On Friday I was chatting with a non-SMB prop trader that I trained several years ago. He was long DLTR when the WMT “news” broke around 2:00PM. From the chat messages you can see that we were in agreement that there was a short term “fading” opportunity in the retail names that had been quickly hammered based on a leaked internal email from a WMT employee.
Read the exchange and then I will add some more thoughts:
2:12 PM Michael: dltr fell hard
me: u didn’t have a stop?
clearly some news there
2:13 PM Michael: i did
me: so probably will make another big move now.
2:14 PM 1.5mln shares in that down move
Michael: fdo as well
me: are they even related?
other than they sell cheap stuff?
2:16 PM Michael: yea thats about all they have in common
2:17 PM me: did u see news?
maybe just a HF getting out of both. really stupid if that is the case
2:18 PM Michael: its news off wmt
2:19 PM me: this wmt drop may be fadable
Michael: Wal-Mart (WMT) executives said February sales are off to the worst monthly start in seven years, calling sales a “total disaster” in internal emails, reported Business Insider, citing a report from Bloomberg.
2:20 PM me: 55 cents to the recent low
2:23 PM Michael: long cost dltr wmt
2:24 PM me: all that while we were chatting. impressive
Michael: ha thanks now need to lock it in
2:31 PM me: gl. hope it reverses for u.
me: those emails were nasty but u never know….
2:32 PM Michael: we shall see
2:34 PM Michael: i locked alot in
So at the beginning of the chat Mike let me know that DLTR a stock that had had just rode up was sold aggressively and he was stopped out. He then shares information that another low cost retailer FDO was hammered. He finds the news story that was the catalyst. It was an internal Wall-Mart email that talks about slow sales first week of February. This “news story” is not significant in my view as retailers had already been disclosing weak sales with the increase in the payroll tax. So in my view the drop was “fadable”. Meaning there would be an opportunity to place a trade on the long side.
Michael is a trend trader so his first instinct is not to fade a powerful down move on a large increase in volume. But with knowledge that the catalyst was a single internal company email and not an actual earnings release or earnings guidance he felt comfortable that some buyers would step in to cause some sort of bounce. But the key is after he reached this conclusion he waited for the price of the stocks to stabilize. A common error for traders is reaching a trading conclusion and then jumping in when price action is not favorable.
I have marked up two charts with comments corresponding with the time we started to chat to 10 minutes into the conversation where he initiated his positions after the initial selling onslaught subsided, and finally where he dumps most of his position to “lock it in”. He took a conservative approach not wanting to rely on a complete reversal of the initial down moves and thus made his comment about locking in his profit.
Overall, I think this was a good trade but one that only someone with a few years of experience should make. The time to evaluate the news, the stocks impacted, possible entry and exit points, and an increase in volatility makes this a difficult trade to execute. Mike chose a good basket of stocks and managed the trade well.
Steven Spencer is the co-founder of SMB Capital and SMB University and has traded professionally for 16 years. His email is [email protected]
No relevant positions