I'm in the mood to lecture tonight. (Barbara is excused since she has heard my lectures over the years/smile.)
Overview.
November burst forth with euphoria and now leaves some with buyer's remorse. Consider that every investor and trader who decided to buy at the November 5 high is now under water. The unknown commentator on CNBC who said "you ain't seen nothing yet" may well have been right but not in a good way. If there is one take away point for readers this evening, it would be that you must never buy giddiness. Odds are, you will regret the move. It is always better to buy fear.
The high for the month on the S&P 500 Index was 1227. Unfortunately, high speed computers were set to sell the Index at this level due to something called a 0.618 % retracement rule. In simple terms, professional hedge funds and institutions assume that down moves in the market will retrace part of the down move before moving down again. While the 0.618% retrace level of the October 2007 - March 2009 down move in the market was exactly @ 1228, I do not recall any warnings to the public on November 5 that it was a very, very bad time to buy stocks. There were no sober commentators on CNBC urging caution. I saw no newspaper headlines about peril ahead.
Some things never change.
Today was a bearish day. The market opened @ 1182.96. The low was 1174,14. The high was 1187.40. The market closed @ 1180.97. This was bearish for several reasons. The close was lower than the open. This condition is a sign that the pros were selling to the retail public throughout the day. The Relative Strength Index (RSI) closed at 45.97. This is not a good time to buy. Good times to buy are when the RSI readings dip below 30 on a daily chart. The MACD line continues to show a down trend in the market. Remember that the trend is your friend until the end. The MACD Histogram remains negative. The stochastic reading is not in unsustainable single digits. Instead, the readings are 24.79 and 30.08. Not a good time to buy. Most amazing to me would be the sheer percentage of bullish investors. The Bullish Percent Index reading for the S&P closed at 77.20. That's far from a good time for buying.
In short, lower prices are ahead.
Fundamentals.
I am concerned that the market is reacting to bad news. This reaction tells you that the character of the market has changed since August 25. Back then, no one cared in the least about Irish debt or Portuguese bonds or the Spanish debt crisis. Now investors are beginning to care. That is always your cue--when bad news came out and the market ignores the bad news, then buy stocks and load up on the C Fund. It is a Bull Market and a good time to be in stocks. But when the character of the market has changed and bad news matters, then you should step aside from the C Fund and seek the safe haven of the G Fund. Do not hope! Please! I have learned the hard way that hoping for the market to turn around will not make the market turn around. Just step aside for a while. There will always be a good time to buy in the future and, probably, at lower prices too!
The drop in the Euro Dollar matters as well. Its another sign of caution.
Our Philosophy.
In our investment club, we are 100% in the C Fund when the market goes up. We are 100% in the G Fund when the market is going down. Its as simple as that. If we were now in the C Fund, we would be stressing what the month of December might bring. Do you remember the May 2009 Flash Crash brought on by the Greek debt crisis? The October 2008 Crash brought on by Lehman Brothers? The March 2008 Crash brought on by Bear Stearns? The February 2007 Crash brought on by the Chinese stock market crash? Alot of investors lost alot of their retirement funds because of these events.
Well, we had had enough. Beginning in August 2008, we decided that it was more prudent to step up to the plate. We would actively watch the market and, when it was a good time to buy, we would go 100% into the C Fund. Why be shy when the market is poised to go up and you can profit from the best September in 79 years? From the best March since the Great Depression? Conversely, if the market is overbought and troubles are brewing in Europe, why stick around in the C Fund and face maximum exposure to loss when you can sleep like a babe 100% in the G Fund? You're not losing money while others are losing their minds, and, you have conserved your hard-earned cash so that you can take full advantage of the next good time to buy.
At the risk of repeating myself, that's how money is made. That's how winning is done. As my seven-year daughter just sang to me, "You've got to believe in something." Buy the fear. Sell the greed.
Good evening,
Wink
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Tuesday, November 30, 2010
Monday, November 29, 2010
Last Night's Drop in the Euro Dollar
I don't normally follow the Euro Dollar. But last night, I was reading a blog on Zero Hedge. The blogger seemed very excited about the drop of the Euro below support. I pulled up a chart and it was true that support had given way. The Euro bounced and then fell even more by morning time in San Diego. Interesting.
Why should you as a TSP investor care about the drop in the Euro?
Well, it seems that the U.S. Dollar is getting stronger as the Euro gets weaker. And a stronger U.S. Dollar has dampened stock prices this year. Global markets are an ever changing puzzle. I also noticed a plunge in the Portuguese market today. Why should you as an investor in TSP care? Well, the drop in the Portuguese stock market shows that the market is not happy about the bailout terms of Irish debt. Investors fear that Portugal (and Spain) might be next, so people are selling Portuguese stocks.
If one had pulled up a chart of the Portuguese stock market on April 29 of this year, you would have seen a stunning sharp drop in their market related to fears over the Greece debt crisis. A week later on May 6, we had the Flash Crash.
My point is that markets are intimately related in this global era of 24-hour markets. When the Euro drops by a sizable amount overnight,you should take note. When the Portuguese market is dropping like a stone because of fears about debt contagion, the fallout might reach our shores within days. It is always best to be prepared for down drafts in the market.
People shrug off problems in Bull Markets. They become fearful and sell problems in Bear Markets.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Why should you as a TSP investor care about the drop in the Euro?
Well, it seems that the U.S. Dollar is getting stronger as the Euro gets weaker. And a stronger U.S. Dollar has dampened stock prices this year. Global markets are an ever changing puzzle. I also noticed a plunge in the Portuguese market today. Why should you as an investor in TSP care? Well, the drop in the Portuguese stock market shows that the market is not happy about the bailout terms of Irish debt. Investors fear that Portugal (and Spain) might be next, so people are selling Portuguese stocks.
If one had pulled up a chart of the Portuguese stock market on April 29 of this year, you would have seen a stunning sharp drop in their market related to fears over the Greece debt crisis. A week later on May 6, we had the Flash Crash.
My point is that markets are intimately related in this global era of 24-hour markets. When the Euro drops by a sizable amount overnight,you should take note. When the Portuguese market is dropping like a stone because of fears about debt contagion, the fallout might reach our shores within days. It is always best to be prepared for down drafts in the market.
People shrug off problems in Bull Markets. They become fearful and sell problems in Bear Markets.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Sunday, November 28, 2010
Sunday Homework
I use Sundays to review the market action from the previous week. I try out a number of alternative scenarios in my mind. What is a Bullish projection for the week? Suppose the market goes nowhere this week? What is a Bearish possibility for the week? I run through all of the "what ifs" in my mind, so that I am prepared should the time to buy be at hand.
I ran through these points about the S&P 500 Index in no particular order:
1. The S&P 500 Index closed below its 200-day moving average on a weekly chart. This is the first weekly close below the 200-day moving average since before the November 5 top. This point is bearish and supports the case for lower prices.
2. The Relative Strength Index (RSI) on a daily chart is around 49. It needs to be lower before its a good time to buy.
3. For an interesting twist on the strength of the trend, I looked at the ADX indicator. The ADX measures the strength of the trend. It doesn't tell you whether the trend is up or down. But it can tell you that are in the calm before serious price action. The reading was 17.50 or thereabouts. That is low. That is really low. It approximates the low readings we saw in early to mid-August. Now, the trick is that a low ADX reading can mean accumulation or distribution by Smart Money. No one can know for sure until the ADX turns back up and heads over 25. If it means accumulation by institutions on the sly like we saw in August, then a good time to buy will be here soon. This take on the low ADX reading makes sense to me. On the other hand, if the low ADX reading means distribution by Hedge Funds and Wealthy Individuals, then lower prices are ahead. The overly bullish sentiment by retail investors supports this interpretation.
4. I then note that the price of the S&P 500 Index is below the 13-day moving average. This is bearish. And the 13-day moving average is downward sloping. This is also bearish. Probabilities suggest that the 13-day moving average will halt any advance in the S&P 500 Index in the short run.
5. There is a gap from Wednesday's close @ 1198. I would not be surprised if the market filled this gap at some point.
6. The trin reading closed @ 2.1. This reading showed selling pressure on Friday. However, the selling was not at a capitulation level. Readings above 2.4 show capitulation. This point suggests that we will see more selling pressure.
7. The MACD line remains open and pointed down. This condition means the trend is down for now.
8. Interestingly enough, the MACD Histogram has flat-lined. This point has caught my eye. In my experience, the time to buy happens when there is positive divergence between the price action and the Histogram. In other words, the histogram has moved higher while the price of the S&P 500 Index has dropped lower. (For a wonderful read about positive divergence and the MACD histogram and how to make money in real time, see Dr. Elder's Come Into My Trading Room.) In simple terms, a good time to buy would be when the S&P 500 Index drops below 1173, sell stops are hit by investors and traders hoping that 1173 would hold as support and the MACD histogram moves higher. That is the sweet spot in time. That is the real time opportunity to buy and add to the C Fund.
9. The full stochastics has not dropped into oversold conditions below 20 on stockcharts.com. So, this point suggests that any thought of a good time to buy is premature at this time. That could change. Market conditions are always changing. But this afternoon, I want to see lower readings. Similarly, the reading on clearstation.com has hit the oversold line once since November 5. I want to see a second or third hit. Then, it will be a good time to buy.
10. CONTRARY OPINION - I have read the Sunday newspaper. I have scanned the headlines. I have watched CNN and Fox News and the local tv stations this weekend. There have been no fearful references to the stock market. None. So, the absence of fear in the media tells me that now is not a good time to buy. Should that change, then I will act accordingly.
Conclusion. Successful investing and trading requires daily homework. Global markets are open 24 hours a day. Sometimes, I think the process is like being a police officer. (My father-in-law was a NYC plains clothes policeman.) He would say that 99% of the time, policing the streets was dull and boring. It was like watching paint dry. But the other 1% of the time made up for it. Watching the market is comparable. There's nothing much going on much of the time. But you have to watch the markets every day so that you can catch the 1% day when it is a good time to buy.
That's how money is made. That's how winning is done. One day at a time.
Have a good Sunday!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
I ran through these points about the S&P 500 Index in no particular order:
1. The S&P 500 Index closed below its 200-day moving average on a weekly chart. This is the first weekly close below the 200-day moving average since before the November 5 top. This point is bearish and supports the case for lower prices.
2. The Relative Strength Index (RSI) on a daily chart is around 49. It needs to be lower before its a good time to buy.
3. For an interesting twist on the strength of the trend, I looked at the ADX indicator. The ADX measures the strength of the trend. It doesn't tell you whether the trend is up or down. But it can tell you that are in the calm before serious price action. The reading was 17.50 or thereabouts. That is low. That is really low. It approximates the low readings we saw in early to mid-August. Now, the trick is that a low ADX reading can mean accumulation or distribution by Smart Money. No one can know for sure until the ADX turns back up and heads over 25. If it means accumulation by institutions on the sly like we saw in August, then a good time to buy will be here soon. This take on the low ADX reading makes sense to me. On the other hand, if the low ADX reading means distribution by Hedge Funds and Wealthy Individuals, then lower prices are ahead. The overly bullish sentiment by retail investors supports this interpretation.
4. I then note that the price of the S&P 500 Index is below the 13-day moving average. This is bearish. And the 13-day moving average is downward sloping. This is also bearish. Probabilities suggest that the 13-day moving average will halt any advance in the S&P 500 Index in the short run.
5. There is a gap from Wednesday's close @ 1198. I would not be surprised if the market filled this gap at some point.
6. The trin reading closed @ 2.1. This reading showed selling pressure on Friday. However, the selling was not at a capitulation level. Readings above 2.4 show capitulation. This point suggests that we will see more selling pressure.
7. The MACD line remains open and pointed down. This condition means the trend is down for now.
8. Interestingly enough, the MACD Histogram has flat-lined. This point has caught my eye. In my experience, the time to buy happens when there is positive divergence between the price action and the Histogram. In other words, the histogram has moved higher while the price of the S&P 500 Index has dropped lower. (For a wonderful read about positive divergence and the MACD histogram and how to make money in real time, see Dr. Elder's Come Into My Trading Room.) In simple terms, a good time to buy would be when the S&P 500 Index drops below 1173, sell stops are hit by investors and traders hoping that 1173 would hold as support and the MACD histogram moves higher. That is the sweet spot in time. That is the real time opportunity to buy and add to the C Fund.
