Art of Trading, Fun of Trading

In the stock market, there are basically two types of players making the daily market movements: investing vs trading. For investing, we are basically talking about long-term investment, which is primarily driven by the fundamentals of the underlying stocks. For trading, it is more of speculation of the short-term movement of stocks and is often nothing to do with the fundamentals but rather the technical setup or sentiments for the stocks. Trading can be in hours, days or weeks with a quick turnaround but investing is typically in at least months or often in years. Personally I’m doing both with my core positions for value quality stocks for long-term investment but at the same time using the technical analysis to do active trading, aiming for quick profits. After many years in the market with active trading, I can summarize the following four levels of satisfaction based on the results of trading. Needless to say, if I’m wrong and lose money for a trade, I feel sad but I always try to learn something from my failure. Below is more of how I will feel when I’m right and making money from trading.

Level 1: Go with the crowd.  This is the basic level of satisfaction that I make money when everyone else is also making money. In other words, I get my trade right for a trend when everyone else is also seeing. Yes, I’m happy but I don’t get too much sense of rewarding with this kind of winning.

Level 2: Make money against the herd.  I get a better sense of rewarding when I trade for an idea that not many people see it. As I said, I’m basically a contrarian against herd and I often see and do something different from most of others in the market. Believe or not, I’m often right and making money by being a contrarian, which gives me quite good satisfaction.

Level 3: Still make money when wrong.  While it is great that I make money when I’m right with an idea, I’m sure you can understand that I will be much happier when I can still make money even when I’m wrong on an idea. This sounds crazy and not believable to many people but believe or not, it is not uncommon that I made money even the stock moved in a different direction from what I was expecting. In options there are different strategies that may make this happen and one typical strategy is to use naked puts to bet for a stock to go up. But with naked puts, you don’t need to be absolutely right for making money. All you need is to bet that the stock won’t drop too much from where you are betting on. In other words, you can make money when the stock is moving up, is staying where it is or even it is moving down a bit, as long as it is not declining too much. Now think about how you will feel when you still make money when you think the stock will go up but it is actually going down? I feel great when this happens and truly get a much bigger sense of rewarding! Just a caveat for those who know how to do naked puts. This is not for everyone and definitely not for any stocks. If not setting it up right, you may lose a lot of money with naked puts. In theory, naked puts have a limited upside but have an almost unlimited downside. Don’t play with it if you don’t know what you are doing with it!!

Level 4: Turn losers into winners.  This is the highest level of satisfaction for me when I’m totally wrong with a trade from the very beginning and all along but I can turn the trade around and eventually turn the loss into profit. This is not something easy obviously but it has been working very well for me to save some of my wrong bets that would have otherwise hopelessly lost money. Again, with options this is possible and you can imagine how much rewarding I will get from this kind of results. Of course, I’m not saying I can do this for all the losing positions and all the time. It is simply not possible and I’d be a big liar if I’m leaving you with this impression. But with sufficient time available and right setup for a stock/option, it is indeed possible to turn a loser to winner without involving additional risks. Now think about it: for any traders, wrong ideas with losing positions are inevitable and are part of trading. For professional traders, it would be considered hugely successful if they can make 50% of trading ideas right. Of course I have to accept I will have many losers for my trading. But if I can turn portion of my losers into winners, I may substantially enhance my overall return. After all, trading is about making money regardless if your idea is right or wrong!!

This is a great strategy working well for me and I’m continuing to perfect it.  I think this is something with which I can set up a business for me for a win-win situation: I can diagnose someone’s portfolio for the losing positions and if possible, come up with a personalized salvage plan to help him/her to minimize the loss and in return of course I can also get some reward.

As you can see, trading or investing is not simply about making money for me; rather it has become a self-rewarding process that I really enjoy and have passion about!

