I don't mean to sound preachy or smug with this post or any of my posts. I make these kinds of posts not so much to try to smugly educate people about my beliefs but more so for myself - to reinforce what I know, bringing out the savvy, inner spok within me so that when the emotional, impulsive and paranoid George Costanza in me tries to take over, I can go back and use these posts as a way to talk to my cool, calm and collective self.
I went to Chapters yesterday to buy some books and magazines for my upcoming trip to Korea. When I visited the economic/business section I noticed an overwhelming theme from the book titles. Doomsday books like I.O.U. and books that talked about the crash and why it happened were dominant. I don't think I saw one book that had optimistic overtones...at least from the titles that were visible to me as I was browsing. 11 years ago, books like "DOW 36000" were the dominant theme. The contrarian implications of these doomsday and "after the fact" books that talk about the crash are quite bullish for the long term especially because of the fact that the stock market has recovered so strongly and yet these books still take up the most space on the shelf. You think the bull market is going to end like this? Highly doubt it.
On these pages I've been showing example after example of how the herd is still dancing to an old tune that no longer plays on the radio. Mind you, observing these kind of things won't help predict where the market will be in the next few weeks or months. Think bigger, think longer term....I tell myself this all the time. I know, I know...it's hard to do that given all of the shit that's going on in the world. But you know what? Look at history to see when it was the best to be a long term bull...it was always during times of uncertainty and gloom like now. Would you rather wait until the unemployment rate drops to sub 5%, the government is running surpluses and consumer confidence is high? Ok fine...you do that. But if you think the stock market won't advance substantially before that happens you have another thing coming to you. Unfortunately, most people chose to be bullish when everything is peachy like this which often coincides with the next bear market being around the corner. Guess when was the last time the US had sub 5% unemployment, consumer confidence was at all time highs and the government was running surpluses - 1999.....a great time to be invested long term for "Dow 36000"....not.
I should also say this...don't think I don't have the same worries and concerns as the next guy out there about today's problems. Although it's my belief that they will somehow get resolved or at the very least get pushed back for several years based upon the action of the stock market for the past 2 years, anytime the market does drop sharply I can't help but get concerned. When the market corrects for a prolonged period like it did in the summer, deep down I can't help but have nagging doubts about the LT bull case even if I was expecting such a correction. It has taken a large of leap of faith to be bullish, it takes courage and it feels somewhat uncomfortable. But ironically, I know from experience that if I feel this way I'm probably on the right side of the market. Back in early 2001 I felt the exact same way when I was bearish. Being a bear back then was very difficult. After all, the 10 years that preceded 2000 were glorious bull market years and anyone who was bearish got absolutely crushed over and over. I remember when the fed did a surprise rate cut in January of 2001 and the financial media trotted out statistics that showed every time the fed cut rates the market was up a year later with one exception....1930. These kind of stats made bears sweat I'm sure...it certainly made me sweat.
Back then in 2001 I was still fairly new to the market and although I avoided going long stocks except for some gold stocks (which I sold waaaaaaayyyy to early...don't even go there....I bought them right at the beginning of the gold bull market), I didn't have enough confidence in myself to short stocks and make money from my bearish convictions. This time around as a bull I had more confidence in myself compared to 10 years ago and I've done well, but I could have and should have done even better if I had complete confidence in myself...not to the point of hubris but confident to the point where I where I should have been able to just "let go" and pull the trigger aggressively (but not recklessly) every time I had a strong inclination and be confident enough to believe that if it didn't work out, I would be able to eventually make up it for and more. At times I did do this but at times I didn't.
I'm still struggling to get to that point where I believe I'm operating at the most optimal level. It's very difficult if not impossible to get to this point because it requires you to be maitain multiple delicate balances simultaneously in 1)self confidence 2) perception and 3) discipline vs conviction.
1) It's neither good to have low self-confidence or too high self confidence. The optimal level is to be high but just below the level of hubris. And that confidence has to be earned. A newbie can't have high confidence in his abilities to play the market because he doesn't have a track record of success and therefore should play small. The worst thing a newbie can experience is to have big initial success. That results in a false sense of confidence which leads to bigger, bolder bets ultimately ending in big losses and the humble realization that their abilities were't as good as they initially thought. When you've earned your stripes, you can be bolder.
2) You need to see the market for what it really is without ego, bias, anger and resentment focusing on what counts while ignoring what doesn't. Do you avoid taking a loss because it will hurt your pride too much? Did you get burned by the market in the past and have been bitter ever since? Are you angry at the economy because you lost your job? Are you trying to "push" the market up or down with your positions because you personally believe the economy/stock market "deserves" to go in that direction? If you answer yes to any of these questions your perception of the market is impaired and your performance will suffer...potentially fatally similar to the driving performance of a drunk.
3) Where do you optimally draw the line between giving your position time to be profitable and cutting losses short? What is the optimal degree to which you "let winners run" as opposed to taking profits? There's no way to determine for sure what is optimal.
If any one of these 3 above factors are out of whack it will contaminate the other ones... and there's really no way of knowing for sure whether you are in perfect harmony because you can't quantify these things like you can with your body temperature for instance. Plus, how do you quantify how much luck played a part of your performance? Again, you can't know exactly.
It's a fascinating game isn't it? The fact that there's so many unquantifiable variables at play makes it impossible to know if you have truly mastered it. Although I know that I can never master it, I love the challenge of trying to do so anyways, constantly trying to improve myself. It's like trying to fully understand women. The room you have for improvement is infinite.
