Yesterday was a great reminder to expect the unexpected. When you are investing in the market, anything can happen. One of the keys to surviving  is to lessen the potential damage when we are caught in an unexpected event. As we saw yesterday, a bearish report or an earlier than expected earnings release are two examples of unexpected events that can lead to a major selloff in your stock.

 

Once you experience a few of these unexpected events—or in my case many of them—you will realize that you need a few rules to survive these unfortunate occurrences. It is important to learn these lessons as soon as you can since each event has the potential to do major damage to your portfolio. 

 

Here are a couple of rules that I use to survive these events:

 

Rule 1: Lighten up a couple of days before an earnings report.

 

Generally, I will exit a position if I am not up at least 5% before earnings and if I am up more than 5%, I generally will sell half of my position and hold onto the other half.

 

The unexpected outcome that convinced me to incorporate this rule was when Google(GOOG) sold off suddenly when its earnings were released ahead of schedule in October 2012 (see chart). It experienced a massive selloff within a few minutes. I wasn’t even in the stock, but I remember being so shocked by this unexpected outcome that I wrote a rule to lighten up on my stocks a few days before earnings.

 

 

 

Rule 2: Always have stops for at least a portion of the position.

Right after I buy a stock, I will always place a stop-loss for at least half my shares.



For years, I used mental stops and generally there is nothing wrong with it. In fact, I usually will use a mental stop for the other half of my shares (My core holding). The problem is that you risk becoming a deer in headlights if a stock sells off dramatically and that can really be costly.



The unexpected outcome that finally convinced me to also place GTC stops happened last year when NQ dropped dramatically when a bearish report was released. This selloff reminded me of the importance of having stops in place. We just don’t know when the next sudden drop will occur, so it is critical that we have stops. Whether the stop is to protect your downside or lock in profits, having a stop on the books can help you to avoid a sudden shift in market direction.

 

 


Yesterday a number of those unexpected events occurred within a few hours. Amazingly these events were almost identical to the events mentioned above. First, Endurance International (EIGI) got hit with a bearish report that sent the stock plummeting.

 

 

 


Then Twitter (TWTR) got hammered once its earnings numbers were released during the market hours.

 

 

 


So if you got caught in one of these events, don’t be too hard on yourself and realize that it’s going to happen. It is part of investing and trading.  In fact, I got caught in TWTR. The difference this time around though, was that I survived it a bit better than in years past because of my rules. Each time around you will get better at handling these events. The most important thing is to learn the lesson and to never give up.



If you have any questions, you can reach us at (800) 424-9033 or at reachus@marketsmith.com.
Best Returns,



Irusha Peiris, CMT
MarketSmith