This is the time of year when I look back to see all the hits and misses I made. First the hits. Coming into the year my longs were almost entirely in Canadian small cap energy services stocks. These stocks and this sector in general were winners in 2011 despite the TSX being down 12% or so for the year. Despite all the dips in the first half of the year, namely, the March dip due to the earthquake in Japan, I held my longs strong. I then started substantially cashing out in June and early July when I sensed a change in character in the market. My timing was excellent. These stocks tumbled alongside the market shortly after...but now most of these stocks have either rebounded back to or above where I sold them! I'm not bitter about that because a) At their lows I no longer had the same positive LT conviction about the overall market as I did earlier in the year b) Oil prices, which these stocks are largely dependent on, rebounded a lot more than I had believed possible. When oil prices dropped below $80 in the summer I figured it was likely that base building would take place and therefore these stocks would do likewise. Of course, that didn't happen and instead oil, along with these service stocks, did a strong V shaped rebound thanks in large part to geopolitics, something which is difficult to anticipate and account for.
Perhaps I should have nibbled on the stocks I sold near their lows in October but even if I did, I could not have justified buying back anything close to the amount I had sold given a) and b) above. Oh well. Hey, shit like that is gonna happen. It's one thing to sell too soon for good reasons only to see the stock go higher and it's another to sell too soon due to emotional factors such as when despite your positive LT convictions you panic during a correction or you try to be smartass trying to bob and weave through every little rally and dip - that's a bonehead move and the latter is what I did late 2010 with PSV.to and got punished BIGTIME for it....you see there's a reason for my avatar.
My biggest bonehead move of 2011 was the failure to pull the trigger on buying TLT calls that I was contemplating in early July missing out one of the biggest bond rallies in decades. The timing of that entry would have been impeccable. I wasn't planning on making a huge bet mind you....something like 5% of my capital....but that 5% bet would have resulted in an additional 10-15% to my results this year.
Overall though I think I did Ok but only just Ok. While a 24% return this year seems pretty damn good considering what the world markets did (especially my home Canadian market which is down 12% ), I should have done better because I didn't fully capitalize on my convictions. Why? The answer is pretty simple. A lack of balls. You see, unlike most traders who tend to make the mistake of being overly aggressive and overly confident in themselves, I tend to be overly cautious. In general, my mistakes tend to be trades that I don't make as opposed to trades that I do. To my credit, I had only 1 losing trade this year and it was minuscule....essentially breakeven. That's not as impressive as it seems because what I think it shows is that I'm playing too tight. I should have been making more trades which no doubt would have resulted in more loosing trades but also more winning ones as well and the additional winners would have more than made up for the additional losers.
Anyhow, what's done is done. The best you can do is learn from your mistakes. So on that note, my resolution for 2012 is for me to grow a pair of brass balls (as inspired from the movie Glengarry Glen Ross). I need to be bolder. I need to believe in myself more. I need to take on more risk when the risk is worth taking.....the latter part of what I just said is key....being bold when there is little or no perceived edge is reckless and that's not what I'm talking about here. Trying to get "revenge" after you made a losing trade or missed out on what would have been a winning trade is also reckless. There's a fine line between boldness and recklessness....don't cross it.
As far as 2012 goes, as I said before I don't have a clue as to how it will turn out. Unlike last year though, it's very likely the market will be up big or down big. As Russell Peters often says "somebody's gonna get a hurt real bad" - either the bulls or bears because we are going to find out next year whether the world economy be dragged into recession by Europe or not.
2012 certainty has the potential to be a very good year because expectations are low. There's plenty of "bullish fuel" in the tank given the significant equity outflows overall in 2011 and a rush to safety via money market and bond funds that rivaled what we saw in late 2008. Despite all the turmoil in Europe, earnings did not roll over in the largest economy in the world, the US. Bears will point out that this is just a matter of time given some of the red flags out there like ECRI's recession call and the rolling over OECD leading indicator. I say "fair enough" to that but until we actually see some hard evidence I'm not going to fully embrace the bear case but nor will I fully embrace the bull case either at this point given the broken market action which suggests to me that this rally we have been seeing is dubious even though it can linger for a while still. There's also a few indicators like the smart money put/call ratio that suggest we're not out of the woods yet. I think there's a good chance we will see a significant sell-off sometime by the end of March and maybe at that point the market will be in a better position to advance in a sustainable way ...we'll see what happens.
So, given these cross-currents I am going to looking for both long and short opportunities. On the long side, I'm looking for deep value opportunities in the small cap/micro cap space - stocks that were perhaps unjustifiably dragged down or held back due to the general market malaise and could be ripe for a rebound via merger/acquisition or otherwise. I recently purchased 2 of such stocks. On the short side, I'm looking to make an IT bearish bet on the market using put options when I get the sense that the market is "ripe" for the sell-off I envision in the first quarter of 2012. At the most, I will only commit 50% of my account to the above long/short strategy. I know I said I want to be bolder in 2012 and beyond but that can only be allowed when I have a substantial LT edge/conviction on the general market which I don't. As a result I will only be willing to commit up to half of my account on any ideas.
