This Week's Battle Plan

A Thank You

Before we begin, I'd like to thank the many of you who sent me e-mails yesterday regarding the interview we did with Richard Machowicz. I know Richard also appreciates your kind words and I will make sure he's aware of your letters the next time he and I get together.

Because this article has had such an impact, we're going to make it available to anyone who you feel can benefit from it. Sometime tomorrow (Monday) our programmers will allow free access to Richard's interview. Readers will not have to be members of TradingMarkets to read it. Please feel free to share this interview with anyone you like, whether they trade or not. Also feel free to copy the article and give it to anyone you think might benefit from it.

This Market

The past few weeks have been amongst the dullest I have seen in a few years. I have found it next to impossible to capture any sustained moves. It's either you take your profits at the end of the first day of the move or you can expect to give a bunch if not all of it back the next day or so. If you are not making money, there's a better chance that it's because the market is causing this instead of anything you are doing wrong. Anyone who is holding positions overnight is getting churned. And even some of the day traders I know and respect are saying that the opportunities have been few and far between. So, who is making money in this market? The same guys who got killed from April-September...the option premium sellers. In the Spring and Summer, they got mangled. But now, with volatility imploding, they are making money. And that's the nature of trading. No methodology works every day. The key is to slow down and sustain yourself when your methodology is not working. Trade less, trade smaller and most importantly, be disciplined and don't do dumb things like forcing trades. And when things go good, you need to become more aggressive. In George Soros' words, "be a pig." Because that's when you will have the best opportunities to make your quarter and sometimes make your year.

If the past few weeks have seemed dull with little opportunity to make money, you are right. And no, don't become a premium seller at this late stage because it's now working. Because ultimately, volatility will pick up, and that game will no longer be as profitable as it is today.

More

One of the mistakes (major mistakes) most of us make as traders is to over-trade. This is true no matter what the market conditions are. Many people take the mind frame "I'm a trader, therefore I must trade." Joe Corona, Tony Saliba's head trader, told an audience at TradingMarkets 2001, that it was his number-one weakness. This is from a guy who has had more than two decades of successful trading experience. He said his performance would be so much better if he could learn to better sit on his hands.

I've heard that same story from many other successful traders. Alternatively, other traders have told me of their success when they have learned to sit on their hands. Recently, one TradingMarkets member spent a week with Dave Floyd. When we spoke, he told me spending the week with Dave was the main reason why he is now showing consistent profits. I asked him what Dave taught him. His pullback strategy on one-minute bars? His Floyd Numbers? His stock selection process? The answer was no. It was watching Dave and his team go out for coffee and do nothing for almost a week. And why did they do that? Because there was no volatility and nothing was setting up that gave them an edge. They simply spent their time waiting until everything came together. And by watching them do this, this gentleman learned that a large part of trading is waiting. It's sitting on your hands and waiting for the right set-up to occur. And when that setup happens, you pounce. Otherwise, you go out for coffee and do nothing. Something for all of us to think about over the next few weeks in this market environment, and especially with the holidays coming up.

TradingMarkets Stock Contest For 2003, or Dylan Speaks (and it's not Bob)

Earlier in the week Gary Kaltbaum wrote a great piece about not listening to the gurus who make yearly market calls. He cited last year's Business Week survey of top Wall Street strategists. In that survey, 48 of the 54 strategists said we would end 2002 higher than 2001. Their consensus for the Dow was 11,090, which is only a few thousand points off, not bad if you consider the sources. Some of their favorite stocks included Tyco, Sun Micro, AOL, etc. Gary went on and talked about the stock-picking contest that CNBC held late last year and disbanded it at mid-year due to the performance of the pros doing the picking. And then on Friday, I was reading USA Today, and they published their performance of the strategists they asked to make predictions last year. The strategists included the heads of investment strategy for Morgan Stanley, Salomon Brothers, First Albany and thee others. These six professionals performance was...  -35%, -12%,  -10% (the best), -36%, -19% and -32%. What was even more incredible was that they selected a total of 25 stocks and a whopping 5 of them went up. Only 20% of their best stock picks showed a profit for the year. What's even more amazing is that the newspaper doesn't miss a beat and they got another five strategists to give investors their "best bets" for 2003, including the guy from Morgan Stanley who was down 35% for the year!

Well, in the spirit of giving free advice, I'm starting a TradingMarkets.com Stock Picking Contest for 2003. The winner will receive a bonus at the end of the year (details later) and will likely get great press coverage as we will blanket the financial press with his or her performance. Are you ready for the rules? Here goes:

1. The only people who are eligible for the contest must be under 5 years old as of January 1, 2003 (I'm not kidding).

2. If they can read or count above 100, they are not eligible.

3. They can use any means they like to pick stocks. The guy from Morgan Stanley obviously uses rigorously tested, proven portfolio management analysis taught at a top Ivy League Business School. The contestants in this contest can do the same (but they'll lose the contest, trust me). Circling stocks with crayons, paint brushes, playing "pin the tail on the stock in the newspaper" and anything else you can think of is eligible.

4. The contestant can be a son/daughter, grandson/grand-daughter, niece, nephew or the child of your mailman. Anyone who qualifies under rules 1 and 2 is eligible.

5. Each contestant selects five stocks.

6. The winner gets $1000 to be used for anything they like (except business school). All entries are due by January 1, 2003. The closing price of each stock on Dec 31, 2002 will be the opening price used. The closing price of the stock on Dec. 31 2003 will be the final price.

7. Updates will be given throughout the year and compared with the results from the five Wall Street professionals that were selected by USA Today.

8. Void where prohibited by law and anything else our general counsel would like me to say.

9. Send your picks not to my regular address, but to info@tradingmarkets.com.

And to start this off, here are my son Dylan's (age 4 1/2) selections for 2003. Blue crayons were used, and he did this after his class at Master Nicky's Fighting and Karate School, so he was pretty pumped up as he was making these selections (then nap time came).

Here are Dylan's picks for 2003:

1. Detroit Edison (DTE | Quote | Chart | News | PowerRating) ("because it starts with 'D' just like Dylan does")
2. Lydall (LDL | Quote | Chart | News | PowerRating)
3. Harris Corp. (HRS | Quote | Chart | News | PowerRating)
4. Bryn Mawr Bank (BMTC | Quote | Chart | News | PowerRating)
5. TCF Financial (TCB | Quote | Chart | News | PowerRating)

There you have it. The first selections for the first annual TradingMarkets.com Stock-Picking Contest, and it looks like he favors the banks for next year. I look forward to seeing the selections of all the contestants. And, if any of the contestants are down less than 35% this year, we'll ask them to come back again...just like they do at USA Today!

New

1. We launched our Mid-day Opportunities column this past week. Each day, at 1:00 PM ET, our War Room gives you their thoughts on where the best opportunities lie for the remainder of the trading day.

2. The Big Saturday Interview is off and running (you can't miss Richard's picture). And in two weeks we'll publish our interview with hedge fund manager and Forbes 400 member Leon Levy.

3. The third part of Kevin Haggerty's five-part Training Series is now available to pre-order (for 10% off the release price). It's Kevin's Opening Hour Strategies, which in my opinion, is amongst his best strategies. Trading the open is where a number of professionals make much of their money and Kevin teaches you how to do this bar by bar using the same strategies he does. You can find more details here.

Finale

A sideways market brings few opportunities for substantial gains but eventually volatility returns as do the opportunities. Use this time to study the markets. I have no idea where 2003 will go except that there will be plenty of good opportunities to make money. Especially for those who have the strategies and knowledge to find them.

Have a great week trading (and Happy Holidays to everyone)!

Larry Connors and Brice Wightman