Don’t Lose Your Position

In honor of the Thanksgiving holiday this week, I thought I’d reshare the fabled Wall Street tale about a character named “old Turkey” from the 1923 classic Reminiscences of a Stock Operator. The book is one you should definitely read if you have not read it before, and reread if you have, for it is filled with all sorts of trading and investing wisdom. None perhaps is so famous, though, as the story of old Turkey, who, when asked why he wasn’t going to sell his stock in a company and buy it back later at a lower price, responded as follows:

“My dear boy,” said old Turkey, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?” Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: “Can you beat it?” he asked me in a stage whisper. “I ask you!” I didn’t say anything. So he went on: “I give him a tip on Climax Motors. He buys five hundred shares. He’s got seven points’ profit and I advise him to get out and buy ’em back on the reaction that’s overdue even now. And what does he say when I tell him? He says that if he sells he’ll lose his job. What do you know about that?” “I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in old Turkey. “I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller.”

And yes, pulling this story out the week of Thanksgiving may be a tad bit eye-rolling, but I was actually reminded of it last week when a few people asked me if they should be doing some selling right now while the market seems to clearly be in “risk-on” mode and many stocks have jumped very quickly. My reply echoed some of old Turkey’s wisdom by reminding them that this is a bull market and no one knows how high it could eventually go. You want to make sure you ride your gains for all you can get out of them, and, unless, a stock is breaking down below a critical level, selling it may end up costing you in the long run. There’s no guarantee that you’re going to get a significant correction to buy back in on either, and there is certainly the chance you don’t time it correctly even if you do. And if this does end up being one of those buying-stampede-type runs, you definitely don’t want to lose your position.

This rally still doesn’t really show signs that it wants to end, but holiday weeks such as this one can be a little unpredictable with the generally lower volume. Going back to 1945,the week of Thanksgiving has largely been better than average, with a 0.62% average gain and almost 75% of weeks finishing positive, but during this current bull market, the week has actually been a bit tough, with a 0.37% average loss. It’s not all bad news, though, since the negative Thanksgiving returns have usually set the market up for a strong finish to the year, with a 3.68% average return over the last month of trading going back to 2009 (Source: Bespoke Investment Group). And we’ll just have to see if some turkey and dressing can slow down the Russell 2000, which has now been up 11 consecutive sessions and continues to play the role of market leader. The small cap rally prompted Sentimentrader to do a study and this actually marks the best performance during a 10-day winning streak in the Russell 2000’s history (13.2% as of Thursday’s close). What’s more, the near-term performance following other 10-day streaks in the past has actually been quite good. One month later, the average return was 3.5% (median 3.7%) and 13 out of 16 periods ended higher, so that, too, bodes well heading into year end.

The third quarter earnings season has come to a close, as well, and 62% of companies ended up reporting earnings above analyst consensus estimates, which is right in line with the historical long-term average (source: FactSet). More interestingly to me, though, was that the cyclical sector earnings beat rates were, in fact, led by technology (74%) and the financials (69%), which means the profitability of the financials was already trending up and doing well even before the election result. This strengthening earnings performance also helps confirm why we saw the KBW Bank Index start to break out over the summer, and, of course, the banks could have more ground to gain in the next couple of years with higher interest rates and a possible rollback of some regulations.