Thursday, December 29, 2011
Friday, December 23, 2011
Go with the flows
The best sentiment indicator as of late has been equity inflows. Despite how crazy market action has been with all these wild swings, if any rally was not accompanied by significant inflows it wouldn't be in danger of collapsing....you could still see big dips but not a complete retracement. The only 2 times since the August crash that we saw a spike in inflows were in mid September and late October, both of which marked significant tops and were followed by losses of about 120 points on the SPX. Since the bottom in late November, despite how erratic and gap happy the rebound has been (which tells me ultimately it's gonna fail) it has attracted negligible inflows so far...in fact, on a net basis, there has been outflows since the November low. The lack of inflows along with other sentiment indicators has made me avoid the short side.
The other sentiment indicators I'm talking about are AAII and NAAIM. AAII currently shows only a modest ratio of 1.2 bulls vs bears and NAAIM shows that active managers have only about 37% long exposure. Those are not the sort of statistics that make me salivate towards playing the short side....they both suggest there's more room for bullishness to rise before reaching the danger zone. One thing though that is indicating complacency is the VIX. At 21, it's pretty damn low considering the market volatility these past several weeks, not to mention all the fundamental issues out there that have yet been resolved.
The VIX has hit one of my bear bet triggers. The other triggers would be AAII sentiment showing about 2:1 bulls vs bears, NAAIM at least 65% exposed long and of course, a spike in inflows. Obviously, there's no law that prohibits the market from tanking big before such stats are reached but from a risk/reward perspective, that's what I need to see to bet along side the bears. If I don't see it, I don't play it. Until then, I'm going to stick with strategy of picking away at some individual names that I can be a strong holder of should I get "caught" and the market does indeed tank big before I believed it was ripe to do so.
Here's something I read this week that I found interesting.
Money market funds brought in $3.2 billion globally last week, extending their longest weekly inflow streak since a 12-week run during the financial crisis at the end of 2008, according to EPFR, a research firm that tracks fund flow data.
When I read things like this it makes me temper my conviction of a big bear market playing out.
If the rush to safety is rivaling what we saw near the depths of the bear market lows in 2008 (when there was far more chaos and destruction compared to now) it suggests we are closer to a LT bottom then an LT top. And remember when I said back in September how the late night talk show hosts were making fun of the economy...something that I also saw in late 2008. Late 2008 wasn't the final bottom but it was close.
The above makes me lean towards the thesis that although it appears likely the market will make another run to the lows in the weeks/months to come due to the shitty market action we have been seeing and a few other things, such a run to the lows would end up being the last move down completing the LT bottoming process that began in early August. As always, I will try my very best to be flexible and open minded about how things are going play out. One thing's for sure is that 2012 is going to be yet another interesting year in the market....aren't they all though?
Ok, that's enough stock market talk. When the closing bell rings Friday, turn off your computer and forget about the market. This is a time for family, friends and food! Remember how you felt as a kid this time of year? Try feeling that same way if you can. Don't be a miserable SOB. I know this sounds cheezy....have a positive attitude and be grateful to be alive and in good health. We all want to make the best out of our life and that's not possible if you're negative or apathetic. And remember, to be really successful you have to consistently do things most people don't do.
Merry Christmas!
Sunday, December 18, 2011
Still Perplexed
When someone asks me where I think the market is headed for the next year or so, I can usually give them an answer. Whether I end up being right or wrong is not the point, the point is that up until now, at least I was able to have a reasonable amount of confidence and clarity to provide a market outlook for the next 1-3 years. Anyone reading this blog since 2009 would know that the outlook I have had since the summer of that year was LT bullish. Coming into 2011, I believed the market would have another good year but it would have to go through a multi-month consolidation phase first at some point because the market was quite overbought. During this phase, I didn't think the downside would be more than 10%. Well, I was clearly wrong about that. Lucky for me I was largely in cash bracing for a correction. It didn't matter how much of a correction it turned out to be - I was safe.
Since the crash I've been having serious doubts about my longer term bullish outlook. There are some economic red flags out there and other indicators that suggest we could be in for a new bear market driven by a global recession. At the same time, there are good arguments to be made against a new big bear market and that this is simply a large correction or mini-bear market. You can always find arguments that support a bullish view or bearish view at any given time which could sometimes cause you get "analysis paralysis". I don't have a case of that. When I was bullish in 2009 and 2010 I was always aware of the bear arguments but I was able to dismiss them. Similar to how a judge scores a fight, I would determine who landed the bigger blows - the bulls or the bears - and then pick who I believed was the winner. This time around though, I can't seem to pick a LT winner because I score the match pretty much even between the bull case and bear case and I have made a few detailed posts highlighting the reasons why it's so tough to pick a side. If you look at what the market has done in the past few months it seems to reflect my judgement of a draw.
IT wise however, my outlook is not as clouded. Evidence to me suggests we aren't done with
downside even if Santa comes to town next week and the market lifts higher all the way into the new year. Capitalizing on IT market moves has been very tricky for me and in that regard, I think I have indeed been a victim of analysis paralysis to some degree but part of it has to do with the type of insane volatility we are seeing. The market is forcing me to either pick tops and bottoms or else chase a potential turning point after a big gap up/down - things that I refuse to do. When In doubt I stay out.
I'm willing to play IT moves if I get a good enough edge and I'm willing to pick away at some individual names trading at excellent values with solid balance sheets with still good prospects for growth. GDC.to was one I bought into last week...very small position. I did well with this one last year. Until I can get some LT conviction about these markets, I'm going to be playing tight and that means being very selective about my trades keeping plenty of powder try.
