Once again, for the hundredth time I'm seeing the burned bag holding permabear community foaming at the mouth calling for the end of the rally as a result of this reversal day. I have documented so many times these past several months about how such reversal days tend to end up being bear traps. And despite the amount of times these losers have been getting their skulls bashed in top picking they have the audacity to show hubris like this when the market is down 1 point after just making fresh 18 month highs. It's a sickness I tell you and there's only 1 cure...bankruptcy. Now look, I mentioned the other day not to be piggish here on the long side but I gotta tell you, this behavior I'm seeing from the bag holders tells me that there is still more pain in store for them before this rally from February 5th is over. We could dip a bit first to sucker in these guys some more before they take it up the kiester again.
I'm getting some mixed signals here. While rydex data is signaling excessive bullishness, AAII sentiment is not and is showing very odd behavior. 2 weeks ago when the market was lower AAII sentiment showed about a 1.8 ratio of bulls vs. bears which is just under the cautionary 2:1 ratio but then the following week even as the market was higher this ratio dropped to 1.2 and now with the market higher still, it came in at .91 meaning bears are slightly outnumbering bulls! This dumb money indicator is showing skepticism in the face of 18 month highs. This can mean 1 of 2 things. 1)the market will simply march higher from here until bulls substantially outnumber bears or 2) downside will be limited to a shallow pullback because that's probably all it's going to take to render the ratio to reach 2:1 of bears over bulls which has signaled strong buy signals in the past.
Next week we get payroll data and expectations are for a solid month of job gains! Wow! Who would ever think that's possible right? We've truly come full circle from 10 years ago. I read somewhere today that expectations are for about 125K new jobs or something like that. Could the market perhaps be sensing an even stronger payroll number....like 200K? When the market makes a very strong and persistent move without any apparent reason quite often it's sensing something significant that will be made obvious later on. There's no doubt top pickers getting squeezed ads fuel to the fire but I think there's more to this. We'll just see what happens in a week from now.
Bottom line: I'm suspicious of today's reversal. Although the market is extended here and a little bit of downside follow through could happen I suspect this is yet another bear trap which will eventually crush every last bear bag holder from a few weeks back. It's piggish to press the long side here in the hopes of this playing out but I got to tell you, I wouldn't short this market just yet for a trade unless your holding period is 1 day or less.
I'm going to be very busy with moving and so I may not be making any posts for a while. I'll try to squeeze in a couple more if I have time and energy.
Thursday, March 25, 2010
Wednesday, March 24, 2010
New 52 week high....mom and pop investor still MIA
An interesting article caught my eye today on Bloomberg today titled "Americans Say They missed 73% rise in S&P 500". It can be found here http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTp.Sf7cvYvU
According to a survey conducted, only 1 in 3 Americans say the value of their portfolio has risen from a year ago! That is truly unbelievable given that the market is up 73% since....actually it's not so surprising when you think about it. I've been documenting here for months the ingrained bearishness of retail investors. These market gurus did what they always do near bear market bottoms.... panic sell out of equities and rush into the safety of cash and bonds and all throughout 2009 investors continued to pile into bond funds while shunning equity funds for the most part. Since mid and long term bonds have dropped quite a bit in value from a year ago while equities have soared, it's no wonder only 1 in 3 Americans have seen the value of their portfolio rise from a year ago. What's the motto of this blog again?
As a former advisor I know firsthand how mom and pop mutual fund investor behave during market cycles. You can preach long term all you want but in the end people will succumb to fear near market bottoms and greed near market tops. One thing I miss about my old job was being able to get firsthand knowledge of what joe six pack investor was thinking and how they were acting. Such firsthand knowledge made me alert to a peak in commodities in the summer of 2008 as I saw reckless buying of natural resource sector funds.
Fear and greed. It's all about fear and greed. If you can learn to control these primal instincts you will have taken a very big step to being successful in this game. When the market crashed in the fall of 2008 I was there on the front lines working as an advisor at the time to whiteness the sheer unadulterated panic selling that took place. Where I worked there was an inbound call center. The calling cue was so jammed up with panic sellers that advisors like me who don't normally take inbound calls had to help out. I took so many "get me the fuck out" type calls. I didn't even bother trying to convince them otherwise...they weren't my clients and they were so angry or scared to be convinced anyways. All of this happened when the TSX was crashing down to 10,000 in early October of 2008. I remember saying to myself "this type of off the charts panic selling from joe sixpack has to be the wrong decision and a year from now these people will regret it big time." Well, despite this panic selling I witnessed the TSX still ended up going down another 25% before hitting the final bottom in March of 2009! But I was right. By early October 2009 the TSX was back up to 11200 or thereabouts and now it’s back up to 12044.
Fear and greed. The typical investor will at some point give into these primal instincts. If you can learn to control them you will have taken a very large step at becoming successful in this game. And if you can learn to spot when other people are acting greedy and fearful you are yet another big step closer to success. There are different types of fear and greed. We all know the traditional forms of them but there are ones that aren't as obvious.
Forms of Greed
1)Overinvesting such as going "all in" or even worse using borrowed money. Typically done chasing a hot stock/market.
2)Letting a winning position ride well beyond your target price, what fundamentals dictate or despite danger signs in the hopes of making more money.
3)When it's time to sell a position you place a limit order just above the market in the hopes of squeezing out a few more dollars.
4) When it's time to buy a position you place a limit order just underneath the market in the hopes of saving a few dollars.
Forms of Fear
1)Panic selling during a severe pullback or a crash purely out of self preservation or disgust.
2)Fear of regret: Fear of the possibility that after you sell a losing position it's going to head higher afterwards. This usually causes you to ride losers even further down.
3)Fear of profits slipping away. Cutting a winner too short out of fear that the paper gains will be wiped out due to a pullback.
4) Fear of losing. Investing too little or pulling the plug on a position on just the smallest of red.
How many of you are guilty of committing at least one of the above sins in the recent past? I know I am but I must say I have improved substantially since I've decided to trade/invest full time.
According to a survey conducted, only 1 in 3 Americans say the value of their portfolio has risen from a year ago! That is truly unbelievable given that the market is up 73% since....actually it's not so surprising when you think about it. I've been documenting here for months the ingrained bearishness of retail investors. These market gurus did what they always do near bear market bottoms.... panic sell out of equities and rush into the safety of cash and bonds and all throughout 2009 investors continued to pile into bond funds while shunning equity funds for the most part. Since mid and long term bonds have dropped quite a bit in value from a year ago while equities have soared, it's no wonder only 1 in 3 Americans have seen the value of their portfolio rise from a year ago. What's the motto of this blog again?
As a former advisor I know firsthand how mom and pop mutual fund investor behave during market cycles. You can preach long term all you want but in the end people will succumb to fear near market bottoms and greed near market tops. One thing I miss about my old job was being able to get firsthand knowledge of what joe six pack investor was thinking and how they were acting. Such firsthand knowledge made me alert to a peak in commodities in the summer of 2008 as I saw reckless buying of natural resource sector funds.
Fear and greed. It's all about fear and greed. If you can learn to control these primal instincts you will have taken a very big step to being successful in this game. When the market crashed in the fall of 2008 I was there on the front lines working as an advisor at the time to whiteness the sheer unadulterated panic selling that took place. Where I worked there was an inbound call center. The calling cue was so jammed up with panic sellers that advisors like me who don't normally take inbound calls had to help out. I took so many "get me the fuck out" type calls. I didn't even bother trying to convince them otherwise...they weren't my clients and they were so angry or scared to be convinced anyways. All of this happened when the TSX was crashing down to 10,000 in early October of 2008. I remember saying to myself "this type of off the charts panic selling from joe sixpack has to be the wrong decision and a year from now these people will regret it big time." Well, despite this panic selling I witnessed the TSX still ended up going down another 25% before hitting the final bottom in March of 2009! But I was right. By early October 2009 the TSX was back up to 11200 or thereabouts and now it’s back up to 12044.
Fear and greed. The typical investor will at some point give into these primal instincts. If you can learn to control them you will have taken a very large step at becoming successful in this game. And if you can learn to spot when other people are acting greedy and fearful you are yet another big step closer to success. There are different types of fear and greed. We all know the traditional forms of them but there are ones that aren't as obvious.
Forms of Greed
1)Overinvesting such as going "all in" or even worse using borrowed money. Typically done chasing a hot stock/market.
2)Letting a winning position ride well beyond your target price, what fundamentals dictate or despite danger signs in the hopes of making more money.
3)When it's time to sell a position you place a limit order just above the market in the hopes of squeezing out a few more dollars.
4) When it's time to buy a position you place a limit order just underneath the market in the hopes of saving a few dollars.
Forms of Fear
1)Panic selling during a severe pullback or a crash purely out of self preservation or disgust.
2)Fear of regret: Fear of the possibility that after you sell a losing position it's going to head higher afterwards. This usually causes you to ride losers even further down.
3)Fear of profits slipping away. Cutting a winner too short out of fear that the paper gains will be wiped out due to a pullback.
4) Fear of losing. Investing too little or pulling the plug on a position on just the smallest of red.
How many of you are guilty of committing at least one of the above sins in the recent past? I know I am but I must say I have improved substantially since I've decided to trade/invest full time.
Sunday, March 21, 2010
Thoughts on Canadian Housing
There's a lot to talk about these days. One subject that is often discussed here in Canada is our housing market and whether it is in a bubble. As a recent home buyer this is something I that I've been paying attention to. I came across a 50 page report by Alexandre Pestov who went to school at Schulich School of Business which happens to be where I went. He argues the housing market is in a bubble that's about to burst. I didn't go through the entire 50 pages, but something that caught my eye which made me snicker was when he discussed housing affordability as measured by the % of household income taken up by ownership costs. In his report he touches upon the previous major peak of the housing market which occurred in 1990 and says
The poor affordability during the last bubble was experienced not as much due to inflated housing prices, but rather due to high borrowing costs. .
This is a very important point which I agree with. If you look at real estate downturns in the past most of them are triggered by a sustainted period of rising borrowing costs i.e. rising mortgage rates.
