The financial media is attributing the sell-off on Friday to Egypt worries. Do you honestly think a sell-off triggered by a social unrest from a country as miniscule as Egypt is going to have legs? Well, if it does it won't be because of problems in Egypt it will probably be due to some other excuse.
This sell-off seems well telegraphed. We hit round number resistance at Dow 12K and SPX 1300. Sell-offs that coincide which such levels to me always suggest profit taking and they tend not to be severe because it’s too obvious and too convenient. Now, the market did close at the lows of the day on Friday which suggest further selling is to come even if there's a bounce Monday. I noticed something interesting. AAII sentiment shows bulls pulling back quite a bit last week and that happened before Friday's sell off. Also, the put/call ratio has been on the high side for a couple days before the sell-off too. This activity somewhat confirms how this sell-off has been quite telegraphed and so probably won't be severe.
I said a few weeks back that I'm not going to get too obsessed about the ST wiggles in the market and so I'll stop right there talking about it. As I said before, it's not a time to be aggressive on the long side but at the same time you need to have courage to stick with positions that you believe are solid LT. Stock picking will be very important for the next several weeks or even months. I had a good week last week with tec.to and wzl.to breaking out. So far my positions are doing how I had hoped they would do which is trade more so on their own accord and less so with the general market. Hopefully this can continue.
One piece of bad news for the bulls is that the worst trader in the world - Lester, switched his 401K from cash to an SPX fund on Thursday nailing the top in true Lester fashion! You might recall several months ago when I talked about how his guy blew up a $300K account trading options whereby practically every decision he made was the wrong one. He trades on pure emotion and impulse. He's already quite pissed that he's down 2% already. So are the bulls doomed with Lester long? Probably not. Lester is fickle and just like how he bought on emotion he will probably sell on emotion either when the losses pile up or when he breaks even and make yet another bad decision. I've seen him do this over and over.
Monday, January 31, 2011
Thursday, January 27, 2011
Some of this and that
I've been sick like a dog lately. Right now I'm in a holding position. With the exception of 3 stocks I have on my radar, I'm not willing to buy or sell anything. I have exposure to the core group of stocks that I'm quite confident about LT, willing to ride out any pain that could result from any kind of general market correction. If I'm a bit fortunate, these stocks will ignore the day to day action of the market and trade on their own accord as they have been doing for the most part, but I'm prepared for the worst. I also have about 50% in cash. The stocks I own are all sub $2 all of which have at least 100% appreciation potential from current prices in the next 12 months (at least in my view).
In these times, I like to reflect upon the rules and guidelines I have made for myself to help ensure that I keep in the right frame of mind. I wrote "the trading bible" for myself which is a 4000 word document containing all of the things I've learned over the years. Every single thing I wrote there has been right as rain and when I went against it I usually paid the price. Every once in a while I re-read it and make revisions if neccessary to make sure I stay sharp and focused. Since I've started this blog I've mentioned several of the lessons and "market truths" that are contained in this document.
As Dennis pointed out 2 weeks ago in the comment section, it's a tricky situation right now for anyone bullish long term given that the market appears "stretched" in the ST. I suggested that in these types of situations you should sell down to the "sleeping point" but still have the courage to maintain core long positions - those that you are quite confident about longer term. The last thing you want to do is be right about the market going down but wrong about your stock going down with it only to see it keep climbing. If you must, then hedge your positions using index puts but don't get overzealous by going net short or even net neutral. Big money is made riding big trends. If you think the bull market is not over then act accordingly and don't get so obsessed with timing corrections. Ya, nothing is for certain and it's not a time to be aggressive on the long side but you have to have at least some courage in this game otherwise you'll just end with mediocre results or hardly any at all.
As far as market action and the vibes I'm getting out there, I gotta tell you, this market is a thing a beauty....not because it's going up but how the motto of my blog continues to play out over and over and over. The market is making complete utter fools of everyone. Coming into the new year I pointed out how I sensed a strong consensus opinion, from both bulls and bears alike, that a correction was immanent which of course made me believe we either wouldn't get one or it would be much milder than expected. Well, here we are approaching the end of the month and surprise, surprise no correction. Those calls for a correction haven't faded. In fact, I have seen several "10% correction" calls from many of the so called "market gurus" out there. Once again, I will re-iterate that at this time, we will likely not get a correction or it will be milder than expected given this group think. One thing though that's bearish is how the market leading NASDAQ has been under performing lately. However, this under performance has only been for 1 week and so let's not make a mountain out of mole hill here just yet.
I'm also noticing a weird thing. Gold has been weak since the start of the year even though the dollar has been weak. Very strange indeed. Is this a warning shot across the bow? I think it could be, but again, let's not make a mountain out of mole hill. In fact, I wouldn't be surprised to see gold bounce as it's now ST oversold and I'm noticing a lot of people on BNN talking about the weakness in gold. How will you know when the gold bull market is over? Quite likely when you see it crash 30% or more within a couple of weeks and plenty of pundits and retail view it as a great buying opportunity. Bubbles don't end quietly, they end violently, so I would be very suspicious of the gold bull market being over if we see a gradual, multi-month correction of 10-20% like last year.
After the initial crash of a bubble you will get several dead cat bounces. If you missed timing the crash (which is difficult and usually unprofitable in attempting to do so) you will still have plenty of opportunity to make big money shorting gold using those dead cat bounces. Let the market tell you when it's ready. Think about this bull market in equities. If you missed the first 30%, which was fast and furious, you still had plenty of opportunity to make money going long. Bottom picking and top picking is usually a losers game, especially top picking because there's no limit as to how high a price can go. If you bottom pick you can simply buy and hold for as long as it takes for the tide to turn. But when you go short with a meaningfully sized position, you risk getting squeezed out your position by force. You don't have the luxury of being early. You can top pick use long dated put options to avoid getting squeezed but even those aren't fool proof given that they still have an expiration....but that's certainty the way to go if you're going to attempt a top pick.