Friday, March 25, 2011
Wednesday, March 23, 2011
myopia
Most of the financial sites and blogs out there comment about the day to day movements of the market and try to predict and trade them. They think they can capture every wiggle. They post charts and analyze them with a slew of useless, voodoo techncial indicators deludedly thinking that the more indicators they use the more accurate they will be. I'm quite sure most of these traders will end up as failures. I'm sure the are successful ST traders out there but for every success there's probably at least 5 failures and those successes could simply be due to a long streak of luck (for example, if you had 1000 people flip a coin 100 times, there's going to be a handful who managed to flip either heads or tails a lot more than 50% of time but that doesn't make them special in anyway...they were just lucky for a long time). The market is simply too random in the ST for anyone to catch all the wiggles and even if you are correct in being a bull in a bull market or bear in a bear market if you're focusing on capturing all the ST movements odds are very high your myopia will cause you to miss out on the big moves and not get fully rewarded for being right about the major trend.
In my opinion, the proper way to play the market is to have more of a longer term holding period but doing so requires you to do a whole lot of nothing. Probably the hardest thing to do in this game is to do nothing. By nothing what I mean is establishing a position/thesis and sticking to it until it is fully played out while ignoring the noise and the temptation to trade all the wiggles of the market. For those like me who do this for a living, this is especially difficult because you're looking at the market action all day and it's hard to just sit on your hands and do nothing. I fight temptation to make ST trades everyday. Sometimes I wish I had another job or distraction to make it easier. Well, I'm going to have a pretty good distraction shortly. On April 3, I'll be on my way to Korea for 6 weeks. Given the time difference the market will be open at 10:30 in the evening which means I will be able to enjoy the day without wondering what's going on and I'll be asleep most of the time while the market is open.
I said this before one time, for any given year, it would be optimal to have made only 2-5 trades the entire year. Take for instance last year. It would have been optimal to sell in January, buy in February, sell in April and then buy again in either early July or September. Or with a 2 trade strategy: Sell in April, buy in July or September. Making the above trades would have captured all the major moves in the market last year. Now, of course, hindsight is 20/20 and even if you're only making a few trades a year it still requires luck in addition to skill in timing everything right like this. But if you simply did nothing but buy and hold you came out on top as well and buying and holding doesn't require timing skills or luck aside from recognizing when a bull market is in place and having the conviction to stomach corrections and ride it until conditions are in place that suggest it's end is near. I guess the luck part would be that during this time there is no catastrophic disaster such as a nuclear attack that wipes out half the earth.
Riding the major trend to its fullest is a very, very difficult thing to do. Even if you are correct in identifiying the trend and staying with it for a while, somewhere along the way odds are high you will get bucked off it prematurely because either a) you thought the market had gone "too far too fast" and want to get back in on the correction that never materialized or b)something gets you worried that the trend is going to end and it turns out not to be case. I have seen this happen first hand with myself and to others including the so called "pros". During the bear market of 2007-2008 very few bears fully capitalized on the decline. They either covered shorts far too early (around SPX 1100-1000) and/or went long for a trade and got ran over. Some bears like Schiff thought they would be protected via gold and commodities and they too got hammered. Some guys like Hussman who were correct in identifying the bear market very early still lost money because they fell into the "too far too fast" trap. During the bull market some guys like Kass were bullish pretty much near the begining of it but they got bucked off the trend way too early (like at 900 or so) and then lost money betting against it because of...you got it... the "too far too fast" trap.
Man, did Livermore nail it 80+ years ago when he said:
You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched
mine that is, they made no real money out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is only after a stock
operator has firmly grasped this that he can make big money.
Alright, that's enough philosophy for the today. Let me induldge in some myopia if you will and talk about the ST. During last's week mini-panic we saw the VIX spike to 30, 4 days in a row where the put/call ratio closed above 1, AAII sentiment showing 1.43 ratio of bears vs bulls and other sentiment measures showing traders fleeing stocks. As I suspected the downside was rather contained. In my view, the bare minimum threshold of pessimism to warrant a correction bottom was reached last week, meaning it would have been more ideal for pessimism to have been a bit higher such as seeing a 2:1 ratio of bears vs bulls. Maybe that will happen if we get a retest or marginal lower low of that bottom. I suspect sometime this year we will indeed see those lows get revisited but I have no sense as to whether that will happen in the immediate future or sometime in the months ahead which means it's quite possible to see the market go higher before it goes lower. I'd put the odds smack dab at 50/50 as to whether the next 50 points will be up or down. I know, I know, this sounds a like a pussy prediction because whatever happens I won't be wrong....but it's honestly the way I feel!
For me, I've done nothing. I've maintained my positions throughout all of this volatility. A retest of last week's lows would likely create a more solid foundation for a more sustainable advance. If we don't retest and simply keep advancing, then it's likely last week's low will be revisited sometime later on in the year which happens to fit well with my consolidation thesis.
Patience folks...but again I must stress not to get too fixated on the ST. Big money is made riding big trends.
In my opinion, the proper way to play the market is to have more of a longer term holding period but doing so requires you to do a whole lot of nothing. Probably the hardest thing to do in this game is to do nothing. By nothing what I mean is establishing a position/thesis and sticking to it until it is fully played out while ignoring the noise and the temptation to trade all the wiggles of the market. For those like me who do this for a living, this is especially difficult because you're looking at the market action all day and it's hard to just sit on your hands and do nothing. I fight temptation to make ST trades everyday. Sometimes I wish I had another job or distraction to make it easier. Well, I'm going to have a pretty good distraction shortly. On April 3, I'll be on my way to Korea for 6 weeks. Given the time difference the market will be open at 10:30 in the evening which means I will be able to enjoy the day without wondering what's going on and I'll be asleep most of the time while the market is open.