So when someone asks me what's in store for the market in the next year or two I answer "I have no fucking idea"....at least not right now.
Since the crash I've been having serious doubts about my longer term bullish outlook. There are some economic red flags out there and other indicators that suggest we could be in for a new bear market driven by a global recession. At the same time, there are good arguments to be made against a new big bear market and that this is simply a large correction or mini-bear market. You can always find arguments that support a bullish view or bearish view at any given time which could sometimes cause you get "analysis paralysis". I don't have a case of that. When I was bullish in 2009 and 2010 I was always aware of the bear arguments but I was able to dismiss them. Similar to how a judge scores a fight, I would determine who landed the bigger blows - the bulls or the bears - and then pick who I believed was the winner. This time around though, I can't seem to pick a LT winner because I score the match pretty much even between the bull case and bear case and I have made a few detailed posts highlighting the reasons why it's so tough to pick a side. If you look at what the market has done in the past few months it seems to reflect my judgement of a draw.
IT wise however, my outlook is not as clouded. Evidence to me suggests we aren't done with
downside even if Santa comes to town next week and the market lifts higher all the way into the new year. Capitalizing on IT market moves has been very tricky for me and in that regard, I think I have indeed been a victim of analysis paralysis to some degree but part of it has to do with the type of insane volatility we are seeing. The market is forcing me to either pick tops and bottoms or else chase a potential turning point after a big gap up/down - things that I refuse to do. When In doubt I stay out.
I'm willing to play IT moves if I get a good enough edge and I'm willing to pick away at some individual names trading at excellent values with solid balance sheets with still good prospects for growth. GDC.to was one I bought into last week...very small position. I did well with this one last year. Until I can get some LT conviction about these markets, I'm going to be playing tight and that means being very selective about my trades keeping plenty of powder try.
So when someone asks me what's in store for the market in the next year or two I answer "I have no fucking idea"....at least not right now.
Tuesday, December 13, 2011
The importance of having the wind at your back
I've said here more than once that this game is not supposed to be easy. If it was, everyone would be playing it and you wouldn't have those dismal statistics that show 90% of traders lose money in the long run. Although the game is not easy, there are things you can do to make is easier. One of those things and in my opinion, the most important thing, is to have the wind at your back and that means trading in the direction of the general trend. You want to be aggressively long stocks when the trend in the general market is on the rise and when economic fundamentals (earnings, leading indicators) are on the rise or stable. Using the same line of thinking, you want to be primarily short when you see the inverse of the above. When a trend in in place today, odds are high that it will be in place tomorrow which makes it whole lot easier to make money if you bet with it is as opposed to against it. If your entry happened to be bad and you get caught in counter trend reaction shortly after it, odds are high that you will eventually get "bailed out" by the primary trend. This is why they say the trend is your friend. Unfortunately, most people follow this adage only when a trend has been in place for a long time and is just about ready to change. Then they fight the new trend not realizing the main trend has changed!
Right now the wind is no longer at the back's of the bulls as it has been since the spring of 2009. The general market has been be flat for the past 6 and 12 months and has been very volatile. Earnings have remained strong, however leading indicators have rolled over which potentially bodes ill for future earnings. I say potentially because sometimes a roll over in leading indicators may simply be an indication of a mid cycle slow down as opposed to a full blown contraction. ECRI has just reconfirmed their recession call. The latest OECD global leading indicator chart corroborates what the ECRI sees.
Now as you can see by this chart the rollover in the leading indicator doesn't guarantee a recession, it could simply signal a mid cycle slowdown much like what happened in 2005. Notice how the leading indicator didn't roll over last summer when there was a lot of worry about a double dip. This time though, that's not the case. The stock market will often bottom and go back to bull mode a little earlier than leading indicators do, but until we see that behavior you have to be skeptical of the bull side and take it a step further and make a bearish bet if you detect complacency during such conditions of shitty market action and deteriorating leading indicators. Of course, I'm talking about longer term bets here. Those of you who play ST moves need not listen.
I think we will probably have to wait until at least March before we could be in that bullish "sweet spot" again whereby the market is early in a new sustainable uptrend with fundamentals on the rise. During such a phase picking winning stocks is a lot easier as you get the benefit of "the tide lifting all boats". Realizing success going long stocks in bear markets or sideways markets is lot a harder. 2008 was an extreme case of that where practically no stocks in the world went up.
Neither the bulls or bears have the wind at their back at the moment and it shows with the market being flat on multiple time frames. This type of sideways market is supposed to be ideal for ST trader types but that's hardly been the case thanks to the unpredictable headline driven nature of this volatility and the big gap up and gap down moves that go with it. Overall though, the bears have the edge here because this volatile, broken action we are seeing suggests we are not yet done with the downside and with economic momentum on the down slope, the market has the opportunity to gain traction to the downside making new lows. One possible silver lining to this broken action is, as I've pointed out before in a recent post, we saw similar broken action in the drawn out bottoming formations of the 2 previous big bear markets. So, the bulls could find some solace that if history is any guide, any downside from here will not be catastrophic and will lead to a LT bottom. The way I look at it is this. I'll believe it when I see it. Given the shitty action we are seeing and the deterioration of fundamentals it's likely there will be another run for the lows sometime in the coming weeks/months. If afterwards the market action and fundamentals suggest a new bull market then I'll be on board long stocks in a major way. In the meantime, there's no sense in loading up on stocks now gritting your teeth hoping that the downdraft in the market you believe is ultimately going to occur, will only end up being part of the bottoming process. If it ends up being worse than that, you are caught holding the bag and that's a spot you don't want to be in.
