What to Do When a Friend Asks You What to Buy

I was sitting in the dining room sipping on cabernet watching the girls make fools out of themselves playing “Just Dance” on the Wii in the living room, when one of my friends comes over and asks me about the stock market.

“Are we going down?”

“No one really knows.”

“So, what should I buy.”

… I hate that question.  “Well, I wouldn’t get too excited.  We are stuck in this 400 point channel on the Dow.  You might get tired if you buy here.”

Well, I’m pretty sure you all have had that conversation with an acquaintance.   My advice to you is to not give any advice.  At least, not a specific one.  There’s something about giving stock tips to friends that never work.  Especially now, when the market is so indecisive, it’s hard to openly say, “You must buy AAPL now.  They are coming out with a new phone!”  Or, “Short Priceline, they are so overbought.”  The truth is you may be right, but giving out one tip gets you no where.  Why?   Because let’s say that one tip does come out right, your friend is going to 3 more wrong trades and now he’s messed up.  This always happens.  The reason why is because they aren’t really equipped with the knowledge and emotional control to be a trader.  I know many of you who read iBC definitely have that ability, so it’s easy for us to offer tips to one another because our advice is more like a community screening for stocks, which means after we poll one another we use our basic skills and intuition to take the potential trade to the next stage.  Your every day friend or coworker that asks for a tip more than likely will take everything at face value and jump right in.  Worst case scenario is that the stock tanks, and by correlation, so does your friendship.

So, the next time someone asks you what to buy, do this… 1)  be vague and broad, tell them you like a stock but you are observing it in the context of the market.  2)  Opt instead to talk about the industry and the overall condition of the market.  For example, I told my friend that the market right now is too volatile and that capital preservation is of priority.  It’s kind of like that catch a fish / teach how to fish proverb.  The fact that maybe 9/10 of your friends do not have the ability to short stocks, will probably mean they won’t have the extra ability to hedge a position fast enough, so be careful with telling them to get aggressive during bipolar markets.   Believe me, this market we are in right now can and will move fast on the down side. 

So, why would I bring this topic out?  Well, I always wanted to talk about it because I was getting tired of people bothering me with stock tips on the basketball court, while I’m playing Wii, trying to catch a wave, or laying in the hammock.  I just feel those are my away from the market times and getting away from the market has always been a skill of mine to trade better in the market.  And of course, knowing how to make an intelligent response to a curious friend that wants to invest will actually make you more confident too.  While you are giving advice, you kind of take the role as a teacher and no matter your age, when others start to respect your opinion you feel more confident in your trading ability and you also reinforce good trading practice when you give it to others. 

Now that I got that off my chest, go short PCLN.

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Hello every buddy.  FINALLY I’m back.  Sorry I had to take off so suddenly.  I had to drop everything and take care of an emergency.  Real stupid stuff.  Timing for me is unopportune on these things… everytime I get caught up in something that pulls me away from work, the market is finally going my way, although the way is still narrow.  The trick here for me is staying the course.  Isn’t that weird though?  I’m sure this happens to a lot of you:  You are forcefully pulled from your trading desk for a few weeks, then you come back and you’ve noticed you’ve outperformed yourself over that period versus the times you over-analyzed things.

Okay, now for some over-analyzing… I’ve already counted at least 3 significant relief rallies within 3 months nicely spaced out, which to make a long market story short, means the market is getting weaker.  What I was taught from my mentor that was difficult to accept, was that sometimes rallies are signs of weakness.  What a paradox.  But it makes sense if you broaden your trading horizon.  Look at where we are right now… barely above 10k on the Dow.  And we’ve had rallies from 10 to 10,600 back to 10, back to 10,600… it’s a market treadmill, and if you’ve been trading within this range you are getting tired, and in that sense too many rallies can be a bad thing.  It’s like sprinting too many times in a long distance race.  This is a timer’s market, and if you don’t have that skill then keep your positions small.  Over the years I’ve used the VIX to time the market quite well, but had to dump it for a few months because the market was totally screwed up, I can’t really explain it without writing a novel.  The good news is that the VIX is back to becoming a very reliable indicator in market’s that require precise timing.  I hope to share it more often because it can really step up your game.  Right now the VIX is gradually heading to 30, which kind of tipped me over to the short side.   It still has a way to go sitting at 26.70.   So exciting!

