Q&A
Since You Asked
with Don Bright
Confused about some
aspect of trading? Professional trader Don Bright of Bright Trading (www.stocktrading.com), an
equity trading corporation, answers a few of your questions.
Going Long?
If you believe stocks return 10% a year, is it
better to go long: 1) ES future contracts? 2) Spy options? —Sky123987
One of the biggest deceptions pulled on the investing public,
historically, is the Roi of “the market.” Well, “the market” consisted
of stocks only, not indexes, for most of its life. The Dow Jones 30 has
had the individual stocks replaced over and over during the past 80
years or so. In fact, the only original stock is GE. So, since you could
not invest in the Dow Jones Industrial Average (Djia), only individual stocks, there was nowhere
near a 10% return as advertised.
Nowadays, you can invest in indexes, replacement stocks and all — but
then, you need to think about that timing aspect to it. So yes, you can
get 10% and more if your timing is good — otherwise, it’s very
doubtful.
Both ES futures contracts and Spy
options are more of a bet on where the market will be in a certain time
period. With options you pay a premium with time decay. With futures
contracts, you ’re competing with the best arbitrageurs in the world.
Either way, both are a bet on future pricing.
As to what to buy — keep it simple — go after stocks with the best
price to book, which reflects what the company is really worth instead
of fanciful financial projections. The lower price to book, combined
with current earnings, is a good way to go.
No Crystal Ball
I’ve read your columns in Stocks & Commodities and I understand
that your firm focuses on short-term trading, but since you’ve been in
the markets so long, I’m hoping you might be able to shed some light on
this current market upheaval.
The market is now down in the 8000–9000 range, down
more than 5,000 points from the high of October 2007. Is this current
situation similar to the crash of 1987? Can we expect a turnaround, and
if so, how long do you think it would take? My retirement funds have
taken a beating and I realize you don’t have a crystal ball, but I’m
checking the opinions of people within the industry. Any insight would
be appreciated. —tradesurf
Wow, talk about tough questions — probably the most difficult I’ve
encountered in the last eight years or so since I’ve written this column
for S&C.
First off, this time around we have a whole new set of variables and
circumstances. In 1987 we had pretty high interest rates and pretty high
unemployment rates to boot compared to 2008. And the mother of all
variables is the governmental influences this time around. I am
referring to the “Plunge Protection Team” from the 1980s and so on, and
currently, we wonder if some of these last half-hour rallies might be
influenced in the same way. Please understand I am not a conspiracy
theorist, but sometimes you just have to wonder.
As of October 14, 2008, we have seen some major blunders, in my
opinion, primarily by not letting the free markets work, allowing bank
bailouts (or rescue plans, if you so choose). What needs to happen,
again in my opinion, is to let the world economies “deleverage” a bit.
We’ve been putting Band-Aids on gunshot wounds, so to speak, for the
last year, and we’ve been trying to use headlines to bolster public
opinion. Well, that hasn’t worked.
I was quoted in The Wall Street Journal on October 13 that after so
many failed attempts at bolstering the economy, we are now involving our
global economic friends in the overall plan:
“I have to admit, they have come up with something that makes
sense,” said trader Don Bright, who was skeptical of Washington’s
initial efforts to bail out the US financial industry. Referring to the
increasingly global approach that’s emerging among policy makers, he
said: “We have to do it this way. We couldn’t do it without our friends,
no matter how all-powerful we’d like to think America is economically.”
So I have hope that we will not sink into a further recession or
depression, but it will take some time to climb out. I am expecting the
Dow Jones Industrial Average to trade in the 8000–9500 range for some
time. Since you’re reading this toward the end of 2008, you’ll know how
well this prediction pans out.
Regardless of how well my guess of the year-end numbers turn out, I
think that the worst is over, barring anything unexpected coming from
out of the blue (and nothing surprises me these days).
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