Copy + Paste:

Most of us make the same mistake with our money over and over again: We buy high out of greed and sell low out of fear, despite knowing on an intellectual level that it is a very bad idea.

The easiest way to see this behavior in action is to watch money flow in and out of mutual funds. Let’s go back to early 2000. The dot-com market had reached a fevered pitch. People were using their home equity to buy tech stocks right after the NASDAQ had a single year return of better than 80 percent!

Then, in January 2000, investors put close to $44 billion dollars into stock mutual funds, according to the Investment Company Institute, shattering the previous one-month record of $28.5 billion. We all know the story from there. Money continued to pour into stock funds, breaking records for February and March and pushing the NASDAQ to 5,000, only to lose half its value by October 2002.

This gets worse. That same October (at the low for the cycle), as investors were selling stocks as fast as they could, where was all the money going? Into bond funds, at a time when bond prices were near record highs.

Think about this pattern for a minute. At the top of the market we can’t buy fast enough. About three years later at the bottom, we can’t sell fast enough. And we repeat that over and over until we’re broke. No wonder most people are unsatisfied with their investing experience.

Now we might be doing it again. Over the last year, investors have put an estimated $506 billion into mutual funds, but $409 billion of that went into bond funds. Let me repeat that: Of the total of over $506 billion, $409 billion went into bond funds.

No one is sure how this will turn out. But with interest rates again near record lows (meaning bond prices are near record highs), you could end up losing money in that bond fund you bought for the purpose of making sure you don’t lose money.

To be clear, the solution here is not to sell your bond funds. It is not to buy stock funds. The point is to recognize that, in aggregate, investors tend to be very bad at timing the market.

It makes far more sense to ignore what the crowd is doing and base your investment decisions on what you need to reach your goals, then stick with the plan despite the fear or greed you may feel. To do otherwise would be following a pattern that has proven to be extraordinarily painful.

Link: Carl Richards

Links:
Watership Down
Monkey Business
Christie’s

NEW YORK (AP) – The stock market had one of its most turbulent days in history as the Dow Jones industrials fell to a loss of almost 1,000 points in less than half an hour on fears that Greece’s debt problems could halt the global economic recovery.

The market’s plunge came less than 90 minutes before the end of trading. The Dow’s drop was its largest loss ever during the course of a trading day, but it recovered to a loss of 347 at the close. All the major indexes lost more than 3 percent.

There were reports that the sudden drop was caused by a trader who mistyped an order to sell a large block of stock. The drop in that stock’s price was enough to trigger “sell” orders across the market.

For fun….

Accenture’s stock at one point traded down to a penny on this computer glitch. Volume was only about 27.5K. So say that one person bought the entire lot at for $275 and held on to them. In a minute, that person turned his or her $275 investment into $1.1 million!

Unfortunately for that person, NASDAQ announced that they would be cancelling orders that were 60% above and below market on consolidated trade price from 2:40 to 3:00. But ah, to dream!

….well, at least good enough for a trade..

Around 11:30am (Eastern time), the stock started to move up. I watched it for a good while to confirm upward price action. Eventually, I started a position at around 12:20pm (Eastern time) – blue arrow.

On this 15-minute chart, which shows the price activity for the past week, you can see a bullish hammer right before the point I bought the stock; that was another good sign that the stock was moving in the right direction.

This particular trade is going to be a swing play, where I’m looking to hold onto this stock for at least a few days or so. Ultimately, I’m looking for an island reversal (where price will jump back to the level prior to the sell-off)  or to slowly fill the gap (where the price covers the empty space). In any case, my plan is to start selling at the point of the red arrow. I may look to increase my position size if the stock hovers above the horizontal, solid white line for a bit.

Cheers!

With that said, I’m looking to restart another position in $RIG…. not right away, but soon..

Anyways, here’s a pretty cool graphic showing the current problem, and how BP plans to stop the oil leak.

Link: What’s Going on Beneath the Sea

Link: Borowitz Report

Copy + Paste from Indiepulp:

He accepted the job because it would be like doing the 1929 issue of the magazine, and he filled the image with tons of satirical imagery, like the U.S. [Treasury] being raided by Wall Street, China dumping money into the ocean, homes being flooded, homes being foreclosed, and CEOs dancing a jig while society devolves into chaos.

It’s too bad that the folks at Fortune don’t have a sense of humor.

Links:
Indiepulp
Link to a giganormous jpeg of the cover for downloading pleasure

Interesting to me (probably way more so than to anyone else) is how beautifully Fibonacci Retracement Lines touched certain candlesticks (the christmas-colored verticle lines). You can see, by using the intraday high and low as a base, this stock was trading between 38.2% and 23.6% mid-day. Yep, I know…. more interesting to me.

So, if you haven’t read the news, basically, Golden Slacks created, marketed, and sold knowingly-crappy investments to other parties. What is worse is that at the same time, they bet against those same investmets. They made moolah when the investments became worthless. That’s it in a nutshell. If you want details, you can read this NY Times article.

Bet Against the American Dream from Alexander Hotz on Vimeo.

Links:
A Show Tune About a Hedge Fund: ‘Bet Against The American Dream’
The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going, by Jesse Eisinger and Jake Bernstein, ProPublica, 5/9/10

Liar’s Poker by Michael Lewis
The Big Short: Inside the Doomsday Machine by Michael Lewis
Outliers: The Story of Success by Malcom Gladwell
A High Wind in Jamaica by Richard Hughes

..and that’s my ring that I wear everyday, right middle finger.

Get the books off of Amazon for cheap. No tax (at least in California) and Free shipping (spend over $25).

What a month!

With all of the current chatter on (unlikely) financial regulation, (likely) Greek bailout, and potential economic recovery in 2010, FAS is a great ticker to exploit. It’s basically a basket of bank stocks on steroids.