I said this before one time, for any given year, it would be optimal to have made only 2-5 trades the entire year. Take for instance last year. It would have been optimal to sell in January, buy in February, sell in April and then buy again in either early July or September. Or with a 2 trade strategy: Sell in April, buy in July or September. Making the above trades would have captured all the major moves in the market last year. Now, of course, hindsight is 20/20 and even if you're only making a few trades a year it still requires luck in addition to skill in timing everything right like this. But if you simply did nothing but buy and hold you came out on top as well and buying and holding doesn't require timing skills or luck aside from recognizing when a bull market is in place and having the conviction to stomach corrections and ride it until conditions are in place that suggest it's end is near. I guess the luck part would be that during this time there is no catastrophic disaster such as a nuclear attack that wipes out half the earth.
Riding the major trend to its fullest is a very, very difficult thing to do. Even if you are correct in identifiying the trend and staying with it for a while, somewhere along the way odds are high you will get bucked off it prematurely because either a) you thought the market had gone "too far too fast" and want to get back in on the correction that never materialized or b)something gets you worried that the trend is going to end and it turns out not to be case. I have seen this happen first hand with myself and to others including the so called "pros". During the bear market of 2007-2008 very few bears fully capitalized on the decline. They either covered shorts far too early (around SPX 1100-1000) and/or went long for a trade and got ran over. Some bears like Schiff thought they would be protected via gold and commodities and they too got hammered. Some guys like Hussman who were correct in identifying the bear market very early still lost money because they fell into the "too far too fast" trap. During the bull market some guys like Kass were bullish pretty much near the begining of it but they got bucked off the trend way too early (like at 900 or so) and then lost money betting against it because of...you got it... the "too far too fast" trap.
Man, did Livermore nail it 80+ years ago when he said:
You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched
mine that is, they made no real money out of it. Men who can both be right and sit tight
are uncommon. I found it one of the hardest things to learn. But it is only after a stock
operator has firmly grasped this that he can make big money.
Alright, that's enough philosophy for the today. Let me induldge in some myopia if you will and talk about the ST. During last's week mini-panic we saw the VIX spike to 30, 4 days in a row where the put/call ratio closed above 1, AAII sentiment showing 1.43 ratio of bears vs bulls and other sentiment measures showing traders fleeing stocks. As I suspected the downside was rather contained. In my view, the bare minimum threshold of pessimism to warrant a correction bottom was reached last week, meaning it would have been more ideal for pessimism to have been a bit higher such as seeing a 2:1 ratio of bears vs bulls. Maybe that will happen if we get a retest or marginal lower low of that bottom. I suspect sometime this year we will indeed see those lows get revisited but I have no sense as to whether that will happen in the immediate future or sometime in the months ahead which means it's quite possible to see the market go higher before it goes lower. I'd put the odds smack dab at 50/50 as to whether the next 50 points will be up or down. I know, I know, this sounds a like a pussy prediction because whatever happens I won't be wrong....but it's honestly the way I feel!
For me, I've done nothing. I've maintained my positions throughout all of this volatility. A retest of last week's lows would likely create a more solid foundation for a more sustainable advance. If we don't retest and simply keep advancing, then it's likely last week's low will be revisited sometime later on in the year which happens to fit well with my consolidation thesis.
Patience folks...but again I must stress not to get too fixated on the ST. Big money is made riding big trends.
Tuesday, March 15, 2011
Keeping composure and observing precedents
I mentioned before that a couple of years ago I created the "trading/investing" bible for myself which is a 4000+ word document outlining all of the things I have learned and believe in when it comes to the markets. This document was forged not out of dogma or self righteousness but from experience and what has actually worked. One of things I wrote was this:
A bull market will not end due to 1 time external events such as a natural disaster, president assassination, or even terrorist attack. Therefore dips that occur as a result of these events during a bull market are good buying opportunities.
These 1 time events don't effect the longer term underpinnings of the overall economy. They tend to create ST disruptions but that's about it.
If you look at previous nuclear fallouts like Chernobyl and 3 Mile Island, the market responded with only a modest dip (not even 5%) which you can barely notice on the long term chart.
After 911 the economy in the US literally grinded to a halt for a few days and confidence was shaken badly, but it was temporary. The stock market ended up dropping as much a 15% but within 1.5 months those losses were all recovered even despite being in a bear market whereby the ultimate bottom occurred in the following year.
Remember Katrina back in 2005? Despite being the costliest natural disaster in US history, with heavy losses to insurance companies, the stock market impact was rather muted. The market had dropped about 5% for 2 months following Katrina and then ended up closing out the year over and above where the market traded prior to Katrina.
History is clear: disasters like we are seeing in Japan are NOT bull market killers. They create temporary panic and although the panic could last for more than 1 day, the market ends up fully recovering the losses in fairly short order. Had this occurred in October, I'm quite sure the market would have been able to shrug it off after a 1 or 2 day knee jerk sell-off. But given the massive run the market has had prior to this news you could probably argue that the market was already setting up for a correction/consolidation anyways and the Japan news simply expedited this process. This in addition to the other concerns already hamstringing the market makes it tricky to call here.
Considering the damage done in Japan and in Europe, today's damage to the US was rather mild and the recovery from the opening was encouraging because the put/call ratio closed quite high today showing heavy skepticism towards this semi-reversal. By no means does this suggest we're out of the woods but it's a good sign for the bulls that downside will be rather contained from here.
These are the types of situations which test your conviction and determines just how much of a believer in the bull case you are. It's easy to be a believer when the market has been going up week after week but what about now? I suspect today chased out a lot of weak holders.