So, overall this where I stand right now - I believe ultimately the market is going to at least make a run for the lows within 6 months. Despite this outlook, I currently don't see enough favorable conditions to make a bearish bet. Discipline trumps conviction. I will only be willing to purchase a limited amount of stocks at this time and such purchases will be very selective and price sensitive. I will also be willing to go net short. Right now I'm about 95% cash.
Right now the wind is no longer at the back's of the bulls as it has been since the spring of 2009. The general market has been be flat for the past 6 and 12 months and has been very volatile. Earnings have remained strong, however leading indicators have rolled over which potentially bodes ill for future earnings. I say potentially because sometimes a roll over in leading indicators may simply be an indication of a mid cycle slow down as opposed to a full blown contraction. ECRI has just reconfirmed their recession call. The latest OECD global leading indicator chart corroborates what the ECRI sees.
Now as you can see by this chart the rollover in the leading indicator doesn't guarantee a recession, it could simply signal a mid cycle slowdown much like what happened in 2005. Notice how the leading indicator didn't roll over last summer when there was a lot of worry about a double dip. This time though, that's not the case. The stock market will often bottom and go back to bull mode a little earlier than leading indicators do, but until we see that behavior you have to be skeptical of the bull side and take it a step further and make a bearish bet if you detect complacency during such conditions of shitty market action and deteriorating leading indicators. Of course, I'm talking about longer term bets here. Those of you who play ST moves need not listen.
I think we will probably have to wait until at least March before we could be in that bullish "sweet spot" again whereby the market is early in a new sustainable uptrend with fundamentals on the rise. During such a phase picking winning stocks is a lot easier as you get the benefit of "the tide lifting all boats". Realizing success going long stocks in bear markets or sideways markets is lot a harder. 2008 was an extreme case of that where practically no stocks in the world went up.
Neither the bulls or bears have the wind at their back at the moment and it shows with the market being flat on multiple time frames. This type of sideways market is supposed to be ideal for ST trader types but that's hardly been the case thanks to the unpredictable headline driven nature of this volatility and the big gap up and gap down moves that go with it. Overall though, the bears have the edge here because this volatile, broken action we are seeing suggests we are not yet done with the downside and with economic momentum on the down slope, the market has the opportunity to gain traction to the downside making new lows. One possible silver lining to this broken action is, as I've pointed out before in a recent post, we saw similar broken action in the drawn out bottoming formations of the 2 previous big bear markets. So, the bulls could find some solace that if history is any guide, any downside from here will not be catastrophic and will lead to a LT bottom. The way I look at it is this. I'll believe it when I see it. Given the shitty action we are seeing and the deterioration of fundamentals it's likely there will be another run for the lows sometime in the coming weeks/months. If afterwards the market action and fundamentals suggest a new bull market then I'll be on board long stocks in a major way. In the meantime, there's no sense in loading up on stocks now gritting your teeth hoping that the downdraft in the market you believe is ultimately going to occur, will only end up being part of the bottoming process. If it ends up being worse than that, you are caught holding the bag and that's a spot you don't want to be in.
So, overall this where I stand right now - I believe ultimately the market is going to at least make a run for the lows within 6 months. Despite this outlook, I currently don't see enough favorable conditions to make a bearish bet. Discipline trumps conviction. I will only be willing to purchase a limited amount of stocks at this time and such purchases will be very selective and price sensitive. I will also be willing to go net short. Right now I'm about 95% cash.
Monday, December 12, 2011
Still not out of the woods
From what I've been reading on the blogs I can tell this market has been hurting traders. If and I stress if, we are at the "endgame" and a big bear market is upon us, Mr. Market is preparing the groundwork to allow for a sudden and large slide to take place. He is doing so by whipsawing the bears into an oblivion while conditioning them to cover any profitable short positions quickly before they get taken away in a blink of an eye. That's what happened in the first half of this year as well which set the stage for the big drop in late July early August. Bears were conditioned to not "go for the kill" because anytime they did that it was they who got killed, and so they covered position far too early and missed out on the large portion of the crash. The same type of conditioning could very well be taking place right now if Mr. Market is planning on sending the market back to the October lows or beyond. He can only do so when there's little company.
The market is still broken behaving as it does when bear market conditions are in place. In my view, whether the market is going up or not and by how much, is not the sole determiner of what constitutes a bear or bull market....it's the way it goes up or down that gives one a better sense in distingushing a correction from a change in trend. Mechanical trend following systems make no such distinctions as they are based purley on price levels and moving averages. That to me is like agreeing to go out with a girl only knowing that she has nice measurements. What about her face, her skin, her age, her personality, her intelligence?