9. The full stochastics has not dropped into oversold conditions below 20 on stockcharts.com. So, this point suggests that any thought of a good time to buy is premature at this time. That could change. Market conditions are always changing. But this afternoon, I want to see lower readings. Similarly, the reading on clearstation.com has hit the oversold line once since November 5. I want to see a second or third hit. Then, it will be a good time to buy.
10. CONTRARY OPINION - I have read the Sunday newspaper. I have scanned the headlines. I have watched CNN and Fox News and the local tv stations this weekend. There have been no fearful references to the stock market. None. So, the absence of fear in the media tells me that now is not a good time to buy. Should that change, then I will act accordingly.
Conclusion. Successful investing and trading requires daily homework. Global markets are open 24 hours a day. Sometimes, I think the process is like being a police officer. (My father-in-law was a NYC plains clothes policeman.) He would say that 99% of the time, policing the streets was dull and boring. It was like watching paint dry. But the other 1% of the time made up for it. Watching the market is comparable. There's nothing much going on much of the time. But you have to watch the markets every day so that you can catch the 1% day when it is a good time to buy.
That's how money is made. That's how winning is done. One day at a time.
Have a good Sunday!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Saturday, November 27, 2010
An Interview with "Shelby Aldrich" - Part II
Its Saturday morning in Las Vegas. I am being interviewed again by our fictional reporter, "Shelby Aldrich," for the Summerlin Gazette. The Reading Room is warm and cozy, a stark contrast to the bitter chill in the air outside. The kids have scattered to the winds, so I have time for a leisurely interview session.
Shelby: Wink, thank you again for your time this morning. Where are your lovely kids?
Wink: The oldest is helping a friend with a move. My middle child is transfixed by Cartoon Network. And the youngest is skating at the ice rink.
Shelby: I see. Well, let's see where we left off. I wanted to ask you about your most memorable failures. Failure seems to be a precondition for success in many areas of life.
Wink: That's right, Shelby, particularly in investing and trading. Three bozo moves come to mind right off the bat. When the market started to crash in 2000, I didn't step back and stop investing. I just assumed that we were in a rolling correction and that higher prices were dead ahead. I would come to this library and read the Investor's Business Daily (IBD) every Saturday morning. Right over there, you see where they keep the newspapers? I just pored over IBD looking for the next Yahoo, the next Juniper Networks, the next Internet Capital Group. I didn't appreciate that a Bear Market is different in character from a Bull Market.
Shelby: Did you have stops in place?
Wink: Sure. But it didn't matter. The trend is your friend. If the trend is down, you're going to lose your money by buying stocks and hoping for a turn around. So, that whole IBD period in 2000 was a setback.
Shelby: And you used those lessons to protect yourself later?
Wink: Exactly. When August 2008 rolled around, I knew what to do when the trend turned down. Get out of stocks!
Shelby: What was your second hall of fame bozo move?
Wink: This is an interesting bozo move drenched in greed, pure unmitigated greed and emotion. When 9-11 happened, I was no longer actively investing and trading. I just assumed the long trend was bullish and I would profit in the end. The stock market closed for a week after 9-11. When the market opened again, I was curious to see what would happen. Well, the market dropped for 5 days in a row. I knew we were near a bottom but I wanted to see what would happen. I was like, you, Shelby, just observing and taking notes and thinking about things.
On options expiration day in October, 2001, I read a post on my favorite website, clearstation.com, about the performance of Juniper Networks (JNPR). Remember, last week I had said that I flirted around with Juniper? Juniper was one of my momentum stocks that I had seized upon after reading Forbes and Fortune. It must have had a price earnings ratio of 340 to 1! LOL. I didn't care during my predator stage. I just wanted price movement.
Anyway, I read a posting that caught my attention. October 20 calls on Juniper had increased from 0.05 on September 24, I think, to 3.5 by the third Friday in October. Even though the underlying price of Juniper had increased from $8.94 to $23.50, the options had increased 70-fold. A hypothetical $5,000 would have increased to $350,000 in 4 weeks! That little price move stuck in my mind. I mulled it over and thought about why this abnormal price event had happened. I eventually decided that I would bide my time and wait for another comparable opportunity in JNPR call options.
Shelby: But you can't depend upon those opportunities happening again? I mean, the market could have kept dropping after 9-11. In that case, those October 20 options would have expired worthless. Or, the price of JNPR might have risen but only up to say, 12 or 16 or even 20. It seems like a roll of the dice to me. Then again, we are in Las Vegas. LOL!
Wink: You're absolutely right. Today, I would chalk it up to a low probability, Black Swan event. But I was still in grade school as a trader and investor. The early years had been too easy. I had to learn to respect risk.
Shelby: So, did you get an opportunity to turn a hypothetical $5,000 into $350,000?
Wink: Well, yes and no. That's why this trade is my Second Worst trade ever. 2001 came and went. I was surprised at how strong the market bounce was. My handle on technical analysis told me that the bounce was about to end due to negative divergences. I remember feeling a sense of satisfaction as the market topped in early 2002. I wasn't making money in my retirement account but I was happy because I had anticipated a top in the market and I was right. It is very important for an investor and trader to reach a place where market tops can be anticipated. Once you reach that stage in your growth, you will have more confidence when its time to sell. When its time to sell, the herd will be very bullish. When its time to sell, the media cheerleaders on CNBC will be giddy. Commentators will be beside themselves with glee. "There's no way this market is going down!" You ain't seen nothing yet!" Those are psychological signs of a market top.
Shelby: So, the market was topping. Why were you still thinking about that October 2001 move in JNPR call options?
Wink: Because I now knew that the market moved in clear cycles from high to low. When the next low came, that would be a good time to buy stock. It would be a good time to buy call options in JNPR.
I remember one of my best investments happened in 2002. Should I mention it now or later?
Shelby: Well, to keep my notes clear, let's stick with your failures for now. Later, we can touch upon your greatest hits. It might surprise you but I think readers will learn more from your struggles and flops.
Wink: You're probably right. So, the year 2002 came and went. I focused on my day job. 2003 came and I noticed that the character of the market had changed.
Shelby: What do you mean "the character of the market had changed?"
Wink: Stocks were going up more than down. Investors were buying the dips, not selling the rallies. I could see the change in the charts. The market had changed from Bear to Bull. I did some research on the market. I remember reading the Stock Almanac and noting that a dip in mid-December was oftentimes followed by a Santa Claus rally. I saw that the market had made a higher low in March of 2003 and a higher low in late August of 2003. Might this pattern of higher highs and higher lows be a setup for a Santa Claus rally? And, if so, might this not be a splendid opportunity to buy underpriced and undervalued JNPR call options?
I put two and two together and decided the opportunity was at hand. It was in front of me. I opened up an options account with a brokerage firm in New York. I deposited my money. I waited patiently for the mid-December 2003 dip in the price of JNPR. One thing I had remembered from September 2001 was that the price of JNPR had dipped below a psychologically important level of 9 before bouncing. In early December 2003, JNPR was trading around 19/18. I could see that it was declining but it was a gentle decline, as if the stock did not want to fall further. I knew from prior readings that a muffled fall is a sign of impending strength. The days ticked by, December 11, December 12, December 13. I waited with patience worthy of the famous trader, Jesse Livermore. December 14....
JPNR began to drop below 18, below 17. I placed a limit order to buy as many JNPR Jan 20 calls @ 0.05 as I could. I believe it was December 17, 2003 when the price of JNPR dropped to 16.84. I knew, I just knew that this was the time to buy! Weak hands would be removed by the running of stops. I pulled up Yahoo.Finance. I typed in "JNPR", "options", and scrolled down to the January 20 calls. The last traded price was 0.05!!!
Yes!! Yes!! Yes!! The price had hit 0.05. I was so happy! I was dancing on air. You would have thought that I was Reginald Lewis who had just closed the deal on Beatrice. I was happy and counting my money/smile. LOL
Shelby: What a build up! This seems like a very skillful move, one you had plotted and planned for over two years. That's a long time to stalk your prey. What happened? Why is this your second biggest failure as a trader?
Wink: If it seems too good to be true, it probably is too good to be true. I met a fisherman the other day in La Jolla that said the same thing.
Here's what happened.
So, I'm happy as a clam. I nailed the absolute bottom of the move into mid-December 2003. 3 days later, my calls were quoted at 0.20. That's a 400% increase in 3 days. Of course, I'm expecting a 70 to 1 return because of the October 2001 JNPR call experience. To hear the cash register ring, I called my options broker (name not revealed). I asked for a price quote on the balance in my account. The broker said, "You have x funds in your account, Mr. Twyman." I was stunned. I was speechless. The grin on my face was gone. I said, "But how can that be? I purchased the January 20 call options 3 days ago at 0.05. The last quoted price was 0.20." The emotionless broker replied, "That right, Mr. Twyman. The last quoted price was 0.20. However, your limit order to buy at 0.05 was never filled. Only 5 contacts traded at that point. Those 5 contacts were all purchased by specialists."
Shelby: Oh, no! (hand over mouth).
Wink: It had never occurred to me to confirm that my limit order was filled. If I had phoned in for a fill confirmation on December 17, 2003, I would have raised my limit order to 0.10. I was mad. I was angry. I was fit to be tied. And this is why this missed trade is my second biggest failure. It was not a failure because I didn't get filled at 0.05. I could have still gotten in a very good price at 0.20. My failure was that I became emotional. I allowed my disapointment to color my judgment.
Had I not been angry at those "floor specialists" who got my 0.05 calls, I would have gotten in at 0.20. Instead, I refused to play a rigged game.
Shelby: And what happened?
Wink: It was a very sad outcome. Rather than be flexible, I sulked. I watched as the price of JNPR leaped from 16.84 to 18.50 and 18.20 to 20 and from 20 to 22.5 and from 22.5 to 30 by the third Friday in January 2004. Had I picked up the phone to confirm the fill and been flexible enough to buy at 0.10 rather than insist on 0.05, I would have earned a 100 to 1 return on my January 20 JNPR calls in 4 weeks. That would have been my George Soros trade, my John Paulson trade, my best trade ever!
Shelby: I now see why you consider it such a failure. You failed to be flexible, to stay with a well-defined situation that you had been stalking for two years, and to heed the trend.
Wink: That's right. Opportunities like December 17, 2003 don't come around every day. I knew that at the time. I remember moping about the missed opportunity that I had foreseen. If you are right on the opportunity and right on the trend, don't quibble over 5 cents. You will regret squandered opportunities that you have sized up for two years more than a flat out losing trade.
Shelby: I fear that we are once again going over our time limitation. I lost track of time. I want to hear about your third biggest failure. Can we return next week and have you talk about your later years when you have made shrewd moves in your retirement account?
Wink: Of course, but the third time will be the charm. I don't want to reinvent the wheel and many of my thoughts are on my blog.
Shelby: I understand. So, you crashed in 2000 like most investors. You then waited for a rare options opportunity for over two years. When the time came to execute, you quibbled over 5 cents and became emotional about special access afforded to floor specialists. In doing so, you passed up a 100 to 1 rate of return. What would the third most notable mistake be?
Wink: By 2007, I was in the swing of things. I understood the ways of floor specialists and market makers. I had removed emotion from my decision making. I was well on my way to becoming a contrarian. Then, I allowed success to go to my head. After a successful campaign where I grew $700 to $20,000 within 6 weeks, I foolishly assumed that I was now King Kong. I could do no wrong. Traders like Larry Williams and Marty Schwartz have talked about losses after outstanding successes. It happened to me in October 2007. After reaching $20,000, I gave it all back on an ill-considered options play on Countrywide. I didn't have the patience to wait for a well-defined situation. As a result, I learned to value patience over greed, discipline over past triumphs. Nowadays, I am quick to sell hysteria after nailing a market bottom. Gains are fleeting when euphoria reigns. Its been an important lesson.
I would have to say, in all frankness, that my failures have taught me more than my gains. Patience, discipline, the clearly defined situation--I've put all of these lessons to good use with the Las Vegas Thrift Savings Plan Investment Club.
(Glances at my watch) Shelby, where did the time go?
Shelby: I know. Have a good day. I look forward to finishing up the interview series next week.
Wink: Me too.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Shelby: Wink, thank you again for your time this morning. Where are your lovely kids?
Wink: The oldest is helping a friend with a move. My middle child is transfixed by Cartoon Network. And the youngest is skating at the ice rink.
