Let’s not beat around the bush — the 1st quarter of 2018 is the first quarter in seemingly forever that U.S. stocks actually lost ground. So let’s first talk about the losers. (who starts off with losers?)
Here are the stocks that never really gave us a chance. We got in, and they quickly laughed in our faces, making a fool of HOLLY, but mostly me, your humble author. Nothing worst then being the last buyer before the obvious top or reversal point was in. (“obvious” is always obvious in hindsight only)
If you had entered when we entered and used our standard 20% trailing stop, you basically rode these rides all the way to bitter disappointment. But here’s something I should make sure I remind readers about up front — DO NOT PUT ALL YOUR ASSETS INTO ANY ONE TRADE. This should be obvious, but if you are, it would be a recipe for disaster. We can afford a 20% trailing stop loss because we’re only putting a fraction of our tradable assets into any one trade. A good rule of thumb might be to size your trades such that a full 20% loss on any one stock only represents about 2% of your equity. That will definitely let you sleep at night. Of course, as swing traders, it’s highly unlikely we’ll ever buy the very highest print in a stock before the reversal comes in (though it felt like it with some of these stocks), and therefore your trailing 20% stop loss will likely result in a smaller than 20% loss (and much smaller to your portfolio due to proper position sizing) once it finally kicks you out.
Next up is the stocks that ended up as losers if you held until the 20% trailing stop, but which offered you plenty of opportunity to trade around the position and likely significantly reduce your risk and possibly even lock in some gains. Naturally, this requires some ninja trading skillz on your part and some of us are better at this than others. But the patient Traders among us may consider scaling into trades instead of making one lump sum purchase. Those who buy on a scale down will have a lower average cost when their stop is hit (at the risk of not getting a full position on if it takes off higher), and those who buy in on a scale up will have greater confidence and cushion of open profits as the upward trend takes hold and the position gets bigger (at the cost of a higher average cost per share). And others may be serial profit takers who parcel out small portions of their position at profitable prices and try to buy that same portion back on any natural, short term reversals. Again, none of this is easy and it takes some skill. But nonetheless, the opportunities are there and HOLLY Hot List stocks offer plenty of opportunity to skillfully trade around positions.
And finally, we’ll celebrate the winners. These stocks were home runs pretty much right out of the gate and you’d have to have really exercised some brain-dead position management to not have realized some gains in these plays. These are the stocks we play the game for. The gains in these stocks are large and they are necessary to recoup the many more smaller losses we’ll accumulate along the way as we continue the hunt for more big winners like these. And equally important and not to be under-emphasized — these stocks keep our competitive (and often spiritual) juices flowing.
Final stats for all trades exited in Q1 or still being held in the portfolio as of March 31, 2018:
Average P/L % if held to stop loss: -7.4%
Average Available Alpha (a measure of the possibility to reap gains): +15.6%
Average open P/L: +0.3%
Average available alpha: +9.5%
S&P 500 (Benchmark, as measured by SPX): -1.2%
Max Alpha available in S&P 500: +7.4%