Don’t Waste Time – Chasing Cars (or Trains)

Apologies to Snow Patrol…  I’m constantly reminded of the futility in chasing trains that have already left the station.  Wednesday the S&P finally broke decidedly above the 1,200 mark and the Dow put on another 100 points, closing decidedly above the 11,000 mark.

If measured against a benchmark, it would be nearly impossible to sit this rally out – even now as prices are extended and dangerous, the relative performance manager must participate or risk losing his clients, assets, or even his job. The benefit of being an individual trader is that I don’t have to risk my capital until the opportunity is actually compelling.  In the meantime the opportunity to be relatively uninvolved in the market allows me to allocate time and energy resources to developing better plans for exploiting the next trading theme.

There’s plenty of speculation that significant short covering is now taking place as the market crosses these technically significant lines.  That’s ok, I actually don’t have any short positions on right now so I suppose there is no harm in watching the speculation continue to lift stocks higher and create even more opportunity when the worm actually turns.

I’m continuing to marvel at advances in stocks like Salesforce.com (CRM) which is now up nearly 40% from its pullback in January and is trading for 65 times expected earnings for this year (which look pretty aggressive).  Abercrombie and Fitch Co. (ANF) is up more than 60% since its January lows despite the fact that sales continue to decline on a year-over-year basis.  Sure, there is a good chance that strong spring retail trends will cause the first quarter (ending in April) to show sales increases but shareholders have already baked a strong recovery into the cake.

It seems there is very little room for positive surprises at this point – and all the risk of disappointment – ahh, but that’s been the story for some time now and the excuses are starting to sound a little bit – or more than a little bit – tired…  So does that mean as a trader I was wrong?  Well, yes and no.

There are some trains that are worth catching, and those that are not.  The aggressive / speculative / risk on trade from January could certainly have been a very profitable trip.  Buying June 35 calls on ANF with just 50 basis points of capital could have contributed handily to the fund’s performance and also given me a bit more risk capital to swing the bat on better trades later in the year.

But at the same time, the bull trade in early February was very difficult to jump on.  There would have been no reason to buy in any size in February

more to be continued – just checking some posting details