An unconventional idea to invest in high-techs

I’m pretty sure not many people, if any, would even think about this idea as a way to put money for the bull trend of high-techs. When we talk about high-tech investment, we certainly first think about companies that are producing endless new ideas involving all kinds of fancy gadgets, creative social media, Internet of Things etc. Or at least those traditional big caps in high-techs such as Intel, Microsoft, Cisco etc. Yes, nothing wrong to look into those individual stocks for this megatrend. But what people often don’t realize is the countries or regions that provide manufacturing capabilities at low costs. You may think about South Korea, or Taiwan or China? Nope! You are already outdated if you think so. The manufacturing center for low labor costs has already quietly shifted in general to Vietnam, and the world’s next big center for semiconductor production will be in Ho Chi Minh City (HCM), the capital of Vietnam. Similar to what China was doing 30 years ago, Vietnam has set up a H-Tech special zone near HCM, called Saigon H-Tech Parks. Intel has established one of its major production plants there, which produces CPUs for 80% of the world’s new PCs. This is just one example and more of such high-tech manufacturing centers will be set up now and in the next few years. As such, Vietnam is on the map for high-tech investment, an unconventional way that not many people can even think about. The thing is you will need to pay a quite deal premium for individual high-tech stocks but since Vietnam is still largely under the radar screen for general investors, their stocks are still cheap. With ETFs, you now have a simple way to put money into the Vietnam stock market. The Market Vectors Vietnam ETF ( VNM) is the one you may consider.
Of course, what I’m talking here is not for short-term trading but rather for long-term investment. And for sure it will be volatile with a lot of up and down fluctuations. So don’t establish your position just with one buying. The best strategy is to use the dollar cost averaging method to buy some initially to get your foot in and buy more when it declines over time. Over the long run, I’m pretty confident this will be a great investment with a huge profit potential.

Which one is better, Walmart or Costco?

Following my post on WMT, I was asked to comment which one is better, Walmart or Costco (COST). First of all, I have to say as a business, I like both. WMT is of course a big brother of over 40 years old. Costco is much younger, only about 20 years in business. They target very different retail population: WMT for poor people and COST for more affluent people, relatively speaking.  So if we have to compare these 2 businesses, we first need to understand how these 2 populations are different in their shopping behaviors. Here is what I'm thinking. The fundamental difference between the poor and the rich is the freedom of choice. For the rich people, they have a lot of flexibility in deciding buying or not buying. Many people judge whether someone is rich based on what he/she owns. This is often not right. People can own a lot of things but are quite poor. This is especially true in the US as American love to borrow for sake of owning things. Actually real rich people do not necessarily own a lot of things but they can certainly afford to buy if they choose to do so. This difference may not be so clear during the good economic period but becomes strikingly clear when the economy is struggling.  If we can understand this fundamental difference, it will be much easier to understand how the economic cycles will impact on WMT vs COST. WMT will have much less negative impact by the bad economic situations and its business is generally more stable throughout good or bad economies. Why so? Well, this is because WMT targets poorer people for whom they have much less choices. They need to buy the basic living stuff regardless it is in good or bad economic situations. This is not necessarily true for COST. Affluent people tend to buy more when they are economically doing well but will cut down their expenditure during the poor economic conditions. Further more, many of them may choose to go to Walmart to save money when their incomes decline. So we can obviously expect WMT should be doing much better than COST when the economy turns down to the hill. Since we have just gone through the financial crisis not long ago, we can simply verify this by comparing how WMT vs COST did during 2008/2009. As you can see below, WMT indeed did much better than COST during that devastating period!

In addition to the general comparison, I also feel more secured by the rather strong track record of the 4 decades of dividend increases for WMT but for COST we only have got about 11 years of history. Finally, the valuation is the most critical factor to determine whether I want to buy a stock for long term. At the current price, COST is definitely not cheap but WMT is quite reasonably priced at the moment. Regardless how great a business is, if you buy at a rich price, you may still lose money in the long run. By now, I guess you may guess which one I'm more in favor of right now. Yes, Walmart!