Shelby: I see. Well, let's see where we left off. I wanted to ask you about your most memorable failures. Failure seems to be a precondition for success in many areas of life.
Wink: That's right, Shelby, particularly in investing and trading. Three bozo moves come to mind right off the bat. When the market started to crash in 2000, I didn't step back and stop investing. I just assumed that we were in a rolling correction and that higher prices were dead ahead. I would come to this library and read the Investor's Business Daily (IBD) every Saturday morning. Right over there, you see where they keep the newspapers? I just pored over IBD looking for the next Yahoo, the next Juniper Networks, the next Internet Capital Group. I didn't appreciate that a Bear Market is different in character from a Bull Market.
Shelby: Did you have stops in place?
Wink: Sure. But it didn't matter. The trend is your friend. If the trend is down, you're going to lose your money by buying stocks and hoping for a turn around. So, that whole IBD period in 2000 was a setback.
Shelby: And you used those lessons to protect yourself later?
Wink: Exactly. When August 2008 rolled around, I knew what to do when the trend turned down. Get out of stocks!
Shelby: What was your second hall of fame bozo move?
Wink: This is an interesting bozo move drenched in greed, pure unmitigated greed and emotion. When 9-11 happened, I was no longer actively investing and trading. I just assumed the long trend was bullish and I would profit in the end. The stock market closed for a week after 9-11. When the market opened again, I was curious to see what would happen. Well, the market dropped for 5 days in a row. I knew we were near a bottom but I wanted to see what would happen. I was like, you, Shelby, just observing and taking notes and thinking about things.
On options expiration day in October, 2001, I read a post on my favorite website, clearstation.com, about the performance of Juniper Networks (JNPR). Remember, last week I had said that I flirted around with Juniper? Juniper was one of my momentum stocks that I had seized upon after reading Forbes and Fortune. It must have had a price earnings ratio of 340 to 1! LOL. I didn't care during my predator stage. I just wanted price movement.
Anyway, I read a posting that caught my attention. October 20 calls on Juniper had increased from 0.05 on September 24, I think, to 3.5 by the third Friday in October. Even though the underlying price of Juniper had increased from $8.94 to $23.50, the options had increased 70-fold. A hypothetical $5,000 would have increased to $350,000 in 4 weeks! That little price move stuck in my mind. I mulled it over and thought about why this abnormal price event had happened. I eventually decided that I would bide my time and wait for another comparable opportunity in JNPR call options.
Shelby: But you can't depend upon those opportunities happening again? I mean, the market could have kept dropping after 9-11. In that case, those October 20 options would have expired worthless. Or, the price of JNPR might have risen but only up to say, 12 or 16 or even 20. It seems like a roll of the dice to me. Then again, we are in Las Vegas. LOL!
Wink: You're absolutely right. Today, I would chalk it up to a low probability, Black Swan event. But I was still in grade school as a trader and investor. The early years had been too easy. I had to learn to respect risk.
Shelby: So, did you get an opportunity to turn a hypothetical $5,000 into $350,000?
Wink: Well, yes and no. That's why this trade is my Second Worst trade ever. 2001 came and went. I was surprised at how strong the market bounce was. My handle on technical analysis told me that the bounce was about to end due to negative divergences. I remember feeling a sense of satisfaction as the market topped in early 2002. I wasn't making money in my retirement account but I was happy because I had anticipated a top in the market and I was right. It is very important for an investor and trader to reach a place where market tops can be anticipated. Once you reach that stage in your growth, you will have more confidence when its time to sell. When its time to sell, the herd will be very bullish. When its time to sell, the media cheerleaders on CNBC will be giddy. Commentators will be beside themselves with glee. "There's no way this market is going down!" You ain't seen nothing yet!" Those are psychological signs of a market top.
Shelby: So, the market was topping. Why were you still thinking about that October 2001 move in JNPR call options?
Wink: Because I now knew that the market moved in clear cycles from high to low. When the next low came, that would be a good time to buy stock. It would be a good time to buy call options in JNPR.
I remember one of my best investments happened in 2002. Should I mention it now or later?
Shelby: Well, to keep my notes clear, let's stick with your failures for now. Later, we can touch upon your greatest hits. It might surprise you but I think readers will learn more from your struggles and flops.
Wink: You're probably right. So, the year 2002 came and went. I focused on my day job. 2003 came and I noticed that the character of the market had changed.
Shelby: What do you mean "the character of the market had changed?"
Wink: Stocks were going up more than down. Investors were buying the dips, not selling the rallies. I could see the change in the charts. The market had changed from Bear to Bull. I did some research on the market. I remember reading the Stock Almanac and noting that a dip in mid-December was oftentimes followed by a Santa Claus rally. I saw that the market had made a higher low in March of 2003 and a higher low in late August of 2003. Might this pattern of higher highs and higher lows be a setup for a Santa Claus rally? And, if so, might this not be a splendid opportunity to buy underpriced and undervalued JNPR call options?
I put two and two together and decided the opportunity was at hand. It was in front of me. I opened up an options account with a brokerage firm in New York. I deposited my money. I waited patiently for the mid-December 2003 dip in the price of JNPR. One thing I had remembered from September 2001 was that the price of JNPR had dipped below a psychologically important level of 9 before bouncing. In early December 2003, JNPR was trading around 19/18. I could see that it was declining but it was a gentle decline, as if the stock did not want to fall further. I knew from prior readings that a muffled fall is a sign of impending strength. The days ticked by, December 11, December 12, December 13. I waited with patience worthy of the famous trader, Jesse Livermore. December 14....
JPNR began to drop below 18, below 17. I placed a limit order to buy as many JNPR Jan 20 calls @ 0.05 as I could. I believe it was December 17, 2003 when the price of JNPR dropped to 16.84. I knew, I just knew that this was the time to buy! Weak hands would be removed by the running of stops. I pulled up Yahoo.Finance. I typed in "JNPR", "options", and scrolled down to the January 20 calls. The last traded price was 0.05!!!
Yes!! Yes!! Yes!! The price had hit 0.05. I was so happy! I was dancing on air. You would have thought that I was Reginald Lewis who had just closed the deal on Beatrice. I was happy and counting my money/smile. LOL
Shelby: What a build up! This seems like a very skillful move, one you had plotted and planned for over two years. That's a long time to stalk your prey. What happened? Why is this your second biggest failure as a trader?
Wink: If it seems too good to be true, it probably is too good to be true. I met a fisherman the other day in La Jolla that said the same thing.
Here's what happened.
So, I'm happy as a clam. I nailed the absolute bottom of the move into mid-December 2003. 3 days later, my calls were quoted at 0.20. That's a 400% increase in 3 days. Of course, I'm expecting a 70 to 1 return because of the October 2001 JNPR call experience. To hear the cash register ring, I called my options broker (name not revealed). I asked for a price quote on the balance in my account. The broker said, "You have x funds in your account, Mr. Twyman." I was stunned. I was speechless. The grin on my face was gone. I said, "But how can that be? I purchased the January 20 call options 3 days ago at 0.05. The last quoted price was 0.20." The emotionless broker replied, "That right, Mr. Twyman. The last quoted price was 0.20. However, your limit order to buy at 0.05 was never filled. Only 5 contacts traded at that point. Those 5 contacts were all purchased by specialists."
Shelby: Oh, no! (hand over mouth).
Wink: It had never occurred to me to confirm that my limit order was filled. If I had phoned in for a fill confirmation on December 17, 2003, I would have raised my limit order to 0.10. I was mad. I was angry. I was fit to be tied. And this is why this missed trade is my second biggest failure. It was not a failure because I didn't get filled at 0.05. I could have still gotten in a very good price at 0.20. My failure was that I became emotional. I allowed my disapointment to color my judgment.
Had I not been angry at those "floor specialists" who got my 0.05 calls, I would have gotten in at 0.20. Instead, I refused to play a rigged game.
Shelby: And what happened?
Wink: It was a very sad outcome. Rather than be flexible, I sulked. I watched as the price of JNPR leaped from 16.84 to 18.50 and 18.20 to 20 and from 20 to 22.5 and from 22.5 to 30 by the third Friday in January 2004. Had I picked up the phone to confirm the fill and been flexible enough to buy at 0.10 rather than insist on 0.05, I would have earned a 100 to 1 return on my January 20 JNPR calls in 4 weeks. That would have been my George Soros trade, my John Paulson trade, my best trade ever!
Shelby: I now see why you consider it such a failure. You failed to be flexible, to stay with a well-defined situation that you had been stalking for two years, and to heed the trend.
Wink: That's right. Opportunities like December 17, 2003 don't come around every day. I knew that at the time. I remember moping about the missed opportunity that I had foreseen. If you are right on the opportunity and right on the trend, don't quibble over 5 cents. You will regret squandered opportunities that you have sized up for two years more than a flat out losing trade.
Shelby: I fear that we are once again going over our time limitation. I lost track of time. I want to hear about your third biggest failure. Can we return next week and have you talk about your later years when you have made shrewd moves in your retirement account?
Wink: Of course, but the third time will be the charm. I don't want to reinvent the wheel and many of my thoughts are on my blog.
Shelby: I understand. So, you crashed in 2000 like most investors. You then waited for a rare options opportunity for over two years. When the time came to execute, you quibbled over 5 cents and became emotional about special access afforded to floor specialists. In doing so, you passed up a 100 to 1 rate of return. What would the third most notable mistake be?
Wink: By 2007, I was in the swing of things. I understood the ways of floor specialists and market makers. I had removed emotion from my decision making. I was well on my way to becoming a contrarian. Then, I allowed success to go to my head. After a successful campaign where I grew $700 to $20,000 within 6 weeks, I foolishly assumed that I was now King Kong. I could do no wrong. Traders like Larry Williams and Marty Schwartz have talked about losses after outstanding successes. It happened to me in October 2007. After reaching $20,000, I gave it all back on an ill-considered options play on Countrywide. I didn't have the patience to wait for a well-defined situation. As a result, I learned to value patience over greed, discipline over past triumphs. Nowadays, I am quick to sell hysteria after nailing a market bottom. Gains are fleeting when euphoria reigns. Its been an important lesson.
I would have to say, in all frankness, that my failures have taught me more than my gains. Patience, discipline, the clearly defined situation--I've put all of these lessons to good use with the Las Vegas Thrift Savings Plan Investment Club.
(Glances at my watch) Shelby, where did the time go?
Shelby: I know. Have a good day. I look forward to finishing up the interview series next week.
Wink: Me too.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Friday, November 26, 2010
Contrary Opinion and the Fisherman
Yesterday morning, I took a stroll along the water's edge in La Jolla. Every now and then, I would take a break and read a few passages from Market Wizards for inspiration. Market Wizards is a summary of interviews with top traders. The interviews are very rich portrayals of how a few traders made it to the top. Interestingly enough, attitude and discipline seemed more important then whether the individual was a fundamentalist or a technical analyst.
While resting on a bench, a gentleman walked up to me and said in jest, "Are you enjoying your front yard?" I replied, "Simply splendid." He asked me about the book that I was reading. I gave a short overview of the book's premise; i.e. to share the life stories and winning traits of top investors and traders.
"What main lessons did you take away from the book," he asked? I was intrigued by his question. It showed interest and curiosity and, possibly, experience with investing.
Because I have read the book countless times over the years, I quickly rattled off three key points: (1) The trend is your friend, (2)You have to be greedy when others are fearful and fearful when others are greedy, (3) Always have the patience to wait for a clearly defined situation.
To my delight, he replied that he was an investor. He had recently invested in a coal mining stock and another stock that produced good dividends. (As you know by now, I do not think it is a good time to be in stocks but I kept my thoughts to myself.) He seemed joyful on Thanksgiving morning. He talked about how he was anticipating a Santa Claus rally into the year's end. He said that "those boys on Wall Street want their year end bonuses. And you know that Goldman Sachs is crooked." I saw his point but, more importantly, I sized him up as the man on the street giving me a honest feel for street sentiment. And his sentiment was strongly bullish yesterday morning.
He volunteered that he was a fisherman up North. He caught wonderful salmon and would gladly share a catch with me if I were interested in the future. I thanked him and gave him my business card.
And as the Bullish fisherman walked away, I felt reassured in my Bearish position.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
While resting on a bench, a gentleman walked up to me and said in jest, "Are you enjoying your front yard?" I replied, "Simply splendid." He asked me about the book that I was reading. I gave a short overview of the book's premise; i.e. to share the life stories and winning traits of top investors and traders.