In these times, I like to reflect upon the rules and guidelines I have made for myself to help ensure that I keep in the right frame of mind. I wrote "the trading bible" for myself which is a 4000 word document containing all of the things I've learned over the years. Every single thing I wrote there has been right as rain and when I went against it I usually paid the price. Every once in a while I re-read it and make revisions if neccessary to make sure I stay sharp and focused. Since I've started this blog I've mentioned several of the lessons and "market truths" that are contained in this document.
As Dennis pointed out 2 weeks ago in the comment section, it's a tricky situation right now for anyone bullish long term given that the market appears "stretched" in the ST. I suggested that in these types of situations you should sell down to the "sleeping point" but still have the courage to maintain core long positions - those that you are quite confident about longer term. The last thing you want to do is be right about the market going down but wrong about your stock going down with it only to see it keep climbing. If you must, then hedge your positions using index puts but don't get overzealous by going net short or even net neutral. Big money is made riding big trends. If you think the bull market is not over then act accordingly and don't get so obsessed with timing corrections. Ya, nothing is for certain and it's not a time to be aggressive on the long side but you have to have at least some courage in this game otherwise you'll just end with mediocre results or hardly any at all.
As far as market action and the vibes I'm getting out there, I gotta tell you, this market is a thing a beauty....not because it's going up but how the motto of my blog continues to play out over and over and over. The market is making complete utter fools of everyone. Coming into the new year I pointed out how I sensed a strong consensus opinion, from both bulls and bears alike, that a correction was immanent which of course made me believe we either wouldn't get one or it would be much milder than expected. Well, here we are approaching the end of the month and surprise, surprise no correction. Those calls for a correction haven't faded. In fact, I have seen several "10% correction" calls from many of the so called "market gurus" out there. Once again, I will re-iterate that at this time, we will likely not get a correction or it will be milder than expected given this group think. One thing though that's bearish is how the market leading NASDAQ has been under performing lately. However, this under performance has only been for 1 week and so let's not make a mountain out of mole hill here just yet.
I'm also noticing a weird thing. Gold has been weak since the start of the year even though the dollar has been weak. Very strange indeed. Is this a warning shot across the bow? I think it could be, but again, let's not make a mountain out of mole hill. In fact, I wouldn't be surprised to see gold bounce as it's now ST oversold and I'm noticing a lot of people on BNN talking about the weakness in gold. How will you know when the gold bull market is over? Quite likely when you see it crash 30% or more within a couple of weeks and plenty of pundits and retail view it as a great buying opportunity. Bubbles don't end quietly, they end violently, so I would be very suspicious of the gold bull market being over if we see a gradual, multi-month correction of 10-20% like last year.
After the initial crash of a bubble you will get several dead cat bounces. If you missed timing the crash (which is difficult and usually unprofitable in attempting to do so) you will still have plenty of opportunity to make big money shorting gold using those dead cat bounces. Let the market tell you when it's ready. Think about this bull market in equities. If you missed the first 30%, which was fast and furious, you still had plenty of opportunity to make money going long. Bottom picking and top picking is usually a losers game, especially top picking because there's no limit as to how high a price can go. If you bottom pick you can simply buy and hold for as long as it takes for the tide to turn. But when you go short with a meaningfully sized position, you risk getting squeezed out your position by force. You don't have the luxury of being early. You can top pick use long dated put options to avoid getting squeezed but even those aren't fool proof given that they still have an expiration....but that's certainty the way to go if you're going to attempt a top pick.
Saturday, January 15, 2011
Fresh 2 year highs.....more people miserable than excited it seems
Anytime a bull market makes a fresh high I check its pulse by looking at a few things. First I look at the advance decline line. Is it making a new high along with the market? If the answer is yes it means the bull market new high is "legitimate" because there is broad participation i.e. most stocks out there are showing strength. On Friday the total market advance decline line did indeed make a new bull market high signalling the bull trend is firmly in tact.
Next, I look at the general mood amongst investors and in the media. Is there exuberance about this new market high? Some exuberance would actually be normal and not bull market threatening but this has been no normal bull market - it's the most hated bull market of all time. As I've been noting Ad nauseam in prior posts there is no such exuberance, in fact, it's the opposite!.
I like to visit the SPY message board to get a pulse of what the loser trader types are thinking. I have been keeping tabs of a select few of these losers who have been nothing but wrong about the market for nearly 2 years and show all the characteristics of a loser trader - self righteous, big ego, dogmatic, bitter and naive trading methods Here's what one of these losers named Rob Campbell posted on Friday
Trading in this "new normal" era is boring and fruitless for me. I trade because I want more, not need more, but the money is a secondary consideration.
The markets once provide a unique way for one to express their point of view on the economy, market itself, long term trends, rational capital flows. The markets have never been perfect but by and large have provide that opportunity to express a view in the terms of a "bet" and unlike a roulette table have an opportunity to quantify the accuracy of your viewpoint.
This is no longer the case unless your view is "the fed is buying so buy", and that view is so offensive on so many levels I can hardly begin. Mostly, I am not going to go express a long bias in a market that goes up daily on the backs of the taxpaying public many of whom have no interest in the markets and gain nothing except more hard times as their dollars are debased and prices of essential needs go up, just so the power elite can keep the markets afloat. I say let it fail, we need a mass overhaul anyway.
May post again but I am cashing out today, closing my account next week, buying some gold and silver bars and look for something to do with my retirement that does not degrade myself by participating in a ponzi scheme that will leave the citizens of the county holding the bag.
This is the rant of a loser and I see so many similar posts from losers like him. This loser is complaining and is quitting trading because the market didn't do what he believes it should be doing and without any doubt he has lost money as a result. He uses words like "fruitless" and "borning" but the truth is quite likely that he's has been getting creamed given his bearish stance since 2009 and that's the real reason he's quitting trading. And like the consensus view of mickey mouse traders out there, he believes the market rise has been the result of "buying from the fed". Can't these idiots see how pathetic they are saying shit like this? What a bunch of whining sore losers who use any sort of excuse they can to blame their failures on. If you are bearish longer term you are in agreement with bad company.
