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The Other Side Of The Trade
Wall street is famous for corporate collapses, mutual fund blow-ups and news events which cause massive losses to those who have invested
based on fundamentals, belief in a company's prospects or use long term buy-and-hold strategies.
New headlines loudly announce the losses. "Barings Bank fails." "Market closed after September 11, 2001 terrorist attack."
"Long Term Capital Management losses are stunning... possible Fed Bailout seen." "Billions in capital wiped out." "Enron, the largest bankruptcy in U.S. history."
The press is fascinated with losers. So are those who watch and read financial news stories.
But... what about "the other side of these trades?"
The Other Side
The stock market is a "zero-sum" game. This means for every winner there is a loser. For every loser there is a winner. Someone is
on either side of every trade.
When big trading events occur, people know the losses must be going somewhere, but no one ever talks about it. The focus is always on the losers.
The damage to a company. The personal losses. How a family is adversely affected.
No question these are interesting news stories. But if the stock market is a zero-sum game, then someone is on the other side of every huge loss.
There are winners for every loser.
Unmentioned and almost always ignored by the press, someone is winning every time you are reading a headline announcing a major financial disaster.
The Facts Are
When a major event occurs, it will often accelerate "existing trends" which are already in place. This is a very important concept.
When corporate collapses occur, the financial markets are almost always already in decline "prior" to the collapse.
Let's look at an example we all remember well:
Jan. 2001 - Enron - stock price $81.00
Aug. 2001 - Enron CEO Jeffrey Skilling quits for "purely personal" reasons. Stock price $43.00
Oct. 2001 - Enron reports loss. Stock price $34.00
Oct. 2001 - SEC requests information about Enron's off balance sheet partners. Stock Price $21.00
Nov. 2001 - Enron's retirement plans frozen. Stock price $14.00
Dec. 2001 - Enron files Chapter 11. Stock price $0.40 cents.
We should also look at the stock market during this time frame.
By January 2001 when Enron was at its high, the markets had already been declining "for six months." No one was forecasting
a bear market. The declines were considered normal profit taking. This view would soon change.
The story of Enron's collapse into bankruptcy is well known. The question is, while we all know who was losing during this corporate debacle, who was winning?
Who Was Winning?
Those subscribers who have been with us for a long while know the answer to this question.
Trend timers were winning! Mutual fund timers who use "price" to determine trends, had moved to short positions (or into cash for conservative timers)
long before Enron broke onto the financial scene.
In fact, Aggressive strategies at FibTimer entered short positions all the way back in September of 2000 and were ahead by + 36% by the time Enron hit its peak at $81.00 a share.
Trend timers continued to profit as the markets declined for most of 2001 and 2002.
Did Enron's unravelling add to the stock market's already sharp declines? You bet.
Did Enron hurt market timers using trend timing strategies? Not at all. We were making
profits through the entire event.
Examples
When "Long Term Capital Management" announced huge losses in August and September of 1998, the NY Federal Reserve Bank organized a bail-out of 3.6 billion dollars
because of fears the losses would cause a wider collapse of the stock market.
The news did cause market losses in the range of 14% in only weeks. But what the financial news did not mention, was that the market's decline had
actually begun in early July. Trend timers were already in short positions.
Coincidence? We do not think so.
This is true for many, many other major events which have affected the markets in negative, as well as positive, ways. The markets always seem to know ahead of time, and those
following trend timing strategies were in the right position, before the events occurred.
We are not saying anyone new anything ahead of time about September 11, 2001, but trend timers were solidly in short positions.
The stock market bubble of 1992 through 2002 burst and was followed by two years of horrific declines. Trend timers were in short positions three months before
the end of 2000, and rode the entire bear market down for huge gains.
Remember, the S&P 500 declined 50% and the Nasdaq declined 80%. Trend timers were on "the other side of those trades" and had corresponding gains in both.
Conclusion
What we are saying is almost all huge, financial events (negative as well as positive), have been forecasted "prior to those events" by changes in price.
As market timers who follow trends, we do not have to know ahead of time that a specific event is going to occur. Market "prices" will tell us long before
the event and we will be in the right position to profit from it.
Trend timers use the same strategies to trade individual stocks. By the time Enron stocks had hit $70.00 a share, there were
untold number of trend timers who had taken short positions. They did not "force" the stock to ever lower prices. Enron did that all by itself.
Think of the huge gains this bearish position generated for those traders.
Trend traders and market timers who follow trend trading strategies,
are the ones on "the other side of the trade" who are never mentioned in the headlines.
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