The author then goes on to say
To level the field and understand how today‟s real-estate prices compare to those of the late 80‟s bubble, it is necessary to adjust the affordability measure for mortgage rates.
This guy goes on to adjust current 5 year mortgage rate to 1990 levels which were 115% higher than they are now to come up with an "adjusted affordability" measure. By those measures housing affordability becomes just as poor as it was at the peak of the last major bubble in 1990. I have one word for this analysis...idiotic. Where does he get this notion that 5 yr. mortgage rates are going to jump 115% anytime soon? I realize that a normalized mortgage rate is higher than present levels but to use 1990 as a benchmark is just plain dumb and/or shows a bearish bias. Even if we are on the secular path of higher interest rates from this point on (which we're probably not) it would likely take at least a couple of decades for rates to go back to 1990 levels. The last time rates where at current levels was in the 1940s. It took over 30 years before they doubled from their low point.
This guy's analysis is an example of making the data fit your thesis instead doing it the other way around like you should. But one thing this idiotic analysis proves is that it would take an unrealistic spike in mortgage rates before housing in Canada was as unaffordable as it was at the last major peak which argues the "bubble" is not in danger of busting anytime soon like he thinks.
I'm not saying that housing in Canada is cheap right now...it's not but if you look previous real estate downturns they are triggered by 2 factors. 1) A trend of higher mortgage rates for at least 1 year and 2) weakening employment conditions. We are not seeing those conditions right now.
Remember what I said about cutting through the bullshit and focus on what really counts? You can talk about how the ascent in housing prices has been too high or too much too soon until you are blue in the face and you can show me ratios and statistics all you want but the fact of the matter is that it all boils down to 2 things: mortgage rates and employment trends and it's the former that tends to matter the most. But when you are dealing with certain areas that have a high concentration of employment in any one sector employment trends are probably just as or even more important. Alberta for example is highly dependent on the fate of oil and gas.
Look, there WILL eventually be a housing downturn but it won't happen just because some ratio hits a certain level just like how a stock doesn't turn down when it hits some magic p/e ratio. History shows we would have to see a significant and sustained rise in mortgage rates in Canada before the "bubble" pops. I'm not sure what that rate is but it's probably a lot higher than present levels and so it will take a while before we get there.
A real estate bust in Canada occurring during the early stages of an economic recovery with mortgage rates still very low is a very low probability event....such a thing has NEVER happened. As mentioned before, real estate downturns happen after rates have climbed significantly for a while and that typically happens towards the end of an economic expansion not the beginning! Real estate downturns become crashes when prior to the peak there was reckless activity such as what we saw in the US with the subprime, liar loans, ect. Canada hasn't engaged in such reckless activity.
I remember back in 2002 people would be talking about a housing bubble in the US. During the 2001 recession housing prices dipped ever so slightly before making new highs as low interest rates enticed buyers. Housing prices in the US peaked in the summer of 2005, 3 years after all the bubble talk first started. By that time people had become desensitized about the notion of a bubble and accepted prices as being permanently elevated. We are not at stage yet here in Canada. Even if we are indeed seeing a bubble in real estate, the fact that so many people are talking about it indicates it's not going to burst anytime soon because we haven't reached the desensitized stage yet.
The Canadian government has put in place new measures to discourage speculative activity by investors and stricter lending standards for mortgage applicants. They too are concerned about a bubble forming even though they don't admit it. All I can say is that I have never seen a bubble burst when so many people are worried about it. When enough people drop their guard then it will.
I might sound biased because my wife and I just recently bought a home. However, we are in a good situation because to buy our home we sold our condo for a $100,000 profit after agent fees and closing costs. So even if our new home drops 20% in value we are still ahead of the game. I was well aware of the "bubble" situation before buying but we are in a position whereby we would be able and willing to live in our new home forever if need be making any real estate downturn a non-issue for us.
This is the advice I give my friends who ask me about real estate...if you can afford to buy a home (assuming a higher interest rate than now) and be able to live in it indefinitely if a downturn were to happen then go for it. If not, then rent. Pretty simple. If we do see this "bubble" burst its likely not going to happen for at least another 2-3 years and by then prices will be higher.
Trying to time the real estate market like the stock market is generally not a good idea. If for example you own a home and you expect a crash you might be tempted to sell it and rent for a year or 2. The problem with this strategy is that real estate is not nearly as liquid as stocks are and by the time you take into account the agent fees, closing expenses, ect, you out of pocket 5-8% of your selling price and then you have to go through it all over again (less the agent fees) when you buy back. And what if you get it wrong?
The poor affordability during the last bubble was experienced not as much due to inflated housing prices, but rather due to high borrowing costs. .
This is a very important point which I agree with. If you look at real estate downturns in the past most of them are triggered by a sustainted period of rising borrowing costs i.e. rising mortgage rates.
The author then goes on to say
To level the field and understand how today‟s real-estate prices compare to those of the late 80‟s bubble, it is necessary to adjust the affordability measure for mortgage rates.
This guy goes on to adjust current 5 year mortgage rate to 1990 levels which were 115% higher than they are now to come up with an "adjusted affordability" measure. By those measures housing affordability becomes just as poor as it was at the peak of the last major bubble in 1990. I have one word for this analysis...idiotic. Where does he get this notion that 5 yr. mortgage rates are going to jump 115% anytime soon? I realize that a normalized mortgage rate is higher than present levels but to use 1990 as a benchmark is just plain dumb and/or shows a bearish bias. Even if we are on the secular path of higher interest rates from this point on (which we're probably not) it would likely take at least a couple of decades for rates to go back to 1990 levels. The last time rates where at current levels was in the 1940s. It took over 30 years before they doubled from their low point.
This guy's analysis is an example of making the data fit your thesis instead doing it the other way around like you should. But one thing this idiotic analysis proves is that it would take an unrealistic spike in mortgage rates before housing in Canada was as unaffordable as it was at the last major peak which argues the "bubble" is not in danger of busting anytime soon like he thinks.
I'm not saying that housing in Canada is cheap right now...it's not but if you look previous real estate downturns they are triggered by 2 factors. 1) A trend of higher mortgage rates for at least 1 year and 2) weakening employment conditions. We are not seeing those conditions right now.
Remember what I said about cutting through the bullshit and focus on what really counts? You can talk about how the ascent in housing prices has been too high or too much too soon until you are blue in the face and you can show me ratios and statistics all you want but the fact of the matter is that it all boils down to 2 things: mortgage rates and employment trends and it's the former that tends to matter the most. But when you are dealing with certain areas that have a high concentration of employment in any one sector employment trends are probably just as or even more important. Alberta for example is highly dependent on the fate of oil and gas.
Look, there WILL eventually be a housing downturn but it won't happen just because some ratio hits a certain level just like how a stock doesn't turn down when it hits some magic p/e ratio. History shows we would have to see a significant and sustained rise in mortgage rates in Canada before the "bubble" pops. I'm not sure what that rate is but it's probably a lot higher than present levels and so it will take a while before we get there.
A real estate bust in Canada occurring during the early stages of an economic recovery with mortgage rates still very low is a very low probability event....such a thing has NEVER happened. As mentioned before, real estate downturns happen after rates have climbed significantly for a while and that typically happens towards the end of an economic expansion not the beginning! Real estate downturns become crashes when prior to the peak there was reckless activity such as what we saw in the US with the subprime, liar loans, ect. Canada hasn't engaged in such reckless activity.
I remember back in 2002 people would be talking about a housing bubble in the US. During the 2001 recession housing prices dipped ever so slightly before making new highs as low interest rates enticed buyers. Housing prices in the US peaked in the summer of 2005, 3 years after all the bubble talk first started. By that time people had become desensitized about the notion of a bubble and accepted prices as being permanently elevated. We are not at stage yet here in Canada. Even if we are indeed seeing a bubble in real estate, the fact that so many people are talking about it indicates it's not going to burst anytime soon because we haven't reached the desensitized stage yet.
The Canadian government has put in place new measures to discourage speculative activity by investors and stricter lending standards for mortgage applicants. They too are concerned about a bubble forming even though they don't admit it. All I can say is that I have never seen a bubble burst when so many people are worried about it. When enough people drop their guard then it will.
I might sound biased because my wife and I just recently bought a home. However, we are in a good situation because to buy our home we sold our condo for a $100,000 profit after agent fees and closing costs. So even if our new home drops 20% in value we are still ahead of the game. I was well aware of the "bubble" situation before buying but we are in a position whereby we would be able and willing to live in our new home forever if need be making any real estate downturn a non-issue for us.
This is the advice I give my friends who ask me about real estate...if you can afford to buy a home (assuming a higher interest rate than now) and be able to live in it indefinitely if a downturn were to happen then go for it. If not, then rent. Pretty simple. If we do see this "bubble" burst its likely not going to happen for at least another 2-3 years and by then prices will be higher.
Trying to time the real estate market like the stock market is generally not a good idea. If for example you own a home and you expect a crash you might be tempted to sell it and rent for a year or 2. The problem with this strategy is that real estate is not nearly as liquid as stocks are and by the time you take into account the agent fees, closing expenses, ect, you out of pocket 5-8% of your selling price and then you have to go through it all over again (less the agent fees) when you buy back. And what if you get it wrong?
Saturday, March 20, 2010
Bear blog deterioration
This weekend a popular bear blog I track has called it quits. I'm not going to mention it for the sake of not starting some pissing match. The author of the blog said he's no longer going to do his daily rants anymore. Instead he's simply going to focus on managing his "subscriber services" (God help them). His reason for quitting the blog is that nobody listens to him anymore and nobody is supporting the blog by subscribing to his services so he feels he is wasting his time. Well, when your readership is on the wrong end of a 1 year 75% rally they probably don't have the confidence nor the cash to subscribe.
Let me tell you something about subscriber services that give you buy and sell signals. Fuck them. Wanna know who George Soros and Warren Buffet subscribe to?....George Soros and Warren Buffet that's who. You can and should learn from others who have been successful and it's perfectly fine to read about the opinions of others (in fact you should be willing to read what both bulls and bears have to say to get a balanced perspective) but in the end you have to be your own guru. Those who are really successful in the market making bundles of money don't concern themselves with the hassles of rinky dink subscriptions...they are too busy making money. The only subscriptions worth signing up to are market data and charts. The only one I currently use is decisionpoint.com. It's well worth the money.
