to start. We will add frequency later in the month. Our goal will be to once again build cash 25% to 35% of our trading account.

Stock Picking, It's Mental!

Stock picking, investing and trading has a strong psychological component. We should acknowledge that, like any endeavor that invites high performance, if you want to be at the top of your game, you need to be self-aware. I bet that a lot of high-performing traders are doing this without knowing they are. They probably would think when reading this that this is overthinking the act of making investment decisions, but would express it in more colorful language. When pressed, I am sure that they would agree that they listen to their gut, or follow certain rules of thumb that have served them well in the past. Like, close out an option once it's lost 50% or more of its value no matter what, that sort of rule. What does it mean, it means that no matter how sure you are that the underlying stock is going to go up or down, you have to cut your losses. This eliminates the emotional component, don't wait until that option turns into zero because you have a connection to that position.

Emotion plays a good role in investment decisions. You need a certain level of confidence to make a trade, speculation or investment and conviction to stay with it (up to a point), that's the good that emotion does. What emotion does the rest of the time in trading is not so good. How many times do we fall in love with a position because it is a stock that no one has heard of but you think it's the bee's knees? How many times have we stayed with a name because it was a winner for years (hello IBM (NYSE:IBM), Kodak (NYSE:KODK), Xerox (NYSE:XRX)) that you could rely on? How many times were there stocks that you hated because they were out of touch that you were missing the turnaround (Oracle)? The key here is the depth of emotion, are stocks really something we love? Is Tesla (NASDAQ:TSLA) the stock to hate?

I wrote about Tesla a few times last week, and the passion, vitriol, and accusations were flying! I guess I shouldn't be surprised by that. Sure, Musk is a character that can be loved or hated, but the stock? It's a piece of paper. Trade it, don't trade it, short it, long it, but love it? Or hate it, and anyone who wants to make a trade in it? That is going to cost you, people. Don't be that guy/gal, check your emotional quotients or you are going to lose at trading and investing. That's all I care about with you my loyal readers is to help you get Alpha. Emotions can and do get in the way, check them.

Checking Myself

Let me come back to checking ourselves and I have to submit that I detect some emotional baggage in my own assertion that Powell will not cut at the next meeting. This is different than "loving" a stock position, but not so much different. I enjoy being contrarian, probably because being a contrarian works out a lot of the time. I also firmly believe that it's the right thing to do.

Let me make the case for you; I have said before that I believe the market will bounce back in the second half of the year. The reasoning is simple, we had an above 3% growth in the first quarter. That is as rare as hen's teeth. The 1st Quarter exhibits a strange anomaly that nearly always is the worst quarter of the year. The answer to why it was so good in spite of its track record is simple - with the threat of the tariff war, everyone double, triple ordered. In Q2 we will have the working off of that forward demand pull and then we will resume normal growth at the back half. That is why the consumer is doing fine and services catering to the US consumer is doing fine and industries that cater domestically are doing fine, why US auto sales are still about 17.2 million, etc.

On top of that, why the hell are we lowering rates? Is it because the stock market is having a tantrum? In this kind of economic climate when all anyone can come up with is that this is an "Insurance Cut"? Really? The consumer is about 70% of our economy and we are doing just fine thank you very much. Powell is not in charge of making it easy for Wall Street, his job is to make it easy for Main Street, the little guy out there. Are we really going to start cutting rates that will affect their savings accounts again? The Fed Mandate is stable prices, is raising rates then lowering rates in less than 8 months adding stability? I think not. Mortgage rates are already low if we lower them to more artificial levels will the banks lend out more mortgages? Or will the risk end up being higher than the reward? It looks great on paper to have a mortgage under 4%, but what happens if you can't get that mortgage?

Powell should also defend the honor of the Fed by standing pat because the Dollar is a fiat currency. If people lose faith in the dollar, that will be very bad for all of us on this planet right now. Before you scoff, look at Gold, look at Bitcoin, there are all sorts of reasons why they are flying and perhaps in a small part, it's due to someone (ahem) trashing the Fed. I hope Powell checks his emotions too and on July 31 does the right thing, whatever that right thing is.

For me, I stay with the position of him not cutting but romancing the market with, "I will cut soon, maybe September, or December if the market needs it. I don't see the economy needing it now." Then there will be a smaller sell-off and back to the rally we go. I still have several weeks to take the market's temperature and the economy's, and if I am wrong, I will reset. Until then, I stay with my conviction.

Relax Long Term Investors

At this point, I want all long-term investors to recognize that this issue has little to do with them. Yes, you do add a new stock or ETF to your long term investment portfolio but it's relatively rare, perhaps once every 2 months or less, and even rarer to eliminate or hold a position. You only need to time your monthly allocations, if at all. If you are a long term investor and you are starting to get into speculation or trading, let me once again urge you to create a separate account for such an activity. This is because I strongly believe that you need a psychological separation from the two activities. They are very different from each other and I am concerned that you might start to trade what should be your long term investments.

In many ways, long-term investing is superior to trading, especially when most of you are not really all that great at it. Just like not many of you are a Pete Sampras in his day, or even on his worst day now. And how many of us approach the golf game of the worst pro on tour or even any of the caddies? Let's approach the act of speculation with that kind of humility and we won't get too burned and maybe we make some coin and have a ton of fun while we are at it. All you need to do is be right some of the time and not allow our emotions to get in the way of the times that we aren't right. That is what I mean by mental.

Check yourself, ask yourself why is it so difficult to trim a position that I am losing money on, especially the one that I got into when I told myself that it was only going to be a trade. Ask yourself why am I even trading today, am I bored, is it just habit, am I addicted to the rush of buying? If after a moment, the answer is yes - and let's face it, the answer IS YES many times - then we are letting emotion get in the way of good trading hygiene, take a breath. It's easy for me to say wise up, look I am just going to say I am guilty as charged. The first step is recognizing there is a problem. Let's all resolve to check ourselves especially when we are so sure of ourselves and what we believe.

Earnings Calendar

Over Earnings Season, I will give a list of companies that I think are significant on Sunday for the week. As a general rule, I want you to trim, reduce or hedge a position that is going into earnings. Most of the time high beta names that we favor sell off after the earnings report for a number of reasons. Most of the time, it's because the analyst projections are too rosy for comfort so the CFO lowers the forward guidance, or analysts want to make a name for themselves so they find something to nitpick. You will hear this again and again from me, I don't like being fully invested going into a binary event. That is gambling, that is something we want to avoid. So reduce risk on binary events, including the Fed meeting got it?

This Week

July 9


Levi Strauss (NYSE:LEVI)


July 11

Delta Air (NYSE:DAL)

Fastenal (NASDAQ:FAST)

I grant you that the current calendar is slim but as we get deeper into earnings, you'll want to check to see if your stocks are reporting. Tomorrow morning we talk about stock news and trades and trimming like it is back to normal.