"What main lessons did you take away from the book," he asked? I was intrigued by his question. It showed interest and curiosity and, possibly, experience with investing.
Because I have read the book countless times over the years, I quickly rattled off three key points: (1) The trend is your friend, (2)You have to be greedy when others are fearful and fearful when others are greedy, (3) Always have the patience to wait for a clearly defined situation.
To my delight, he replied that he was an investor. He had recently invested in a coal mining stock and another stock that produced good dividends. (As you know by now, I do not think it is a good time to be in stocks but I kept my thoughts to myself.) He seemed joyful on Thanksgiving morning. He talked about how he was anticipating a Santa Claus rally into the year's end. He said that "those boys on Wall Street want their year end bonuses. And you know that Goldman Sachs is crooked." I saw his point but, more importantly, I sized him up as the man on the street giving me a honest feel for street sentiment. And his sentiment was strongly bullish yesterday morning.
He volunteered that he was a fisherman up North. He caught wonderful salmon and would gladly share a catch with me if I were interested in the future. I thanked him and gave him my business card.
And as the Bullish fisherman walked away, I felt reassured in my Bearish position.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Wednesday, November 24, 2010
Rules for Investing and Trading
To play the game of investing and trading, you have to know the rules. Otherwise, you will give your hard-earned money to others who do know the rules. I've read many financial books but Market Wizards: Interviews with Top Traders by Jack D. Schwager and Reminiscences of a Stock Operator by Edwin Lefevre remain my best playbooks on how the game is played.
Commit these rules to heart and you should benefit over the long run:
1. "There is nothing new in Wall Street." Lefevre at page 10
2. The trend is your friend.
3. "I wasn't patient enough to wait for a clearly defined situation." Schwager at page 18
4. "I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game--that is, to play the market only when I was satisfied that precedents favored my play." Lefevre at page 21
5. Stay in markets with major trends. Schwager at page 23
6. "Whenever I read the tape by the light of experience I made money, but when I made a plain fool play I had to lose." Lefevre at page 21
7. "Ed Seykota would never get out of anything unless the trend changed." Schwager at page 24
8. "Of course, I let the craving for excitement get the better of my judgment." Lefevre at page 22
9. "When news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news." Schwager at page 27
10."The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages." Lefevre at page 22
11. "I knew that the big money was going to be made on the trades that met my criteria. There will always be trades that meet those requirements, but there may be fewer of them, so you have to be much more patient." Schwager at page 28
12. "There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." Lefevre at page 36
Have a Happy Thanksgiving!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Commit these rules to heart and you should benefit over the long run:
1. "There is nothing new in Wall Street." Lefevre at page 10
2. The trend is your friend.
3. "I wasn't patient enough to wait for a clearly defined situation." Schwager at page 18
4. "I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game--that is, to play the market only when I was satisfied that precedents favored my play." Lefevre at page 21
5. Stay in markets with major trends. Schwager at page 23
6. "Whenever I read the tape by the light of experience I made money, but when I made a plain fool play I had to lose." Lefevre at page 21
7. "Ed Seykota would never get out of anything unless the trend changed." Schwager at page 24
8. "Of course, I let the craving for excitement get the better of my judgment." Lefevre at page 22
9. "When news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news." Schwager at page 27
10."The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages." Lefevre at page 22
11. "I knew that the big money was going to be made on the trades that met my criteria. There will always be trades that meet those requirements, but there may be fewer of them, so you have to be much more patient." Schwager at page 28
12. "There is only one side to the stock market; and it is not the bull side or the bear side, but the right side." Lefevre at page 36
Have a Happy Thanksgiving!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Tuesday, November 23, 2010
The Trend is Your Friend
There is an old saying that the trend is your friend. Certainly, the trend has been down in the S&P 500 Index since November 5, 2010. We are now re-testing the lows of 1173 made last Tuesday, November 16. The news from Korea this morning rattled the markets. Notice that the market did not shrug off or ignore the bad news. It reacted severely to bad news by dropping to a low of 1176. The path of least resistance is now down in a down trend. So, the take away point this evening is that the market's reaction to bad news confirmed that the market is weak. We also had a market that closed down more than 1%. When a market closes down more than 1%, it is considered a true selling day. These days are generally bad times to hold stocks. There are always exceptions but the vast majority of stocks will follow the general trend of the market.
Should the market breach 1173, last Tuesday's low, we should see an acceleration in selling pressure.
Traditionally, investors and traders are conditioned to anticipate calm and peaceful trading days around Thanksgiving. The market's behavior today is another example of how contrary opinion can prove profitable.
Have a good evening!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Should the market breach 1173, last Tuesday's low, we should see an acceleration in selling pressure.
Traditionally, investors and traders are conditioned to anticipate calm and peaceful trading days around Thanksgiving. The market's behavior today is another example of how contrary opinion can prove profitable.
Have a good evening!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Monday, November 22, 2010
Just the Technicals Tonight
The S&P 500 Index opened up @ 1198.07. It made a low of 1184.58 which seems to have been a buy point for short-term traders. Apparently, 1184.58 represented a day trader trend line of support. From there, the market bounced up. The high was 1198.94. The close was 1197.84.
The day was a bearish day. The close was lower than the open, despite the late day rally. And the volume on today's down day was greater than Friday's volume on an up day. (A down day is when the close is lower than the open. An up day is when the close is higher than the open.)
Investors remain way too bullish on the market. A buying opportunity is not close at hand as long as the Bullish Quotient on the S&P 500 Index sits @ 76.60. Where's the fear? The Relative Strength Index (RSI) closed @ 54.54. That's not a buying moment. The MACD lines remain in a down trend. The full stochastics leave me cold @ 46.39 and 34.08.
This day will soon be forgotten.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
The day was a bearish day. The close was lower than the open, despite the late day rally. And the volume on today's down day was greater than Friday's volume on an up day. (A down day is when the close is lower than the open. An up day is when the close is higher than the open.)
Investors remain way too bullish on the market. A buying opportunity is not close at hand as long as the Bullish Quotient on the S&P 500 Index sits @ 76.60. Where's the fear? The Relative Strength Index (RSI) closed @ 54.54. That's not a buying moment. The MACD lines remain in a down trend. The full stochastics leave me cold @ 46.39 and 34.08.
This day will soon be forgotten.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Saturday, November 20, 2010
An Interview with "Shelby Aldrich"
To spice things up a little, I decided to shift gears for a moment. My normal routine thus far has been to post a commentary on market conditions of the day or, in the alternative, to argue the merits of Contrary Opinion. This morning, let's try something different. Imagine that I am being interviewed by a fictional reporter, "Shelby Aldrich" of the "Summerlin Gazette." We are in the Reading Room at the Public Library in Summerlin, an affluent neighborhood in Las Vegas. The Summerlin library offers a wonderful view of the mountains, particularly in the wintertime when the air is crisp and mountain snow reaches from the blue skies to the brown desert floor below.
Shelby: Good morning, Wink. Thank you for sharing your insights on the markets. I know you have several commitments with your kids, so I appreciate the opportunity to chat with you.
Wink: My pleasure. My oldest is dying to go to a play with his friend. My youngest two kids have soccer games, so Saturday mornings are busy for us.
Shelby: Were you always interested in the markets?
Wink: No, not at all. When I was growing up, I wanted to be President. LOL! I also loved history. When I was in junior high school, I would read a book a day. History and politics--those were my passions. I loved to read. I loved student government.
Shelby: What happened?
Wink: Well, I grew up and went off to college. There, I discovered I was an introvert at heart. And introverts are not really good at glad- handing. I remember cringing at the idea of seeing my picture on campaign posters. It was then and there that I decided the White House was not in my future. Smile.
Shelby: Was there any talk around the dinner table about the market or stocks?
Wink: None. Zip. I do remember that my mother admired my favorite Uncle, "Nelson." Nelson had acquired 16 properties in two states. He had no mortgage debt that my mom knew of. Nelson always bought at a discount, 50 cents on the dollar or less. My mom would sing Uncle Nelson's praises morning, noon, and night. So, I soaked in an admiration for successful entrepreneurs from my mom. I remember subscribing to Black Enterprise Magazine in high school. I would read about the successes of Earl Graves, John Johnson, and Reginald Lewis. I always thought they were just like my Uncle Nelson, just on a larger playing field. So, there wasn't talk about the market or stocks. There was a deep reverence, however, for Uncle Nelson and his success as an entrepreneur.
Shelby: When did you become interested in the market and stocks?
Wink: When my oldest child was born in 1996, I got the idea that I should have a custodial account for him. A custodial account seemed like a far-sighted thing to do. I've always had dynastic tendencies, so the idea of an account spanning the generations appealed to me. But I knew nothing about the market or stocks. Before my wife and I got married in 1991, we sought out a wonderful financial planner and adviser in Washington, D.C., "J.D." J.D. reviewed our financial status and urged us to place our discretionary savings into a well-regarded mutual fund. The mutual fund performed well as far as mutual funds go. I think we got maybe a 5% to 10% return over 5 years. I had no complaints. I didn't know better.
Shelby: What do you mean by "you didn't know better?"
Wink: Well, as I began to research the market, I discovered that my mutual fund was under performing many stocks and even the S&P 500 Index. Mind you, we were in the middle of the great Bull Market of the 1990s. Why was my mutual fund under performing the market? I then learned that most professional money managers underperformed the S&P 500 Index. I was intrigued by this fact. I didn't know A from B but I knew that someone was beating the market.
Shelby: What motivated you to dig deeper for an answer? Most busy professionals don't have the time or inclination to do their own research. Either they lack the training or the credentials or they just assume its a big old casino.
Wink: Several reasons come to mind. Number 1, I come from a long line of stubborn people. "Bull-headed" is the term that my Virginia relatives would use. My DNA led me to question the process, not myself. Number 2, my grandfather-in-law had parleyed his savings into a wonderful nest egg by investing with Charles Schwab. So, I knew from personal experience that it was possible to invest and to do well. Number 3, I am an intellectual. I love intellectual puzzles. The idea of figuring out the market seemed as good a puzzle as any.
Shelby: So, where did your "Bull-headedness" lead you?
Wink: I remember buying a copy of Forbes and Fortune magazine one day. I sat down in the living room by the fire place and read both magazines from cover to cover. I tried to size up which company had the best growth prospects. I was a babe in the woods! LOL! After my analysis of every company discussed in the two magazines, I decided upon Intel. I thought they had great growth prospects based upon their role in the computer industry.
Shelby: Did you have second-doubts? Fears? Anxieties? I mean, you had no background or experience in picking stocks at all.
Wink: I trusted my analysis at the time. I was also motivated to beat the rate of return in my mutual fund. I wasn't worried or fearful.
Shelby: What happened?
Wink: I invested a few thousand dollars for my oldest child in Intel. The investment was profitable. I think I made a 50% profit after a few years. You have to remember that we were entering the go-go years of the late 1990s. I had made a profit but I was also greedy and saw how other stocks were outperforming Intel. So, I didn't feel a great sense of satisfaction with the investment.
Shelby: It sounds like you are an overachiever.
Wink: You know, the first person to call me an overachiever was my faculty adviser, Larry Sabato, in college. I had wanted to take a third-year level course even though I was only a first-semester student. Hubris, I tell you, hubris! Anyway, Larry said I was an overachiever. I didn't really know how to take his comment at the time. I still don't. I wrestle with his comment to this day.
Shelby: I think what I am getting at is that most investors would have been tickled to death to have earned a 50% rate of return, particularly on their first investment ever with no prior training or experience.
Wink: I hadn't thought of it that way before. Its not uncommon for novices to stumble into a winning investment or trade the first time out. Its how you handle and learn from failure that separates the long-timers from the flashes in the pan.
Shelby: What happened after Intel?
Wink: When my second child was born in 1997, I repeated the process. I bought an issue each of Forbes and Fortune magazine. I sat down in the living room by the fireplace. I read both magazines from cover to cover and tried to size up which company had the most promising prospects. Which company seemed destined to best profit from the fundamental trends in the internet? I was a fundamentalist without really knowing why. I decided that Yahoo seemed like a good investment. Its prospects seemed the brightest.
Shelby: Well, that was a smart move!
