If you follow individual growth stocks, you probably noticed that Nu Skin (NUS) got slaughtered over the past two days. The stock had been a strong part of the Weekend IBD Portfolio, and has been growing consistently for over a year.
The huge drop in price is apparently the result of a Chinese investigation that is accusing the company of being an illegal pyramid scheme. I know that there is a fine line that determines the difference between a legit network marketing company and an illegal pyramid scheme, but I’m not exactly sure what that difference is. Either way, the story isn’t a big deal as far as my trading is concerned, the huge drop in price definitely is though.
The Big Drop
As you can see from the chart, the stock was cruising along just fine until the news broke Wednesday. After closing at 136.47 on Tuesday evening, the stock opened down at 127.47 on Wednesday and then closed even lower at 115.23.
That was just the beginning though, because NUS opened down even lower on Thursday at 89.79. The price traded down as low as 67.51 on Thursday before closing at 84.24. That was good for a loss of almost 27% in just 48 hours.
The Weekend IBD Portfolio
Fortunately for me, only one of my trend following portfolios was holding NUS. The Weekend IBD Portfolio, which has been performing very well, was sitting on a 9.6% gain in NUS just this past weekend. After Wednesday’s action, that position turned into a loss of just under 10%. Then, after Thursday’s action, that loss grew to be 32.47%.
I doesn’t take any advanced mathematics to figure out that this really hurt the portfolio. But is there anything I could have, or should have, done to handle this situation differently?
Possible Exit Strategy Adjustments
Right now, I have an order placed to sell the position at the market at Friday’s open. This is how I should have traded this event according to the strategy, as I laid it out. The stock didn’t close below a 10% loss or 40% off of its 20-week high until Thursday, so any action before that would have been premature.
But after Wednesday’s terrible action, I knew things weren’t going to turn out well. Stocks don’t just bounce right back from catastrophic losses like that. The big question I am facing is whether or not I should have overrode the system and exited the position sooner, either during the day Wednesday, after the close Wednesday, or during the day Thursday.
Obviously, overriding the system and exiting sooner would have worked out well in this case. But I’m not sure that it would be in my best interest to do so in the long term. How would I define what magnitude of loss makes overriding the strategy acceptable?
Another option would be to institute a stipulation that requires me to exit any position that experiences a one-day loss of x percent. But how would I determine the correct percent for x, and isn’t that going to complicate what is supposed to be a very simple system?
In the end, this is probably just one of the outliers that is going to happen from time to time with this type of strategy. It sucks, but any trading strategy that doesn’t take its lumps from time-to-time is probably doomed to blow up anyway. Handling a loss like this without freaking out is probably a more important lesson than rushing to fix a strategy that might not be broken.