One thing the market will do is expose your weaknesses. If you are ignorant and make decisions based upon data the market doesn't care about or useless indicators, you will get punished. If you don't believe enough in yourself or your convictions you will get punished by not making nearly as much money as you should have or getting shaken out near the end of a dip/correction. If you believe too much in yourself and your convictions the market will eventually humble you for being greedy, stubbornly dogmatic or arrogant. If you're bitter/biased you will not see the market for what it is and you will get punished. If you are disorganized and reckless (don't have guidelines/rules, don't plan your trades) you will get punished. If you are emotional and make snap decisions you will get punished.
You will definitely learn about yourself playing the market...try to keep the cost of this information at a minimum.
A bull market will not end due to 1 time external events such as a natural disaster, president assassination, or even terrorist attack. Therefore dips that occur as a result of these events during a bull market are good buying opportunities.
These 1 time events don't effect the longer term underpinnings of the overall economy. They tend to create ST disruptions but that's about it.
If you look at previous nuclear fallouts like Chernobyl and 3 Mile Island, the market responded with only a modest dip (not even 5%) which you can barely notice on the long term chart.
After 911 the economy in the US literally grinded to a halt for a few days and confidence was shaken badly, but it was temporary. The stock market ended up dropping as much a 15% but within 1.5 months those losses were all recovered even despite being in a bear market whereby the ultimate bottom occurred in the following year.
Remember Katrina back in 2005? Despite being the costliest natural disaster in US history, with heavy losses to insurance companies, the stock market impact was rather muted. The market had dropped about 5% for 2 months following Katrina and then ended up closing out the year over and above where the market traded prior to Katrina.
History is clear: disasters like we are seeing in Japan are NOT bull market killers. They create temporary panic and although the panic could last for more than 1 day, the market ends up fully recovering the losses in fairly short order. Had this occurred in October, I'm quite sure the market would have been able to shrug it off after a 1 or 2 day knee jerk sell-off. But given the massive run the market has had prior to this news you could probably argue that the market was already setting up for a correction/consolidation anyways and the Japan news simply expedited this process. This in addition to the other concerns already hamstringing the market makes it tricky to call here.
Considering the damage done in Japan and in Europe, today's damage to the US was rather mild and the recovery from the opening was encouraging because the put/call ratio closed quite high today showing heavy skepticism towards this semi-reversal. By no means does this suggest we're out of the woods but it's a good sign for the bulls that downside will be rather contained from here.
These are the types of situations which test your conviction and determines just how much of a believer in the bull case you are. It's easy to be a believer when the market has been going up week after week but what about now? I suspect today chased out a lot of weak holders.
One thing the market will do is expose your weaknesses. If you are ignorant and make decisions based upon data the market doesn't care about or useless indicators, you will get punished. If you don't believe enough in yourself or your convictions you will get punished by not making nearly as much money as you should have or getting shaken out near the end of a dip/correction. If you believe too much in yourself and your convictions the market will eventually humble you for being greedy, stubbornly dogmatic or arrogant. If you're bitter/biased you will not see the market for what it is and you will get punished. If you are disorganized and reckless (don't have guidelines/rules, don't plan your trades) you will get punished. If you are emotional and make snap decisions you will get punished.
You will definitely learn about yourself playing the market...try to keep the cost of this information at a minimum.
Japan in shambles
Wow....the Nikkei is crashing tonight. It's down almost 14% as I type this on top of a 6% beating the other day! The damage was rather mild for the US markets on Monday but the futures are very deep in the red tonight down 2.4% as of right now and so it will probably be ugly Tuesday...at least initially. It appears as though the cause of the panic selling is that things are taking a turn for the worse at the damaged nuclear power plant.
Some notable bears like Faber were touting Japanese stocks just recently. Talk about terrible timing. I know, I know...who could have predicted the tsunami in Japan and a possible nuclear disaster, but man, this latest call is adding insult to injury given how wrong he and the other grumps have been about the US market for several months.
These sort of one offs like what's happened to Japan is an example as to why I tend to avoid playing the ST...it's simply too random. These types of events are also the hazards of LT investing as well...you have to be willing to accept that these things can happen and deal with the ST pain that they can inflict. And if the event is extremely serious like say a nuclear attack that wipes out a large country then the market fallout could be very bad and lasting. That's just part of the game that you can't control...no different than a hockey player who gets a career ending injury because of cheap shot hit from behind that sends him head first into the boards.
So, how much of the sell-off is due to adjusting expectations lower and how much is it due to panic? I think the latter has more to do with it. It's been my experience that panic led sell-offs triggered by 1 time negative shocks like this eventually get fully retraced. Think 911. The market was closed for a few days and when it re-opened it went down hard for 1 week. But even despite the market being in the midst of a bear trend, the losses from 911 were recovered and then some a few months later. So, the question is, when does the bottom get put in? Let the market tell you. When you see a big down day initially followed by a late day reversal to the green or close to break even, that has been a reliable indicator of at least a ST bottom but I'd like to see a high put/call ratio day along with this type of reversal to get some confirmation of a bottom; especially now a days when everyone is a technician thus making any kind of chart pattern a lot less reliable than before.
Bottom line: Keep a cool head and let this shit blow over before making any moves. If you end up seeing ridiculous panic selling in some of the stocks you have on your radar then by all means take advantage of it. Otherwise, wait until you see the whites of the eyes of all those Johnny come lately bulls who were late to the party.
And by the way, don't you find it odd how gold is down $13 tonight? Just like in the panic of 2008 the true flight to safety was in the $US. Gold took a beating like everything else.