Wink: It turned out well. We had great markets between 1997 and 2000. I think the custodial account grew from $2,000 to $20,000. I remember that we paid for my second child's private school education with his yahoo profits. Those were good times for yahoo. You see moves like that in a raging Bull Market, particularly towards the end.
Wink: I promised my wife that I wouldn't miss the soccer games. So, I have time for one or two more questions. We can continue the interview next weekend, if you like.
Shelby: Yes, yes. That would be fine. Did you avoid the 2000 Crash?
Wink: No. I got caught up in the mania like everyone else. I remember times in early 2000 when I would read Forbes and Fortune magazine like a predator. I would write down all of the companies listed and note the rate of return for the previous 30 days. Then, I would invest in the stock with the highest rate of return for the past 30 days! It was pure momentum investing and destined for failure. Juniper Networks was one of those momentum stocks that I had a fling with.
Shelby: What lessons did you take away from the 2000 Crash?
Wink: Markets never go up forever. When people are euphoric, you have to get out of the market. You must force yourself out. A lot of real estate investors wished they had forced themselves out of the housing market in 2005.
Shelby: Well, thank you Wink for sharing your insights. Hopefully, we can finish up the interview next Saturday.
Wink: That would be fun. Ok, kids, let's go!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Shelby: Good morning, Wink. Thank you for sharing your insights on the markets. I know you have several commitments with your kids, so I appreciate the opportunity to chat with you.
Wink: My pleasure. My oldest is dying to go to a play with his friend. My youngest two kids have soccer games, so Saturday mornings are busy for us.
Shelby: Were you always interested in the markets?
Wink: No, not at all. When I was growing up, I wanted to be President. LOL! I also loved history. When I was in junior high school, I would read a book a day. History and politics--those were my passions. I loved to read. I loved student government.
Shelby: What happened?
Wink: Well, I grew up and went off to college. There, I discovered I was an introvert at heart. And introverts are not really good at glad- handing. I remember cringing at the idea of seeing my picture on campaign posters. It was then and there that I decided the White House was not in my future. Smile.
Shelby: Was there any talk around the dinner table about the market or stocks?
Wink: None. Zip. I do remember that my mother admired my favorite Uncle, "Nelson." Nelson had acquired 16 properties in two states. He had no mortgage debt that my mom knew of. Nelson always bought at a discount, 50 cents on the dollar or less. My mom would sing Uncle Nelson's praises morning, noon, and night. So, I soaked in an admiration for successful entrepreneurs from my mom. I remember subscribing to Black Enterprise Magazine in high school. I would read about the successes of Earl Graves, John Johnson, and Reginald Lewis. I always thought they were just like my Uncle Nelson, just on a larger playing field. So, there wasn't talk about the market or stocks. There was a deep reverence, however, for Uncle Nelson and his success as an entrepreneur.
Shelby: When did you become interested in the market and stocks?
Wink: When my oldest child was born in 1996, I got the idea that I should have a custodial account for him. A custodial account seemed like a far-sighted thing to do. I've always had dynastic tendencies, so the idea of an account spanning the generations appealed to me. But I knew nothing about the market or stocks. Before my wife and I got married in 1991, we sought out a wonderful financial planner and adviser in Washington, D.C., "J.D." J.D. reviewed our financial status and urged us to place our discretionary savings into a well-regarded mutual fund. The mutual fund performed well as far as mutual funds go. I think we got maybe a 5% to 10% return over 5 years. I had no complaints. I didn't know better.
Shelby: What do you mean by "you didn't know better?"
Wink: Well, as I began to research the market, I discovered that my mutual fund was under performing many stocks and even the S&P 500 Index. Mind you, we were in the middle of the great Bull Market of the 1990s. Why was my mutual fund under performing the market? I then learned that most professional money managers underperformed the S&P 500 Index. I was intrigued by this fact. I didn't know A from B but I knew that someone was beating the market.
Shelby: What motivated you to dig deeper for an answer? Most busy professionals don't have the time or inclination to do their own research. Either they lack the training or the credentials or they just assume its a big old casino.
Wink: Several reasons come to mind. Number 1, I come from a long line of stubborn people. "Bull-headed" is the term that my Virginia relatives would use. My DNA led me to question the process, not myself. Number 2, my grandfather-in-law had parleyed his savings into a wonderful nest egg by investing with Charles Schwab. So, I knew from personal experience that it was possible to invest and to do well. Number 3, I am an intellectual. I love intellectual puzzles. The idea of figuring out the market seemed as good a puzzle as any.
Shelby: So, where did your "Bull-headedness" lead you?
Wink: I remember buying a copy of Forbes and Fortune magazine one day. I sat down in the living room by the fire place and read both magazines from cover to cover. I tried to size up which company had the best growth prospects. I was a babe in the woods! LOL! After my analysis of every company discussed in the two magazines, I decided upon Intel. I thought they had great growth prospects based upon their role in the computer industry.
Shelby: Did you have second-doubts? Fears? Anxieties? I mean, you had no background or experience in picking stocks at all.
Wink: I trusted my analysis at the time. I was also motivated to beat the rate of return in my mutual fund. I wasn't worried or fearful.
Shelby: What happened?
Wink: I invested a few thousand dollars for my oldest child in Intel. The investment was profitable. I think I made a 50% profit after a few years. You have to remember that we were entering the go-go years of the late 1990s. I had made a profit but I was also greedy and saw how other stocks were outperforming Intel. So, I didn't feel a great sense of satisfaction with the investment.
Shelby: It sounds like you are an overachiever.
Wink: You know, the first person to call me an overachiever was my faculty adviser, Larry Sabato, in college. I had wanted to take a third-year level course even though I was only a first-semester student. Hubris, I tell you, hubris! Anyway, Larry said I was an overachiever. I didn't really know how to take his comment at the time. I still don't. I wrestle with his comment to this day.
Shelby: I think what I am getting at is that most investors would have been tickled to death to have earned a 50% rate of return, particularly on their first investment ever with no prior training or experience.
Wink: I hadn't thought of it that way before. Its not uncommon for novices to stumble into a winning investment or trade the first time out. Its how you handle and learn from failure that separates the long-timers from the flashes in the pan.
Shelby: What happened after Intel?
Wink: When my second child was born in 1997, I repeated the process. I bought an issue each of Forbes and Fortune magazine. I sat down in the living room by the fireplace. I read both magazines from cover to cover and tried to size up which company had the most promising prospects. Which company seemed destined to best profit from the fundamental trends in the internet? I was a fundamentalist without really knowing why. I decided that Yahoo seemed like a good investment. Its prospects seemed the brightest.
Shelby: Well, that was a smart move!
Wink: It turned out well. We had great markets between 1997 and 2000. I think the custodial account grew from $2,000 to $20,000. I remember that we paid for my second child's private school education with his yahoo profits. Those were good times for yahoo. You see moves like that in a raging Bull Market, particularly towards the end.
Wink: I promised my wife that I wouldn't miss the soccer games. So, I have time for one or two more questions. We can continue the interview next weekend, if you like.
Shelby: Yes, yes. That would be fine. Did you avoid the 2000 Crash?
Wink: No. I got caught up in the mania like everyone else. I remember times in early 2000 when I would read Forbes and Fortune magazine like a predator. I would write down all of the companies listed and note the rate of return for the previous 30 days. Then, I would invest in the stock with the highest rate of return for the past 30 days! It was pure momentum investing and destined for failure. Juniper Networks was one of those momentum stocks that I had a fling with.
Shelby: What lessons did you take away from the 2000 Crash?
Wink: Markets never go up forever. When people are euphoric, you have to get out of the market. You must force yourself out. A lot of real estate investors wished they had forced themselves out of the housing market in 2005.
Shelby: Well, thank you Wink for sharing your insights. Hopefully, we can finish up the interview next Saturday.
Wink: That would be fun. Ok, kids, let's go!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Friday, November 19, 2010
Contrary Opinion - Market Conditions
Today, the S&P 500 Index opened @ 1196.12 The market then dipped down to 1189.44 during the first two hours of the trading day. From that point, it was a steady climb up to a high of 1199.97 before the market closed @ 1199.73. I still anticipate a touch of the 1206 area before a further decline.
Rising Wedge Pattern: Since November 5, the market has been in a down trend. Markets never go down in a straight line, although it may feel like it sometimes. Markets go down. They retrace. They go down further. They retrace. They go down further. That's the natural psychology of fear and greed at work. The trend is your friend, so you always want to think in terms of the trend; i.e. is the trend up or is the trend down?
If the market is in a down trend and goes up, we could have a classic pattern known as the Rising Wedge pattern. This just means that prices appear bullish (due to higher highs and higher lows), however, the trend is more powerful in the end. Eventually, prices will drop below the minor up trend line of the Rising Wedge and drop to a lower low. 1206 would be a natural resistance point for the end of the Rising Wedge pattern since Tuesday, November 16. That's my anticipation.
The Dumb Money Factor: After the close of the trading session, I glanced at the options activity on the Index.
(You may recall that options activity on the Index is a nice contrarian signal at extremes. When mom and pop are overly eager to buy calls or bets that the market will rise, then it is a good time to sell the market. When mom and pop are scared out of their minds and stocking up on puts or bets that the market will fall, then it is a good time to buy the market.)
I could not believe my eyes.
The Index closed for the week @ 0.77. This was the third most extreme demand for calls by the retail public since December 21, 2007. And you might note that the market declined after December 21, 2007 until crashing Tuesday morning on
January 22, 2008. I remember that crash. The U.S. markets were closed on Monday due to the King Holiday. Meanwhile, the European markets were collapsing that Monday but U.S. investors had to patiently wait for 24 hours until our markets opened.
All of this is to say that we should lean in the opposite direction from the Index options buyers. We should anticipate that a drop in the market is more probable than a rise. That's how Contrary Opinion works.
For those readers who want to enrich their understanding of how markets work, I would suggest two books--Reminiscences of a Stock Operator by Edwin Lefevre and Market Wizards by Jack D. Schwager. These books are excellent and pleasant reads. Most professional traders have them in their libraries.
Have a great weekend!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Rising Wedge Pattern: Since November 5, the market has been in a down trend. Markets never go down in a straight line, although it may feel like it sometimes. Markets go down. They retrace. They go down further. They retrace. They go down further. That's the natural psychology of fear and greed at work. The trend is your friend, so you always want to think in terms of the trend; i.e. is the trend up or is the trend down?
If the market is in a down trend and goes up, we could have a classic pattern known as the Rising Wedge pattern. This just means that prices appear bullish (due to higher highs and higher lows), however, the trend is more powerful in the end. Eventually, prices will drop below the minor up trend line of the Rising Wedge and drop to a lower low. 1206 would be a natural resistance point for the end of the Rising Wedge pattern since Tuesday, November 16. That's my anticipation.
The Dumb Money Factor: After the close of the trading session, I glanced at the options activity on the Index.
(You may recall that options activity on the Index is a nice contrarian signal at extremes. When mom and pop are overly eager to buy calls or bets that the market will rise, then it is a good time to sell the market. When mom and pop are scared out of their minds and stocking up on puts or bets that the market will fall, then it is a good time to buy the market.)
I could not believe my eyes.
The Index closed for the week @ 0.77. This was the third most extreme demand for calls by the retail public since December 21, 2007. And you might note that the market declined after December 21, 2007 until crashing Tuesday morning on
January 22, 2008. I remember that crash. The U.S. markets were closed on Monday due to the King Holiday. Meanwhile, the European markets were collapsing that Monday but U.S. investors had to patiently wait for 24 hours until our markets opened.
All of this is to say that we should lean in the opposite direction from the Index options buyers. We should anticipate that a drop in the market is more probable than a rise. That's how Contrary Opinion works.
For those readers who want to enrich their understanding of how markets work, I would suggest two books--Reminiscences of a Stock Operator by Edwin Lefevre and Market Wizards by Jack D. Schwager. These books are excellent and pleasant reads. Most professional traders have them in their libraries.
Have a great weekend!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Thursday, November 18, 2010
Market Conditions - Resolution of the Inside Day
As you recall, yesterday was an inside day. We knew that we would see greater price action today. It was just unclear whether the action would be up or down. Now we know.
