2.6. 2000—THE BUBBLE BURSTS

Celera Genomics (CRA), shown in Figure 2.12, had made a critical announcement about their mapping of the human genome in late 1999, sending biotechnology stocks soaring. The group continued to make huge price advances in early 2000. As with the Internet sector, many of which had no earnings, market perception played an important role in the bio-techs, many of which not only had no earnings but also had no revenues. So, with none of the classic fundamental variables on which to measure the company, I applied to the biotechnology sector what I had learned about market perception with the Internet sector. If market perception was highly positive due to a belief held by institutional funds that the company had huge potential, this could be seen in the price/volume action of the stock, as it was the signature of significant, big money institutional buying. This was key to my making a triple-digit return in 2000 on the long side, a year when the market averages such as the NASDAQ Composite were down nearly −40 percent.

The biotechnology sector topped in late February, shortly before the general market topped. The general market then put in a top on March 10 as shown in Figure 2.13. I was quick to take my account off margin and move into cash as each one of my stocks hit its sell alert in the ensuing days. For the rest of the year, I did some infrequent, light buying, and so I was able to preserve most of the profits I had made that first quarter. It is critical not to overtrade, and perhaps it is often best to do nothing, and just sit in cash when the market is not acting right. That said, overtrading is one of the most difficult issues to overcome even for the most seasoned investors. The market will tempt the trader to jump back in by making things look almost right. And most traders would rather remain active than dormant. But it is often best just to sit and do nothing if the market is not acting just right. In my experience, I have observed that this is easier said than done.

Figure 2.12. Celera Corp (CRA) daily chart, 1999–2000.: Chart courtesy of eSignal, Copyright 2010

Figure 2.13. NASDAQ Composite Index daily chart, 2000.: Chart courtesy of eSignal, Copyright 2010

Here is another argument for staying on the sidelines if the market is not acting just right. If one only trades 10 optimal buy situations in a given year, and makes an average of 10 percent on each trade, one's entire account would be up 159 percent in that year if one invested one's whole account each time such an optimal buy point arose. In practice, due to risk management reasons, even if one invested 25 percent of one's account in each trade, one's whole account would still be up about 40 percent for the year. Of course, ample experience is required to know that the odds are greatly on your side, and that there are no guarantees. However, if we take the period of 2006–2009 as one example, the latter part of 2006 and 2007 were just right for buying, and big money could be made during such windows of opportunity. Then in early September 2009, GLD had a perfect setup and gold stocks could be bought, as they correlate highly with GLD. Of course, there were other picture-perfect plays during these years, giving one further opportunity to do well. I am not saying this in hindsight but am basing this on my actual profits during these picture-perfect, albeit brief, periods. My mistake was overtrading during the less optimal periods.

Incidentally, I noticed that O'Neil does little when the market is not acting right. You can make a fortune just by being long the right stocks at the right times when the window of opportunity is open. My market direction model is almost always on a buy signal during such times, and, if not, it has always switched to a buy signal within days after the first few leading stocks break out of sound bases. You can further enhance your performance by learning short selling techniques, which are discussed in Chapter 6.