It seems as if anytime the market makes new highs people get more miserable! What the fuck is this world coming to? This is madness! One thing's for sure...it tells me that this bull market is far from over correction or no correction. Oh and did you notice what this loser said near the end of this rant? He's buying silver and gold bars....hmmm....what does that tell you?
When we do eventually get the correction that everyone is bracing for and I start having doubts about the bull case I'm going to go back to this post and recent ones and say to myself that there's no way the bull market could have been over with the losers of the market - guys like rob campbell and your average main street joe - still bearish...well, I don't want to get dogmatic myself but it just seems inconceivable.
Publish Post
Next, I look at the general mood amongst investors and in the media. Is there exuberance about this new market high? Some exuberance would actually be normal and not bull market threatening but this has been no normal bull market - it's the most hated bull market of all time. As I've been noting Ad nauseam in prior posts there is no such exuberance, in fact, it's the opposite!.
I like to visit the SPY message board to get a pulse of what the loser trader types are thinking. I have been keeping tabs of a select few of these losers who have been nothing but wrong about the market for nearly 2 years and show all the characteristics of a loser trader - self righteous, big ego, dogmatic, bitter and naive trading methods Here's what one of these losers named Rob Campbell posted on Friday
Trading in this "new normal" era is boring and fruitless for me. I trade because I want more, not need more, but the money is a secondary consideration.
The markets once provide a unique way for one to express their point of view on the economy, market itself, long term trends, rational capital flows. The markets have never been perfect but by and large have provide that opportunity to express a view in the terms of a "bet" and unlike a roulette table have an opportunity to quantify the accuracy of your viewpoint.
This is no longer the case unless your view is "the fed is buying so buy", and that view is so offensive on so many levels I can hardly begin. Mostly, I am not going to go express a long bias in a market that goes up daily on the backs of the taxpaying public many of whom have no interest in the markets and gain nothing except more hard times as their dollars are debased and prices of essential needs go up, just so the power elite can keep the markets afloat. I say let it fail, we need a mass overhaul anyway.
May post again but I am cashing out today, closing my account next week, buying some gold and silver bars and look for something to do with my retirement that does not degrade myself by participating in a ponzi scheme that will leave the citizens of the county holding the bag.
This is the rant of a loser and I see so many similar posts from losers like him. This loser is complaining and is quitting trading because the market didn't do what he believes it should be doing and without any doubt he has lost money as a result. He uses words like "fruitless" and "borning" but the truth is quite likely that he's has been getting creamed given his bearish stance since 2009 and that's the real reason he's quitting trading. And like the consensus view of mickey mouse traders out there, he believes the market rise has been the result of "buying from the fed". Can't these idiots see how pathetic they are saying shit like this? What a bunch of whining sore losers who use any sort of excuse they can to blame their failures on. If you are bearish longer term you are in agreement with bad company.
It seems as if anytime the market makes new highs people get more miserable! What the fuck is this world coming to? This is madness! One thing's for sure...it tells me that this bull market is far from over correction or no correction. Oh and did you notice what this loser said near the end of this rant? He's buying silver and gold bars....hmmm....what does that tell you?
When we do eventually get the correction that everyone is bracing for and I start having doubts about the bull case I'm going to go back to this post and recent ones and say to myself that there's no way the bull market could have been over with the losers of the market - guys like rob campbell and your average main street joe - still bearish...well, I don't want to get dogmatic myself but it just seems inconceivable.
Publish Post
Thursday, January 13, 2011
Regrets
When I first started trading full time in December 2008 I had a watch list of a handful of mining stocks that were trading close to or at cash value. I didn't buy most of these stocks and since then the gains that these stocks have had are eye popping. We're talking 400-500% on average. One of them includes clm.to which I first stumbled upon when it was $1.15. That stock is now over $17 today thanks to a take over offer. It hurts seeing these stocks where they are now and where they were when I first noticed them.
Hindsight is 20/20. When I look back I ask myself: could I have done better? The answer is yes, but I know I can't be too hard myself. When I first compiled these basket of stocks I had just began trading full time in December of 2008. I was bearish at the time and the financial world as I had known it, looked like it was coming to an end. I saw so many people turn bullish too early in 2008 (including some bears) and got absolutely crushed. I saw extremes that I don't think I will ever see in my life time again! One of these extremes was that in late November 2008 there was a point when every single stock in the SPX was trading below their 200,50 and 20 day moving average! The market literally had no pulse....it was dead. I traded during the previous bear market of 2000-2002 and never was there a time when the market came close to getting pounded like that.
So, given this and given a situation for months wherby cheap simply became even more cheap...a lot more cheap, it was only natural for me to be cautious and refrain from bottom fishing what looked to be cheap stocks. Although I was bearish on the market I was too affraid to short because of the insane volatility and obviously too affraid to go long. So, I did hardly anything for the first 3-4 months when I started. My mistake was that I failed to notice or I should say failed to appreciate that most of the stocks on my watch list were showing great relative strength in early 2009. While the market sank to new lows in March these stocks were making higher lows. By the time April 2009 rolled along I was warming up to the bull side but I wasn't full fledged bullish until the summer of 2009 and by then those basket of cheap mining stocks had already made big moves and so I looked for other opportunities.
I'm sure I'm not the only one with regrets about missed opportunities in the stock market. To me, it hurts more when I miss out on an opportunity then when I take a loss because when taking a loss at least you gave it a shot giving yourself the chance to have been successful. But when you don't take any action it gives you zero chance of being successful...sure, it also avoids you any chance of failure but in the long run inaction will indeed result in failure...it guarentees it. It's far better to have taken chances and failed then to have taken no chances at all.