The market gapped up in the morning and made a dramatic move to the upside. I was not surprised because we were experiencing oversold conditions on a daily chart. See the 1-year chart for the S&P 500 Index at clearstation.com. Now, today can be best understood as a short covering day. In other words, investors and traders who were shorting the market had second thoughts and bought back their shares. This "forced" buying by short sellers propelled the market higher in a rapid fashion. A classic sign of a short-covering rally would be a gap up from oversold conditions in a rapid fire fashion up to resistance. Master trader Bruce Kovner has written that "the principal characteristic of a bear market is very sharp down movements followed by quick retracements....In a bear market, you have to use sharp countertrend rallies to enter positions." Jack D. Schwager, Market Wizards, page 70.
This circumstance is very striking. The fearful short sellers covering today are right about the direction of the market. The market will continue to go down below 1173. The short sellers fueling today's rally were just too early. I don't recommend short selling because investing for the long haul is less stressful. But it is instructive that you can be fundamentally right on the direction of the market but wrong in your timing. The smart short sellers were covering their bets on Tuesday afternoon when the S&P 500 Index hovered around 1173.
I would anticipate that the S&P 500 Index will hit the 1206 area tomorrow. That should prove to be a short-term top for this countertrend rally. Why am I so confident? Well, I could be wrong. No one gets the direction of the market right all of the time. However, I can list three reasons that signal a short term top is near.
Reason No. 1: The 0.618% retracement level.
Professional traders and money managers recognize that when a market retraces, a common retracement level is 0.618% of the previous move. The move could be up. The move could be down. It doesn't matter. When the S&P 500 Index peaked @ 1127 on November 5, I was fairly confident that that was a top of importance. 1127 represented almost a 0.618% retracement of the down move from 1576.09 on October 11, 2007 to 666.79 on March 6, 2009. I banked on major institutions and hedge funds having computer programs keyed into the 0.618 level. And the market came to a halt at that 1127 0.618 retracement level!
Similarly, the 0.618 retracement level of the 1227 (November 5) to 1173 (November 16) down move is 1206. Thus, I anticipate that high-powered computer programs will be fired up to sell the S&P at around 1206. I could be wrong but, if I am wrong, I would be surprised.
Reason No. 2: The Dumb Money Factor.
In an earlier post, I urged readers to do the opposite of dumb money. Dumb money would be retail investors who trade options on the index. They are wrong like clockwork. At the close today, options traders were as bullish as they have been in the past six months since June 28. And what happened on June 28? The market dropped 70 points in 3 days into July 1. So, the positioning of Dumb Money at today's close suggests that the market has more down side.
Reason No. 3: Corrective Wave Pattern (Elliott Wave)
Even if I ignored the 0.618 retracement pattern and the Dumb Money Factor, I would be mindful of the Elliott Wave pattern that corrections take place in an A-B-C fashion. First, there is the initial down move that takes everyone by surprise. That is Move A down. Second, there is the sharp short covering rally up to frustrate the short sellers who are right but weak. That is Wave B. In my experience, Wave B usually ends at the 13-day moving average. Finally, there is a Wave C down which suggests raw panic and capitulation. Wave C goes lower than Wave A and usually represents a good buying opportunity at the bottom. Today was Wave B. Wave C remains ahead of us.
Conclusion: For these three reasons, I see lower prices ahead. And then it will be a good time to buy.
I leave you with an insightful quote from trader Mark Weinstein about the art of using different tools and rules:
"It is experience and gut feel. I use all forms of technical analysis, but interpret them through gut feel. I do not believe in mathematical systems that always approach markets in the same way. Using myself as the "system," I constantly change the input to achieve the same output--profit!" Market Wizards, supra, at page 339.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
The market gapped up in the morning and made a dramatic move to the upside. I was not surprised because we were experiencing oversold conditions on a daily chart. See the 1-year chart for the S&P 500 Index at clearstation.com. Now, today can be best understood as a short covering day. In other words, investors and traders who were shorting the market had second thoughts and bought back their shares. This "forced" buying by short sellers propelled the market higher in a rapid fashion. A classic sign of a short-covering rally would be a gap up from oversold conditions in a rapid fire fashion up to resistance. Master trader Bruce Kovner has written that "the principal characteristic of a bear market is very sharp down movements followed by quick retracements....In a bear market, you have to use sharp countertrend rallies to enter positions." Jack D. Schwager, Market Wizards, page 70.
This circumstance is very striking. The fearful short sellers covering today are right about the direction of the market. The market will continue to go down below 1173. The short sellers fueling today's rally were just too early. I don't recommend short selling because investing for the long haul is less stressful. But it is instructive that you can be fundamentally right on the direction of the market but wrong in your timing. The smart short sellers were covering their bets on Tuesday afternoon when the S&P 500 Index hovered around 1173.
I would anticipate that the S&P 500 Index will hit the 1206 area tomorrow. That should prove to be a short-term top for this countertrend rally. Why am I so confident? Well, I could be wrong. No one gets the direction of the market right all of the time. However, I can list three reasons that signal a short term top is near.
Reason No. 1: The 0.618% retracement level.
Professional traders and money managers recognize that when a market retraces, a common retracement level is 0.618% of the previous move. The move could be up. The move could be down. It doesn't matter. When the S&P 500 Index peaked @ 1127 on November 5, I was fairly confident that that was a top of importance. 1127 represented almost a 0.618% retracement of the down move from 1576.09 on October 11, 2007 to 666.79 on March 6, 2009. I banked on major institutions and hedge funds having computer programs keyed into the 0.618 level. And the market came to a halt at that 1127 0.618 retracement level!
Similarly, the 0.618 retracement level of the 1227 (November 5) to 1173 (November 16) down move is 1206. Thus, I anticipate that high-powered computer programs will be fired up to sell the S&P at around 1206. I could be wrong but, if I am wrong, I would be surprised.
Reason No. 2: The Dumb Money Factor.
In an earlier post, I urged readers to do the opposite of dumb money. Dumb money would be retail investors who trade options on the index. They are wrong like clockwork. At the close today, options traders were as bullish as they have been in the past six months since June 28. And what happened on June 28? The market dropped 70 points in 3 days into July 1. So, the positioning of Dumb Money at today's close suggests that the market has more down side.
Reason No. 3: Corrective Wave Pattern (Elliott Wave)
Even if I ignored the 0.618 retracement pattern and the Dumb Money Factor, I would be mindful of the Elliott Wave pattern that corrections take place in an A-B-C fashion. First, there is the initial down move that takes everyone by surprise. That is Move A down. Second, there is the sharp short covering rally up to frustrate the short sellers who are right but weak. That is Wave B. In my experience, Wave B usually ends at the 13-day moving average. Finally, there is a Wave C down which suggests raw panic and capitulation. Wave C goes lower than Wave A and usually represents a good buying opportunity at the bottom. Today was Wave B. Wave C remains ahead of us.
Conclusion: For these three reasons, I see lower prices ahead. And then it will be a good time to buy.
I leave you with an insightful quote from trader Mark Weinstein about the art of using different tools and rules:
"It is experience and gut feel. I use all forms of technical analysis, but interpret them through gut feel. I do not believe in mathematical systems that always approach markets in the same way. Using myself as the "system," I constantly change the input to achieve the same output--profit!" Market Wizards, supra, at page 339.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Wednesday, November 17, 2010
Market Conditions
The Standard & Poor's 500 Index opened at 1178.33 It made a low of 1175.82 and a high of 1183.56. The close was 1178.59.
Today was an inside day, a relatively rare event in the marketplace. An inside day occurs when the low and high of a day's price action are contained within the high and low of the previous day. Yesterday, the high was 1194 and the low was 1173. What does this mean? It means that the price is quietly consolidating before the next major move. It doesn't tell us whether the next move will be up or down. We just know that the next move will be greater than the price range today.
Professional investors and traders see inside days as days of opportunity. They will buy if the price tomorrow exceeds the high of today (1183.56). Conversely, they will sell if the price tomorrow exceeds the low of today (1175.82). Because inside days are unusual and rare, the pros love an opportunity to profit from a burst in short-term price action.
No one can predict how the price will break out of today's trading range. I wouldn't be surprised if the price bounced up and hit resistance @ 1207. If the market did bounce up to 1207, that would be a shorting opportunity. (A shorting opportunity means you would position yourself for a further drop in price.) The bounce up to 1207 would also tell me that the downside will be limited. When a breakout fails (and the breakout on November 5 has failed because the price has dropped back below the former high @ 1219), there is always a sense that the drop could really accelerate to the downside. This anticipation would make sense if yesterday's gap down held. However, if the gap down closed, then I would know that the downside would be somewhat muted.
If the price breaks down below 1175, I would be surprised in that the market is already oversold on a short-term basis(see the 1-year chart of the S&P 500 Index @ clearstation.com). A break below 1175 would probably travel below the 50-day moving average and stop @ 1158 or so.
Anyway, we are in a waiting period right now. Lower prices are ahead, whether they come sooner or later.
Have a good evening!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Today was an inside day, a relatively rare event in the marketplace. An inside day occurs when the low and high of a day's price action are contained within the high and low of the previous day. Yesterday, the high was 1194 and the low was 1173. What does this mean? It means that the price is quietly consolidating before the next major move. It doesn't tell us whether the next move will be up or down. We just know that the next move will be greater than the price range today.
Professional investors and traders see inside days as days of opportunity. They will buy if the price tomorrow exceeds the high of today (1183.56). Conversely, they will sell if the price tomorrow exceeds the low of today (1175.82). Because inside days are unusual and rare, the pros love an opportunity to profit from a burst in short-term price action.
No one can predict how the price will break out of today's trading range. I wouldn't be surprised if the price bounced up and hit resistance @ 1207. If the market did bounce up to 1207, that would be a shorting opportunity. (A shorting opportunity means you would position yourself for a further drop in price.) The bounce up to 1207 would also tell me that the downside will be limited. When a breakout fails (and the breakout on November 5 has failed because the price has dropped back below the former high @ 1219), there is always a sense that the drop could really accelerate to the downside. This anticipation would make sense if yesterday's gap down held. However, if the gap down closed, then I would know that the downside would be somewhat muted.
If the price breaks down below 1175, I would be surprised in that the market is already oversold on a short-term basis(see the 1-year chart of the S&P 500 Index @ clearstation.com). A break below 1175 would probably travel below the 50-day moving average and stop @ 1158 or so.
Anyway, we are in a waiting period right now. Lower prices are ahead, whether they come sooner or later.
Have a good evening!
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Tuesday, November 16, 2010
Market Conditions - The Storm Has Arrived
Well, Barbara, the Storm has arrived.
Today was an uber bearish day. The market gapped down at the open. (Bearish Sign #1) The open was the high of the day. (Bearish Sign #2) The market fell throughout the day, down through 1190, 1180, and touching 1173 before closing @ 1178. (Bearish Sign #3) The market closed down more then 1%. (Bearish Sign #4) Gary Smith considers these days to be "true selling days." It is not a good time for stock holdings. Even the buying of U.S. treasuries by the Federal Reserve did not stir the market to rise. (Bearish Sign #5) Always remember that when a piece of good news comes out and the market continues to drop, then market conditions are poor for stock holdings.
Tonight, we are out of stocks. It is a good feeling. Smart investing requires good offense and good defense. The good offense comes when it is time to buy. Even though you might be fearful, you commit 100% to the C Fund and trust your observation and experience. The good defense comes when you reject greed and accept patience and discipline as true allies. When storm clouds are on the horizon, its time to step aside and wait.
There will be buying opportunities ahead of us. The opportunities oftentimes appear when no one wants to own stocks. We are now waiting for that moment. It will come. And when it comes, we will commit 100% into the C Fund. And we will beat the S&P 500 Index again this year.
As I type, the S&P 500 Index is up 5.65% for the year and dropping every day/smile.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Today was an uber bearish day. The market gapped down at the open. (Bearish Sign #1) The open was the high of the day. (Bearish Sign #2) The market fell throughout the day, down through 1190, 1180, and touching 1173 before closing @ 1178. (Bearish Sign #3) The market closed down more then 1%. (Bearish Sign #4) Gary Smith considers these days to be "true selling days." It is not a good time for stock holdings. Even the buying of U.S. treasuries by the Federal Reserve did not stir the market to rise. (Bearish Sign #5) Always remember that when a piece of good news comes out and the market continues to drop, then market conditions are poor for stock holdings.
Tonight, we are out of stocks. It is a good feeling. Smart investing requires good offense and good defense. The good offense comes when it is time to buy. Even though you might be fearful, you commit 100% to the C Fund and trust your observation and experience. The good defense comes when you reject greed and accept patience and discipline as true allies. When storm clouds are on the horizon, its time to step aside and wait.