As Ivan Draggo said "I fight for me!" I write this blog for cathartic purposes. It's also a good way for me to look back whenever I feel a particular way about the market as I did in the past and then see how things turned out. Also, getting feedback and other perspectives is beneficial but not critical. If nobody showed up here I wouldn't give a rat's ass. It's been about 11 months now and I probably have less than 10 regular readers and it doesn't bother me one bit unlike like that crybaby who's shutting down his blog.
I've also noticed deterioration in other bearish blogs. They aren't making as many posts as they used to. The author of one of them has allowed for other people to make posts which means he's too dejected to chime in all the time. Is this a contrarian sign that another bear market is around the corner? I don't think so but it may very well signal a correction in the near future.
First of all, these bears are capitulating begrudgingly. They haven't converted to bulls nor have given up completely. Some have given up by force (i.e. by getting crippled or wiped out) while others have tried to become more "flexible" by attempting to play both sides while others are still outright permabearing. None of these clowns have actually converted to the bull side outright and are still bears deep down. Bull markets don't end with bears simply capitulating begrudgingly like this. They end when most people have embraced the bull market i.e. when most people are believers of the bull market. The destruction of so many bears like we are seeing right now means we are probably near the tail end of the first phase of the bull market. The situation right now reminds me very much of the destruction of tech/internet retail bulls occurred in 2001. Their despair didn't signal the end of the bear market but simply led to the recognition phase of it. Then the last of the holdouts got wiped out in 2002. Bull markets take more time for people to be converted from bears to bulls because fear is at least twice as strong as greed and bull markets move a lot slower than bear markets (aside from the initial 10-12 month rally that typically occurs off the bear market bottom). Since we've just been through 2 devastating bear markets in a span of 10 years bearishness seems to be deeply ingrained almost permanently so.
Let me tell you something about subscriber services that give you buy and sell signals. Fuck them. Wanna know who George Soros and Warren Buffet subscribe to?....George Soros and Warren Buffet that's who. You can and should learn from others who have been successful and it's perfectly fine to read about the opinions of others (in fact you should be willing to read what both bulls and bears have to say to get a balanced perspective) but in the end you have to be your own guru. Those who are really successful in the market making bundles of money don't concern themselves with the hassles of rinky dink subscriptions...they are too busy making money. The only subscriptions worth signing up to are market data and charts. The only one I currently use is decisionpoint.com. It's well worth the money.
As Ivan Draggo said "I fight for me!" I write this blog for cathartic purposes. It's also a good way for me to look back whenever I feel a particular way about the market as I did in the past and then see how things turned out. Also, getting feedback and other perspectives is beneficial but not critical. If nobody showed up here I wouldn't give a rat's ass. It's been about 11 months now and I probably have less than 10 regular readers and it doesn't bother me one bit unlike like that crybaby who's shutting down his blog.
I've also noticed deterioration in other bearish blogs. They aren't making as many posts as they used to. The author of one of them has allowed for other people to make posts which means he's too dejected to chime in all the time. Is this a contrarian sign that another bear market is around the corner? I don't think so but it may very well signal a correction in the near future.
First of all, these bears are capitulating begrudgingly. They haven't converted to bulls nor have given up completely. Some have given up by force (i.e. by getting crippled or wiped out) while others have tried to become more "flexible" by attempting to play both sides while others are still outright permabearing. None of these clowns have actually converted to the bull side outright and are still bears deep down. Bull markets don't end with bears simply capitulating begrudgingly like this. They end when most people have embraced the bull market i.e. when most people are believers of the bull market. The destruction of so many bears like we are seeing right now means we are probably near the tail end of the first phase of the bull market. The situation right now reminds me very much of the destruction of tech/internet retail bulls occurred in 2001. Their despair didn't signal the end of the bear market but simply led to the recognition phase of it. Then the last of the holdouts got wiped out in 2002. Bull markets take more time for people to be converted from bears to bulls because fear is at least twice as strong as greed and bull markets move a lot slower than bear markets (aside from the initial 10-12 month rally that typically occurs off the bear market bottom). Since we've just been through 2 devastating bear markets in a span of 10 years bearishness seems to be deeply ingrained almost permanently so.
Friday, March 19, 2010
Worst trader in the world calls it quits....my thoughts about trading options
Remember how I said I have a folder which contains a list of loser traders that I follow? Well, one of my 2 all stars is calling quits. He has to be the worst trader to have ever stepped on this earth..no joke! He recently came clean with his wife about the losses he has sustained during these past 2 years and he shared on a blog what he was going to say. Read this jaw dropping disaster...
Dear ____,
We need to talk and I need to be completely honest about some very bad news about my stock trading. I confess that I have been lying to you about my stock trading for the past two years and I have lost some large amounts of money. I apologize for withholding information from you and I realize that I have seriously betrayed your trust. I also realize that I have ignored your repeated requests to stop trading stock options and we are in serious trouble because of my foolish mistakes. I hope that I can someday regain your trust, but I know that may never happen.
Now, if she does not pull a knife from the kitchen drawer by this point, I have to explain the following details:
The bad news is that I have lost over $100 K from our joint investment account over the last two years. The net effect is that we owe $10000 to the IRS because I withdrew $40000 from my IRA to do some stock option trading. I was a complete failure at this trading project and have lost all of the money and have no money left to pay the tax bill. To make matters worse, I withdrew $7000 from our savings account in January to try to make enough money from trading to pay the IRS bill. I cannot do any of this successfully and lost all of the $7000 too. The only thing I can do at this point is to take $17000 from my Dad’s trust fund inheritance money to pay the IRS bill and restore our savings account.
The other bad news that I have to share is that my Dad loaned a large sum of money to me in 2008 for me to invest and I lost all of that cash by January 2009. Because of this huge mistake, my trust inheritance from Dad is reduced by $65000 and there is really only about $20000 left in the trust (maybe $25000 if I am really lucky).
Finally, to make matters worse, I have lost all of the money in my IRA ($300k) due to some very stupid trading. I can give you all the details if you want, but I am sure you do not want to know and there is nothing that can be done about this anyway.
This is a self destructive person with a gambling addiction to the extreme. This guy primarily traded options and folks, let me tell you about options, if you don't use them properly they are as dangerous as a child playing with a loaded gun like this guy learned the hard way. In fact, you'd be better off if you just never touch options whatsoever and I'll explain why.
The stock market attracts the gambling types...those who want to get rich quick without having to work. These people tend to be options traders, future traders, day traders or some combo of them. A lot of people who trade options tend to trade front month or 2 month expiry with out of the money (OTM) or at the money (ATM) strikes. They trade these because these options have high leverage and therefore offer the potential for big gains in a short period of time.
When you buy a short dated OTM or ATM option you have 3 things working against you immediately: time premium, volatility premium, wide bid-ask spread
To make a successful OTM or ATM trade, not only do you have to get the direction of the stock right (which is hard enough for most people) but you also have a very limited time to get it right. If you managed to succeed so far, next you need the stock to move in a magnitude that is greater than the volatility premium built into the option price. Therefore, it's possible for you to be right about a stock's direction, get the timing right and still lose money! Finally, you get nicked by the wide bid ask spread.
My advice about OTM and ATM options is to generally avoid them but if you want to know how to use them in the most effective way possible here's how….
1) Trend Trade
Buy the option on a counter-trend move of a well established trend (example, buy a call on the dip of an up trending stock) . Don't pick tops or bottoms with short dated ATM or OTM options. …you are almost guaranteed to lose money if you do that. The trend is indeed your friend because odds are a trend that's in place will likely continue to carry on in that direction and gather steam (especially during bear markets and the tail end of a bubble move). This gives you the best shot to overcome the timing and volatility premium factors that work against you.
Use an "all or nothing" approach. Either you make 100%+ or potentially nothing. The noise volatility and wide bid ask spreads make money management (i.e. trying to cut losses short) very ineffective for these types of options.
Most people get crushed playing OTM or ATM options because they tend to sell if they make a quick 10-20% but when the position goes against them, they ride it right into the ground for heavy losses and a big factor for doing that are the wide spreads. This is a very poor risk/reward equation which is why you should aim for big gains if you play OTM or ATM options….go big or go bust. If you don’t think you could make 100% or more on the trade then don’t make the trade.
Use at least 3 months until expiration. Give yourself time to be right.
2) Hedging
Using OTM and ATM options is a cheap way to hedge a portfolio. This is the only time you should buy an option that goes against the trend (example buying a put in a rising trend). Again, you should give yourself at least 3 months until expiration.
Don't go overboard with the hedging trying to profit overall from a counter trend move.
In my opinion, you should just stay away from ATM or OTM options most of the time. If you want to use options smartly for leverage then you use long dated, deep in the money options. For example, you can get about 4 to 1 leverage on the SPY and pay only a 3% premium if you buy a September 90 call which means if the SPY trades flat from now until September expiration, you would only lose 3% of your capital. This is far better than using those double or triple leverage ETFS whereby if you were to hold from now until September you can lose a ton of money if the market is flat due to the "decay" factor…you can even lose if the market actually goes in the direction you are positioned for!
Whatever you do, don't be like the sorry SOB I featured above who literally lost everything playing around with options.
Dear ____,
We need to talk and I need to be completely honest about some very bad news about my stock trading. I confess that I have been lying to you about my stock trading for the past two years and I have lost some large amounts of money. I apologize for withholding information from you and I realize that I have seriously betrayed your trust. I also realize that I have ignored your repeated requests to stop trading stock options and we are in serious trouble because of my foolish mistakes. I hope that I can someday regain your trust, but I know that may never happen.
