[This posting is my final interview with fictional reporter "Shelby Aldrich."]
Shelby: Good morning, Wink.
Wink: Hi, Shelby.
Shelby: The market flipped on Wednesday, November 30. Let's spend our final session talking about the market from now until the end of the year. Our readers are more interested in what's going to happen right now for understandable reasons.
Wink: I agree. We are in an opportunity moment. Anyone interested in my past decisions can read my blog.
Shelby: Now, Wink. I'm pulling my hair out this week. Remember your posting about Contrary Opinion and the Fisherman?
Wink: Of course.
Shelby: Well, what happened? Is the Fisherman right after all?
Wink: (Assuming my best Jim Rogers impersonation) Well,it depends, Shelby. Where was the value in real time? Where is the hysteria in real time? One of my favorite blog guys is Corey Rosenbloom. I like Rosenbloom because he lays out the case for making money in clear Elliott Wave terms.
Shelby: And what is the Elliott Wave approach again?
Wink: Sure. Markets don't go up in a straight line (although it might feel like it sometimes/LOL). There is a five wave pattern. The market goes up and everyone is caught off guard. That is Wave I. Then, the market corrects, reacts or consolidates. That is Wave II. If the market is really strong, Wave II will not react much at all. It will just be a sideways consolidation. This is the prime opportunity to buy! This is your well defined opportunity. Why? Because another wave, Wave III, will follow Wave II. This is where you make your money in powerful terms. Then, there is Wave IV. Wave IV will likely be a correction or reaction. Then, there is a final Wave V higher. This is the final high. You must sell and get out of the market at this point. Have no regrets about selling. The view will be sunny and bright but you must get out. No hesitation.
Shelby: But I read your blog on December 2. You were looking for a reaction to 1192.
Wink: Yes, I was. And if the market had reacted to 1192, that would have been the buy of the month. However, when the character of the market has changed from sideways to up, then you must read your dashboard and make your best judgment in real time. You take the pulse of the market by reviewing the Trin, the market's reaction to bad news, whether its the first hour of the trading day or the last hour of the trading day, etc. There is an artistry to the process. You're looking at your indicators and digging into your experience database. I'm asking myself if I have seen this movie before. I'm remaining flexible because I have learned that being flexible is more important than being right.
Let me repeat that. Being flexible is more important than being right.
Shelby: But how do you know when to stay the course and when to be flexible? Throughout the month of November, you made the case for lower prices. And from November 5 to November 30 you were right. If I were preparing a brief, for example, for the Bearish case, I would cite many of the points you raised in your blog: too many bullish investors, contrary opinion, stochastic reading failing to breach the oversold line, etc. Aren't you afraid that your original analysis was right?
Wink: The master trader Ed Sekoyta said that you must know the rules. And you must know when to break the rules. Elliott Waves keep you flexible and on the right side of the market. It also helps that I have seen past examples of a chart pattern that fails. Bulkowski (I can't recall his first name right now) has done important research in this regard. The most powerful moves happen when the market goes up contrary to expectations. So, when I saw the price action on December 1, I knew from experience, observation, and research that I was looking at a busted chart pattern in real time. These conditions are real money makers because the market tends to go a ways in the opposite direction of the market's expectation.
Shelby: Is that a plug for Contrary Opinion?
Wink: Yes. Contrary Opinion on November 30 was to be long the market. And Contrary Opinion has been proven right.
Shelby: Let's return to the La Jolla Fisherman. Was the fisherman a contrarian on Thanksgiving morning?
Wink: No, he was not. His views are part of the dominant bullish sentiment.
Shelby: But he's making money right now because he was right.
Wink: But for how long? I would always say to Joel in my office that you had to look at the road ahead, not the rear view mirror.
Shelby: And what do you see up ahead for the rest of December?
Wink: I see emotion. I see pitched battles between fear and greed. Did you see Art Hogan (a major money manager)yesterday morning on CNBC? He was emotional in my opinion. You could hear it in his voice. He was urging investors to get out of bonds and move into equities. Maybe, he's long on the market. Maybe, he's short on the market and expecting lower prices. Maybe, Hogan is long the market and trying to sell out his positions. Maybe, he's behind in his performance for the year and is chasing the market. I don't know.
But what I do know is that one of the top professional money managers in the country, in my humble opinion, had emotion in his voice yesterday morning. That got my attention.
Shelby: How so?
Wink:There are three ways to think about the market this weekend. The market can keep going up into January. We will have limited reactions and corrections. The Santa Claus rally will be long and strong. My Fisherman will be vindicated. That's way number one. The market could drop like a stone Monday morning and continue to drop. Remember that I believe there is strong resistance @ 1257. This is a multi year level of resistance, not the garden variety resistance. This scenario is the sum of all fears for buy and hold investors. That's way number two.
I don't think life is that easy. Life is not that easy.
Then, there's a third more complex way for things to develop. This way would frustrate both bulls and bears. The market could keep going up into Mutual Fund Monday on December 13. I can see this because retail investors will read the newspapers this weekend and get very excited about the market. Their buying pressure will push the market higher up to the 1272 level. The following weekend, the last mom and pop will drop their coin into the slot machine. I'm thinking that will raise the market to the 1289 level on Monday morning, December 13. At that point, I'm out.