This world giant retailer is in a sweet spot

I guess I don't need to talk too much about Walmart (WMT), the world largest retailer. It is a great and dominating business that has been very successful in the past several decades and it has been treating investors really well, although it is also one of the most hated companies. It gushes out a lot of money and pays investors with increasing dividends for years. In average, its dividends grow over 20% annually. This kind of stock can indeed make you really rich as long as you are patient and keep going with it for long. Now, WMT is in a sweet spot from the valuation and technical perspectives. No question that WMT is facing a lot of challenges, most notably the e-commerce with fast growing on-line shopping. The dollar stores are also a big challenge for it. But the thing is you won't get any chance to buy it cheap if a great company is doing everything great. The significant difficulties WMT faces have brought down its share price quite a lot recently and at the moment it is sitting right at its long-term strong support line.

While WMT is a bit struggling right now, I really don't worry about it in the long run. It will try its best to adapt to the new business environment and survive well. The recent 2 moves by WMT has further convinced me that it will overcome the challenges successfully: WMT is introducing a $50 per year service for unlimited online delivery that will directly compete with Amazon; and WMT is teaming up with Alibaba for its online business.

As a sidebar consideration, WMT will likely fare much better than other stocks if the market goes down in a severe correction, which is what I'm expecting for some time now. The best example is to look at what WMT did during the financial crisis in 2008/2009. When the whole market was crashing like a hell, WMT was among a very few that were doing quite well. This is the stock people will rush into as a safe heaven when in panic. I feel good about WMT at this price.

A once in a century day!

Not sure if you realize that today is a very special day, a day occurring in less than once in 100 years: 15-5-15-5. Today is May 15, 2015 on Friday. For traders, today is even more special as it is an option expiration day. So I want to say something to leave a record in my blog. Since this blog is about investing and trading, let me share with you something about option on the option expiration day. I’m active to trade with options and every option expiration day (the 3rd Friday of each month) is usually my pay day. Why so? Because I usually have several options for income in works each month and more often than not I’m simply collecting money on the 3rd Friday every month when my options expire. On this special day, let me talk about what I’m getting from my most loved stock, MSFT.

As I said many times, MSFT is one of my most loved stocks for long-term. I not only enjoy its long-term earning potential via its fast growing dividends and share price gain, I also frequently trade it for incomes. You see, regardless how great a stock is, it will have good days and bad days. Its share prices will fluctuate, which sometimes could be in extremes. No immunity for MSFT! We have a perfect example recently. About 3 weeks ago, MSFT jumped from low $40s to almost $50 in just 2 days. This kind of 10% move for the size of MSFT is very unusual and as I said, it was often the result of short squeeze. When a stock at this kind of extreme overbought status, it is almost inevitable that it will have to come down first before marching higher again. So I placed deep-in-the-money cover calls against my existing shares for income purpose. For sure as you can see below, MSFT declined soon from $49 to $46 within a few days. So my covered calls have gained almost dollar for dollar accordingly. But this kind of downward move was also too fast too much for me. Although I think MSFT has still more room to go down, in the immediate next few days, I was betting it would go up a bit first instead of going down straight. Since I didn’t want to give up what I had already got in paper from the covered calls if MSFT turned around, I made another income trade: selling put options for a strike $47 expiring today May 15. Well, definitely it was a right trade. MSFT closed above $48 today and my put options expired worthless, meaning I pocked in all the premium for the trade.

While trading is not for anyone, it is a very powerful way to make money from the stock market. The key is to know what and how you play with trading. If you use trading blindly as gambling, most likely you will lose money and FAST! But if you do have a sound knowledge and discipline, and armed by good strategy and technical analysis, trading could be rather lucrative and profitable.

Happy Centurial Day!