Some notable bears like Faber were touting Japanese stocks just recently. Talk about terrible timing. I know, I know...who could have predicted the tsunami in Japan and a possible nuclear disaster, but man, this latest call is adding insult to injury given how wrong he and the other grumps have been about the US market for several months.
These sort of one offs like what's happened to Japan is an example as to why I tend to avoid playing the ST...it's simply too random. These types of events are also the hazards of LT investing as well...you have to be willing to accept that these things can happen and deal with the ST pain that they can inflict. And if the event is extremely serious like say a nuclear attack that wipes out a large country then the market fallout could be very bad and lasting. That's just part of the game that you can't control...no different than a hockey player who gets a career ending injury because of cheap shot hit from behind that sends him head first into the boards.
So, how much of the sell-off is due to adjusting expectations lower and how much is it due to panic? I think the latter has more to do with it. It's been my experience that panic led sell-offs triggered by 1 time negative shocks like this eventually get fully retraced. Think 911. The market was closed for a few days and when it re-opened it went down hard for 1 week. But even despite the market being in the midst of a bear trend, the losses from 911 were recovered and then some a few months later. So, the question is, when does the bottom get put in? Let the market tell you. When you see a big down day initially followed by a late day reversal to the green or close to break even, that has been a reliable indicator of at least a ST bottom but I'd like to see a high put/call ratio day along with this type of reversal to get some confirmation of a bottom; especially now a days when everyone is a technician thus making any kind of chart pattern a lot less reliable than before.
Bottom line: Keep a cool head and let this shit blow over before making any moves. If you end up seeing ridiculous panic selling in some of the stocks you have on your radar then by all means take advantage of it. Otherwise, wait until you see the whites of the eyes of all those Johnny come lately bulls who were late to the party.
And by the way, don't you find it odd how gold is down $13 tonight? Just like in the panic of 2008 the true flight to safety was in the $US. Gold took a beating like everything else.
Friday, March 11, 2011
weekend ramblings
Middle East unrest, emerging market tightening, Charlie Sheen tirades... pick your excuse to account for the sell off that has taken place recently. You wanna know what I think the true reason is? Duh...winning. The market has been winning i.e. rising relentlessly. It's up almost 30% in 6 months on top of a 100% two year advance. In such cases the market is entitled to some sort of pause and it doesn't really matter what the excuse is. I'm not suggesting the concerns I've mentioned are meaningless. Not at all. But let's take a look at all the other worries that have been out there since March of 2009
commercial real estate shoe to drop
ARMS resets
"shadow" foreclosure inventory hitting the market causing another downleg in housing prices
double dip reccession
head and shoulders top
Dubai
PIIGS
commercial real estate shoe to drop
ARMS resets
"shadow" foreclosure inventory hitting the market causing another downleg in housing prices
double dip reccession
head and shoulders top
Dubai
PIIGS
stubbornly high unemployment
low volume
death cross
hindenburg omen
I'm sure there's more you can add to this list. Some of these concerns triggered dips/corrections but despite it all the market has had it's biggest run up since 1955. Oh but wait...it's all a bs government manipulated bull market and the earnings explosion is just a fabrication right?
Let's look at history. The reccession in 1990 was a housing led bust just like in 2008 but not as severe. As the article I posted last week mentioned, the recovery in the early 90s was initially sluggish and structural headwinds appeared firmly in place as is the popular view today. Back then the government had to step in and "manipulate" the market by forming the resolution trust to mop up all the bad real estate related debt banks had on their books.
In the early 1980s most large US banks were technically insolvent due to bad loans to Latin America but the government allowed them to report assets at inflated prices because their market value would have reflected panick/fire sale prices making them insolvent. Sound familiar? I'm sure bears were screaming bloodly murder at the time just like they did this time around.
And so I ask this, how did the market and the economy fare in the years that followed these 2 episodes of goverment manipulation and what looked like a hopeless economy? I'm sure you know. Government manipulation of the economy has been in existance for like...ever. The panic of 1907 is yet another example of when a higher authority had to step in to rescue the market. And so guess what....contrary to popular belief, government manipulation can work - when their timing is right. When they step in during panic situations it works because they are doing akin to what most savvy investors do - buy low when fear is rampant. All you bears out there, don't get all hot under the collar now. I didn't say all government manipulation works. If it did we would never have recessions. But if you think that this recovery is all just a house of cards because of government manipulation in the market then you could be in for a very rude awaking....if it hasn't happened already, which I'm sure for most of the bears it has.
Months ago, I mentioned that I'm going to focus more on big picture issues and less on ST flucuations and I intend to continue doing so. But believe me, I'm not going to be so cocky in thinking that my LT bullish stance is bullet proof. That sort of thinking can get you into a lot of trouble. But I have a very, very hard time embracing the bear case when I see reports like how in the face of the strongest bull advance since 1955, 1 in 7 Americans believe the recovery is sustainable (as per a recent bloomberg survey). Every fibre of my being tells me I have to fade dumb money main street when they act contrary to the stock market like this. Of course, I could have said the same thing in April of 2010 just prior to the flash crash and a 15% correction, since Main Street sentiment was probably the same if not worse then. But I'm not talking about the short or intermediate term. I'm talking about the long term here.
Regading the shorter term, look again at the charts I posted in early January. In bull markets you can see periods of several months where the trend goes sideways/moderately down which typically happens after a big move up and when traditional sentiment indicators show high bullishness. Coming into this year I was expecting to see such a phase begin in the not too distant future but I knew it would be tricky to time it precisely as are most corrections in bull markets which is a major reason why I don't short in bull markets.