There will be buying opportunities ahead of us. The opportunities oftentimes appear when no one wants to own stocks. We are now waiting for that moment. It will come. And when it comes, we will commit 100% into the C Fund. And we will beat the S&P 500 Index again this year.
As I type, the S&P 500 Index is up 5.65% for the year and dropping every day/smile.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Saturday, November 13, 2010
Understanding Contrary Opinion
One of my favorite books is Investment Psychology Explained: Classic Strategies to Beat the Market by Martin J. Pring. Pring was the publisher of the newsletter, The Pring Market Review, and a respected commentator on the market. I respect Pring because he nailed the essence of successful investing. As Pring saw it, "All of us are comfortable buying stocks when prices are high and rising and selling when they are declining, but we need to develop an attitude that encourages us to do the opposite." (page 1) John D. Rockefeller understood the point. In the later part of his life, he said that one should only buy stocks on down days and sell on up days. Hmmn.
The following are a few points that Pring observed about contrary opinion:
1. The practice of contrary opinion is an art and not a science. (page 110)
2. To be a true contrarian involves study, creativity, wide experience, and above all, patience. (page 110)
3. Investors tend to move in crowds that by nature are driven by herd instincts and the desire for instant wealth. (page 111)
4. When virtually everyone has taken the position the market is headed in a certain direction, there is no one left to push the trend any further. (page 111)
5. Contrary Opinion requires us to go against our natural instincts--a difficult task indeed. (page 113)
6. We need to be skeptical of the headlines and must try to identify the reasoning behind them. (page 124)
7. It is better to be early and right than late and wrong.
8. Don't extrapolate the future from the present. (page 127)
9. People like to conform. (page 130)
10. If an argument appears in the popular press, you can be sure that everyone who wants to buy is already on board. (page 132)
I leave you with this thought on Saturday morning--The Federal Reserve started buying bonds and treasuries on Friday. (Quantitative Easing II). The market did not go up on Friday. It fell. "A fully positioned condition by the majority of participants is revealed when a news event, supporting their position, fails to move prices in the expected direction" R. Earl Hadady, Contrary Opinion:Using Sentiment to Profit in the Futures Market, pages 63-64.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
The following are a few points that Pring observed about contrary opinion:
1. The practice of contrary opinion is an art and not a science. (page 110)
2. To be a true contrarian involves study, creativity, wide experience, and above all, patience. (page 110)
3. Investors tend to move in crowds that by nature are driven by herd instincts and the desire for instant wealth. (page 111)
4. When virtually everyone has taken the position the market is headed in a certain direction, there is no one left to push the trend any further. (page 111)
5. Contrary Opinion requires us to go against our natural instincts--a difficult task indeed. (page 113)
6. We need to be skeptical of the headlines and must try to identify the reasoning behind them. (page 124)
7. It is better to be early and right than late and wrong.
8. Don't extrapolate the future from the present. (page 127)
9. People like to conform. (page 130)
10. If an argument appears in the popular press, you can be sure that everyone who wants to buy is already on board. (page 132)
I leave you with this thought on Saturday morning--The Federal Reserve started buying bonds and treasuries on Friday. (Quantitative Easing II). The market did not go up on Friday. It fell. "A fully positioned condition by the majority of participants is revealed when a news event, supporting their position, fails to move prices in the expected direction" R. Earl Hadady, Contrary Opinion:Using Sentiment to Profit in the Futures Market, pages 63-64.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Friday, November 12, 2010
Contrary Opinion and the Fear Factor
The following is an essay I submitted to the website Market Oracle UK:
Contrary Opinion and the Fear Factor
By Wink Twyman
Last week, I turned on CNBC in the early morning hours. Anchor Sue Herera was in a bubbly mood. She said that, after the market’s performance that week, one commentator said, “You ain’t seen nothing yet!” Because I am jaded on media coverage, I immediately took Herera’s cheerleading as a signal that the top was close at hand. It occurred to me that the average investor and trader might take Herera’s words to heart, rush out to Scottrade or Charles Schwab, and plunk down their hard-earned money on “black,” I mean, the stock of their choice because the market was now safe.
The purpose of this essay is to show that it is never safe when commentators say, “You ain’t seen nothing yet!” In fact, this is often the worst possible time to buy stocks. Never buy giddiness or veiled hints that the best is yet to come. Oftentimes, while you are buying stage right, the pros are selling stage left.
The famous trader, Jesse Livermore, remarked that he was often tasked with the job of marking up stocks for sale to the retail public. The public never seemed interested in low prices. But once a stock started to move, the level of interest from amateurs would increase proportionately. It was understood behind the scenes that the insiders were already in. They were using the increase in prices to scale out of their positions. Now, the oddest point Livermore noticed was that the retail public would continue to buy on the way down! Apparently, hope springs external. The average guy would always hope that the next drop down was support and that this support would hold. Of course, there is no such thing as support in a Bear Market.
Livermore never knew CNBC. He died in the 1940s. But he would have recognized the game that was going on last week. Some things are timeless.
Nicholas Darvas was a Las Vegas dancer who stumbled into investing and trading during the 1950s. I love the Darvas story because he had the persistence and determination to figure out the system on his own. Darvas candidly wrote about his early days when he sought out stock tips and “financial advice sheets.” The commentators were always excited about the market. They urged readers to “Buy this stock now before it is too late!” And guess what? Darvas would rush out to buy the recommended stocks. The stocks took that as a signal to drift lower and lower. The pattern never changed. Eventually, Darvas woke up and opened his eyes. He realized that “when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling.”
It did not pay to be late to the party.
Gary Smith is another example of an average guy who read the papers and treaded water. For years, Smith wanted to succeed as a trader more than anything in the world. He worked tirelessly. He read The Wall Street Journal. He read Barron’s. He was influenced by the news of the moment. And still he went nowhere as a trader for sixteen years. It was only when he discovered contrary opinion did he turn himself around as a trader. Learning to ignore The Wall Street Journal, for example, was his saving grace.
These are just a few examples of contrary opinion. There are many, many stories out there in the wild and woolly world of financial markets. The take away point is that buying should be at a point of fear, not warm and fuzzy feelings or the urgings of commentators.
Consider that one of the best times to buy the S&P 500 Index this year was August 25, 2010. On that date, I urged my fellow investors in the Las Vegas Thrift Savings Plan (TSP) to move 100% of their retirement funds from the G Fund (essentially a cash position) to the C Fund (a diversified portfolio of stocks). I remember that day well. There was no giddiness from Herera on CNBC. No media commentators were crowing that “You ain’t seen nothing yet!” During my lunch stroll along the harbor, I saw the newspaper headlines proclaiming that the stock market had suffered a series of setbacks. When I saw that bearish headline, I knew my call to move 100% into stocks was the right call.
What were retail investors and traders worried about during the last week in August? They were worried about a developing Head and Shoulders pattern on the Index, (on no!), the Hindenburg Omen (oh dear!), and the Grand Cardinal Cross (oh my!). Most of all, there was fear in the air. Even I was fearful on the morning of August 27 as the S&P 500 Index dipped below 1040 and I was Bullish!!!
Ultimately, it is always a good time to buy when the fear factor has gripped the hearts and minds of Bulls, Bears, and the “Get Me the Hell Out of Dodge” Crowd. That’s how money is made. That’s how winning is done. Buy the fear.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Contrary Opinion and the Fear Factor
By Wink Twyman
Last week, I turned on CNBC in the early morning hours. Anchor Sue Herera was in a bubbly mood. She said that, after the market’s performance that week, one commentator said, “You ain’t seen nothing yet!” Because I am jaded on media coverage, I immediately took Herera’s cheerleading as a signal that the top was close at hand. It occurred to me that the average investor and trader might take Herera’s words to heart, rush out to Scottrade or Charles Schwab, and plunk down their hard-earned money on “black,” I mean, the stock of their choice because the market was now safe.
The purpose of this essay is to show that it is never safe when commentators say, “You ain’t seen nothing yet!” In fact, this is often the worst possible time to buy stocks. Never buy giddiness or veiled hints that the best is yet to come. Oftentimes, while you are buying stage right, the pros are selling stage left.
The famous trader, Jesse Livermore, remarked that he was often tasked with the job of marking up stocks for sale to the retail public. The public never seemed interested in low prices. But once a stock started to move, the level of interest from amateurs would increase proportionately. It was understood behind the scenes that the insiders were already in. They were using the increase in prices to scale out of their positions. Now, the oddest point Livermore noticed was that the retail public would continue to buy on the way down! Apparently, hope springs external. The average guy would always hope that the next drop down was support and that this support would hold. Of course, there is no such thing as support in a Bear Market.
Livermore never knew CNBC. He died in the 1940s. But he would have recognized the game that was going on last week. Some things are timeless.
Nicholas Darvas was a Las Vegas dancer who stumbled into investing and trading during the 1950s. I love the Darvas story because he had the persistence and determination to figure out the system on his own. Darvas candidly wrote about his early days when he sought out stock tips and “financial advice sheets.” The commentators were always excited about the market. They urged readers to “Buy this stock now before it is too late!” And guess what? Darvas would rush out to buy the recommended stocks. The stocks took that as a signal to drift lower and lower. The pattern never changed. Eventually, Darvas woke up and opened his eyes. He realized that “when these financial tipsters advise the small operator to buy a stock, those professionals who have bought the stock much earlier on inside information are selling.”
It did not pay to be late to the party.
Gary Smith is another example of an average guy who read the papers and treaded water. For years, Smith wanted to succeed as a trader more than anything in the world. He worked tirelessly. He read The Wall Street Journal. He read Barron’s. He was influenced by the news of the moment. And still he went nowhere as a trader for sixteen years. It was only when he discovered contrary opinion did he turn himself around as a trader. Learning to ignore The Wall Street Journal, for example, was his saving grace.
These are just a few examples of contrary opinion. There are many, many stories out there in the wild and woolly world of financial markets. The take away point is that buying should be at a point of fear, not warm and fuzzy feelings or the urgings of commentators.
Consider that one of the best times to buy the S&P 500 Index this year was August 25, 2010. On that date, I urged my fellow investors in the Las Vegas Thrift Savings Plan (TSP) to move 100% of their retirement funds from the G Fund (essentially a cash position) to the C Fund (a diversified portfolio of stocks). I remember that day well. There was no giddiness from Herera on CNBC. No media commentators were crowing that “You ain’t seen nothing yet!” During my lunch stroll along the harbor, I saw the newspaper headlines proclaiming that the stock market had suffered a series of setbacks. When I saw that bearish headline, I knew my call to move 100% into stocks was the right call.
What were retail investors and traders worried about during the last week in August? They were worried about a developing Head and Shoulders pattern on the Index, (on no!), the Hindenburg Omen (oh dear!), and the Grand Cardinal Cross (oh my!). Most of all, there was fear in the air. Even I was fearful on the morning of August 27 as the S&P 500 Index dipped below 1040 and I was Bullish!!!
Ultimately, it is always a good time to buy when the fear factor has gripped the hearts and minds of Bulls, Bears, and the “Get Me the Hell Out of Dodge” Crowd. That’s how money is made. That’s how winning is done. Buy the fear.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Waiting for a Good Time to Buy
One of my favorite moments is when I can e-mail Barbara and say, "Now is a good time to buy. The storm is past." I take great satisfaction in scanning the market every day and taking the pulse of market sentiment. Things are not always what they seem in the marketplace. I am usually most anxious and fearful when investors are giddy. Conversely, I am usually most at peace when the headlines are proclaiming that the market has had its worst week in such and such a time. Those times are usually good times to buy.
Market Conditions This Week --
1. The market closed down for the week. We had a true selling day (more than 1% down) on every single index except for the Dow Jones Industrial Average. According to trader Gary Smith, true selling days are good times to be out of the market. I agree. Selling pressure tends to feed upon itself. Fear is a more powerful emotion than greed. Every investor and trader who bought the euphoria of the Federal Reserve's Quantitative Easing (QE2) when the Standard & Poors 500 Index was above 1200 is now underwater. They are hoping that the market will not correct further. I fear they will have a few more days (weeks?) of worry.
2. The S&P 500 Index closed below its 13-day moving average for the first time since August. This daily close below the 13-day moving average is a bearish development. It suggests that the trend has changed from up to down for now. The probabilities favor lower prices, not higher prices, for the moment.