In hindsight I should have had to courage to buy starter positions in those basket of mining stocks. Positions small enough such that I could use a "no stop" policy to give them the time they need to prove themselves no matter how much further they declined. The panick of 2008 was the mirror inverse of the mania of late 1999 early 2000. In 2008 there was indiscrimate selling of all stocks. Valuations didn't matter whatsoever. In 2000 it was the opposite. It's amazing to have seen this transition from one extreme to the other. What I learned from these experiences is that in order to be successful in being the contrarian in these panick situations you either a)need to wait for the turnaround to happen first or b) have the conviction and proper strategy to withstand initial losses for being early. If you elect to use method a) you would miss out on a big portion of the new trend because the intial reversal from a mania or panic is explosive and relentless. If you use method b) it means you are bottom picking or top picking and doing so under panick situations you will often be early and the pain of intial losses could be great. Almost all the smart asses who attempt option b get wiped out because they commit too much captial and either capitulate by force or by choice because the pain is simply too great. This is why when you top pick or bottom pick under panic situations you need to do so with limited capital giving yourself plenty of time and being mentally able to sustain big losses should you be early (which you probably will be). I should have used this strategy with those mining stocks. I should have commited a small portion of my captial such that if I was early or even flat out wrong I would be able to take whatever pain was dished out. I instead elected to use strategy a) which is actually the right thing to do....with most of your capital but not all. I religiously follow a rule that prohibits me from top or bottom picking the market but there are those rare times when the risk/reward of top or bottom picking is warented with a limited amount of captial and such a time occurs when there is a mania or panic and you see signs that a long term reversal appears immanent. To be honest, I didn't see such a reversal coming near the lows of March of 2009. Although I was seeing doom and gloom galore which is what you see at major bottoms I said to myself "well, what do you expect to see when the financial system is collapsing like never before?". Keep in mind, one would have been been unmercifully crushed trying to play the contrarian card in late September while the market was on it's way to collapsing 25% in 2 weeks. Even though panic and fear was through the roof the market still tanked a lot more in the months to come. When March 2009 rolled along since it looked like a depression was immanent it was certainty conceivable for the market to go lower still. After all, the market had declined 90% from peak to trough during the last depression. But unlike most bears, I wasn't dogmatic in believing that the market must drop by this amount. I was certainty open to alternatives and my open mindedness and objectivity allowed me to turn fully bullish correctly albeit, a few months after the bottom. But, in those first few months huge gains took place including those basket of small cap mining stocks that I was tracking and so I had missed the boat and looked for opportunities elsewhere.
So, now that I look at what I wrote I don't feel as bad as I did prior to writing this for missing out on some of the big moves that took place with those stocks I had noticed 2 years ago. I had just started out trading full time in a crazy volatile market. I wasn't bullish on the general market just yet and so how could I have bought those stocks when we were in an environment where cheap simply became cheaper? But I should have had the balls to have committed at least a minor investment to these cheap stocks especially when they were showing great relative strength in early 2009. That minor investment would have made a huge impact. But, I have no excuses for the fuck up I made in November with psv.to and mal.to. That was a boneheaded, cowardly move.
It's important that I deal with these regrets in the right way. The wrong way would be to try to get "revenge" by being recklessly aggressive and chasing poor set-ups. This will only compound the agony. The correct way to deal with mishaps is to learn from them and improving yourself as a result. The correct way is to look ahead and stop agonizing about the past which you can't change. I'm guilty of doing this. I beat myself up a lot because of regrets not just in the market but in life....and I've had a few.
Hindsight is 20/20. When I look back I ask myself: could I have done better? The answer is yes, but I know I can't be too hard myself. When I first compiled these basket of stocks I had just began trading full time in December of 2008. I was bearish at the time and the financial world as I had known it, looked like it was coming to an end. I saw so many people turn bullish too early in 2008 (including some bears) and got absolutely crushed. I saw extremes that I don't think I will ever see in my life time again! One of these extremes was that in late November 2008 there was a point when every single stock in the SPX was trading below their 200,50 and 20 day moving average! The market literally had no pulse....it was dead. I traded during the previous bear market of 2000-2002 and never was there a time when the market came close to getting pounded like that.
So, given this and given a situation for months wherby cheap simply became even more cheap...a lot more cheap, it was only natural for me to be cautious and refrain from bottom fishing what looked to be cheap stocks. Although I was bearish on the market I was too affraid to short because of the insane volatility and obviously too affraid to go long. So, I did hardly anything for the first 3-4 months when I started. My mistake was that I failed to notice or I should say failed to appreciate that most of the stocks on my watch list were showing great relative strength in early 2009. While the market sank to new lows in March these stocks were making higher lows. By the time April 2009 rolled along I was warming up to the bull side but I wasn't full fledged bullish until the summer of 2009 and by then those basket of cheap mining stocks had already made big moves and so I looked for other opportunities.
I'm sure I'm not the only one with regrets about missed opportunities in the stock market. To me, it hurts more when I miss out on an opportunity then when I take a loss because when taking a loss at least you gave it a shot giving yourself the chance to have been successful. But when you don't take any action it gives you zero chance of being successful...sure, it also avoids you any chance of failure but in the long run inaction will indeed result in failure...it guarentees it. It's far better to have taken chances and failed then to have taken no chances at all.