Unlike with the start of prior corrections, I didn't see reckless call buying in the options market which makes me believe that any downside from here will be contained. We've had 2 days in a row now whereby the put/call ratio closed above 1 which means bearish sentiment is rapidly rising. In addition, I don't think this correction was very surprising. Therefore there's a good chance this correction will be rather mild and the "real" correction won't start till later on. Whatever...I'm not going to get obsessed about these ST predictions because quite frankly the ST is often just a guessing game and you're more than likely to blow your brains out trying to game the day to day like most people out there do. As I said many times before, big money is made riding the big trends.
I'm in a position whereby I'm comfortable with my exposure. I'm about 60% long 40% cash and my longs have been dancing to their own tune for the most part holding up quite well overall...so far.
low volume
death cross
hindenburg omen
I'm sure there's more you can add to this list. Some of these concerns triggered dips/corrections but despite it all the market has had it's biggest run up since 1955. Oh but wait...it's all a bs government manipulated bull market and the earnings explosion is just a fabrication right?
Let's look at history. The reccession in 1990 was a housing led bust just like in 2008 but not as severe. As the article I posted last week mentioned, the recovery in the early 90s was initially sluggish and structural headwinds appeared firmly in place as is the popular view today. Back then the government had to step in and "manipulate" the market by forming the resolution trust to mop up all the bad real estate related debt banks had on their books.
In the early 1980s most large US banks were technically insolvent due to bad loans to Latin America but the government allowed them to report assets at inflated prices because their market value would have reflected panick/fire sale prices making them insolvent. Sound familiar? I'm sure bears were screaming bloodly murder at the time just like they did this time around.
And so I ask this, how did the market and the economy fare in the years that followed these 2 episodes of goverment manipulation and what looked like a hopeless economy? I'm sure you know. Government manipulation of the economy has been in existance for like...ever. The panic of 1907 is yet another example of when a higher authority had to step in to rescue the market. And so guess what....contrary to popular belief, government manipulation can work - when their timing is right. When they step in during panic situations it works because they are doing akin to what most savvy investors do - buy low when fear is rampant. All you bears out there, don't get all hot under the collar now. I didn't say all government manipulation works. If it did we would never have recessions. But if you think that this recovery is all just a house of cards because of government manipulation in the market then you could be in for a very rude awaking....if it hasn't happened already, which I'm sure for most of the bears it has.
Months ago, I mentioned that I'm going to focus more on big picture issues and less on ST flucuations and I intend to continue doing so. But believe me, I'm not going to be so cocky in thinking that my LT bullish stance is bullet proof. That sort of thinking can get you into a lot of trouble. But I have a very, very hard time embracing the bear case when I see reports like how in the face of the strongest bull advance since 1955, 1 in 7 Americans believe the recovery is sustainable (as per a recent bloomberg survey). Every fibre of my being tells me I have to fade dumb money main street when they act contrary to the stock market like this. Of course, I could have said the same thing in April of 2010 just prior to the flash crash and a 15% correction, since Main Street sentiment was probably the same if not worse then. But I'm not talking about the short or intermediate term. I'm talking about the long term here.
Regading the shorter term, look again at the charts I posted in early January. In bull markets you can see periods of several months where the trend goes sideways/moderately down which typically happens after a big move up and when traditional sentiment indicators show high bullishness. Coming into this year I was expecting to see such a phase begin in the not too distant future but I knew it would be tricky to time it precisely as are most corrections in bull markets which is a major reason why I don't short in bull markets.
Unlike with the start of prior corrections, I didn't see reckless call buying in the options market which makes me believe that any downside from here will be contained. We've had 2 days in a row now whereby the put/call ratio closed above 1 which means bearish sentiment is rapidly rising. In addition, I don't think this correction was very surprising. Therefore there's a good chance this correction will be rather mild and the "real" correction won't start till later on. Whatever...I'm not going to get obsessed about these ST predictions because quite frankly the ST is often just a guessing game and you're more than likely to blow your brains out trying to game the day to day like most people out there do. As I said many times before, big money is made riding the big trends.
I'm in a position whereby I'm comfortable with my exposure. I'm about 60% long 40% cash and my longs have been dancing to their own tune for the most part holding up quite well overall...so far.
Saturday, March 5, 2011
Interesting Article
I found an interesting article from Time Magazine today. Check out this excerpt from it:
The outward sign of the change is an economy that stubbornly refuses to recover from the recession. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining. At a TIME economic forum last week, forecasters predicted that U.S. growth would amount to only 1.8% this year and 2.6% for next, about half the speed of a normal recovery. The current slump already ranks as the longest period of sustained weakness since the Great Depression.
That was the last time the economy staggered under as many "structural" burdens, as opposed to the familiar "cyclical" problems that create temporary recessions once or twice a decade. The structural faults represent once-in-a-lifetime dislocations that will take years to work out.
A lot of this stuff sounds familiar to you I'm sure. Oh by the way, I forgot to mention that the article was written in September....of 1992.
Thursday, March 3, 2011
4 week average of initial claims for unemployment drops below 400K
I've talked about this a few times in the past....history has shown that when the 4 wk average of initial claims drops below 400K, strong and persistant job creation was immanent. With this week's intial claims number plummenting to 368K
it has pushed the 4 wk avg down to 394K, below 400K for the first time since the recovery started. The ISM number this week was also very strong yet again. Add to the mix strong earnings for well over a year poised to make new all time highs, the evidence appears overwhealming that the economy is ready to stand on it's own two feet and lagging indicators like the unemployment rate is going to rapidly improve within a year. Of course, the forward looking stock market has been reflecting these things all along...yet so many people, retail and pro alike, refused to listen and still for the most part refuse to listen. They were and still are too angry and bitter from getting burned by the dual bear markets of the 2000s to do so.