Now, if she does not pull a knife from the kitchen drawer by this point, I have to explain the following details:
The bad news is that I have lost over $100 K from our joint investment account over the last two years. The net effect is that we owe $10000 to the IRS because I withdrew $40000 from my IRA to do some stock option trading. I was a complete failure at this trading project and have lost all of the money and have no money left to pay the tax bill. To make matters worse, I withdrew $7000 from our savings account in January to try to make enough money from trading to pay the IRS bill. I cannot do any of this successfully and lost all of the $7000 too. The only thing I can do at this point is to take $17000 from my Dad’s trust fund inheritance money to pay the IRS bill and restore our savings account.
The other bad news that I have to share is that my Dad loaned a large sum of money to me in 2008 for me to invest and I lost all of that cash by January 2009. Because of this huge mistake, my trust inheritance from Dad is reduced by $65000 and there is really only about $20000 left in the trust (maybe $25000 if I am really lucky).
Finally, to make matters worse, I have lost all of the money in my IRA ($300k) due to some very stupid trading. I can give you all the details if you want, but I am sure you do not want to know and there is nothing that can be done about this anyway.
This is a self destructive person with a gambling addiction to the extreme. This guy primarily traded options and folks, let me tell you about options, if you don't use them properly they are as dangerous as a child playing with a loaded gun like this guy learned the hard way. In fact, you'd be better off if you just never touch options whatsoever and I'll explain why.
The stock market attracts the gambling types...those who want to get rich quick without having to work. These people tend to be options traders, future traders, day traders or some combo of them. A lot of people who trade options tend to trade front month or 2 month expiry with out of the money (OTM) or at the money (ATM) strikes. They trade these because these options have high leverage and therefore offer the potential for big gains in a short period of time.
When you buy a short dated OTM or ATM option you have 3 things working against you immediately: time premium, volatility premium, wide bid-ask spread
To make a successful OTM or ATM trade, not only do you have to get the direction of the stock right (which is hard enough for most people) but you also have a very limited time to get it right. If you managed to succeed so far, next you need the stock to move in a magnitude that is greater than the volatility premium built into the option price. Therefore, it's possible for you to be right about a stock's direction, get the timing right and still lose money! Finally, you get nicked by the wide bid ask spread.
My advice about OTM and ATM options is to generally avoid them but if you want to know how to use them in the most effective way possible here's how….
1) Trend Trade
Buy the option on a counter-trend move of a well established trend (example, buy a call on the dip of an up trending stock) . Don't pick tops or bottoms with short dated ATM or OTM options. …you are almost guaranteed to lose money if you do that. The trend is indeed your friend because odds are a trend that's in place will likely continue to carry on in that direction and gather steam (especially during bear markets and the tail end of a bubble move). This gives you the best shot to overcome the timing and volatility premium factors that work against you.
Use an "all or nothing" approach. Either you make 100%+ or potentially nothing. The noise volatility and wide bid ask spreads make money management (i.e. trying to cut losses short) very ineffective for these types of options.
Most people get crushed playing OTM or ATM options because they tend to sell if they make a quick 10-20% but when the position goes against them, they ride it right into the ground for heavy losses and a big factor for doing that are the wide spreads. This is a very poor risk/reward equation which is why you should aim for big gains if you play OTM or ATM options….go big or go bust. If you don’t think you could make 100% or more on the trade then don’t make the trade.
Use at least 3 months until expiration. Give yourself time to be right.
2) Hedging
Using OTM and ATM options is a cheap way to hedge a portfolio. This is the only time you should buy an option that goes against the trend (example buying a put in a rising trend). Again, you should give yourself at least 3 months until expiration.
Don't go overboard with the hedging trying to profit overall from a counter trend move.
In my opinion, you should just stay away from ATM or OTM options most of the time. If you want to use options smartly for leverage then you use long dated, deep in the money options. For example, you can get about 4 to 1 leverage on the SPY and pay only a 3% premium if you buy a September 90 call which means if the SPY trades flat from now until September expiration, you would only lose 3% of your capital. This is far better than using those double or triple leverage ETFS whereby if you were to hold from now until September you can lose a ton of money if the market is flat due to the "decay" factor…you can even lose if the market actually goes in the direction you are positioned for!
Whatever you do, don't be like the sorry SOB I featured above who literally lost everything playing around with options.
Thursday, March 18, 2010
fading myself
I've been having a phenomenal run these past weeks and a large reason for that was due to my beloved bev.to. I bought this one in September at .52 and this morning I sold it all at about an average of 3.35. Why did I do this? There were a few reasons. Part of it has to do with selling into strength on good news which is typically a good thing to do with micro caps especially when it renders the stock overbought on high volume because most of the time a pullback will ensue. The other part has to do with fading the euphoria I was feeling about the good run I was having. Anytime I would have such euphoria in the past I would tend to suffer a short term setback shortly afterwards. Finally, I felt it was time to let go of the stock because when I was really honest with myself, I didn't really know the company specific fundamentals enough to have the conviction to "press" my position after such a run up. This stock is largely influenced on its own story as opposed to macro factors (high idiosyncratic risk). The name of this blog is bull, bears and pigs and I don't want to be the latter. Although bev.to could still go up from here, based upon the reasons above it was time to end this love affair....at least for now.
Anytime I look to buy a stock first and foremost the chart has to be appealing. This is what the chart bev.to looked like when I bought in.
When I first saw this chart I said to myself "what a thing of beauty". If you can find stocks that exhibit this sort of gentle pattern of higher highs and higher lows you could practically buy it blindly during the consolidation phase after a ST peak which is what I did. I preformed my DD after buying and then added more later on.
As I said before, the first thing I look for in a stock are great charts. Forget balance sheets and income statements, those are secondary. The market tells all. Financial statements only tell you about the past which the market doesn't give a shit about. A stock with crummy financials but with a chart pattern similar to the above is likely sending the message that the financials are about to get a whole lot better in the near future. Can the market get it wrong? Can it just be a head fake? Of course....this is not a game of certainties but of probabilities.
Right now I'm sitting on quite a bit of cash searching for the next bev.to.
Anytime I look to buy a stock first and foremost the chart has to be appealing. This is what the chart bev.to looked like when I bought in.
When I first saw this chart I said to myself "what a thing of beauty". If you can find stocks that exhibit this sort of gentle pattern of higher highs and higher lows you could practically buy it blindly during the consolidation phase after a ST peak which is what I did. I preformed my DD after buying and then added more later on.
As I said before, the first thing I look for in a stock are great charts. Forget balance sheets and income statements, those are secondary. The market tells all. Financial statements only tell you about the past which the market doesn't give a shit about. A stock with crummy financials but with a chart pattern similar to the above is likely sending the message that the financials are about to get a whole lot better in the near future. Can the market get it wrong? Can it just be a head fake? Of course....this is not a game of certainties but of probabilities.
Right now I'm sitting on quite a bit of cash searching for the next bev.to.
Wednesday, March 17, 2010
Market makes new highs....but still getting no respect
Anytime the market makes a new 52 week high like today, I like to get a feel for what the amateur traders/investors are thinking. Normally and naturally, you would see enthusiasm and some enthusiasm is perfectly justified. Only when you see euphoria should your contrarian radar go off. Instead, I'm still seeing plenty of disbelief and hatred which means the suckers are either still short or sitting on the sidelines. Based on anecdotes, I find that a lot of the trapped bears from 3 weeks ago are still trapped. One by one they are giving up but only by force not by choice (i.e. not because they converted to bulls). Many of the bagholders appear to be holding April puts it seems. Thus, it wouldn't surprise me to see the market go higher or sideways from here until close to April expiration to crush these jokers first and then we see a sell-off of significance. That would be quite fitting with the motto of this blog wouldn't it? But don't be piggish here. The market is quite extended in the ST and it would be prudent to starting take some longs off the table here or use something like a covered call or collar strategy.
We could still very well (and probably will) continue to see new highs with some shallow dips along the way but the risk/reward in the ST isn't really good here on the long side. But for LT positions, the outlook is still good. Earnings are trending up, monetary conditions are still very accommodative and the retail suckers who have been getting crushed since last spring are still showing little in the way of humility. Sure, many are quite depressed, angry and frustrated (which is a sign that a ST pullback isn't too far off) but they are still not giving this Bull Run any respect whatsoever.
I continue to see commercials on TV which say things like “in times like these” or “in this economy”. The most powerful and reliable contrarian indicator is when you see the stock market act completely opposite of the sentiment towards the economy you see in commercials, TV shows and in movies. By the time the lemmings in the media are aware and convinced of a trend in the economy or the stock market it’s probably close to or already done running its course and man did they ever nail it. The media has been bearish for well over a year now in commericals, sitcoms and even movies. Micheal Moore's movie "Capitalism: a love story" was released last year which discusses how people are getting screwed by the greed in Corporate America. That guy needs to drop a couple of tons. In April the movie "Wall Street 2" is going to be released and the focus of the movie will be about a financial meltdown similar to that of 2008, yet another example of the media being late to the party. Wall street 1 was released in 1987 whereby the famous catch phrase in the movie is “greed is good”. What happens in 1987? The biggest crash since 1929. You see what I mean!? The media is the ultimate dumb money indicator and they are still bearish folks. Just remember that during the next correction.
We could still very well (and probably will) continue to see new highs with some shallow dips along the way but the risk/reward in the ST isn't really good here on the long side. But for LT positions, the outlook is still good. Earnings are trending up, monetary conditions are still very accommodative and the retail suckers who have been getting crushed since last spring are still showing little in the way of humility. Sure, many are quite depressed, angry and frustrated (which is a sign that a ST pullback isn't too far off) but they are still not giving this Bull Run any respect whatsoever.
I continue to see commercials on TV which say things like “in times like these” or “in this economy”. The most powerful and reliable contrarian indicator is when you see the stock market act completely opposite of the sentiment towards the economy you see in commercials, TV shows and in movies. By the time the lemmings in the media are aware and convinced of a trend in the economy or the stock market it’s probably close to or already done running its course and man did they ever nail it. The media has been bearish for well over a year now in commericals, sitcoms and even movies. Micheal Moore's movie "Capitalism: a love story" was released last year which discusses how people are getting screwed by the greed in Corporate America. That guy needs to drop a couple of tons. In April the movie "Wall Street 2" is going to be released and the focus of the movie will be about a financial meltdown similar to that of 2008, yet another example of the media being late to the party. Wall street 1 was released in 1987 whereby the famous catch phrase in the movie is “greed is good”. What happens in 1987? The biggest crash since 1929. You see what I mean!? The media is the ultimate dumb money indicator and they are still bearish folks. Just remember that during the next correction.