Shelby: Of the C Fund?
Wink: That's correct. Out of all stocks.
Now, the Fisherman is very, very happy at 1289. He is counting his money. His last thought is of selling. He has projected past gains into the future. We all do it. I do it. But understanding waves and cycles protects you from warm and fuzzy feelings at the top.
Anyway, the Fisherman's last thought will be of selling. My first thought will be of selling.
The market then drops of its own weight into December 22. This drop produces panic among Fishermen worldwide/smile. What happened to the Santa Claus rally? Is this just a normal reaction?
The market then confounds the bears by bouncing into December 31 on light volume.
Shelby: I'm guessing you favor scenario number 3.
Wink: Life is not simple. If it were, everyone would be rich. My gut tells me that,at these lofty levels, no one will be right. Just follow the trend. Have the patience to wait for the well-defined situation. Sell hysteria. Repeat as necessary.
Shelby: Any final thoughts this morning?
Wink: These are exciting, and perilous, times in the market. Back in August, one could kick back and let the market do its thing. That was Wave III. We are now in Wave V up. Profits will be quick but you must be nimble as greed remains your greatest enemy.
I think long term buy and holders who want to retire before 2012 should just move 100% into the G Fund when the market hits 1272. You can then re-assess market conditions in 2011. Things are crazy now because professional money managers have incentives to jam the market higher. But the market is most at risk of dropping when its being manipulated. Be profitable. Be prudent. Be cautious.
Shelby: Thank you Wink for your insights over the past three weeks.
Wink: You're welcome. And I want to thank Barbara and the gang for their support over the years. And Joel, throw away that rear view mirror! (smile)
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Hi, You should have an attorney! Flexible is one way of describing it. Have been following for a short time, must say the jury is still out, but you do have my attention. Thank You, C.K.
ReplyDeleteThanks. For what its worth, the market seems to perform best when it confounds the most investors and traders. It only makes sense since fear is a more powerful force than greed. Now, when a critical mass of people are positioned for "x" and "y" happens, that sets up an explosive move in the opposite direction. The shorts have to cover rapidly and greedy longs (like me/smile) pile on. I got the idea from Bulkowski who has studied busted chart patterns for some time.
ReplyDeletePeople like Bruce Kovner, Marty Schwartz, Michael Marcus, Gary Smith, Bulkowski and others have all emphasized the importance of flexibility. Certainly, Ed Seykota has underscored the importance of knowing the rules and knowing when to beak the rules. This gem fits nicely into the busted chart pattern opportunity.
All the standard disclaimers are out there. This blog is for educational purposes only. I think that regular investors can learn from patterns, rules, and waves that occur over and over again in the market. Its important to not be wedded to a single outcome or stance. There are times to be bullish There are times to be bearish. Now is a time to be bullish.
Everyone has to make their own calculation and perform their own due diligence. The benefit of this blog is that the reader can see someone in real time with years of experience making judgment calls. That's a special learning platform that is not always available for the average person. It is comparable to being inside the mind of an artist as he or she makes countless choices on canvas.
Thanks again for your comment. I study the market alot. I react to what the market is doing. No one has the answer all the time. But through experience and observation, discipline and the clearly defined situation, you can come close to that place where tops are anticipated and market crashes are avoided.
This blog is offered in that spirit.
Q: What are your thoughts on the market this evening?
Charles:
ReplyDeleteQ: Are you the fisherman? Just wondering.
Wink
Hi, Thank You for your kind reply, My post was a poor and obvious failed attempt at humor. Certainly I have been the fisherman, but after thiry five years of amateur investing, CONFOUNDED is what would best describe me. I too spend much time considering the market but must admit I have made a poor analyst. So please accept my apology and my gratitude. As to my thoughts for the market, 100% in the TSP (S) fund.
ReplyDeleteCharles, That's cool. It is interesting to me how the worlds of analysis and making money co-exist. You need some analysis to make money, however, too much analysis results in paralysis/smile. (That's not an original phrase but it works.)
ReplyDeleteCONFOUNDED might be the subject of my next posting. As you can see, I was annoyed when the market tanked in 2008. Just a little bit of technical analysis would have saved alot of people alot of money. Just a little bit.
My problem is that I am so steeped in the knowledge base that I have forgotten more than I have learned over the years/smile. For example, the High and Tight Bull Flag (Bulkowski). Obviously, the three past trading days have produced a raging Bull Flag. Higher prices are ahead! But my first thought was of the busted chart pattern, an equally valid signal. But in the heat of the moment (closing bell on Wednesday, December 1, 2010), why didn't I immediately think "High and Tight Bull Flag" rather than a Busted Chart Pattern? It's an interesting question that goes to retrieval of experience in real time.
Anyway, my dear friend Barbara couldn't care less about these academic questions/smile. She just wants to make money for her retirement. I think I can do that better than she could as a buy and hold investor.
So (wisely), Barbara has learned to ignore my lectures and focus on my actions. Is Wink moving 100% into the C Fund? If so, then I am. Is Wink moving 100% into the G Fund? If so, then I am. Over the years, Barbara has made money by following my lead.
So, the analysis keeps me sharp. My actions make me money!
All the best, Charles. You have inspired me to draft an essay about being CONFOUNDED.
Wink