The way this market has been behaving on the upside since any of the rally attempts made off of IT lows, namely the early August and October lows, suggested to me that they are not sustainable. They smack of short covering panics and squeezes. It does not matter to me how high the market goes...if it continues to go up erratically with high volatility like what we've been seeing lately, I will continue to be skeptical. That doesn't necessarily mean I'm going to bet against it....I won't unless I see enough weak handed investors/traders embrace the rally while at the same time a lot of bears throw in the towel. I've been around this game long enough to know that the market will do whatever it takes to squeeze every last weak bear into submission while sucking in longs. The bear market rally from late September 2001 to March 2002 is a perfect example of how long Mr. Market can keep the balls in the air before pulling the rug right from underneath everyone.
Friday's Euro zone meeting was essentially a dud. No definitive and bold action was made to stem the crisis. At best it was a baby step. The market had sold off sharply the day before and then rallied back to recover all the losses the day after. Bears are pulling their hair out as to how this could be. The reason is probably because there wasn't enough longs to milk while at the same time there were plenty of bears still remaining who figured that the euro zone meeting hype was going to be sold. Thursday revealed that as per NAAIM active managers only had 35% exposed to the long side, no net inflows into equities during the preceding 14 days and AAII sentiment showed a neutral 1.1 bulls vs bears. That to me suggested there wasn't enough suckers for the bears to capitalize on and in the end it was them who were the suckers as they trampled over each other running to the exits. Compare these numbers to the latest ST peak in early November when the numbers which were respectively 54%, 1.8 bulls vs bears and about $15 billion of inflows - these number weren't really that extreme either (which is why I didn't pull the trigger on a bear bet) but they were a bit on the high side.
Until I see a strong edge I am going to continue to be patient and just simply watch the action. It's been agonizing doing so for such a long time but when I took at the chart and look at the meat grinder that is this market, for the most part I believe I have made the correct decision. I am still willing though to make some buys in individual names but they gotta be really ripe for the pickings and I'm not going to commit large. Until I'm can feel bullish again about the trend in the general market I can't justify being aggressive long stocks no matter how appealing some of them may be. On the bear side, no matter how skeptical I am about a rally, I will not bet against it if I feel such a trade is "crowded" for I know Mr. Market can squeeze and squeeze and squeeze the bears into submission. In this type of market, doing less is doing more.
The market is still broken behaving as it does when bear market conditions are in place. In my view, whether the market is going up or not and by how much, is not the sole determiner of what constitutes a bear or bull market....it's the way it goes up or down that gives one a better sense in distingushing a correction from a change in trend. Mechanical trend following systems make no such distinctions as they are based purley on price levels and moving averages. That to me is like agreeing to go out with a girl only knowing that she has nice measurements. What about her face, her skin, her age, her personality, her intelligence?
The way this market has been behaving on the upside since any of the rally attempts made off of IT lows, namely the early August and October lows, suggested to me that they are not sustainable. They smack of short covering panics and squeezes. It does not matter to me how high the market goes...if it continues to go up erratically with high volatility like what we've been seeing lately, I will continue to be skeptical. That doesn't necessarily mean I'm going to bet against it....I won't unless I see enough weak handed investors/traders embrace the rally while at the same time a lot of bears throw in the towel. I've been around this game long enough to know that the market will do whatever it takes to squeeze every last weak bear into submission while sucking in longs. The bear market rally from late September 2001 to March 2002 is a perfect example of how long Mr. Market can keep the balls in the air before pulling the rug right from underneath everyone.
Friday's Euro zone meeting was essentially a dud. No definitive and bold action was made to stem the crisis. At best it was a baby step. The market had sold off sharply the day before and then rallied back to recover all the losses the day after. Bears are pulling their hair out as to how this could be. The reason is probably because there wasn't enough longs to milk while at the same time there were plenty of bears still remaining who figured that the euro zone meeting hype was going to be sold. Thursday revealed that as per NAAIM active managers only had 35% exposed to the long side, no net inflows into equities during the preceding 14 days and AAII sentiment showed a neutral 1.1 bulls vs bears. That to me suggested there wasn't enough suckers for the bears to capitalize on and in the end it was them who were the suckers as they trampled over each other running to the exits. Compare these numbers to the latest ST peak in early November when the numbers which were respectively 54%, 1.8 bulls vs bears and about $15 billion of inflows - these number weren't really that extreme either (which is why I didn't pull the trigger on a bear bet) but they were a bit on the high side.
Until I see a strong edge I am going to continue to be patient and just simply watch the action. It's been agonizing doing so for such a long time but when I took at the chart and look at the meat grinder that is this market, for the most part I believe I have made the correct decision. I am still willing though to make some buys in individual names but they gotta be really ripe for the pickings and I'm not going to commit large. Until I'm can feel bullish again about the trend in the general market I can't justify being aggressive long stocks no matter how appealing some of them may be. On the bear side, no matter how skeptical I am about a rally, I will not bet against it if I feel such a trade is "crowded" for I know Mr. Market can squeeze and squeeze and squeeze the bears into submission. In this type of market, doing less is doing more.
Wednesday, December 7, 2011
Book review: Confessions of a street addict
I just finished reading this book written by Cramer in 2002. In it he tells the stories of his carreer including how he broke into the business along with major ups and downs he went through with his hedge fund and his website thestreet.com. It was an entertaining read for the most part and that along with gaining some insights into the inner workings of the hedge fund world were the main reasons why I read this book. There were some nuggets of wisdom that can be gleaned from the book as well. If you weren't trading during the late 90's which featured the Asian contagion, the collapse of LTCM and the dot com mania, this book will give you a "in the trenches" prospective of it. The most interesting part of the book is when Cramer talks about his struggles in 1998 whereby his hedge fund was on the brink of collapse.
