Stocks, charts, risk management & coffee

Jim Cramer v. SMB Capital

I happened to catch Jim Cramer and Jeff Tomasulo from SMB Capital on CNBC today. Both were asked the question of whether Citigroup was a buy today at $3.15.

Cramer is typically a lightening rod in more among pro and pro-am traders. Traders love to poke fun at his erroneous predictions. His trading strategies demonstrated on Mad Money are considered to be for dumb retail investors.

Cramer recently mentioned to buy Citigroup at $3.25 as a long term buy. Today he characterized it as a call option. Jim’s theory is pretty simple. Citigroup is out of the danger zone of going to $0 with this capital raise. It is only a $3 stock with limited downside. Meanwhile, even if it only goes back to its September high at $5 it will be a big win. You don’t even have to dream about Citigroup going to $25.

I don’t know much about SMB other than their blog that I check from time to time and their presence on Stocktwits. I can objectively say that SMB’s trading strategies are more sophisticated than Jim Cramer’s strategies. I don’t know anything about SMB’s trading record.

So let’s call Cramer a retail trader (ironic since he is the ultimate insider, but I’m talking about the style he promotes on CNBC) and Jeff Tomasulo a sophisticated trader.

Tomasulo’s opinion of Citigroup on CNBC was that he thought it was retail trader (and thus dumb money) thinking to buy at $3. The example he used was the retail trader thinking they’ll do great if it goes to $6. Tomasulo alludes to the fact that Citi could go down to $2 and lose 33%. That would be the same as a $30 stock going to $20. Yet, very unsophisticated retail traders don’t think in percentages.

Tomasulo thought there were better ideas out there. I’m not so sure.  He suggested buying Goldman Sachs at $160 with a tight stop at about $157. He thought that Goldman was a market leader during the rally and that if the market were to go higher it would not do so without Goldman. Makes sense and nothing original there. Many traders are tracking leading stocks such as GS and AAPL.

Tomasulo didn’t say it, but I assume he’s taking the GS trade using the December low as support with a stop loss using 1 day’s average true range which comes out to about 4 points (or something along those lines).

Generally, my trading style is much more similar to Tomasulo’s style than to Cramer’s style.

Yet when the segment ended I couldn’t help but think that Tomasulo was overthinking things and that Jim had the better trade.

It always sounds intelligent to say that you’ll take a shot on a trade and use a tight stop to limit losses (and it often is a good trade). Yet, this year, my personal experience is that wider stops would have been much better than tight stops. A trader with tight stops often gets stopped out  when support is temporarily overrun at obvious support levels. Of course, right after the stop out occurs, the stock tends to rebound.  It’s happened to me quite a bit this year when I’ve used the tighter stops. Over time, a bunch of small losses will add up to a big loss. Personally, I just have not found setting tight stops to work very well in this market.

On the other hand, Jim’s strategy is simple. Sure there is uncertainty with Citigroup, but with the additional capital and the payback of TARP, the stock is not going to $0. You make money betting on uncertainty. If there was certainty, there wouldn’t be opportunity. Basically, if anything happens to cause Citigroup to produce normalized earnings in the coming years, the stock will be worth more than $3. Other positive catalysts?  There could be a reverse stock split which might permit greater  institutional ownership. Citi might be broken up and generate some spinoffs (which are usually good for shareholders). And most importantly, the government is behind Citi too. Is there any doubt that the Obama administration desires to send out a positive press release touting all the profits earned on the Citi investment? We have learned about the power of the government in 2009. I want to be a part of that.

My point is that sometimes commonsense wins over technicals. I find myself agreeing with Jim that Citi is essentially a call option. It doesn’t mean that SMB’s Goldman trade can’t work too. I just think sometimes too much knowledge can cause you to miss the obvious.