In hindsight I should have had to courage to buy starter positions in those basket of mining stocks. Positions small enough such that I could use a "no stop" policy to give them the time they need to prove themselves no matter how much further they declined. The panick of 2008 was the mirror inverse of the mania of late 1999 early 2000. In 2008 there was indiscrimate selling of all stocks. Valuations didn't matter whatsoever. In 2000 it was the opposite. It's amazing to have seen this transition from one extreme to the other. What I learned from these experiences is that in order to be successful in being the contrarian in these panick situations you either a)need to wait for the turnaround to happen first or b) have the conviction and proper strategy to withstand initial losses for being early. If you elect to use method a) you would miss out on a big portion of the new trend because the intial reversal from a mania or panic is explosive and relentless. If you use method b) it means you are bottom picking or top picking and doing so under panick situations you will often be early and the pain of intial losses could be great. Almost all the smart asses who attempt option b get wiped out because they commit too much captial and either capitulate by force or by choice because the pain is simply too great. This is why when you top pick or bottom pick under panic situations you need to do so with limited capital giving yourself plenty of time and being mentally able to sustain big losses should you be early (which you probably will be). I should have used this strategy with those mining stocks. I should have commited a small portion of my captial such that if I was early or even flat out wrong I would be able to take whatever pain was dished out. I instead elected to use strategy a) which is actually the right thing to do....with most of your capital but not all. I religiously follow a rule that prohibits me from top or bottom picking the market but there are those rare times when the risk/reward of top or bottom picking is warented with a limited amount of captial and such a time occurs when there is a mania or panic and you see signs that a long term reversal appears immanent. To be honest, I didn't see such a reversal coming near the lows of March of 2009. Although I was seeing doom and gloom galore which is what you see at major bottoms I said to myself "well, what do you expect to see when the financial system is collapsing like never before?". Keep in mind, one would have been been unmercifully crushed trying to play the contrarian card in late September while the market was on it's way to collapsing 25% in 2 weeks. Even though panic and fear was through the roof the market still tanked a lot more in the months to come. When March 2009 rolled along since it looked like a depression was immanent it was certainty conceivable for the market to go lower still. After all, the market had declined 90% from peak to trough during the last depression. But unlike most bears, I wasn't dogmatic in believing that the market must drop by this amount. I was certainty open to alternatives and my open mindedness and objectivity allowed me to turn fully bullish correctly albeit, a few months after the bottom. But, in those first few months huge gains took place including those basket of small cap mining stocks that I was tracking and so I had missed the boat and looked for opportunities elsewhere.
So, now that I look at what I wrote I don't feel as bad as I did prior to writing this for missing out on some of the big moves that took place with those stocks I had noticed 2 years ago. I had just started out trading full time in a crazy volatile market. I wasn't bullish on the general market just yet and so how could I have bought those stocks when we were in an environment where cheap simply became cheaper? But I should have had the balls to have committed at least a minor investment to these cheap stocks especially when they were showing great relative strength in early 2009. That minor investment would have made a huge impact. But, I have no excuses for the fuck up I made in November with psv.to and mal.to. That was a boneheaded, cowardly move.
It's important that I deal with these regrets in the right way. The wrong way would be to try to get "revenge" by being recklessly aggressive and chasing poor set-ups. This will only compound the agony. The correct way to deal with mishaps is to learn from them and improving yourself as a result. The correct way is to look ahead and stop agonizing about the past which you can't change. I'm guilty of doing this. I beat myself up a lot because of regrets not just in the market but in life....and I've had a few.
Friday, January 7, 2011
Fading Mainstreet and the "people are bullish like in 2007" calls
Readers of this blog should know by now my disdain for Main Street's ability to predict the economy or the stock market. Main Street sentiment lags what is actually happening in the economy. Their opinions are formed based upon things like the unemployment rate - a lagging indicator and what they read in the popular media which tends to follow lagging or coincident indicators themselves. And think about it for a second....who better to know the least amount the economy and the stock market then your average Main Street Joe sixpack? The most successful hunters attack weak prey and when it comes to the jungle known as investing, Main Street is the weakest prey. So, you see...you don't have to have a PHd in economics or finance to be successful in this game. All you have to do is bet against the Main Street schmuck to win. Now, there's a correct and incorrect way of doing this. You need to realize that in the last 2-4 innings of a trend, Main Street tends to actually be in harmony with the trend i.e. they are right about it (but quite late). So for example, if you try to be a smart ass by betting against an uptrend in the market or a particular asset just because you see a lot of Joe Blow six packs positive about it, you run a high risk of getting your ass handed to you for being early. Just ask anyone who shorted tech stocks in 1999.
Most people don't use contrarian theory correctly. It doesn't work so well when the dumb money is in harmony with the trend because although these dummies will end up getting burned, they will actually be right for a while. Contrarian theory works best when you see significant dumb money resistance to an existing trend. Therefore, to fade Main Street with the highest probability of success do so when they are feeling one way about the economy but the stock market has been going in the opposite direction. This is what's happening right now.
Lately I've been seeing tons of evidence both anecdotally and in the media to support the notion that Main Street is still quite cautious about the economy/stock market. I talked about it here and here. Yesterday I got a back massage and I had an interesting chat with the masseuse. She asked me what I did for a living and as a result I found out that her mom, who's now retired, took up day trading about 5 years ago (near the market top of course) but now she does it "for fun". In other words, she took a beating and doesn't do much of it anymore. The masseuese then said "I know it's not a good time to be in the market". I didn't respond....no need to. But I wanted to thank her for this dumb money anecdote which adds to the pile of anecdotes I've come across lately confirming the same message.
Today there was an article in the National Post discussing a recent poll of 2560 Canadians asking them their outlook on the Canadian, US and global economy. Regarding the global economy (which was very similar to US results) 20% felt it would improve, 28% felt it would be unchanged, while 43% felt it would worsen (the rest didn't know). Another question asked was this: Which of the following best describes how you feel about Canada's economy? A chart was displayed which showed the results
Mild reccession: 55%
Strong reccession: 10%
Moderate growth: 30%
Strong growth: 0%
(I know, the above only adds up to 95%...not sure what happened to the other 5% but it doesn't matter)
So, you can see that the average Canadian still feels dour when comes to the economy. Notice that 2/3 of Canadians still think Canada is in a recession when in fact it has been out of one for well over a year now. Main Street in Canada is still well behind the curve. The stock market in Canada and the rest of the world have been soaring making fresh new 2 year highs while these guys are still down in the dumps.