Now a days, Cramer is despised and ridiculed by pretty much everyone in the retail trading community who has been trading for at least a few years. While I am certainty aware of his faults and have been critical of him myself at times, but I've always respected him because he is successful. Say what you want about him but you don't get to where he is by being a loser. He made millions for himself and his clients both as a broker with GS and at the helm of his hedge fund which averaged about 24% net of fees over a span of 12 years under his tenure. He is a veteran of the street and has a lot of knowledge of the inner workings of it. He is well connected and comes up with useful ideas and insights now and then.
After reading his book, I had more respect for Cramer in some ways but less respect in other ways. On the positive side, if what Cramer says is true (which I believe is the case), there are very few people on this earth who are more tenacious and hard working than him. It was inspiring to me. He battled through many personal and financial adversities which were brutally agonizing. On the negative side, some of things that Cramer and his fund did to make money bordered on insider trading and market manipulation. Cramer's firm would generate a lot of commissions for various brokers and as a result they would be able to get access to the important people in the sell side like the big analysts. One particular strategy emphasized by his trader wife, was to talk to analysts gaming them if they were about to upgrade or downgrade a stock and then jumping in with a position if they had good reason to suspect one was coming. If they felt the analyst was warming up to stock they would feed them positive information to give them the "push" they needed to pull the trigger on an upgrade.Another benefit of their "pull" with the brokers was that they were able to know things that the typical retail trader would never be able to know such as if there was a big seller who was putting pressure on a stock and was just about done liquidating their position. When it comes to ST trading individual stocks, which a lot of hedge funds like Cramer's former fund focus on, retail trader's are at a significant disadvantage because of what I discussed above. This is one of the many reasons I don't believe in ST trading.
Cramer also talked about how grueling, cruel but yet ridiculously lucrative it was to have worked for him. Would I have worked for him if given the chance? Yes...the money would be too great to resist. Would I have lasted? Probably not. Aside from his rapid ST trading style which isn't my forte and is incredibly stressful, I would probably not be able to put up with the abuse he inflicts on his subordinates which included getting water bottles thrown at you and having a post-it note stuck to your forehead all day with the stock symbol of the bad trade you made. I would probably be burned out and stressed having little time and energy for sports, friends or any other kind of life. I realize hard work and sacrifice is essential to success in this game but if attaining success in such a way is going to make you miserable then it's really not success. Perhaps it would have been worth it to put up with the abuse for a few years to build up a good chunk of change then quit and work for yourself.
I've being doing this full time for about 3 years now and my returns have been on par with Cramer's when he was at his fund but I achieved them far more passively, with far less stress never on the brink of collapse and without having the advantage of the inside scoop from the big brokerages at Wallstreet. I've also done it in more difficult market conditions. But 3 years means jack. I could have just as well been lucky rather than good which is similar to the line Cramer ends with in his book.
Now a days, Cramer is despised and ridiculed by pretty much everyone in the retail trading community who has been trading for at least a few years. While I am certainty aware of his faults and have been critical of him myself at times, but I've always respected him because he is successful. Say what you want about him but you don't get to where he is by being a loser. He made millions for himself and his clients both as a broker with GS and at the helm of his hedge fund which averaged about 24% net of fees over a span of 12 years under his tenure. He is a veteran of the street and has a lot of knowledge of the inner workings of it. He is well connected and comes up with useful ideas and insights now and then.
After reading his book, I had more respect for Cramer in some ways but less respect in other ways. On the positive side, if what Cramer says is true (which I believe is the case), there are very few people on this earth who are more tenacious and hard working than him. It was inspiring to me. He battled through many personal and financial adversities which were brutally agonizing. On the negative side, some of things that Cramer and his fund did to make money bordered on insider trading and market manipulation. Cramer's firm would generate a lot of commissions for various brokers and as a result they would be able to get access to the important people in the sell side like the big analysts. One particular strategy emphasized by his trader wife, was to talk to analysts gaming them if they were about to upgrade or downgrade a stock and then jumping in with a position if they had good reason to suspect one was coming. If they felt the analyst was warming up to stock they would feed them positive information to give them the "push" they needed to pull the trigger on an upgrade.Another benefit of their "pull" with the brokers was that they were able to know things that the typical retail trader would never be able to know such as if there was a big seller who was putting pressure on a stock and was just about done liquidating their position. When it comes to ST trading individual stocks, which a lot of hedge funds like Cramer's former fund focus on, retail trader's are at a significant disadvantage because of what I discussed above. This is one of the many reasons I don't believe in ST trading.
Cramer also talked about how grueling, cruel but yet ridiculously lucrative it was to have worked for him. Would I have worked for him if given the chance? Yes...the money would be too great to resist. Would I have lasted? Probably not. Aside from his rapid ST trading style which isn't my forte and is incredibly stressful, I would probably not be able to put up with the abuse he inflicts on his subordinates which included getting water bottles thrown at you and having a post-it note stuck to your forehead all day with the stock symbol of the bad trade you made. I would probably be burned out and stressed having little time and energy for sports, friends or any other kind of life. I realize hard work and sacrifice is essential to success in this game but if attaining success in such a way is going to make you miserable then it's really not success. Perhaps it would have been worth it to put up with the abuse for a few years to build up a good chunk of change then quit and work for yourself.