Monday, March 15, 2010
Looking ahead...watch out for China
So, what's going to be the next "excuse" for the market to sell off? We've seen the market work its way through swine flu fears, Dubai fears, Obama bank regulation fears and now just recently Greece fears. All of the above provided excuses for the market to sell off, but because these fears do little the derail the recovery in earnings - the ONLY thing that really matters at the end of the day; they turned out to be just corrections. These types of one time exogenous events never derail bull markets. What derails bull markets over 90% of the times are sustained tight monetary conditions that eventually squeeze profits and tips the economy into recession. You know such conditions are in place when there is an inverted yield curve. A lot of people point out the subprime blow up as the trigger to the collapse in 2008. That's true, but the pin the popped the subprime bubble was tight money.
For a few months now, China has engaged in "soft" tightening policies to nip the bud of what they believe is an overheating economy, namely in real estate. After seeing what happened in the US when a real estate bust turns ugly, I'm sure Chinese officials don't want the same thing to happen.
I use the term soft tightening because they haven't raised lending rates but rather they have been taking alternative measures to slow things down. I'm no economist but I believe what Chinese officials are doing is very savvy. They are taking preemptive measures to prevent a dangerous real estate bubble from developing. Such measures include raising bank reserve ratios, reinstating the business tax exemption period for pre-owned home sales to five years from two (which discourages flipping); increasing the minimum down payment developers must pay for land purchases and more.
Lending rates (i.e. interest rates) have always been the big kahuna when determining whether overall monetary conditions are tight or not. Since lending rates in China (and the world) remain historically low these "soft" tightening measures being taken by China shouldn't slow down their economy to the point where boom turns to bust but we could very well see signs of deceleration come spring or summer and that could spook the markets into dreading about a "double dip" recession. If we do start to see signs of deceleration in China commodities would likely drop very sharply.
The message of the markets suggest that I could very well be correct in believing that China may start showing visible signs of a slowdown in the near future. The Shanghai Comp and the Hang Seng are both looking rather weak given the strength in the global markets as of late. In fact, they have been showing relative weakness vs. the US and European indices since mid July and especially since December. As the world markets have been making or are close to making new 52 week highs last week, the Shanghai and Hang Seng are still below their 52 week highs 13% and 11% respectively. That Shanghai actually peaked way back in July. If there's anything to pay attention to and worry about it's not Greece or some other one off... its China. Remember, at the bear market bottom last March as the US and European markets were making new lows, the Chinese markets made a higher low showing significant relative strength which turned out to be a leading indicator. Now China has failed to make a new high while the rest of the world is. Could the Chinese market be a leading indicator again to the downside this time? I think yes, but only for the IT term.
So how worried should we be about a China slowdown? Not much at this point but enough to be on guard for another scare in the market sometime in the coming weeks/months. Given that earnings momentum is strong on the upside with monetary conditions still very favorable all over the world, as China slows the rest of world should be able to pick up the slack and it's likely any Chinese moderation in growth will be just that....a moderation unless they raise rates substantially and any China related weakness in the markets would again prove to be just a correction in an ongoing bull market. Even if China ends up having a hard landing the rest of the world may have very well recovered enough to handle it. After all, China only accounts for about 7-8% of Global GDP (although a Chinese hard landing would likely hurt Japan too which accounts for 8-9% of GDP).
In early or mid 2008 I remember reading a foolish argument by bulls such as Ken Fisher about how a booming China was going to save the rest of the slumping world similar to how the US saved emerging markets in 1998 when they had a crisis. That argument was foolish for 2 reasons 1) China is too small to save the rest of the world and 2) China's growth is largely dependant on exports to the rest of the world which was hurting. Since that argument turned out to be bogus, then it must mean the opposite could in fact be true...that a slumping China could be handled by the rest of the world i.e. it wouldn't be enough to derail the prevailing positive growth trends in non-Chinese countries (except for perhaps Japan).
The bottom line is this....we're likely still in consolidation mode here even if the market manages to make new highs in the coming weeks. There's still potential for more worries in the weeks/months ahead and my best guess would be that a Chinese slowdown is going to be one of them. Such concerns would likely be short lived as per the reasons I discussed above. Here's another reason not to fear the end of this bull run - the advance decline line. It has made a significant new 52 week high last week which means that the breadth of the market is still very strong i.e. market is showing very good internal strength. During the topping process of a bull market (which typically lasts several weeks or even months), as the market makes new highs or retests previous ones it does so with less and less stocks participating. So, on the surface the market appears strong but internally it's deteriorating. It’s like meeting a gorgeous girl but then you realize she’s as dumb as a post and her hot body is the result of diet pills and semi-starvation.
With the market still strong internally, the yield curve still very steeply sloped and with so many amateur investors still LT bearish, aside from corrections, the odds of the bull market terminating anytime soon are close to nil.
For a few months now, China has engaged in "soft" tightening policies to nip the bud of what they believe is an overheating economy, namely in real estate. After seeing what happened in the US when a real estate bust turns ugly, I'm sure Chinese officials don't want the same thing to happen.
I use the term soft tightening because they haven't raised lending rates but rather they have been taking alternative measures to slow things down. I'm no economist but I believe what Chinese officials are doing is very savvy. They are taking preemptive measures to prevent a dangerous real estate bubble from developing. Such measures include raising bank reserve ratios, reinstating the business tax exemption period for pre-owned home sales to five years from two (which discourages flipping); increasing the minimum down payment developers must pay for land purchases and more.
Lending rates (i.e. interest rates) have always been the big kahuna when determining whether overall monetary conditions are tight or not. Since lending rates in China (and the world) remain historically low these "soft" tightening measures being taken by China shouldn't slow down their economy to the point where boom turns to bust but we could very well see signs of deceleration come spring or summer and that could spook the markets into dreading about a "double dip" recession. If we do start to see signs of deceleration in China commodities would likely drop very sharply.
The message of the markets suggest that I could very well be correct in believing that China may start showing visible signs of a slowdown in the near future. The Shanghai Comp and the Hang Seng are both looking rather weak given the strength in the global markets as of late. In fact, they have been showing relative weakness vs. the US and European indices since mid July and especially since December. As the world markets have been making or are close to making new 52 week highs last week, the Shanghai and Hang Seng are still below their 52 week highs 13% and 11% respectively. That Shanghai actually peaked way back in July. If there's anything to pay attention to and worry about it's not Greece or some other one off... its China. Remember, at the bear market bottom last March as the US and European markets were making new lows, the Chinese markets made a higher low showing significant relative strength which turned out to be a leading indicator. Now China has failed to make a new high while the rest of the world is. Could the Chinese market be a leading indicator again to the downside this time? I think yes, but only for the IT term.
So how worried should we be about a China slowdown? Not much at this point but enough to be on guard for another scare in the market sometime in the coming weeks/months. Given that earnings momentum is strong on the upside with monetary conditions still very favorable all over the world, as China slows the rest of world should be able to pick up the slack and it's likely any Chinese moderation in growth will be just that....a moderation unless they raise rates substantially and any China related weakness in the markets would again prove to be just a correction in an ongoing bull market. Even if China ends up having a hard landing the rest of the world may have very well recovered enough to handle it. After all, China only accounts for about 7-8% of Global GDP (although a Chinese hard landing would likely hurt Japan too which accounts for 8-9% of GDP).
In early or mid 2008 I remember reading a foolish argument by bulls such as Ken Fisher about how a booming China was going to save the rest of the slumping world similar to how the US saved emerging markets in 1998 when they had a crisis. That argument was foolish for 2 reasons 1) China is too small to save the rest of the world and 2) China's growth is largely dependant on exports to the rest of the world which was hurting. Since that argument turned out to be bogus, then it must mean the opposite could in fact be true...that a slumping China could be handled by the rest of the world i.e. it wouldn't be enough to derail the prevailing positive growth trends in non-Chinese countries (except for perhaps Japan).
The bottom line is this....we're likely still in consolidation mode here even if the market manages to make new highs in the coming weeks. There's still potential for more worries in the weeks/months ahead and my best guess would be that a Chinese slowdown is going to be one of them. Such concerns would likely be short lived as per the reasons I discussed above. Here's another reason not to fear the end of this bull run - the advance decline line. It has made a significant new 52 week high last week which means that the breadth of the market is still very strong i.e. market is showing very good internal strength. During the topping process of a bull market (which typically lasts several weeks or even months), as the market makes new highs or retests previous ones it does so with less and less stocks participating. So, on the surface the market appears strong but internally it's deteriorating. It’s like meeting a gorgeous girl but then you realize she’s as dumb as a post and her hot body is the result of diet pills and semi-starvation.
With the market still strong internally, the yield curve still very steeply sloped and with so many amateur investors still LT bearish, aside from corrections, the odds of the bull market terminating anytime soon are close to nil.
Thursday, March 11, 2010
Soul searching bears
Ever hear the expression "a watched pot never boils"? Well, that's kind of what we got here with the market. Coming into this week a lot of people knew the market got very overbought and so these people tried to game the pullback that just "had to" happen. At the same time there are trapped bears from 2-3 weeks ago who I'm sure are waiting for some sort of a dip to at least cut losses. What tends to happen in these situations is sideways or slightly down action for a few days followed by a pop higher which is what indeed did happen. Now here we are back at the 52 week high for the SPX. As mentioned before, the growth sensitive indices such as the NASDAQ and RUT have already made new 52 week highs a few days prior and the SPX was simply dragging its lazy ass to catch up.
Browsing the blogs I can still detect quite a bit of pain and despair from retail bears tonight. There's still quite a few who haven't thrown in the towel after getting caught short a few weeks back. They are all second guessing themselves here. Some are hoping for the "double top" possibility others feel such a thing happening would be too obvious and we need to make new highs to "squeeze out all the bears" before the market can tank again (this is what I think will happen). But what these trapped bears must realize is that it's THEM who are part of those same bears that need to be squeezed!