Here's an interesting sentiment indicator which I just stumbled upon. It's called the Dow Jones Economic Sentiment Indicator (ESI). A desciption of the indicator is as follows:
The Dow Jones Economic Sentiment Indicator aims to gauge the health of the U.S. economy by weighing the balance of sentiment in articles published by 15 major American newspapers.
This is a great indicator because it measures newspaper media sentiment towards the economy which tends to be lagging or coincident. The next best source of "dumb money" sentiment aside from the little guy on main street is the media. Here's a historical chart of ESI. The current reading is actually 46 (not updated on the graph)
So, you can see that based upon historical readings optimism about the economy, although improving is still low with plenty of room to improve before becoming "too bullish" on a LT basis. I also love this indicator because I'm sure hardly anyone knows about it and so it makes it more reliable.
So, based upon what I discussed in this post, can you still say "bullishness is just as high as it was at the 2007 peak" like so many bearish pundits are pointing out. Again, sentiment indicators like Investor's Intelligence which these bears are pointing out don't necessarily reflect LT sentiment conditions, they reflect the views of fickle market timers/advisors who have a ST focus. And as I said before it's also common to see bullish sentiment "thrusts" early in a recovery when evidence starts becoming more and more obvious that the recession is indeed over.
If you look at the start of 1984, 1992 and 2004, all of which were early recovery years, Investor's Intelligence survey's and such were also showing extreme bullish sentiment just like now. It seems that nobody except for me is pointing this out. What ended up eventually happening after sentiment became so called "too bullish" early in a recovery was a multi-month consolidation phase working off this bullish sentiment. They can be quite scary and prolonged making even the most staunchest of bulls sweat. Take for example what happened last summer.
Take a look at what happened in 1984, 1992 and 2004 when there was "too much bullishness" in the sentiment surveys to start off the year.
1984
1992
2004
So, as you can see, in all 3 charts above, the market went through a downward titling consolidation phase which I'm sure made bulls sweat and bears foam at the mouth but in the end the bulls prevailed and prevailed big because the bull market was far from over.
I think we are going to see something similar happen this year as we saw in above 3 charts. In the near future we are probably going to enter some sort of multi-month consolidation phase which will make bulls sweat while making the bears foam at the mouth but by the end of the year the bulls will have prevailed given everything I talked about earlier on. This was similar to what I expected last year at this time as well. Now, just like last year, trying to profit off of corrections in bull markets is difficult and should be avoided. In bull markets you don't go short you go long....either stocks, cash or some combo of the two (Ok fine you can go short to hedge some longs but never go net short or even come close to it).
So what should one do given this outlook? Well, I believe in such an scenario stock picking will be very important. If you can find those winners that have a lot of things going from them company specific wise and you plan to be a long term holder then I would still buy them or at least get a 50% position. I have found that in such cases these types of stocks can ignore ST adverse fluctuations of the general market when the primary trend is still bullish long term. For example when I bought bev.to in September of 2009 that stock traded completely on it's own accord until I sold it in March of 2010 (and it still trades on it's own accord).
The time to get aggressive will be when the current "excessive bullishness" from ST trader types unwinds and hits the opposite extreme. It will require patience however...you might have to wait until the summer or the fall!
It has required courage to be a bull these past couple years and I still feel it requires courage...somewhat of a leap of faith if you will and that tells me it's the right path to be on LT.
Most people don't use contrarian theory correctly. It doesn't work so well when the dumb money is in harmony with the trend because although these dummies will end up getting burned, they will actually be right for a while. Contrarian theory works best when you see significant dumb money resistance to an existing trend. Therefore, to fade Main Street with the highest probability of success do so when they are feeling one way about the economy but the stock market has been going in the opposite direction. This is what's happening right now.
Lately I've been seeing tons of evidence both anecdotally and in the media to support the notion that Main Street is still quite cautious about the economy/stock market. I talked about it here and here. Yesterday I got a back massage and I had an interesting chat with the masseuse. She asked me what I did for a living and as a result I found out that her mom, who's now retired, took up day trading about 5 years ago (near the market top of course) but now she does it "for fun". In other words, she took a beating and doesn't do much of it anymore. The masseuese then said "I know it's not a good time to be in the market". I didn't respond....no need to. But I wanted to thank her for this dumb money anecdote which adds to the pile of anecdotes I've come across lately confirming the same message.
Today there was an article in the National Post discussing a recent poll of 2560 Canadians asking them their outlook on the Canadian, US and global economy. Regarding the global economy (which was very similar to US results) 20% felt it would improve, 28% felt it would be unchanged, while 43% felt it would worsen (the rest didn't know). Another question asked was this: Which of the following best describes how you feel about Canada's economy? A chart was displayed which showed the results
Mild reccession: 55%
Strong reccession: 10%
Moderate growth: 30%
Strong growth: 0%
(I know, the above only adds up to 95%...not sure what happened to the other 5% but it doesn't matter)
So, you can see that the average Canadian still feels dour when comes to the economy. Notice that 2/3 of Canadians still think Canada is in a recession when in fact it has been out of one for well over a year now. Main Street in Canada is still well behind the curve. The stock market in Canada and the rest of the world have been soaring making fresh new 2 year highs while these guys are still down in the dumps.
Here's an interesting sentiment indicator which I just stumbled upon. It's called the Dow Jones Economic Sentiment Indicator (ESI). A desciption of the indicator is as follows:
The Dow Jones Economic Sentiment Indicator aims to gauge the health of the U.S. economy by weighing the balance of sentiment in articles published by 15 major American newspapers.
This is a great indicator because it measures newspaper media sentiment towards the economy which tends to be lagging or coincident. The next best source of "dumb money" sentiment aside from the little guy on main street is the media. Here's a historical chart of ESI. The current reading is actually 46 (not updated on the graph)
So, based upon what I discussed in this post, can you still say "bullishness is just as high as it was at the 2007 peak" like so many bearish pundits are pointing out. Again, sentiment indicators like Investor's Intelligence which these bears are pointing out don't necessarily reflect LT sentiment conditions, they reflect the views of fickle market timers/advisors who have a ST focus. And as I said before it's also common to see bullish sentiment "thrusts" early in a recovery when evidence starts becoming more and more obvious that the recession is indeed over.