Doug Kass issued a mea culpa Wednesday morning admitting that he was too negative about the market over the past year. He claims his bearishness was too dogmatic and that he didn't listen to the market which was telling him to think otherwise. Other traders such as the "Rev Shark" over at realmoney.com (who has been atrocious with his calls) also admit to being too bearish. Although the "Rev Shark" admits strong earnings underpinned the rising market, he also blaims the effect of QE for his mishap and says how the market had a manipulative feel to it similar to the typical rants of loser permabear traders who have been crushed. Pathetic.
The above is an example of what I mean by when I said that you need to be strong in your convictions when the market is agreeing with you, when it's not it means you are either early or flat out wrong, either of which will do equal damage to your account balance. When the market is slapping you in the face over and over and over there has to be a point when you come to realization that you're wrong and it's time to change your way thinking. Unfortunately for most people, this moment tends to happen far, far too late and by the time they make the switch the market slaps them in the face again. For some with massive egos, like Prechter, such a moment never happens. He's been LT bearish since 1987. And despite the mea culpas I've noted from Kass and the "Rev Shark", these guys have not turned into full fledged bulls. They are more respectful of the market upside but still cautious deep down willing to run for the hills into their bear caves the moment the market shows any weakness.
I want to say something about market pundits like Kass. Kass made a great call when he pounded the table bullish near the March 2009 bottom. This gave him quite a boost in popularity. This is similar to how bears like Roubini and Pretchter correctly called the bear market of 2008 near it's beginning. But it doesn't surprise me whatsoever to see pundits who made great calls make terrible calls later on. I warned about this in April of 2009 when I said today's geniuses will be tomorrow's goats which is why you can only rely on yourself and be willing to bet against those who have had a hot hand calling the market if that's what's called for. You also need to do your homework on these "gurus". A lot of the times, these guys are like broken clocks who were wrong for months, years or even decades and then finally they get it right and get famous as a result. Meanwhile the media and sheep investors who lick their ass don't bother to look at their long term track record.
Ok, so back to the market now. Although it's a good thing longer term that the evidence is suggesting more and more that the economic expansion will be self-sustaining, at some point the market is going to be looking ahead to the prospect of the fed raising rates especially with inflation pressures building. The ECB has already hinted that they are prepared to do so soon. Bernanke on the other hand, sent a clear message that rates are not going to go up anytime soon and I think this is a mistake. He should have left himself some hedge clause. I think he's behind the curve and I think he'll end up capitulating and changing his tune sooner than most expect. If I'm right, the market would have to adjust it's expectations regarding interest rates and that would be bearish in the intermediate term. This is what happened in 2004 and it triggered a multi-month correction phase with the market dropping 10% throughout it...and if oil prices stay around current levels, it won't be such a bullish thing to see rising interest rates during such circumstances. These are the sort of circumstances that makes placing a bearish bet on the market more worthwhile - not one-offs like social unrest in a couple of small countries. Now of course, if the social unrest spreads to oil heavy weights Saudi Arabia, Iraq, and Iran then it becomes a much more significant concern because that could easily cause another $20-30 pop in oil. Quite frankly it's a legitimate concern to have.
Depsite all the concerns I've noted above, none of them are bull market killers...bull market tamers yes, but not killers. Also, it's going to be difficult as always to capitalize on downside moves in a bull market. Many people have already learned this the hard way on more than one occasion. The consolidation phase I'm envisioning could very well happen at higher prices and start 1-3 months from now or even longer which would can easily drive a bear or sidelined bull insane as they lose money or miss out on gains respectively. For now, I'm still sticking with my longs and cash position and still not making any downside bets....yet. If I end up doing so, it won't be a large bet. What prevents me from making such a bet is the rabid top picking that's still out there which has been counter acting to some degree I'm sure, the contrarian implications of high bullish sentiment in the sentiment surveys, insider selling and retail returning to the market. By the way, did you notice how AAII sentiment has been so quick to drop back down to 1:1 bulls vs bears for 2 weeks in a row now? And for what, a 3% pullback after the market has surged 100% in under 2 years? Yet again, this shows how fickle any retail bulls are and why I said before that the sentiment surveys are only useful for ST market timing. They are NOT a reflection of LT market sentiment which is what matters in gauging the the health of the LT market trend. Deep down, these fickle bulls in addition to the permabears which are still plentiful, are worried about another 2008 or flash crash. Survey's show that 60+% of Americans and Canadians still think we are in a recession. THAT is the sort of sentiment you should be paying attention to. When you see on TV shows like House this week still make mention of the recession and how a character on the show lost money in the stock market THAT tells you what the true underlying market sentiment is. This is why I'm bullish LT because no bull market has ended with people still talking about the recession that caused the previous bear market. It's also why I'm quite reluctant to make any bearish bets as tempting as it often may be at times. If I think the odds are overwhelming for the bears in the ST/IT, I might pull the trigger on a downside bet, but if I have any doubts whatsoever I'll pass and that's been the right play for several months. If I pass on bearish set up that ends up playing out on the downside that's fine by me. In bull markets it's best to error on being too bullish then too bearish especially in my case when my longs aren't very market sensitive. I still don't have that that gut feel that some sort of meaningful correction is immanent - like witinh a week or so. The last time I felt this was in early November and that correction ended up being rather mild.
it has pushed the 4 wk avg down to 394K, below 400K for the first time since the recovery started. The ISM number this week was also very strong yet again. Add to the mix strong earnings for well over a year poised to make new all time highs, the evidence appears overwhealming that the economy is ready to stand on it's own two feet and lagging indicators like the unemployment rate is going to rapidly improve within a year. Of course, the forward looking stock market has been reflecting these things all along...yet so many people, retail and pro alike, refused to listen and still for the most part refuse to listen. They were and still are too angry and bitter from getting burned by the dual bear markets of the 2000s to do so.