Some of the die hards are questioning their faith in the bear case all together and swear they will be more flexible towards the long side. I've seen this happen time and time again over the past 12 months when these guys get burned. All it takes is a drop of 1% for these jokers to run for the hills and go back to permabearing....akin to an abusive spouse who swears he'll never raise a hand again but then gets drunk and angry again the next week. These jokers are in the bargaining stage of grief. Who are they kidding? Their deep rooted bearish biases will never allow them to play the long side successfully because they have near zero conviction towards it.
Around mid November I made a post titled "a watched pot never boils" when the SPX was around 1110. The market feels very similar to that period right now because like then, the market got overbought, bears got trapped and a lot of people where trying to game the pullback. What ended up happening is that the market still found a way to grind higher for another 40 points despite signs of complacency. Eventually though, about 2 months later after torturing most bears into submission, the market peaked and those gains were given up and then some as we hit 1045 in early February. I don't think it will take 2 months to top like before but I think at least 2-3 weeks of further marginal upside or sideways action is in store before enough bears have been shaken out and enough weak bulls have been sucked in before the next correction begins.
Again, this is just a guess on my part. Who knows, I might even consider playing a small downside spec trade if and only if the risk/reward is heavily skewed towards downside. But I will never go net short in a bull market even if I feel strong about a correction comming. I've learned that in bull markets you will keep yourself out of a lot of trouble if you resist going net short to try and profit from a minor correction. It's OK to raise cash or hedge a bit when things gets a bit frothy but don't overdo it or you will regret it one day. Big money is made riding big trends and surprises in a bull market tend to be on the upside which can and will make you look foolish eventually if you try to game all the minor corrections. This is why in a bull market, buy and hold is the best strategy...you will have a hard time beating it trust me.
The bottom line is that I still believe we are in a consolidation phase here and so I don't think the market is going to run away on the upside even though marginal new highs is likely. I may consider a small downside bet in the coming weeks but LT I remain bullish.
Browsing the blogs I can still detect quite a bit of pain and despair from retail bears tonight. There's still quite a few who haven't thrown in the towel after getting caught short a few weeks back. They are all second guessing themselves here. Some are hoping for the "double top" possibility others feel such a thing happening would be too obvious and we need to make new highs to "squeeze out all the bears" before the market can tank again (this is what I think will happen). But what these trapped bears must realize is that it's THEM who are part of those same bears that need to be squeezed!
Some of the die hards are questioning their faith in the bear case all together and swear they will be more flexible towards the long side. I've seen this happen time and time again over the past 12 months when these guys get burned. All it takes is a drop of 1% for these jokers to run for the hills and go back to permabearing....akin to an abusive spouse who swears he'll never raise a hand again but then gets drunk and angry again the next week. These jokers are in the bargaining stage of grief. Who are they kidding? Their deep rooted bearish biases will never allow them to play the long side successfully because they have near zero conviction towards it.
Around mid November I made a post titled "a watched pot never boils" when the SPX was around 1110. The market feels very similar to that period right now because like then, the market got overbought, bears got trapped and a lot of people where trying to game the pullback. What ended up happening is that the market still found a way to grind higher for another 40 points despite signs of complacency. Eventually though, about 2 months later after torturing most bears into submission, the market peaked and those gains were given up and then some as we hit 1045 in early February. I don't think it will take 2 months to top like before but I think at least 2-3 weeks of further marginal upside or sideways action is in store before enough bears have been shaken out and enough weak bulls have been sucked in before the next correction begins.
Again, this is just a guess on my part. Who knows, I might even consider playing a small downside spec trade if and only if the risk/reward is heavily skewed towards downside. But I will never go net short in a bull market even if I feel strong about a correction comming. I've learned that in bull markets you will keep yourself out of a lot of trouble if you resist going net short to try and profit from a minor correction. It's OK to raise cash or hedge a bit when things gets a bit frothy but don't overdo it or you will regret it one day. Big money is made riding big trends and surprises in a bull market tend to be on the upside which can and will make you look foolish eventually if you try to game all the minor corrections. This is why in a bull market, buy and hold is the best strategy...you will have a hard time beating it trust me.
The bottom line is that I still believe we are in a consolidation phase here and so I don't think the market is going to run away on the upside even though marginal new highs is likely. I may consider a small downside bet in the coming weeks but LT I remain bullish.
Wednesday, March 10, 2010
Pay attention to the leaders and the losers
I've stressed many times in the past to follow the market leader i.e. the sector that is leading the strength (or weakness) of the overall market. In the bear market it was wise to follow the banking index which led the way to the downside. During this bull market tech has been the leader and so it pays to follow it. During the past 12 months whenever the NASDAQ has made a new 52 week high it wasn't too long before the lagging SPX and DOW followed suit. The equally weighted SPX has actually in fact made a new 52 week high along with key sectors such as the consumer discretionary and retail. Small and mid cap sectors have also made new 52 week highs. The fact that the growth sensitive smaller caps have been outpacing large caps is also another healthy sign for the market longer term. I still think we are in a sideways type consolidation phase here for the overall market as measured by the SPX with the possibility for marginal new 52 highs but I suspect every last bear is going to get squeezed before we see any kind of meaningful dip and that probably entails a move above 1150. That's my best guess.
I've mentioned before that there's a lot of ways to study the market but that only few ways are effective. One very unusual but effective method I have is to keep tabs of what the losers are thinking. By losers I'm referring to message board and blog posters who have been atrocious at calling the market and display traits of an amateur. I have a folder in my favorites tab labeled "losers" which tracks these posters. I currently have 6 people in my loser folder. The top 2 are my "all star losers". One of them has freely admitted to having blown his entire $300K IRA with his trades and is now down to his last $500!!!! In the past 6 months he has literally been on the wrong side of over 90% of his trades. Never have I seen such an impulsive, undisciplined trader in my life. He has got to be the world’s worst trader....and I'm not even exaggerating! The other all star loser has openly claimed to have stopped trading since November 2008 and yet he posts at least 20 messages a day of nonstop doom and gloom. He's in his 40's and lives alone probably never been married or laid for that matter. To be bearish LT would be to be in agreement with this pathetic loser, therefore you must fade this idiot no if ands or buts.
My theory is this...you can analyze charts and indicators to death but since losers will by definition lose you can win by doing or thinking the opposite of what they do! Seems too simplistic doesn't it? But it works!
I've mentioned before that there's a lot of ways to study the market but that only few ways are effective. One very unusual but effective method I have is to keep tabs of what the losers are thinking. By losers I'm referring to message board and blog posters who have been atrocious at calling the market and display traits of an amateur. I have a folder in my favorites tab labeled "losers" which tracks these posters. I currently have 6 people in my loser folder. The top 2 are my "all star losers". One of them has freely admitted to having blown his entire $300K IRA with his trades and is now down to his last $500!!!! In the past 6 months he has literally been on the wrong side of over 90% of his trades. Never have I seen such an impulsive, undisciplined trader in my life. He has got to be the world’s worst trader....and I'm not even exaggerating! The other all star loser has openly claimed to have stopped trading since November 2008 and yet he posts at least 20 messages a day of nonstop doom and gloom. He's in his 40's and lives alone probably never been married or laid for that matter. To be bearish LT would be to be in agreement with this pathetic loser, therefore you must fade this idiot no if ands or buts.
My theory is this...you can analyze charts and indicators to death but since losers will by definition lose you can win by doing or thinking the opposite of what they do! Seems too simplistic doesn't it? But it works!
Saturday, March 6, 2010
Weekend Ramblings
"The purpose of the stock market is to make fools of as many men as possible".
This is the motto of my blog. Are you a believer yet? Never has this been so true in the past 2 years. The bulls were huge fools in 2008 (and even the bears were too since most covered way too early) with their constant bottom calls and got ran over. In 2009 it was the bears who were equally foolish with their constant top calls and they got ran over.
Despite this monster of a bull market it's still getting little respect. Since I know that the market will make fools of the most amount of people possible I'm always trying to gauge what the sentiment of the trading community is. It seems that last week practically every trader got caught short given the despair that's out there. I continue to believe that the majority of traders have a seemingly unshakable bearish bias - the opposite of the bias that existed in 2000 and 2001. Even the butt sniffing monkey traders who chase anything that moves claiming to play "both sides" are bearish deep down inside feeling more comfortable being short as opposed to long.
Why is it that this bearishness is so ingrained? There are 2 reasons
1) A lot of these traders got burned either in the most recent bear market or the one prior and got converted to the "dark side"
2) They aren't paying attention to the things that the market cares about such as forward looking indicators and earnings trends which have turned up very sharply since last spring. Instead they focus on lagging or coincident indicators like the unemployment rate and take comfort in idiotic notions such as a GS/fed conspiracy to prop up stock prices. This is denial at its finest.
Here are some charts that the I believe the market has been paying attention to for the past 12 months with the last one being the most important.
This is the motto of my blog. Are you a believer yet? Never has this been so true in the past 2 years. The bulls were huge fools in 2008 (and even the bears were too since most covered way too early) with their constant bottom calls and got ran over. In 2009 it was the bears who were equally foolish with their constant top calls and they got ran over.
Despite this monster of a bull market it's still getting little respect. Since I know that the market will make fools of the most amount of people possible I'm always trying to gauge what the sentiment of the trading community is. It seems that last week practically every trader got caught short given the despair that's out there. I continue to believe that the majority of traders have a seemingly unshakable bearish bias - the opposite of the bias that existed in 2000 and 2001. Even the butt sniffing monkey traders who chase anything that moves claiming to play "both sides" are bearish deep down inside feeling more comfortable being short as opposed to long.
Why is it that this bearishness is so ingrained? There are 2 reasons
1) A lot of these traders got burned either in the most recent bear market or the one prior and got converted to the "dark side"
2) They aren't paying attention to the things that the market cares about such as forward looking indicators and earnings trends which have turned up very sharply since last spring. Instead they focus on lagging or coincident indicators like the unemployment rate and take comfort in idiotic notions such as a GS/fed conspiracy to prop up stock prices. This is denial at its finest.