If you look at the start of 1984, 1992 and 2004, all of which were early recovery years, Investor's Intelligence survey's and such were also showing extreme bullish sentiment just like now. It seems that nobody except for me is pointing this out. What ended up eventually happening after sentiment became so called "too bullish" early in a recovery was a multi-month consolidation phase working off this bullish sentiment. They can be quite scary and prolonged making even the most staunchest of bulls sweat. Take for example what happened last summer.
Take a look at what happened in 1984, 1992 and 2004 when there was "too much bullishness" in the sentiment surveys to start off the year.
1984
1992
2004
So, as you can see, in all 3 charts above, the market went through a downward titling consolidation phase which I'm sure made bulls sweat and bears foam at the mouth but in the end the bulls prevailed and prevailed big because the bull market was far from over.
I think we are going to see something similar happen this year as we saw in above 3 charts. In the near future we are probably going to enter some sort of multi-month consolidation phase which will make bulls sweat while making the bears foam at the mouth but by the end of the year the bulls will have prevailed given everything I talked about earlier on. This was similar to what I expected last year at this time as well. Now, just like last year, trying to profit off of corrections in bull markets is difficult and should be avoided. In bull markets you don't go short you go long....either stocks, cash or some combo of the two (Ok fine you can go short to hedge some longs but never go net short or even come close to it).
So what should one do given this outlook? Well, I believe in such an scenario stock picking will be very important. If you can find those winners that have a lot of things going from them company specific wise and you plan to be a long term holder then I would still buy them or at least get a 50% position. I have found that in such cases these types of stocks can ignore ST adverse fluctuations of the general market when the primary trend is still bullish long term. For example when I bought bev.to in September of 2009 that stock traded completely on it's own accord until I sold it in March of 2010 (and it still trades on it's own accord).
The time to get aggressive will be when the current "excessive bullishness" from ST trader types unwinds and hits the opposite extreme. It will require patience however...you might have to wait until the summer or the fall!
It has required courage to be a bull these past couple years and I still feel it requires courage...somewhat of a leap of faith if you will and that tells me it's the right path to be on LT.
Thursday, January 6, 2011
Bad attitudes
Tonight I watched the gold metal game of the World Junior Hockey tournament and witnessed Canada give up 5 goals in the third period blowing a 3-0 lead losing to Russia 5-3. What a disastrous collapse. Canada was playing very well up until they let in that first goal. Then Russia scored less than 20 seconds later making it 3-2. At that time I was shouting at the TV for the Canadian coach to call a time out. After Russia scored again to tie the game, then the idiot calls a time out. "Too late you jerk" were the words that came out of my mouth. What had happened to team Canada was a total mental collapse. It wasn't so much that Russia started playing better, (which they did)....it was more so that Canada played worse....a whole lot worse. Those two quick goals terrified them. You could see in their body language. They were badly rattled and as a result they played timidly backing away from their opponents instead of challenging them. If the coach would have called the time out after those two quick goals I think it would have made a material difference. I think he's responsible more than anyone. How in the blue hell can you not call a time out after your team got scored on twice in less than 20 seconds in the 3rd period of a gold metal game? The coach is often unjustly blamed when a team preforms poorly but in this case he's guilty. He had a chance to stop the bleeding before it became fatal.
I've played competitive sports all my life and through the years I've learned the importance of having the right attitude and being mentally resilient. In sports you need to be confident in yourself and believe you get better but you need to have steady, grounded confidence. When you're playing really well you need to tell yourself that maybe this means you're getting better but you're probably not as good as your recent performance suggests. When your in a slump or made a bad play you need to tell yourself that you're not as bad as your recent play suggests. You need to accept and prepare for the fact that you will make mistakes, get into slumps and get unlucky bounces so that when they happen it doesn't rattle you. You need to keep that upper middle ground mentally - upper in the sense that you not just neutral about yourself....you're solidly confident but not euphoric.
The problem that young athletes tend to have is that they are more prone to having their confidence swing from euphoria to depression instead of finding that upper middle ground and staying there. I remember myself going through these swings. I remember at one point when my confidence was completely shattered. I was playing poorly because I had not played for several months due to injury and I was badly out of shape. Instead of cutting myself some slack I took my poor play pretty hard. I had so little confidence that it got to the point where I was hoping nobody would pass me the ball out of fear that I would screw up. When I saw how team Canada was playing after the Russians got second goal and especially after they got that tying goal, I could see the exact same collapse in confidence and fear. Canadian players were afraid to get engaged. Instead of challenging any oncoming Russian attacks they timidly backed away. They made several unforced errors from simple routine plays. If I was coaching team Canada I would have called a time out after the Russians scored those quick two goals and tried to settle my team down. I would remind them that they are the better team because they had them dominated the whole game. I would tell them to get angry and play hungry as if the score is 0-0. Unlike in my case when my poor confidence was the result of me being in bad shape and therefore somewhat justifies the poor confidence, the team Canada players should not have had this collapse in confidence because they were indeed the better team. The coach failed miserably.
Another phenonemun in sports is that the veteran loaded teams tend to win championships compared to teams loaded with younger players even though they may be more skillful. This is due to experience, not just because of having played more games, but more importantly because of the mental edge confidence wise the veterans have over the young players which was aquired as a result of experience. They don't get rattled as easy, they don't get too high they don't get too low. They don't get nervous under pressure situations not only because they've been in them before and therefore more desensitized to the pressure but also because over the years they have developed a near unshakable belief in themselves which would remain unchanged no matter what the outcome. Therefore they play with no fear, they play to win.