Go with regional banks

Regional banks are breaking out through its trading box, to the upside! As you can see from the ETF for regional banks (KBE), it has been trading sideways for over a year now between $30-34. In other words, it has been confined in a trading box but now it is showing up its head above the box. Technically it is significant as it is often the early sign that the trend is changing and a new uptrend may be starting. I think what’s going on in the macroeconomy dose support this move. You see, fundamentally regional banks are much more sound and stronger than the big banks as they are more disciplined in focusing on the actual banking business and much less involved in the fancy stuff like derivatives or subprime mortgage that had almost wiped out the big boys. Now it becomes more and more likely that the Fed will start to raise the short-term interest rates in the not too long future. This will certainly benefit very much the banks in general and of course the regional banks as well. I think this breakout is the way the market is telling us that regional banks will be running higher from here.  Of course, no trend will start straight-line without volatility. And also we cannot completely rule out the possibility that this is just a false breakout although I do believe the regional bank sector is ready to move up.

Oil is unlikely to simply jump high from here

I talked about an idea to play with declining oil prices via the oil storage company, NS and it has worked out well. Hopefully you have already made some money from it. But if you missed it, here may come another opportunity.

Oil has likely hit its bottom around low $40 and in the past couple of weeks, it has rather impressively strengthened to go briefly over $60. But I highly doubt it will simply go up from here to return to the previous highs like $80 or $90. You see, the US still producing too much oil due to the revolutionary new drilling technology, fracking but the demand has been decreasing not increasing due to worldwide weakening of the economy. Yes, the number of active rigs for drilling has been substantially reduced in the past half a year or so but not to the level that has greatly impacted on the reduction of oil produced. In other words, we haven’t seen enough blood in the streets that will trigger a turnaround for the oil sector. This day for sure will come but I don’t think it has knocked on our door at the moment. So my gut feeling is that we will still see chopping fluctuations of oil prices for a while for the moment between $40-60, and for the moment it is more likely that oil may go down from here around $60. If this thesis is correct, which sector will benefit most? See the chart below. Can you see that in the past 3 months when the oil price has crashed and fluctuated, the oil refinery company, Valero (VLO), has moved almost in a perfect inverse relationship? For refineries, their business thrive when they can buy the crude oil cheap because they can get more profit margin from their final product, gasoline, due to reduced costs. So VLO (blue) went up when the crude oil (red) plummeted but declined when the crude oil strengthened. Now if the crude oil is going to come down again as I expect, VLO will likely be doing well. Of course, this is not for a long-term play but more for a short-term trading sensitive to the oil price. Trade accordingly.

An interesting HCV player that may be taken over

I guess everyone knows how hot the hepatitis C (HCV) area is. After a huge success of Gilead to launch the first HCV drug that can cure the disease, the gold hunting for other HCV drugs has never been so fierce and strong. You see, HCV affects 3.2 million people in the United States alone and the market for hepatitis C drugs hit $15 billion last year and it is estimated to increase 50% to $22 billion by the end of 2017. Needless to say, if you have a drug for HCV, you hold a gold mine, sort of speaking. Right now, Gilead, Abbott, and Merck are the leading companies that have HCV drugs approved in the market. But so far, these drugs require 12 weeks of treatment with a huge price tag. If new drugs can shorten the treatment duration with similar efficacy, I’m sure it will be a great advantage in terms of marketing. So here comes my today’s idea.

 Achillion Pharmaceuticals (ACHN) is a clinical stage biotech focusing on HCV. Its lead product, ACH-3102, has been tested in combo with Sovaldi from Gilead and it appears to be effective for a quick cure among a small group of hepatitis C patients. More excitingly, the combo regimen only required six weeks of treatment. With this kind of potentially big drug in hands, I figure ACHN is among one of the active targets for those companies looking for entering this hot area or enhancing their existing HCV franchise. Now the odds for ACHN becomes even bigger at the moment. Why? Well, ACHN is much cheaper now than a quarter ago. You see, as a small biotech still burning cash, ACHN requires money. One often used approach is to raise money from the stock market by selling additional shares. That is exactly what ACHN did in Feb by issuing additional shares in a secondary offering worth more than $132 million. This of course significantly diluted the value of the existing stocks and the stock fell almost 40%. This is bad news for the existing shareholders but great news for potential buyers. They can now buy it at a much affordable price tag as the company only has a market cap of $1.1 billion. Buying ACHN now around $9 is a good bet for a potential merger I think. If it happens, your shares may jump 50-100% overnight in values. Of course, I have no crystal ball and there is no guarantee as it is a pure speculation.

