You state that we should put a stop loss in 7% - 8% under our initial purchase price. However on stocks that you are recommending lately like KLAC for instance, you state that the buy price is 46 3/8 on 10M shares and put a stop in at 45 7/8. This is much less than 7% - 8%. Why are you calling for such a tight stop? Is it the current market conditions or should we start putting in tighter stops on all new positions? (March 15, 2001)
Over the weekend we discussed that we were starting to place stop losses on breakouts right up under the pivot point as a function of the market that we are in. The Nasdaq is in a bear, and now the S&P 500 has joined it with the Dow starting to spiral down as well. That makes it harder for breakouts to succeed. Everything can look super and the stock breaks out on strong volume. Then news hits and shuffles the deck again and some of the solid breakouts fail. That can happen in any market, but in a bear market investors are nervous and ready to sell. In a bull market we can give a little more rope with the 7% stop loss. Now that the other two major indexes are failing, breakouts have it even harder, so we are shortening the rope on them. As we never want them to fall below their pivot point anyway, we are not taking chances if the breakout falls to that level. It is too risky in this market if the strong volume on the buying is met with strong selling volume after a gain. On options we often just go ahead and close them out when the move starts to stall, mainly looking for the day it is going to close well off of its intraday high. When that happens we have told our brokers we want to exit the position when we are in options. We don't want to let a gain evaporate. In sum, it is a function of the market now that the Dow and the big caps are selling as well.
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