I've being doing this full time for about 3 years now and my returns have been on par with Cramer's when he was at his fund but I achieved them far more passively, with far less stress never on the brink of collapse and without having the advantage of the inside scoop from the big brokerages at Wallstreet. I've also done it in more difficult market conditions. But 3 years means jack. I could have just as well been lucky rather than good which is similar to the line Cramer ends with in his book.
Saturday, December 3, 2011
Weekend Ramblings
Wow, what a crazy market. We went from having one of the worst weeks in history to one of the best! Anyone who has been using a mechanical trend following system has been getting absolutely butchered by this volatility. For me, I haven't been getting butchered but I haven't been making anything either as I continue to remain sidelined. I'm willing to entertain intermediate term trades but the market has been moving too quickly for me. For instance, coming into this week the risk/reward for such a trade on the long side was looking favorable. The market was deeply oversold and sentiment was bearish enough to give the green light (it wasn't super bearish but bearish enough). All I needed to see was a little bit of stability to give me the impression that the market had found a bottom. Instead we opened up the week with a big gap up and never looked back. We gaped up big not once, not twice, but trice this week! Now, as I said before, when it comes to bear market rallies vs new bull market rallies, they tend to look the same initially - they are explosive and a gap and run to start either isn't uncommon. What distinguishes them is how the market behaves after the initial thrust is over. But to see 3 gaps like that in one week on flimsy catalysts tells me this is a bear market rally IMO.
Let's look at the reasons for the rally this week. First there was a report Sunday night that the IMF was going to help Italy, which didn't even end up happening. Then the big rally on Wednesday was due to the coordinated efforts of central banks around the world to provide liquidity to European banks. Lol! Come on...who actually thinks this is some sort of panacea? It does fuck all to address the underlying problem of insolvency. We saw similar types of liquidity aid in 2008. Did that mark the end of the crisis? Hell no. If anything it tells you that there's more trouble ahead. Sure, there was better than expected data out of the US but that was clearly secondary. (And what about the weak data coming out of China?). I don't mean to sound like zerohedge.com here but the reasons for last week's rally were a joke.
Here's what I think basically happened. Coming into the week a lot of shorts were nervous with their finger on the cover button because they knew the market was very oversold and so any hint of good news would send them running for exits. The IMF rumor did the trick. With the rally on Monday having been done of low volume and Tuesday showing no follow through, the rally looked week and destined to fail the next day and so I bet a lot of these bears put back on those shorts and bears who had missed the recent decline figured this was their chance to make amends. Then the bears got blind sided again by the central bank news and panicked probably flushing out the more "longer term" swing trader/mechanical types who had shorted the market after the "triangle breakdown". It was one lemming domino toppling another. I've said recently a few times before that bears are their own worst enemy not the PPT, not Goldman Sachs but their own herd behavior. Remember the motto of this blog folks. The market is not going to easily accommodate the legions of permabears that are still out there even if it were to have terminal cancer and on its way to the end game. The bear will take their money too!
Anyhow, I've decided that it's time for me to take some action. I'm going back to basics by looking for individual small cap/micro cap stocks that are overlooked, trading near or below tangible book, have low debt, turning the corner with earnings (or have stable earnings) and are not heavily influenced by the behavior of the general market and have promising technical action (base building bottoming formations or gently upward sloping charts). These are hard to find but they are out there and you tend to see more of them out there when you have markets like this. I've put in some orders already for a couple stocks. I have a few others I'm looking at that are promising but need to show another month or two of base building. Once I have exposure to these names I will be much more inclined to hedge unlike before. I will likely use puts on index or sector ETFs. I will also consider engaging in IT trades on the general market should the opportunity present itself and I will also be keeping a cash reserve of at least 50%. I've been pretty good at picking winning stocks that have outperformed the market big time although I know all too well that in bull markets it's much easier to pick winners. In bull markets everyone is a genius as they say. Although in this bull market there hasn't been many geniuses....in fact there were more dummies than geniuses this time around because so many were bitter and angry at the market during it's rise.
The Euro crisis has everyone fixated including me (I gotta stop this shit). As a result, I think you'll be able to find some real gems there in the small cap/micro space that have been unduly trashed. I love this space because not only are the gains more potentially explosive, you have a much higher chance of getting an edge because they tend not be followed much by analysts and institutional investors until after they make a big move which then creates another upside catalyst. Another thing too is that these stocks can sometimes be slow to react to major trend changes in the market giving you the opportunity to buy or sell before they get pulled in by it. Finally, they are not being whipped around by HFTs and day trader types. Low liquidity can be an issue however and often times these stocks will be dormant for weeks or even months. So, if you crave day to day excitement and use tight stops these stocks are not for you. And just remember, if we get another 2008, very few stocks will be able to withstand being sucked into the carnage including the small cap/micro cap space. But it's not always that way with bear markets. In 2000-2002, small cap value and gold stocks did very well relative the SPX. So, you can find winners out there in a shitty market.....it's just that it will be a lot harder and using a hedge could be the way to go. If however, you have good reason to be very bearish in the IT or LT then you must go at least net neutral...you should optimally be net short though. That's the mindset I'll be having going forward until I have good reason to believe the bull market is back.
