Q&A
Since You Asked
Confused about some aspect of trading? Professional
trader Don Bright of Bright Trading (www.stocktrading.com), an equity trading
corporation, answers a few of your questions.
Going Long?
If you believe stocks return 10% a year, is it better to go long: 1) ES future contracts? 2) Spy options? —Sky123987
One of the biggest deceptions pulled on the investing public, historically, is the Roi of “the market.” Well, “the market” consisted of stocks only, not indexes, for most of its life. The Dow Jones 30 has had the individual stocks replaced over and over during the past 80 years or so. In fact, the only original stock is GE. So, since you could not invest in the Dow Jones Industrial Average (Djia), only individual stocks, there was nowhere near a 10% return as advertised.
Nowadays, you can invest in indexes, replacement stocks and all — but then, you need to think about that timing aspect to it. So yes, you can get 10% and more if your timing is good — otherwise, it’s very doubtful.
Both ES futures contracts and Spy options are more of a bet on where the market will be in a certain time period. With options you pay a premium with time decay. With futures contracts, you ’re competing with the best arbitrageurs in the world. Either way, both are a bet on future pricing.
As to what to buy — keep it simple — go after stocks with the best price to book, which reflects what the company is really worth instead of fanciful financial projections. The lower price to book, combined with current earnings, is a good way to go.
No Crystal Ball
I’ve read your columns in Stocks & Commodities and I understand that your firm focuses on short-term trading, but since you’ve been in the markets so long, I’m hoping you might be able to shed some light on this current market upheaval.
The market is now down in the 8000–9000 range, down more than 5,000 points from the high of October 2007. Is this current situation similar to the crash of 1987? Can we expect a turnaround, and if so, how long do you think it would take? My retirement funds have taken a beating and I realize you don’t have a crystal ball, but I’m checking the opinions of people within the industry. Any insight would be appreciated. —tradesurf
Wow, talk about tough questions — probably the most difficult I’ve encountered in the last eight years or so since I’ve written this column for S&C.
First off, this time around we have a whole new set of variables and circumstances. In 1987 we had pretty high interest rates and pretty high unemployment rates to boot compared to 2008. And the mother of all variables is the governmental influences this time around. I am referring to the “Plunge Protection Team” from the 1980s and so on, and currently, we wonder if some of these last half-hour rallies might be influenced in the same way. Please understand I am not a conspiracy theorist, but sometimes you just have to wonder.
As of October 14, 2008, we have seen some major blunders, in my opinion, primarily by not letting the free markets work, allowing bank bailouts (or rescue plans, if you so choose). What needs to happen, again in my opinion, is to let the world economies “deleverage” a bit. We’ve been putting Band-Aids on gunshot wounds, so to speak, for the last year, and we’ve been trying to use headlines to bolster public opinion. Well, that hasn’t worked.
I was quoted in The Wall Street Journal on October 13 that after so many failed attempts at bolstering the economy, we are now involving our global economic friends in the overall plan:
“I have to admit, they have come up with something that makes sense,” said trader Don Bright, who was skeptical of Washington’s initial efforts to bail out the US financial industry. Referring to the increasingly global approach that’s emerging among policy makers, he said: “We have to do it this way. We couldn’t do it without our friends, no matter how all-powerful we’d like to think America is economically.”
So I have hope that we will not sink into a further recession or depression, but it will take some time to climb out. I am expecting the Dow Jones Industrial Average to trade in the 8000–9500 range for some time. Since you’re reading this toward the end of 2008, you’ll know how well this prediction pans out.
Regardless of how well my guess of the year-end numbers turn out, I think that the worst is over, barring anything unexpected coming from out of the blue (and nothing surprises me these days).