Here are some charts that the I believe the market has been paying attention to for the past 12 months with the last one being the most important.
How many times have you heard people say "the market is disconnected with reality" every time the market advances to a new high? People just don't get how the market works. The market doesn't care about today's reality as much as it does about tommorows and it doesn't care about the unemployment rate it cares about EARNINGS and what they will be in the future NOT what they have been in the past. It will do it's best to try and discount future earnings and therefore forward and conincident indicators that are related to earnings are what matters. So, could it be that maybe, just maybe the market has been rising all this time in response to the sharp rise in the above economic gauges and sharp rise in earnings instead of it being a big GS prop job?
Another weak excuse that I keep on hearing from the permabears is how this bull market has been on "low volume". For fuck sakes bears, come up with a different excuse. You've been saying this since April of 2009 and have been getting your asses kicked ever since. How many shovels to the skull will it take before you realize that volume has been a USELESS indicator? What does the market care about? EARNINGS! That's it! And it doesn't care about what earnings were but what they are going to be going forward. Why is it that there's low volume? Bears say it's based upon unfounded hope by a few optimists. I say it's because so many people are still in disbelief, still burned and shell-shocked from 2008 that they are staying on the sidelines untill it's painfully clear that blue skys are hear again. If anything, the low volume is a bullish indicator reflecting the attitude you see in the first phase of a bull market - disbelief, skepticism, and doubt and here's a couple of new ones...anger and hatred! It's so bizarre how when the market has a strong week, close to making a new 52 week high, that the trading community is reeling instead of celebrating. What does that tell you? Can you honestly say "everyone is bullish" when most traders are losing money during a strong market? I also get a laugh when I see permabear types who have been wrong for months try to play contrarian saying "everyone is bullish so it's time to be bearish" Hello??? What about you? It's also funny how these guys tend to think that they are smart money, that they are the "contrarian" and it's just a matter of time before the "sheep" get slaughtered. Little do they realize that these "sheep" got slaughtered in 2008. They capitulated in droves and they haven't come back even though the market has surged for 12 months. So guess what bears "YOU'RE THE SHEEP!"
I know I sound really arrogant and hurtful in this post and I'm asking for a spanking by Mr. Market but I'm just venting here. Don't worry, I've been around long enough to know not to get cocky and kick people when they’re down and trust me, I'll easily trade in the bull suit for a bear one if need be, but in my view, it's the bears who are the cocky and arrogant ones because they stubbornly refuse to capitulate after getting it wrong for so long. I find that guys like Prechter, Roubini and Gross are still highly regarded. I'm waiting for the day when at least 1 of them gets ridiculed for their bad calls like Cramer did in March 2009 on the Daily Show. Cramer's public humiliation on that show has to go down as the best contrarian indicator of all time!
So, what will we see next in the ST? We are extremely ST overbought now and so sideways or down action is likely for a few days at least. I wouldn't be surprised to see just that followed by a stab to 1150 or marginally higher. After that, we head back to 1100-1115. That's my best guess as to how things will play out in the weeks ahead but it's just that....a guess and I'm not going to be betting on it....I'm doing just fine with my individual plays and I'd rather stick to them instead of playing a guessing game of chicken with other traders. If it ain’t broke don't fix it as they say.
Friday, March 5, 2010
Bull Market turns 1....Bears were confident a month ago...now they are sulking
Quite a day! Lots to talk about. Bears really took it up the kiester this week. While browsing my favorite bear blog I noticed the permabear types were quite in agony today. 1 month ago I mentioned how these jokers had a resurgence in confidence...how they felt a bounce would be a "gift" to go short. I'm quite sure a lot of bears went short when the market bounced to around the 1085-1100 area because that was the "gift" they were waiting for. I've always said beware of when the market hands you a gift because that gift is often a guillotine designed for your neck. Bears got their bounce and now they've been bounced.
The market was overbought heading into today and now it's even more overbought likey very close to maximum ST overbought. Hitting maximum ST overbought doesn't necessarily preclude an immediate major drop (although it can). What sometimes happens instead is that the market backs off a bit to relieve a bit of this condition and either retests the high of the move or makes a new high and does this for a few days or even weeks. Either way, it's not prudent to be chasing the market on the long side during such conditions because the risk/reward isn't good.
Personally, I don't believe the market is going to break out to make significant new 52 week highs just yet even though a retest of 1150 or marginal new high is likely in the cards....we're pretty much there now. The market leading NASDAQ which is showing good relative strength is already at the 52week high. I noticed Apple has made a new all time high. Apple has been the market leader of this bull market and you will be well served to pay attention to the market leader. Apple making a new high is a LT positive indicator.
With the bears sulking like this it may turn out to be a good ST bearish contrary indicator! After all, they were thumping their chests one month ago at the market bottom and now they are crying in their beer. I have found that whenever I have seen the bears crying like this the suffering could actually go for a bit longer before they get thrown a bone. But don't be a greedy bull here. This rally since the February low has been somewhat sloppy with plenty of unfilled gaps below which suggests we will see downside again to at least the 1100-1115 level in the not too distant future even if we go higher from here. This would fit well into the multi-month consolidation pattern I've called.
If the market ends up stopping and reversing significantly anywhere between now and around the 1150 area you're going to see the bears get excited about a double top, failed rally, lower high pattern or whatever the case may be to confirm their stubborn, money losing bearish biases. That's exactly what happened in 2004. Take a look at the chart in 2004.
For the first 7 months in 2004 the market looked like it was making a series of lower highs and lower lows and this got the bears all lathered up for what they believed was going to be the next bear market down leg after a supposed 1 year "bear market rally". In the end, it turned out to be a multi-month consolidation pattern in disguise which ripped the bears a new one bankrupting the last of them who were already badly mauled by the 2003 rally.
The consolidation phase I'm expecting could show similar action as what was seen in first half of 2004, however, DON'T ever expect the market the play out exactly the same way wiggle for wiggle as it did in a prior period even though there's similarities in circumstances. It won't happen. For example this year we've already seen a 9% drop whereas in 2004 such a drop didn't happen until late March. And don't ever think dogmatically about the market. Be completely open and unbiased to new evidence that would invalidate your thesis. Your thesis should fit the facts not the other way around.
The job number came in better than expected but it's still showing losses so it's not like it was an eye popping good number. However, I think a lot of people were bracing for a worse than expected number echoing the thoughts I had the other about bad wheather in Feburary. An interesting tidbit of news today was that consumer credit has risen for the first time in 1 year. Now, one data point a trend does not make, so let's keep an eye on this. But if this does end up being a trend this is going to put a big dent to the "deleveraging new normal economy" group think that's out out there.
The bull market has now turned 1. Go back in history to see if there was ever a bear market rally that lasted as long as 1 year (not to mention a 70% rise). Let me save you some time....there was NEVER such an occurance, but there's always a first time for everything I suppose....
The market was overbought heading into today and now it's even more overbought likey very close to maximum ST overbought. Hitting maximum ST overbought doesn't necessarily preclude an immediate major drop (although it can). What sometimes happens instead is that the market backs off a bit to relieve a bit of this condition and either retests the high of the move or makes a new high and does this for a few days or even weeks. Either way, it's not prudent to be chasing the market on the long side during such conditions because the risk/reward isn't good.
Personally, I don't believe the market is going to break out to make significant new 52 week highs just yet even though a retest of 1150 or marginal new high is likely in the cards....we're pretty much there now. The market leading NASDAQ which is showing good relative strength is already at the 52week high. I noticed Apple has made a new all time high. Apple has been the market leader of this bull market and you will be well served to pay attention to the market leader. Apple making a new high is a LT positive indicator.
With the bears sulking like this it may turn out to be a good ST bearish contrary indicator! After all, they were thumping their chests one month ago at the market bottom and now they are crying in their beer. I have found that whenever I have seen the bears crying like this the suffering could actually go for a bit longer before they get thrown a bone. But don't be a greedy bull here. This rally since the February low has been somewhat sloppy with plenty of unfilled gaps below which suggests we will see downside again to at least the 1100-1115 level in the not too distant future even if we go higher from here. This would fit well into the multi-month consolidation pattern I've called.
If the market ends up stopping and reversing significantly anywhere between now and around the 1150 area you're going to see the bears get excited about a double top, failed rally, lower high pattern or whatever the case may be to confirm their stubborn, money losing bearish biases. That's exactly what happened in 2004. Take a look at the chart in 2004.
For the first 7 months in 2004 the market looked like it was making a series of lower highs and lower lows and this got the bears all lathered up for what they believed was going to be the next bear market down leg after a supposed 1 year "bear market rally". In the end, it turned out to be a multi-month consolidation pattern in disguise which ripped the bears a new one bankrupting the last of them who were already badly mauled by the 2003 rally.
The consolidation phase I'm expecting could show similar action as what was seen in first half of 2004, however, DON'T ever expect the market the play out exactly the same way wiggle for wiggle as it did in a prior period even though there's similarities in circumstances. It won't happen. For example this year we've already seen a 9% drop whereas in 2004 such a drop didn't happen until late March. And don't ever think dogmatically about the market. Be completely open and unbiased to new evidence that would invalidate your thesis. Your thesis should fit the facts not the other way around.
The job number came in better than expected but it's still showing losses so it's not like it was an eye popping good number. However, I think a lot of people were bracing for a worse than expected number echoing the thoughts I had the other about bad wheather in Feburary. An interesting tidbit of news today was that consumer credit has risen for the first time in 1 year. Now, one data point a trend does not make, so let's keep an eye on this. But if this does end up being a trend this is going to put a big dent to the "deleveraging new normal economy" group think that's out out there.
The bull market has now turned 1. Go back in history to see if there was ever a bear market rally that lasted as long as 1 year (not to mention a 70% rise). Let me save you some time....there was NEVER such an occurance, but there's always a first time for everything I suppose....
Thursday, March 4, 2010
Back at par
The market is now essentially back to break even for the year.