Doug Kass issued a mea culpa Wednesday morning admitting that he was too negative about the market over the past year. He claims his bearishness was too dogmatic and that he didn't listen to the market which was telling him to think otherwise. Other traders such as the "Rev Shark" over at realmoney.com (who has been atrocious with his calls) also admit to being too bearish. Although the "Rev Shark" admits strong earnings underpinned the rising market, he also blaims the effect of QE for his mishap and says how the market had a manipulative feel to it similar to the typical rants of loser permabear traders who have been crushed. Pathetic.
The above is an example of what I mean by when I said that you need to be strong in your convictions when the market is agreeing with you, when it's not it means you are either early or flat out wrong, either of which will do equal damage to your account balance. When the market is slapping you in the face over and over and over there has to be a point when you come to realization that you're wrong and it's time to change your way thinking. Unfortunately for most people, this moment tends to happen far, far too late and by the time they make the switch the market slaps them in the face again. For some with massive egos, like Prechter, such a moment never happens. He's been LT bearish since 1987. And despite the mea culpas I've noted from Kass and the "Rev Shark", these guys have not turned into full fledged bulls. They are more respectful of the market upside but still cautious deep down willing to run for the hills into their bear caves the moment the market shows any weakness.
I want to say something about market pundits like Kass. Kass made a great call when he pounded the table bullish near the March 2009 bottom. This gave him quite a boost in popularity. This is similar to how bears like Roubini and Pretchter correctly called the bear market of 2008 near it's beginning. But it doesn't surprise me whatsoever to see pundits who made great calls make terrible calls later on. I warned about this in April of 2009 when I said today's geniuses will be tomorrow's goats which is why you can only rely on yourself and be willing to bet against those who have had a hot hand calling the market if that's what's called for. You also need to do your homework on these "gurus". A lot of the times, these guys are like broken clocks who were wrong for months, years or even decades and then finally they get it right and get famous as a result. Meanwhile the media and sheep investors who lick their ass don't bother to look at their long term track record.
Ok, so back to the market now. Although it's a good thing longer term that the evidence is suggesting more and more that the economic expansion will be self-sustaining, at some point the market is going to be looking ahead to the prospect of the fed raising rates especially with inflation pressures building. The ECB has already hinted that they are prepared to do so soon. Bernanke on the other hand, sent a clear message that rates are not going to go up anytime soon and I think this is a mistake. He should have left himself some hedge clause. I think he's behind the curve and I think he'll end up capitulating and changing his tune sooner than most expect. If I'm right, the market would have to adjust it's expectations regarding interest rates and that would be bearish in the intermediate term. This is what happened in 2004 and it triggered a multi-month correction phase with the market dropping 10% throughout it...and if oil prices stay around current levels, it won't be such a bullish thing to see rising interest rates during such circumstances. These are the sort of circumstances that makes placing a bearish bet on the market more worthwhile - not one-offs like social unrest in a couple of small countries. Now of course, if the social unrest spreads to oil heavy weights Saudi Arabia, Iraq, and Iran then it becomes a much more significant concern because that could easily cause another $20-30 pop in oil. Quite frankly it's a legitimate concern to have.
Depsite all the concerns I've noted above, none of them are bull market killers...bull market tamers yes, but not killers. Also, it's going to be difficult as always to capitalize on downside moves in a bull market. Many people have already learned this the hard way on more than one occasion. The consolidation phase I'm envisioning could very well happen at higher prices and start 1-3 months from now or even longer which would can easily drive a bear or sidelined bull insane as they lose money or miss out on gains respectively. For now, I'm still sticking with my longs and cash position and still not making any downside bets....yet. If I end up doing so, it won't be a large bet. What prevents me from making such a bet is the rabid top picking that's still out there which has been counter acting to some degree I'm sure, the contrarian implications of high bullish sentiment in the sentiment surveys, insider selling and retail returning to the market. By the way, did you notice how AAII sentiment has been so quick to drop back down to 1:1 bulls vs bears for 2 weeks in a row now? And for what, a 3% pullback after the market has surged 100% in under 2 years? Yet again, this shows how fickle any retail bulls are and why I said before that the sentiment surveys are only useful for ST market timing. They are NOT a reflection of LT market sentiment which is what matters in gauging the the health of the LT market trend. Deep down, these fickle bulls in addition to the permabears which are still plentiful, are worried about another 2008 or flash crash. Survey's show that 60+% of Americans and Canadians still think we are in a recession. THAT is the sort of sentiment you should be paying attention to. When you see on TV shows like House this week still make mention of the recession and how a character on the show lost money in the stock market THAT tells you what the true underlying market sentiment is. This is why I'm bullish LT because no bull market has ended with people still talking about the recession that caused the previous bear market. It's also why I'm quite reluctant to make any bearish bets as tempting as it often may be at times. If I think the odds are overwhelming for the bears in the ST/IT, I might pull the trigger on a downside bet, but if I have any doubts whatsoever I'll pass and that's been the right play for several months. If I pass on bearish set up that ends up playing out on the downside that's fine by me. In bull markets it's best to error on being too bullish then too bearish especially in my case when my longs aren't very market sensitive. I still don't have that that gut feel that some sort of meaningful correction is immanent - like witinh a week or so. The last time I felt this was in early November and that correction ended up being rather mild.
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