Oh, any by the way, I’m looking at buying RIMM after the good earnings report. The stock is at $71 in after market trade. This is a cup and handle breakout above the 200-day SMA and horizontal resistance.  The September gap could fill taking this to $80.

rimm_001

§2037 · December 17, 2009 · C, GS, RIMM · · [Print]
  • Great review. :)
  • Last comment on C before I move on. I think C bulls needs to set reasonable expectations. At $3 the stock as a 73 million dollar market cap. I think we could certainly see a 146 million dollar market cap over a period of time causing this to run up to $6. However, I've seen some comments on other sites expecting a run up to $20 (not sure where people get numbers from). This is not realistic. I also expect that we'll see a reverse stock split soon.
  • Great post concerning over analyzing a trade, stops & choosing where to place the stops. A perfect example of exactly what you are speaking about is a respected technical analyst, Louise Yamada who correctly called the Market drop far before the fact but on March 6th 2009 made very similar comments regarding another analyst who had just spoken about Citi at $2 a share. In retrospect, it is easy to say many traders would've bought Citi at $1 or $2 in March, but Louise Yamada pointed out that if the stock fell to $1 it would still have been a 50% loss.

    In the end, those that bought Citi at $1 & sold at a profit did very well. Ultimately the combination of good technical analysis & proper risk management should take a trader out of trades before they accelerate against them. Technical Analysis & Proper risk management together often lead to long term portfolio success. For reference, I included Louise Yamada's March 6th clip below. Ultimately, her call before the fact concerning the market drop proved very accurate. Proper risk management would have protected anyone who viewed those March 6th comments & kept shorts on from allowing those shorts to run too far against them. Good Trading:
    Louise Yamada March 6th, '09:
    http://www.cnbc.com/id/15840232?video=105465084...
  • I would add to your post by saying that sometimes it helps to diversify your portfolio a bit with different types of bets when the opportunity presents itself. My bread and butter is certainly TA, but if the market abnormal like it has been during the past year, sometimes unique opportunities present themselves. So while I always have TA in the mix, having a strategy in early 09 that bankruptcy risk was overdone across the S&P 500 was a great reason (call it a mix of technical and fundamental) to buy all of the stocks in the S&P 500 priced under $5. TA would not have told you to buy those stocks.

    Sometimes you have to paint your own canvas.
  • Agree with the importance of diversification & altering the portfolio when markets reach extreme levels. A Similar recent case occurred in Natural Gas. This summer, Technicals forewarned that a drop towards $3/MMBtu had an increased probability of occurring. Technicals also suggested that once Natural Gas trended towards the $3/MMBtu range it reached quite oversold levels. Despite the risk, a profitable risk/reward benefit presented itself. Taking a long Natural Gas trade near $3/MMBtu proved very profitable. Making it one trade within a diversified portfolio would have spread the risk out while still allowing the trader to capitalize off of the oversold conditions. Good trading for the end of the year.
  • Natural gas was also a great example of where a tight stop and basic TA would have shaken you out before the move higher. Obvious support on UNG was at $8.9-$9. But it ended up running down to $8.40-$8.5 shaking the obvious stops out. If UNG/NG turns out to be a double bottom (still could be a descending triangle), it just shows how difficult it is to actually execute. The second bottom is almost always a bit higher or lower than the first. Setting good stops has to be one of the toughest parts of TA.
  • Great thoughts and take on the interview. Note: I did not see the segment, but I am scratching my head at 1 of your conclusions. I don't think you abandon technicals for common sense - that's a false choice. There is common sense in technicals i.e., until most recently we've seen giant swings in volatility. Given that terrain its been more prudent and successful to widen stops and fade highs and lows during these waves.

    When one starts mixing Cramer common sense and abandons the technical realities, you're without a firm footing and subject to whichever way the wind blows. Even if you follow Cramer's call - think of the wider environment and what technical macro themes are in play.
  • Well, I'm not saying to abandon technicals. The argument against C was actually fundamental (uncertainty, no earnings in 2010). C has horizontal support at $3 so it is a pretty good entry point. Additionally, institutional buyers thought $3.15 was a decent enough discount to buy the stock. $3.25 was the government's cost basis (reportedly). So I feel pretty good about buying near $3 and around the price the institutional buyer's paid. So the $3.15 number is not out of thin air.

    I agree with your conclusion generally although I wouldn't apply it to the Citi trade.
blog comments powered by Disqus
←
→