Friday, January 13, 2006
Strategies and Marketz : I luv Momos Part I
It really pays to know who your fellow investors are ; especially when you are invested in that stock/sector. Are they deep value guys who are going to patiently stick around for a long while or are they of the day-trading variety ?
As an active trader and as somebody who loves using options to amplify leverage, I want to be in sectors/stocks/ETFs where sharp short term moves occur and yet, where some underlying trends persist, thus allowing for a coherent basis to speculation.
That means the stocks that very so gently rise a percent or two a month with no sharp moves are not the ones I would trade speculatively. But it also means I hate the NMGCs and TASRs of the world. Sure, these stocks have plenty of sharp short-term moves but their occurrence is too chaotic for me. Those stocks and the many other stocks like them (and some ETFs too) belong in the realm of the super-day-traders.
The sweet spot for me is to identify sectors where
i) Clear trends are evident
ii) Volatility is high
iii) Liquidity is high
iv) Transaction volume (in terms of dollars and shares) is high
Basically, I'm looking for sectors/stocks/ETFs where momentum chasing funds have a huge position.
The market may not be a zero sum game, but it is not too far from it either. Stealing from other short-term traders is a futile exercise for a small or medium sized speculator. The only way (IMHO) to consistently make money is to siphon off cash from an arena where the Big Boyz play. Where the daily churn is in the hundreds of millions of dollars if not billions, so that a few thousand dollars is a mere rounding error. That is also the arena where a small speculator can play to his strengths. An what are these strengths exactly ?
AGILITY AGILITY AGILITY
and of course, the FLEXIBILITY that comes with that agility.
Think about it. When a big player (say a momo fund) that has a short-term focus enters a stock, they simply cannot allow the market to come to them as they accumulate and build up their positions. If they waited for ever for the right prices for each new block-buy, the trend maybe over before they even have a position. They have to accumulate quickly and their very desperation creates short term trends that translate into tradable moves. And they may have to distribute quickly too. Because of their short term focus, they need to take profits every now and then. And despite their short term focus, their size places grave limitations on how quickly they can enter and exit.
There is a fundamental asymmetry here and one that I have profited from and hope to continue to profit from.
This is not a weekend lecture-fest. There is a point to my philosophizing. And that is those stocks/sectors/ETFs where the big momo funds have a huge presence are the best places to make money for small speculators with a short-term bias. To be continued ...
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