Wednesday, November 17, 2010

"Prognosis only after the game" - A move is overextended only in hind-sight. $study

An interviewer once asked football player João Pinto, then playing for Benfica, what his prognosis was for the game. He dryly replied "prognosis only after the game". I will describe two successful day trades  I made based on  assuming the moves were overextended, one in $HD and the other in $AKAM.

The AKAM trade was done on Monday 15th November. It was falling around 6% against the sp500 on an Oppenheimer downgrade .http://blogs.wsj.com/marketbeat/2010/11/15/oppenheimer-cuts-monster-stock-akamai-to-market-perform/?mod=yahoo_hs . The week before the stock had fallen given worries of lost business at Netflix http://seekingalpha.com/article/236411-netflix-inks-content-delivery-deal-with-level-3-confirms-akamai-worries?source=yahoo . The first buy trade was at 10:52 and I sold the position at 15:52 .

In this trade as in the next one I hedged market risk by going short the SP500 via $SPY; I shorted 130% of the AKAM position.

The Home depot trade was done yesterday, 16th November. Results came out in the morning and were ok. The stock was outperforming the SP500 by about 5%. I thought this was excessive and started  shorting at 10:16 . I closed my position at 14.47
I was long 90% of the position size in SPY. Again, I was betting on the relative performance of the stock, not its absolute performance.

The thing about both trades is I had to make a judgment call on whether the moves were excessive or not; unlike the football player at the beginning of this post,  traders have to prognosticate before the end result is known in order to make money.