As far as the market goes now we're no longer oversold but not overbought yet either. I don't see a huge edge either way although I do see a couple of things that favor the bulls. There was an outflow last week despite the big rally. That's bullish. Also current NAAIM sentiment shows that active mangers reduced their exposure despite the big rallly and it's only at 30% (it got as high at 50% at the peak a couple weeks ago and historically that's only neutral). This too is bullish and suggests this rally still has legs. If however it doesn't and the rally ends up failing soon then it likely that any downside would not be the start of a big bear downleg to new lows.
Everyone is eyeing when the Euro leaders meet next week (I think it's the 8th) and it's expected some sort of a "plan" to deal with the crisis will be announced. Barring any major surprises, the market will probably not do much up until that day. Hold on....didn't I just say I gotta stop being so fixated about Europe?
Let's look at the reasons for the rally this week. First there was a report Sunday night that the IMF was going to help Italy, which didn't even end up happening. Then the big rally on Wednesday was due to the coordinated efforts of central banks around the world to provide liquidity to European banks. Lol! Come on...who actually thinks this is some sort of panacea? It does fuck all to address the underlying problem of insolvency. We saw similar types of liquidity aid in 2008. Did that mark the end of the crisis? Hell no. If anything it tells you that there's more trouble ahead. Sure, there was better than expected data out of the US but that was clearly secondary. (And what about the weak data coming out of China?). I don't mean to sound like zerohedge.com here but the reasons for last week's rally were a joke.
Here's what I think basically happened. Coming into the week a lot of shorts were nervous with their finger on the cover button because they knew the market was very oversold and so any hint of good news would send them running for exits. The IMF rumor did the trick. With the rally on Monday having been done of low volume and Tuesday showing no follow through, the rally looked week and destined to fail the next day and so I bet a lot of these bears put back on those shorts and bears who had missed the recent decline figured this was their chance to make amends. Then the bears got blind sided again by the central bank news and panicked probably flushing out the more "longer term" swing trader/mechanical types who had shorted the market after the "triangle breakdown". It was one lemming domino toppling another. I've said recently a few times before that bears are their own worst enemy not the PPT, not Goldman Sachs but their own herd behavior. Remember the motto of this blog folks. The market is not going to easily accommodate the legions of permabears that are still out there even if it were to have terminal cancer and on its way to the end game. The bear will take their money too!
Anyhow, I've decided that it's time for me to take some action. I'm going back to basics by looking for individual small cap/micro cap stocks that are overlooked, trading near or below tangible book, have low debt, turning the corner with earnings (or have stable earnings) and are not heavily influenced by the behavior of the general market and have promising technical action (base building bottoming formations or gently upward sloping charts). These are hard to find but they are out there and you tend to see more of them out there when you have markets like this. I've put in some orders already for a couple stocks. I have a few others I'm looking at that are promising but need to show another month or two of base building. Once I have exposure to these names I will be much more inclined to hedge unlike before. I will likely use puts on index or sector ETFs. I will also consider engaging in IT trades on the general market should the opportunity present itself and I will also be keeping a cash reserve of at least 50%. I've been pretty good at picking winning stocks that have outperformed the market big time although I know all too well that in bull markets it's much easier to pick winners. In bull markets everyone is a genius as they say. Although in this bull market there hasn't been many geniuses....in fact there were more dummies than geniuses this time around because so many were bitter and angry at the market during it's rise.
The Euro crisis has everyone fixated including me (I gotta stop this shit). As a result, I think you'll be able to find some real gems there in the small cap/micro space that have been unduly trashed. I love this space because not only are the gains more potentially explosive, you have a much higher chance of getting an edge because they tend not be followed much by analysts and institutional investors until after they make a big move which then creates another upside catalyst. Another thing too is that these stocks can sometimes be slow to react to major trend changes in the market giving you the opportunity to buy or sell before they get pulled in by it. Finally, they are not being whipped around by HFTs and day trader types. Low liquidity can be an issue however and often times these stocks will be dormant for weeks or even months. So, if you crave day to day excitement and use tight stops these stocks are not for you. And just remember, if we get another 2008, very few stocks will be able to withstand being sucked into the carnage including the small cap/micro cap space. But it's not always that way with bear markets. In 2000-2002, small cap value and gold stocks did very well relative the SPX. So, you can find winners out there in a shitty market.....it's just that it will be a lot harder and using a hedge could be the way to go. If however, you have good reason to be very bearish in the IT or LT then you must go at least net neutral...you should optimally be net short though. That's the mindset I'll be having going forward until I have good reason to believe the bull market is back.
As far as the market goes now we're no longer oversold but not overbought yet either. I don't see a huge edge either way although I do see a couple of things that favor the bulls. There was an outflow last week despite the big rally. That's bullish. Also current NAAIM sentiment shows that active mangers reduced their exposure despite the big rallly and it's only at 30% (it got as high at 50% at the peak a couple weeks ago and historically that's only neutral). This too is bullish and suggests this rally still has legs. If however it doesn't and the rally ends up failing soon then it likely that any downside would not be the start of a big bear downleg to new lows.
Everyone is eyeing when the Euro leaders meet next week (I think it's the 8th) and it's expected some sort of a "plan" to deal with the crisis will be announced. Barring any major surprises, the market will probably not do much up until that day. Hold on....didn't I just say I gotta stop being so fixated about Europe?
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