3. On a weekly chart, the S&P 500 Index closed down. Probabilities again suggest that this down week will be followed by another down week in the marketplace.
4. I got a wonderful sell signal yesterday at the close of trading. I know that this signal is not simple but bear with me. (I know you're watching, Barbara/smile). There are smart investors and traders. There are dumb investors and traders. Smart money tends to be right more often than not. Maybe, they are better connected or have deeper pockets or whatever. But they tend to get it right. Dumb money tends to get it wrong. You can make money doing the opposite of what dumb money does.
Smart money is composed of institutions, hedge funds, and wealthy individuals like George Soros and John Paulson. Dumb money is the retail guy who watches Jim Cramer on CNBC and decides to buy gold because Jim said so. (not a smart idea!) Dumb money reads an article in the Wall Street Journal and won't touch an investment because the reporter said so. (Not a smart idea! You can make money by fading or going against the media.)
We want to be like smart money, not dumb money.
Now, how do we track the moves of dumb money? How do we pick up the trail of dumb money and go the other way? One tool is options activity on the index. Studies have shown that dumb money gambles on options and that dumb money loses like clockwork to smart money, particularly at extremes. So, when dumb money is absolutely convinced that the market is going higher and they rush out to buy calls, then it is good bet that the market will do the opposite and head lower.
This contrarian signal flashed yesterday between noon and 1:00 p.m., the last hour of the trading day. I could not believe my eyes when I saw how bullish people were on options. According to my chart, people were buying calls (bets that the market will go higher) at the highest rate since June 28. What happened after June 28? The market dropped 70 points within 3 days. So, yesterday, I felt very confident that the market would be dropping, not rising, for a while.
When Will It Be A Good Time to Buy?
I am looking for several factors to come together. These factors are as follows:
1. The Relative Strenght Index (RSI) needs to fall into the 30ish level on a daily basis. Today, the RSI closed in the 50s. That's better than last week but not good enough for me to place that e-mail to Barbara.
2. The stochastics needs to drop to the oversold level. The stochastics is still hanging up around 79. That's not a good time to buy. A good time to buy would be at least the 20ish level. During the last week in August, I saw with my own eyes how the S&P 500 Index reached down into the single digits on the stochastics! I knew from hard experience and observation that those readings were unsustainable. It was a good time to buy.
3. Resistance on the S&P 500 Index was @ 1129 on August 9. This number is very, very important to me. I think about this number alot (more than I care to admit/smile.) There is an important principle in investing that former resistance turns into future support. In other ways, there are a group of investors and traders back @ 1129 who missed the boat. They misjudged how strong the rally off of the August 27 bottom @1039.74 would be. Now, they have had to sit out a powerful rally up to the 1227 level for 2 1/2 months. They are eager to get on board the train. They may also be investors and traders who went short the S&P 500 @ 1129. Bad mistake! These people are eager to cover and cut their losses and get out even.
So, there are communities of investors and traders with a vested interest in what the S&P does @ 1129. We are concerned as well because this area may provide a good time to buy. We simply have to see if the market reaches down to this area and whether the other signals (RSI readings, Stochastics reading) support a buy decision.
The hardest part about investing is having the patience and discipline to wait for a good time to buy. Its like staking prey, according to trader Mark Weinstein. Its like stalking prey.
Conclusion: Sentiment has turned in the market. What goes up must come down. Our job now is to have the patience and discipline to wait for a good time to buy. No one can predict the future. But we know that a good time to buy will have a certain character. We are waiting for fear. As Baron Rothschild once said, we are waiting for the proverbial blood to run in the streets.
Then, we buy.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Market Conditions This Week --
1. The market closed down for the week. We had a true selling day (more than 1% down) on every single index except for the Dow Jones Industrial Average. According to trader Gary Smith, true selling days are good times to be out of the market. I agree. Selling pressure tends to feed upon itself. Fear is a more powerful emotion than greed. Every investor and trader who bought the euphoria of the Federal Reserve's Quantitative Easing (QE2) when the Standard & Poors 500 Index was above 1200 is now underwater. They are hoping that the market will not correct further. I fear they will have a few more days (weeks?) of worry.
2. The S&P 500 Index closed below its 13-day moving average for the first time since August. This daily close below the 13-day moving average is a bearish development. It suggests that the trend has changed from up to down for now. The probabilities favor lower prices, not higher prices, for the moment.
3. On a weekly chart, the S&P 500 Index closed down. Probabilities again suggest that this down week will be followed by another down week in the marketplace.
4. I got a wonderful sell signal yesterday at the close of trading. I know that this signal is not simple but bear with me. (I know you're watching, Barbara/smile). There are smart investors and traders. There are dumb investors and traders. Smart money tends to be right more often than not. Maybe, they are better connected or have deeper pockets or whatever. But they tend to get it right. Dumb money tends to get it wrong. You can make money doing the opposite of what dumb money does.
Smart money is composed of institutions, hedge funds, and wealthy individuals like George Soros and John Paulson. Dumb money is the retail guy who watches Jim Cramer on CNBC and decides to buy gold because Jim said so. (not a smart idea!) Dumb money reads an article in the Wall Street Journal and won't touch an investment because the reporter said so. (Not a smart idea! You can make money by fading or going against the media.)
We want to be like smart money, not dumb money.
Now, how do we track the moves of dumb money? How do we pick up the trail of dumb money and go the other way? One tool is options activity on the index. Studies have shown that dumb money gambles on options and that dumb money loses like clockwork to smart money, particularly at extremes. So, when dumb money is absolutely convinced that the market is going higher and they rush out to buy calls, then it is good bet that the market will do the opposite and head lower.
This contrarian signal flashed yesterday between noon and 1:00 p.m., the last hour of the trading day. I could not believe my eyes when I saw how bullish people were on options. According to my chart, people were buying calls (bets that the market will go higher) at the highest rate since June 28. What happened after June 28? The market dropped 70 points within 3 days. So, yesterday, I felt very confident that the market would be dropping, not rising, for a while.
When Will It Be A Good Time to Buy?
I am looking for several factors to come together. These factors are as follows:
1. The Relative Strenght Index (RSI) needs to fall into the 30ish level on a daily basis. Today, the RSI closed in the 50s. That's better than last week but not good enough for me to place that e-mail to Barbara.
2. The stochastics needs to drop to the oversold level. The stochastics is still hanging up around 79. That's not a good time to buy. A good time to buy would be at least the 20ish level. During the last week in August, I saw with my own eyes how the S&P 500 Index reached down into the single digits on the stochastics! I knew from hard experience and observation that those readings were unsustainable. It was a good time to buy.
3. Resistance on the S&P 500 Index was @ 1129 on August 9. This number is very, very important to me. I think about this number alot (more than I care to admit/smile.) There is an important principle in investing that former resistance turns into future support. In other ways, there are a group of investors and traders back @ 1129 who missed the boat. They misjudged how strong the rally off of the August 27 bottom @1039.74 would be. Now, they have had to sit out a powerful rally up to the 1227 level for 2 1/2 months. They are eager to get on board the train. They may also be investors and traders who went short the S&P 500 @ 1129. Bad mistake! These people are eager to cover and cut their losses and get out even.
So, there are communities of investors and traders with a vested interest in what the S&P does @ 1129. We are concerned as well because this area may provide a good time to buy. We simply have to see if the market reaches down to this area and whether the other signals (RSI readings, Stochastics reading) support a buy decision.
The hardest part about investing is having the patience and discipline to wait for a good time to buy. Its like staking prey, according to trader Mark Weinstein. Its like stalking prey.
Conclusion: Sentiment has turned in the market. What goes up must come down. Our job now is to have the patience and discipline to wait for a good time to buy. No one can predict the future. But we know that a good time to buy will have a certain character. We are waiting for fear. As Baron Rothschild once said, we are waiting for the proverbial blood to run in the streets.
Then, we buy.
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Saturday, November 6, 2010
What a Week!
This week, the market blew through resistance @ 1219 and set a new high for the year. The market's reaction to the Federal Reserve announcement was very bullish. So, I am a Bull for now.
Is this a good time to buy? No.
Even if the character of the market has changed, it doesn't pay to just buy any old time. Prices are high right now. People are excited. It is always a better move to Buy Low, not Buy High. Prices are most tempting when prices are high. But how many times have retail investors purchased a stock because of excitement and then watch the prices drift lower and drift lower?
What are good times to buy and add to the C Fund?
First, you want to buy fear. You want a situation when investors are fearful and on edge about the future. That is not the case now. Euphoria reigns.
Second, you want to buy at support levels. In other words, find a level on the S&P 500 Index where the price made a previous low and that low held. Why? Its about psychology. The investors and traders at the greatest risk are those who bought the breakout of the S&P above 1219, the former high for the year. I think prices are going higher but there is no demonstrated support yet @ 1219. 1219 must be tested. Next week will be important in this regard. The low this week was 1177. 1177 seems like a natural support for me. Should the S&P 500 drift down to 1177, you can count on two forces. Everyone who bought in a rush this week will be underwater and experiencing anxiety and fear. You will also have the opposing force of patient investors and traders waiting to ride the next move up. Waiting for support allows us to benefit from these two opposing forces.
Third,it doesn't pay over the long run to buy when technical indicators are crazed. The Relative Strength Index (Index) closed at around 78. That's abnormal for an entire index and not sustainable over the long run. The volume this week was not strong enough to support a breakout. According to famous investor William O'Neil, a breakout above resistance should be supported by at least 50% more volume than the previous 50-day moving average in volume. I ran some calculations Thursday night. I was shocked to find that the volume was paltry despite appearances on the surface.
In summary, I am a Bull now. The market is telling me that prices will be heading higher. The market is also telling me that I would be sorry if I bought now. The temptation is oh so great. That's greed. Let's put greed aside. Patience and discipline are better allies. Next week is a new week. Mutual Fund Monday should be up. But the rest of the week will be more instructive.
Prices never go to the moon. Nor do they drop to the center of the earth. We buy when folks fear the drop to the center of the earth.
Wink
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Is this a good time to buy? No.
Even if the character of the market has changed, it doesn't pay to just buy any old time. Prices are high right now. People are excited. It is always a better move to Buy Low, not Buy High. Prices are most tempting when prices are high. But how many times have retail investors purchased a stock because of excitement and then watch the prices drift lower and drift lower?
What are good times to buy and add to the C Fund?
First, you want to buy fear. You want a situation when investors are fearful and on edge about the future. That is not the case now. Euphoria reigns.
Second, you want to buy at support levels. In other words, find a level on the S&P 500 Index where the price made a previous low and that low held. Why? Its about psychology. The investors and traders at the greatest risk are those who bought the breakout of the S&P above 1219, the former high for the year. I think prices are going higher but there is no demonstrated support yet @ 1219. 1219 must be tested. Next week will be important in this regard. The low this week was 1177. 1177 seems like a natural support for me. Should the S&P 500 drift down to 1177, you can count on two forces. Everyone who bought in a rush this week will be underwater and experiencing anxiety and fear. You will also have the opposing force of patient investors and traders waiting to ride the next move up. Waiting for support allows us to benefit from these two opposing forces.
Third,it doesn't pay over the long run to buy when technical indicators are crazed. The Relative Strength Index (Index) closed at around 78. That's abnormal for an entire index and not sustainable over the long run. The volume this week was not strong enough to support a breakout. According to famous investor William O'Neil, a breakout above resistance should be supported by at least 50% more volume than the previous 50-day moving average in volume. I ran some calculations Thursday night. I was shocked to find that the volume was paltry despite appearances on the surface.
In summary, I am a Bull now. The market is telling me that prices will be heading higher. The market is also telling me that I would be sorry if I bought now. The temptation is oh so great. That's greed. Let's put greed aside. Patience and discipline are better allies. Next week is a new week. Mutual Fund Monday should be up. But the rest of the week will be more instructive.
Prices never go to the moon. Nor do they drop to the center of the earth. We buy when folks fear the drop to the center of the earth.
Wink
Standard Disclaimers
1. This blog is for educational purposes only.
2. None of the individuals associated with the Las Vegas TSP Investment Club are registered financial advisors.
3. This blog is not an offer to the public to buy or sell any stocks, options, commodities or futures.
4. You are encouraged to do your own due diligence and to consult with a professional financial advisor before making any investment decision.
5. This blog cannot take responsibility for the results of your investment and trading decisions.
Subscribe to:
Posts (Atom)