Market Volatilty and the Use Of Value Limit Orders

Okay, so unless you live on the streets, of Calcutta India, on the planet Nabloon, you probably know how the market tanked today, and was at one point off in excess of ten percent, in what has to be one of the most volatile days in the history of the market.
Sadly, I did not sell most of my stocks as I had an inkling to do last week, but honestly, was too whimpy to pull the trigger. The ones I didn’t sell lost money with the rest of the market. I did pull a little off the table, but not much. Kind of like having $1,000 at a poker game where you suspect cheating going on, so you take $75 off the table and say, well, you ain’t stealing this, and then continue to play the rest in a game where the odds aren’t in your favor.
NEVERTHELESS, I DID DO VERY WELL TODAY compared to everyone else because of some very active trading. I don’t know how much of this is luck, and how much of this is skill, but I will tell you, I have been consistently good at doing this sort of thing over the last couple years, I win betting sports, I win at poker. I don’t think you can completely chalk this up to luck.
What I hope you take away from this is value investing and the use of limit orders. The Dow Jones Index finished off over 3% today, but in one ten minute period, dropped over 600 additional points to what has been attributed to a mass sell off which like a snow ball turning into an avalanche, broke through support levels which triggered “sophisticated” computerized algorithms to flood the market with even more sell orders.
The first order I saw on my personal order page from my broker, Fidelity Investments, was an order for Proctor and Gamble (PG) which had been executed at $56.47. I had placed this LIMIT ORDER months ago, believing this would be a very favorable purchase price value wise for a top notch consumer products company. It started the day at above $62 a share, meaning that it would have to fall 10% in value in one day for this order to be executed, which is almost unheard of for a company this size. Only five minutes earlier it had been trading at $61 a share. How in the world did this order get executed?
I check the ticker. Sure enough, not only did PG hit $56, it was trading at $39 a share in a matter of minutes. $39 a share?!! Meaning this stalwart, almost fuddy duddy stock had plummeted a whopping 37% from its opening price. A stock that was last trading at such levels nine years ago after the September 11th attacks. A company that has increased it’s earnings and dividends EVERY YEAR?
“Oh my fucking God,” was my refrain, “Iran must have just nuked Israel.” I had to refresh, there was no explanation for this. Some calamitous event must have taken place? Was the market about to drop to zero? Bye-bye nest egg. Oh well!
Well some traders, recognizing value, began to buy-up the stock and within minutes the stock was back up to $52, then $56 where I had purchased, then over $60 where I sold, glad to get out with a nice profit in exchange for a few harrowing minutes.
The point being, I had a limit order in place, at a price I thought would be an excellent entry point into a company with a fantastic track record of growth. Had I not had the limit order in beforehand, I almost certainly would have missed out on this incredible buying opportunity.
The same was true for General Electric (GE.) I actually placed a limit order in today, well below the market price at that hour. I was emailing my friend Andrew, telling him that if this sucker falls below $17, I’m buying, and minutes after placing my order, it was executed. I also had a limit order in at $15.88 that was placed on March 5th, and as the market went through the computer generated sell off, that order was surprisingly filled to.
The point being, do your research, figure out an entry point into a stock where you think you are getting a good long term deal. Stick to it, and if you purchase shares in the company at that price, great, if not no big deal, you’re not chasing the stock at higher costs.
With the market is as volatile as it is, and will likely be in the coming weeks, those “value limit orders” have an excellent chance of getting filled. Then, even if the stock drifts lower, you can sit back and wait for the market to gain some semblance of sanity, because, assuming your analysis is correct, you got a good deal on it.
Where do I think the market will go from here? Stocks are no longer cheap as they were last year. I believe that the Greeks will do what is easiest, (human nature not liking self-sacrifice)- they will likely default on their debt, or have the EU inflate the currency. If you think “austerity measures” are going to work in Greece, then you don’t know Greeks. (or most of the planet)
There will be a temporary flight to safety, into the dollar, as there was today, which will TEMPORARILY hold off inflation here in the States. However, we are running massive budget deficits as well, and will continue to do so, cause let’s face it, no one wants to be the sacrificial lamb here either. (“Gimme, gimme, gimme”) We also have had a massive increase in the money supply due to the stimulus, which leads to, yeah, inflation.
Our only savior might be technological advancement, that makes things cheaper and increases the quality of life. That being said, even assuming the dollar rises (which will make my summer travels all the merrier) I still like commodity stocks. (often as the dollar rises, the rest of the world cannot afford to pay more of their currency for dollar denominated commodities, and they sink in value.) So while my call here may seem oxy-moronic, the point is, commodities have more intrinsic/real value than pieces of paper. If oil stocks, especially Exxon (XOM) go lower, I recommend you buy.

(All sales were today 5/6/2010. Of the 6 trades completed today, only one was not purchased in May 2010, 4 of these were day trades- buying and selling with the same day)
Stock Bought @ Date Sold @
BP $48.80 5/3/2010 $51.16 + 0.84 dividend captured= $52.00 Gain 6.55%
GE $16.45 5/6/2010 $17.31 Gain 5.22%
GE $15.88 5/6/2010 $17.25 Gain 8.62%
PG $56.47 5/6/2010 $60.83 Gain 7.72%
PWR $19.54 1/14/2010 $20.38 Gain 4.29%PWR $19.19 5/6/2010 $19.84 Gain 3.38%

BP- British Petroleum
GE- General Electric
PG- Proctor Gamble
PWR- Quanta Services


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