I continue to believe we will see sideways action for at least another month or 2 which fits into the pattern observed after the initial thrust of a new cyclical bull market . During this phase we could see the market go as far as making a marginal new 52 week high but it probably wouldn't go much further than that before heading back down.
On Feb 5th the day the market hit its most recent low, I criticized a certain commentator on realmoney.com who posted the following comment "Assume the worst. The safest play here is to look for more downside". Well, so much for that “safe” play. Now this same guy says "The Action Has Been Impressive. We've broken overhead resistance without difficulty, and the pullbacks have been mild". If the market starts heading down again you can be sure this clown will flip back to bear mode. I'm quite sure the average fast money, weak handed momo trader like this guy is still bearish deep down even if they play the long side which means they will dump longs at the first hint of weakness. At bull market tops LT and ST market players have fully embraced the long side looking to buy on dips. Right now the LT investor is still skeptical as you can tell by the flows into equity funds during the past 12 months. Traders on the other hand have for the most part been skeptical as well but sometimes have shown bouts of excessive bullishness like in June of 2009 and in late 2009 but such bullishness got rapidly extinguished on just a modest pullback which indicates as I suggested that deep down inside they don't really believe in this bull market. All of this suggests the market is nowhere close to hitting a major peak.
From a ST perspective, right now we are kind of stuck in the middle. The market is back to ST overbought but sentiment indicators are neutral. This makes the market rather edgeless here for index traders which is why (I know I sound like a broken record) I continue to just focus on individual names. This benign, sideways environment is perfect for stock picking. You might be thinking "why talk about the general market if you are focusing on individual names so much?" It's because I realize that stocks don't exist in a vacuum. Although you may find names that are fairly non-correlated to the market, that can only last for so long if the market goes back into full bear mode. Stock picking without any regards to general market conditions is like a gardener who only focuses on the progress of his plants without any regards to changes in the general climate. I don't care how well you can pick your plants and mix your fertilizer...when summer changes to winter if you don't harvest them before hand they will all be dead.
The next phase of the bull market will likely occur when the market starts to sniff steady job growth. Don't be surprised if this Friday's non-farm number turns out to be disappointing due to unusually bad weather in February.
I continue to believe we will see sideways action for at least another month or 2 which fits into the pattern observed after the initial thrust of a new cyclical bull market . During this phase we could see the market go as far as making a marginal new 52 week high but it probably wouldn't go much further than that before heading back down.
On Feb 5th the day the market hit its most recent low, I criticized a certain commentator on realmoney.com who posted the following comment "Assume the worst. The safest play here is to look for more downside". Well, so much for that “safe” play. Now this same guy says "The Action Has Been Impressive. We've broken overhead resistance without difficulty, and the pullbacks have been mild". If the market starts heading down again you can be sure this clown will flip back to bear mode. I'm quite sure the average fast money, weak handed momo trader like this guy is still bearish deep down even if they play the long side which means they will dump longs at the first hint of weakness. At bull market tops LT and ST market players have fully embraced the long side looking to buy on dips. Right now the LT investor is still skeptical as you can tell by the flows into equity funds during the past 12 months. Traders on the other hand have for the most part been skeptical as well but sometimes have shown bouts of excessive bullishness like in June of 2009 and in late 2009 but such bullishness got rapidly extinguished on just a modest pullback which indicates as I suggested that deep down inside they don't really believe in this bull market. All of this suggests the market is nowhere close to hitting a major peak.
From a ST perspective, right now we are kind of stuck in the middle. The market is back to ST overbought but sentiment indicators are neutral. This makes the market rather edgeless here for index traders which is why (I know I sound like a broken record) I continue to just focus on individual names. This benign, sideways environment is perfect for stock picking. You might be thinking "why talk about the general market if you are focusing on individual names so much?" It's because I realize that stocks don't exist in a vacuum. Although you may find names that are fairly non-correlated to the market, that can only last for so long if the market goes back into full bear mode. Stock picking without any regards to general market conditions is like a gardener who only focuses on the progress of his plants without any regards to changes in the general climate. I don't care how well you can pick your plants and mix your fertilizer...when summer changes to winter if you don't harvest them before hand they will all be dead.
The next phase of the bull market will likely occur when the market starts to sniff steady job growth. Don't be surprised if this Friday's non-farm number turns out to be disappointing due to unusually bad weather in February.
Monday, March 1, 2010
Sports and investing
The Winter Olympics was capped off last night by a thrilling overtime win by the Canadian hockey team over the US. The US managed to tie the game in the last 25 seconds of regular time. Just prior to this tying goal Canada hit 2 posts and missed a breakaway. After the missed breakaway I said to my wife "I've seen this story so many times....when 1 team fails to capitalize on so many good opportunities like this the other team will score on the first decent chance they get". Low and behold that's exactly what happened! Why does this happen so often? I think it has to do about the state of mind of both teams. For the team that misses great chances to finish off their opponents they may become demoralized, starting doubting themselves and switch from a “playing to win” attitude to a “playing not to lose” attitude. For the other team the opposite happens. The fact that they survived their opponent's vicious attack is like being given a second chance at life after a near death experience. Since they shouldn't even be in a position to still be able to actually win the game they feel they have nothing to lose and all to gain and as a result they play fearlessly with confidence. This shift in attitudes by both the winning and losing teams makes it more likely for the losing team to get an opportunity to tie the game and capitalize on it.
With investing/trading a similar shift in attitude often happens. Your mistakes and missed opportunities may cause you to lose confidence and "play tight"...you trade not to lose instead of trading to win and more often than not this results in further missed opportunities and losses. On the other hand, if you managed to catch a break or you get on a bit of a roll you tend to get a surge in confidence which puts you into "the zone" mentally where you able to see things more clearly and make the most of the opportunities that present themselves. Personally, I've been in the above 2 situations many times.
Here's another thing that you often see in sports. A team that has been the aggressor and has a small lead in a game will often change tactics to protect the lead i.e. play defensive even though the other team hasn't changed their tactics yet. This drives me crazy and is another example of playing not to lose instead of playing to win. The best defense is a good offense because there's no better defense than when you have control. The opposing team has essentially a zero chance of scoring when you are in possession of the puck, ball or whatever vs. a positive probability when the opposing team in possession. Therefore, dominating the play (without taking unnecessary risks such as having your defensemen pinch all the time) is the best defense as opposed to going into a defensive shell whereby you allow more opportunities for your opponent to have control and put pressure on you.
As a investor the above is similar to a situation where you have a winning stock/position that is still acting well, still below your target price and yet you decide to take a big chunk or all of the position off the table or put in a tight stop just because you are showing a nice gain and you don't want to see those gains slip away. This is playing unnecessary defense.... this is playing not to lose. Although you don't risk losing doing this unlike the dominating sports team that switches to playing defense, it is in a sense like losing because you obviously lose out on making more money but in addition to that, having that extra money would allow you to be even more offensive and win even more. Think of it this way... having more money in your account allows you to be more tolerant of paper losses on any of your future positions....it allows you more opportunity to act on your convictions i.e. play offense to make even more money and having more money is the best defense against future loses.
The offensive "playing to win" attitude as opposed to the defensive "playing not to lose" attitude is the correct way to go in my opinion. It's easier said than done and I've been guilty of going into the "playing not lose" mode many times and still do so. In addition, there's a fine line between being aggressive playing to win and being reckless and there will be times when you were correct in being aggressive and it backfires. That's going to happen sometimes because this is not a game of certainties. Like in poker, the correct play can still result in a loss. However, I believe in the long run thinking offensively with the "playing to win" attitude is the right attitude but you need to have ability, courage and mental fortitude (i.e. not getting discouraged by losing streaks) to do it successfully. Very few people have all these 3 traits.
With investing/trading a similar shift in attitude often happens. Your mistakes and missed opportunities may cause you to lose confidence and "play tight"...you trade not to lose instead of trading to win and more often than not this results in further missed opportunities and losses. On the other hand, if you managed to catch a break or you get on a bit of a roll you tend to get a surge in confidence which puts you into "the zone" mentally where you able to see things more clearly and make the most of the opportunities that present themselves. Personally, I've been in the above 2 situations many times.
Here's another thing that you often see in sports. A team that has been the aggressor and has a small lead in a game will often change tactics to protect the lead i.e. play defensive even though the other team hasn't changed their tactics yet. This drives me crazy and is another example of playing not to lose instead of playing to win. The best defense is a good offense because there's no better defense than when you have control. The opposing team has essentially a zero chance of scoring when you are in possession of the puck, ball or whatever vs. a positive probability when the opposing team in possession. Therefore, dominating the play (without taking unnecessary risks such as having your defensemen pinch all the time) is the best defense as opposed to going into a defensive shell whereby you allow more opportunities for your opponent to have control and put pressure on you.
As a investor the above is similar to a situation where you have a winning stock/position that is still acting well, still below your target price and yet you decide to take a big chunk or all of the position off the table or put in a tight stop just because you are showing a nice gain and you don't want to see those gains slip away. This is playing unnecessary defense.... this is playing not to lose. Although you don't risk losing doing this unlike the dominating sports team that switches to playing defense, it is in a sense like losing because you obviously lose out on making more money but in addition to that, having that extra money would allow you to be even more offensive and win even more. Think of it this way... having more money in your account allows you to be more tolerant of paper losses on any of your future positions....it allows you more opportunity to act on your convictions i.e. play offense to make even more money and having more money is the best defense against future loses.
The offensive "playing to win" attitude as opposed to the defensive "playing not to lose" attitude is the correct way to go in my opinion. It's easier said than done and I've been guilty of going into the "playing not lose" mode many times and still do so. In addition, there's a fine line between being aggressive playing to win and being reckless and there will be times when you were correct in being aggressive and it backfires. That's going to happen sometimes because this is not a game of certainties. Like in poker, the correct play can still result in a loss. However, I believe in the long run thinking offensively with the "playing to win" attitude is the right attitude but you need to have ability, courage and mental fortitude (i.e. not getting discouraged by losing streaks) to do it successfully. Very few people have all these 3 traits.
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