Anyway I’m getting a billion phone calls so I have to run away to Star Bucks or Borders for a while.  I tell you, I just want to move to East Asia where no one knows me, trade stocks in the late afternoon, play around until the sun goes down into the ocean, then play around some more, that kind of stuff.  Instead, I’m stuck in Hawaii.  Crap.

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After watching PCLN tear up the market, I couldn’t help but look for a more aggressive play within a related industry.  My theory is that any big price movement in PCLN from here on will generate bigger moves in related stocks.  In other words, the industry is back, and so I turn to somewhere aggressive…. China!

ZNH – China Southern Airlines Company

This “quiet stock” has been a favorite one to trade both long and short here on IBC.  I remember getting long this in the single digits back in 09 with Ragin, but we took it off the table to trade something more exciting, like GMCR.   It was a good move I guess, but if we held on, then ZNH would have more than doubled our investment.  I never thought ZNH would be a good “investment”, but I understood it to be a good trading stock.  Now it sits right about $22, up  about 175% in a few months without even trying.  A good lesson learned.

The pertinent question now is, do we buy or short ZNH right here?  Two long-term charts tell two totally different stories.  I’m not big on technicals, but ZNH right here is at a very important point.   

1 year:

5-year (looks like crap)

 I’ve been staring at the the price-volume pattern of ZNH over 1-year versus 5-years and there’s no reason why it can’t double again from here.  But the confusing thing is that with a market cap of 3Bil the average daily volume is only 25k.  This is fishy, and is usually a red flag for short sellers to attack.

 Would you buy or sell here?   I say sell, but I’m going to buy and watch this stock gain another 25%.   Chinese bears don’t know how to time anything.

Finally, it looks like PCLN is in the beginning of another breakout…

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I guess that’s the problem with shorting the market.  You tend to get all backwards in everything in life.  For example, I laugh at the despair of my friends, naturally they become my enemies.  I’m envious of the success of my companion, inevitably we depart.  Watching Tiger Woods missing puts entertains me.  I saw an old man jogging trip and fall, it brought me great joy.  Things burning excites me.  It’s raining right now and I’m loving it, but I’m hoping it will rain harder on the weekend because I know it will be someone’s dream wedding.

So of course, when the Nasdaq is down -3%, and the Dow is down -200 points, the world’s panic is my elation.  My only regret is that it isn’t down harder.  That goes the same for my individual short setups.  I’m left with some tricky decisions…

Do we add more shorts here?  Do I scoop up a bargain?  The answer to both questions is no.   We sit tight.  We watch this market screw us all a little bit, but staying in the game long enough will reward both sides.  My side more than theirs.  Because the real winners are neither long or short, but keep their cool and laugh at everyone else.  This is the stock market people… look a little closer, release your dark side, or we will take your money.

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Now that I’m addicted to PriceLine the stock (PCLN), I was going through my notes and previous post on trading this stock.  Turns out my call on a short-squeeze in May was a great trigger point and learning .  This is an old chart I put up, but the formula or principle is still there:

1)  notice the sharp 80 point drop in less than one month.  Obviously you need a “sharp decline” to start the squeeze.

2)  volume check shows there was some panic selling, but since there was only one large red bar I would lean more toward “profit-taking.”

3)  Buying check after support-  notice the steady buying after PCLN hits support at 180.  Good old fashion whole number.  Just by eye-balling it, that support looks like a long term trend line, I’m guessing 90-day?

4)  Timing-  the spark that starts the rally most often occurs during big news events, like earnings.  In this case, it was surprise earnings.  This would have been a perfect spot for an options strangle play!  Anyway, here comes the volume.

End result….

Now go bank some coin.

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This Guy is Rich

Wow, Trekky.  Not hating, just saying… this is CROX 2009, HANS 2008.  High growth companies, heavily shorted, but surprises on earnings after earnings.

Priceline claims to have a competitive advantage over Expedia and Orbitz in the emerging market areas.  While that may be a way for you to look left, Priceline’s real domination is at home.  But even their CEO likes to water it down by acknowledging that a decline in the economy in Europe and a possible recession in America would significantly affect their earnings.  Hence the heavy shorting.  But, this has been the same story over and over.  A CEO that promises little, an economy that looks so gloomy, especially for an industry like the airlines… enter the short selling.  PCLN will be a nice short-squeeze study for new investors.  Can you point out the buy points?

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