How I Missed the Breakout Trade of the Decade

Stock Market Analyze

Regrets, I’ve had a few;

But then again, too few to mention…

Do you recognise these lines?

Chances are you do. They’re from Frank Sinatra’s signature tune, My Way.

The 1968 recording was a big hit. Its 75 weeks in the UK Top 40 is still a record. Not bad for a song that took just four hours to write!

For all its success, Sinatra came to hate the song. His daughter said the legendary crooner thought it was self-serving and indulgent. But My Way stuck; Frank could never shake it.

Regret is a powerful emotion. It’s something we all experience at some point. Sure, regret can be painful. But it can also be a useful way to learn from past mistakes.

In a minute, I’m going talk about regret in the markets. You’ll see how I missed a highly profitable trade. It’s a situation you may find familiar.

But let me start with a short story. This was the prompt that got me thinking about regret.

Nothing but a memory

I remember my primary school days like yesterday. You see, Dad was a publican, and he’d just bought a pub on Sydney’s outskirts. The only problem was a tortuous daily commute.

It’s easy to forget the difference expressways make. In those days, getting across town was a long meandering drive. So the decision was made to move to Sydney’s outer north west.

Today, the north west is a fast growing ‘middle ring’ area. But in the late 1970s, it was semi-rural. Acreages and small farms dotted the region. The suburban sprawl was still a decade away.

Our new place was set on two and a half acres. I had a homemade cricket pitch down the side. There was also a big back paddock with a couple of horses. It was a youngster’s dream.

We left the district when I began high school. But I still drive past the old house when I’m nearby. It brings back fun memories. My kids also enjoy seeing where I was at their age.

But I have a regret.

We were standing by the paddock fence a year ago. I thought of knocking on the front door. It was a chance to give the kids a closer look. But I held back. I didn’t want to disturb the current owners.

So why’s this a regret?

Well, I drove by the property a few weeks ago. There’s nothing left standing. My old house has made way for an 86-dwelling construction site. My kids will never get beyond the paddock fence.

They say your biggest regrets are not what you do, but what you don’t do. I agree. These are the ones that tend to linger in my mind the longest.

‘I’ve missed it’

I believe the best remedy for regret is action. I’d much rather have a go, but fail. These regrets typically fade quickly. It’s doing nothing that bugs me the most.

Take the stock market for instance.

Do you ever hesitate to buy after a quick share price rise?

Many people do. You may hear them say ‘I’ve missed it’. They then watch as the shares spiral to dizzying heights, all the while kicking themselves for not buying.

Don’t worry if you’ve done this. I have too — many times. It’s something I still have to work on.

I’ve always been good at buying a breakout. This is when a stock busts higher after a period of trading quietly. Many big trends start this way.

My problem was buying if I missed the initial move. I’d start worrying about a pullback, instead of trusting the trend. It was a case of getting in on the ground floor, or not at all.

An example was near the end of the GFC selloff. I’d been following the market closely. I thought a major turning point was coming, and I was ready to buy.

Have a look at this chart of the S&P 500…

Source: BigCharts
[Click to enlarge]

This is how I saw it at the time. The US market had a steep fall in November 2008. But it quickly began to rebound. This was a sign that the tide was turning. It was time to make a move.

I bought two big parcels of shares in an index fund — one on 9 December 2008, and the other on 6 January 2009. You can see my entry points on the chart.

But I was too early. I cut my position shortly after, as the market took a turn lower.

Have a look at what happened next…

Source: BigCharts
[Click to enlarge]

The market made a final low on 6 March. It then began a sharp move higher. The S&P 500 rallied for six straight weeks, and put on close to 30%. This was one of the strongest rallies in history.

But I wasn’t on board.

You see, I hadn’t seen a clear point to get back in. There wasn’t a breakout (which I was good at buying) — just a fast move higher. By the time I knew I should buy, I balked at the higher price.

Here’s the final chart in the series…

Source: BigCharts
[Click to enlarge]

It still bugs me to think about. I had the right idea. All I had to do was re-enter the trade. But I didn’t take action. Regrets, I’ve had a few…

Thankfully, it’s not all bad. Regret also has a positive side. For me, regret is the incentive not to repeat a mistake. This has made a real difference to the way I trade.

Next week, I’ll show you what I mean. You’ll see a stock that could have easily gotten away. But thanks to past regrets, it’s shaping up as highly profitable trade.

I’ll also tell you how I use regret to weigh up a situation. This has had a big impact on how I enter a runaway trade. I think you’ll find it interesting. You’ll be able to use this tactic yourself.

Until next week,

Jason McIntosh,
Editor, Quant Trader

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PS: All images in the article above are sourced by Quant Trader, unless otherwise noted.

Jason McIntosh

Jason McIntosh

Jason is a professional quantitative analyst. Before he graduated in 1991 he joined Bankers Trust — a Wall Street investment bank — to be a trader. After Bankers Trust was taken over in 1999, Jason, already financially independent, co-founded a stock market advisory and funds management business called Fat Prophets. At 37 he sold his part of that business and retired. These days, he’s a private trader and system developer. In 2014 he launched the wildly successful trading service: Quant Trader.

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