When it comes to trading all the above regarding confidence and metal fortitude applies just the same if not more. You must be confident in yourself but not euphoric when things go well. You must be prepared for the inevitable mistakes, slumps and bad luck that is bound to occur, this way they don't get you down too much when it does actually occur. But your confidence has be legitimate. Do you have the ability, experience and results that justify you being so confident in yourself?
You also need to have the right attitude. The right attitude is that you and only you are responsible for your results and there is no blaming of others. The right attitude is that you accept the market for what it is rather than what you think it should be. I see tons of bad attitudes out there ranging from the "pro" to the retail schmuck. Some pros are so full of themselves with their dogmatic, self righteousness that they often invest in a way that says "I'm right and the market is wrong" refusing to change their mind no matter how strongly the market has moved in opposition to them. Others, typically retail schmucks, become permanently bitter/angry at the market after getting burned. They become so in denial and even delusional that they start weak or false arguments. Examples of this is how I commonly see people scoff at this bull market by saying things like "it's all due to fed money printing", "It's all on low volume", "it's the PPT", "It's GS bots who are buying". If only these people could see how pathetic they are saying these things.
I've played competitive sports all my life and through the years I've learned the importance of having the right attitude and being mentally resilient. In sports you need to be confident in yourself and believe you get better but you need to have steady, grounded confidence. When you're playing really well you need to tell yourself that maybe this means you're getting better but you're probably not as good as your recent performance suggests. When your in a slump or made a bad play you need to tell yourself that you're not as bad as your recent play suggests. You need to accept and prepare for the fact that you will make mistakes, get into slumps and get unlucky bounces so that when they happen it doesn't rattle you. You need to keep that upper middle ground mentally - upper in the sense that you not just neutral about yourself....you're solidly confident but not euphoric.
The problem that young athletes tend to have is that they are more prone to having their confidence swing from euphoria to depression instead of finding that upper middle ground and staying there. I remember myself going through these swings. I remember at one point when my confidence was completely shattered. I was playing poorly because I had not played for several months due to injury and I was badly out of shape. Instead of cutting myself some slack I took my poor play pretty hard. I had so little confidence that it got to the point where I was hoping nobody would pass me the ball out of fear that I would screw up. When I saw how team Canada was playing after the Russians got second goal and especially after they got that tying goal, I could see the exact same collapse in confidence and fear. Canadian players were afraid to get engaged. Instead of challenging any oncoming Russian attacks they timidly backed away. They made several unforced errors from simple routine plays. If I was coaching team Canada I would have called a time out after the Russians scored those quick two goals and tried to settle my team down. I would remind them that they are the better team because they had them dominated the whole game. I would tell them to get angry and play hungry as if the score is 0-0. Unlike in my case when my poor confidence was the result of me being in bad shape and therefore somewhat justifies the poor confidence, the team Canada players should not have had this collapse in confidence because they were indeed the better team. The coach failed miserably.
Another phenonemun in sports is that the veteran loaded teams tend to win championships compared to teams loaded with younger players even though they may be more skillful. This is due to experience, not just because of having played more games, but more importantly because of the mental edge confidence wise the veterans have over the young players which was aquired as a result of experience. They don't get rattled as easy, they don't get too high they don't get too low. They don't get nervous under pressure situations not only because they've been in them before and therefore more desensitized to the pressure but also because over the years they have developed a near unshakable belief in themselves which would remain unchanged no matter what the outcome. Therefore they play with no fear, they play to win.
When it comes to trading all the above regarding confidence and metal fortitude applies just the same if not more. You must be confident in yourself but not euphoric when things go well. You must be prepared for the inevitable mistakes, slumps and bad luck that is bound to occur, this way they don't get you down too much when it does actually occur. But your confidence has be legitimate. Do you have the ability, experience and results that justify you being so confident in yourself?
You also need to have the right attitude. The right attitude is that you and only you are responsible for your results and there is no blaming of others. The right attitude is that you accept the market for what it is rather than what you think it should be. I see tons of bad attitudes out there ranging from the "pro" to the retail schmuck. Some pros are so full of themselves with their dogmatic, self righteousness that they often invest in a way that says "I'm right and the market is wrong" refusing to change their mind no matter how strongly the market has moved in opposition to them. Others, typically retail schmucks, become permanently bitter/angry at the market after getting burned. They become so in denial and even delusional that they start weak or false arguments. Examples of this is how I commonly see people scoff at this bull market by saying things like "it's all due to fed money printing", "It's all on low volume", "it's the PPT", "It's GS bots who are buying". If only these people could see how pathetic they are saying these things.
Tuesday, January 4, 2011
Everyone, bulls and bears alike calling for a January correction
I've had a pretty good sense in the past knowing when the "correction" trade is overcrowded. I gotta say that I definitely sense that now. Bulls are on guard for a correction and bears are calling for one too. In fact, I've never seen such a unanimous call for a correction as I do now in a long time. Near the low of the day I saw a headline from bigcharts.com that said some portfolio manager claimed the January correction has started. The market didn't even go in the red for the year yet and this guy's already saying the correction has started? Talk about being over-eager. I believe this group think call for a correction means that a correction either won't happen or will be quite shallow, well below expectations.
Here's another thing I'm noticing. That data that is coming out lately is suggesting more and more that the economy is gaining further traction and the recovery will be self sustaining. Initial weekly claims for unemployment last week plummeted to 388K, bringing the 4 week average very close to the 400K mark which in the past has signaled strong and persistent job gains. Meanwhile the Chicago PMI soared to a 30 year high. Remember what I said a few weeks back....bullish sentiment can remain chronic and be ignored by the market when evidence of a self sustaining recovery start to appear. Well, it looks to me like this may be happening. In such cases, it's difficult for the market to gain any downside traction because the data is just too good while too many people are sitting on the sidelines.
I know it's piggish to expect the market to go higher still given the run we've had, but I gotta tell you I think it's going to happen without much in the way of downside....at least for now.
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