Predict cancers with 100% accuracy?

There is exciting new findings that suggests cancers can be predicted 13 years in advance with 100% accuracy. Of course there is a long way to go first to  further verify this finding and then to apply this breakthrough in real life. I’m sure there will be fierce competition in race to become the first one(s) to identify and develop the biomarkers associated with this phenomenon. And there may be great opportunities to invest in this big  idea if it is materialized.

Enjoy higher dividends from EU SmallCaps

Over 2 years ago, I recommended to buy Japanese stocks, especially those small caps given the new QE programs engineered by Abe. Well, it has paid off very well as the JP stocks have broken out through its 15 years downward trend recently. Those who bought DFJ have enjoyed even more gains from capital gains plus high dividends.

Now you should consider the same strategy for the EU stocks. Since Draghi opened the spigot of QEs in EU, the EU stocks have notably marched high. There will be much more gain to come as long as the QE momentum is in place. You may play with this trend via FEZ or HEDJ but you can also consider to follow the path as for the JP stocks by buying DFE,  WisdomTree Europe SmallCap Dividend ETF. You see, when the trend is up, you generally get more from small caps and dividend paying stocks are doing even better in general. The chart below can demonstrate this point by comparing DFE vs FEZ. DFE (in red) has more than doubled the return of FEZ in the past 5 years.

How to turn a loss to gains

It is no secret that I love MSFT and very much!! I cannot remember how many times I have talked about it here. MSFT is truly my darling as it has let me make reliable and consistent gains and incomes over years. Needless to say, when people hate it and dump its shares, I’m the buyer. I can hardly lose money by collecting MSFT shares during panic sales. The most recent experience just a few weeks ago was interesting as I initially had significant paper loss but I eventually turned it to notable gains. Thought to share with you how I did it.

Since peaked around $50 end of last year, MSFT had entered into a notable downtrend. It dropped to as low as $40 in the past few months. As I said, when people dislike MSFT and are selling, I’m buying and I  was actually aggressively buying  when it started to go down below $45. I used call options to do so. Here is the first trick how to play with options. Unless you are very savvy with options, it is very difficult to make money with out of money options. Statistically over 70% of chances options will expire worthless. With this in mind, I generally buy deep-in-the-money options for those I don’t mind to own if I’m wrong. This was exactly how I played with MSFT calls. I bought March $40 calls when it was around $45. Unfortunately my timing was off as MSFT continued to go down and in Mar it plunged to close to $40 for a short while. Well, when my March call options expired Mar 20, I could choose to close my calls to take the big loss (almost $4/share). But I sticked to my strong belief in MSFT and I excised my calls by buying MSFT at $40. My paper loss obviously did not go away as I still had $4/share loss in my account with now holding my MSFT stocks.  Then came with the April 20 earnings report and MSFT surprised everyone (except me of course) that it was doing much better than expected. Its stock shot up by 10% the next day and is now trading around $49 as I’m writing. Well, this magnitude of rally in one day for this size of the company is usually a result of short squeeze as apparently there was too much short interest floating around before the earnings call and people had to rush to cover their shorts when they were caught up by surprise. Now actually I feel MSFT is in a short-term extreme overbought condition at a nose-bleeding level. I don’t want to give up my nice sizable gains I have got. So I’m now selling calls against my existing stock shares. In addition, I’m even sell short MSFT stock naked. It’s obviously very risky but I’m so convinced that MSFT has to “crash” first before being able to go up again, I’m willing to take the risk.  So here are two takeaway messages:

·    Don’t play with out of money call options lightly unless you really know what you are doing

• For long term great stocks that you want to own, stick to your plan and don’t give up easily.

Remember this: When you buy good stocks at good prices, good things will happen!!