Anyways, in the first week of February, FAS failed to break above the 20 day, Exp. Moving Avg (red line). My interest peaked when it hit the lower Bollinger band (lower green line). The previous day saw an ugly, ugly down move (long red bar). The sell off was overdone, and brought it into Oversold territory (Stochastics indicator – bottom set of black/red lines). With a relatively low risk, I started buying.

Into the second week of February, FAS continued to languish and then consolidated in the Oversold area. I bought more and more trying to lower my cost average (price paid per share) to the point I was comfortable with my position.

My big picture plan was to trade and extract the price difference between the Bollinger Bands (solid squigly green lines) – buy at the lower green band and sell at the upper green band.

Along the way, we witnessed some good battles between the bears and the bulls…

Beginning on February 16th, the bulls came out with much force, and gapped up the stock, which decidedly turned the MACD indicator up (black line criss crossed the red line). 

Throughout February, the bears and the bulls had good fights between the 50 day EMA (squigly blue line) and the 20 day EMA (squigly red line). For a while, every time the bulls tried pushing FAS over the blue line, the bears came back to push it towards the red line. We were in grid lock until the last trading day of February and the first day of March, when the bulls were successful in pushing above the blue line and led their march towards the upper green line.

Around this time, FAS was in the Overbought Stochastics area (which is a relatively safe time to sell), but with some seriously good momentum. Since FAS had not hit the upper green line like planned, I was not yet ready to sell, so I started paying more attention to the Relative Strength Index (RSI). In the recent past, FAS topped out (orange circle) when the RSI reached the upper line (powder blue circle)….

Not exactly perfect, but check out what happened yesterday. FAS not only got really close to the upper RSI line (powder blue circle), it also hit the upper Bollinger Band (squigly green line), and per the original plan, I dumped all of my FAS shares. It is possible that FAS could go higher in the next few days, but I think the bears will be coming back soon to take it down to at least the 50 day EMA (squigly blue line). If the bulls can hold it there, I will be back in the game.

Anyways, after commissions, I yielded + 27.8%, which is damn good for me! It was a good swing trade.

Even Stocktwits gave me a shout out…

Cheers!

Copy + Paste from Bloomberg:

To: Lloyd Blankfein
Re: Winning the Public Relations War

Six months ago, with what I mistakenly took to be your tacit approval, I attempted to address ordinary Americans, almost as equals. (read it here)

They envied and resented our firm; I sought merely to correct their misunderstandings about Goldman Sachs and send them on their way, so that they might more briskly resume their quest for gainful employment.

In hindsight, I misjudged their ability to see the reality of their situation, and of ours. At the time I accepted your strong suggestion that I never again try to speak directly to mortals — or, as you referred to them, “The Morts.”

Now our predicament is suddenly more dire. Ordinary Americans wish to control not just our pay but our core values: We at Goldman have long stood for the right of every prop group to trade against its firm’s customers. If we abdicate that right, who are we, deep down?

In just the past few days many of us on the Goldman trading floor have wrestled with that question. We believe that rather than re-think our core values we should re-think our relations with the American public.

Hence this memo. Your recent non-verbal signals — your habit of passing directly behind my trading desk en route to the elevators, your selection of the urinal adjacent to my own — convince me that you continue to value my thoughts.

As it happens, I have recently conducted a thorough study of the culture of ordinary Americans. Please take the following ideas in the spirit in which they are intended: a team spirit. There is no “I” in Goldman Sachs, or in me. Nor will there ever be.

Idea No. 1: Give the Morts a small, perhaps even illusory, stake in our upside.

We have all seen the effects on the hearts and minds of our government officials and business leaders when they sense that our prosperity might one day be theirs. In the past year Warren Buffett has gone from being a leading critic of Wall Street to the greatest defender of Wall Street bailouts. Him we needed to pay hard cash — most accept less.

That’s perhaps the most curious trait of these ordinary Americans: you don’t need to give them any money to lead them to hope that you might. Take Larry Summers, for instance. We both know that we would never actually employ even this surprisingly intelligent Mort in anything but the most humiliatingly ceremonial role. But he doesn’t know that — and thus he has done so much for us.

Ordinary Americans

Obviously we can never employ large numbers of ordinary Americans. But if you stop for a moment and think like a Mort you will realize that we don’t need to. We need only harness two more of his many irrational traits: overconfidence, plus a willingness to ignore the odds — as evidenced by everything from his interest in the Lotto, to his belief in what he calls “love.”

Each year, for example, Goldman Sachs might announce a grand national competition, much like “American Idol.” Finalists will appear before a national television audience to be judged by a panel of three rather ordinary looking Goldman executives. On stage they will perform various Wall Street tricks: negotiating with Tim Geithner, lobbying the Senate Banking Committee, designing securities that blow up, selling bonds to Germans, etc.

The winner receives a job at Goldman Sachs. Which brings me to…

Big Idea No. 2: Give Morts the illusion that they have been admitted into our realm, and can now truly see who we are and what we do.

The winner of our national competition, for instance, might easily be attached to a small Web-enabled, head-top photographic device. Thus equipped he would become the eyes and ears of Morts everywhere. As he stumbles around our offices, attempting to understand that which is beyond his comprehension, he will no doubt create what ordinary Americans refer to as “comedy.” Morts love to laugh, to the point where they interpret our most straightforward remarks as occasions for humor. As we do not respond to comedy it will not disrupt the flow of our business, and we can encourage it.

Let me say here that I, like every other Goldman trader, have admired the lengths to which you have gone to resemble an ordinary, non-threatening American. Your conscious decision to forgo muscle definition, along with your persistent hairlessness, has been nothing less than enlightened public relations.

Only So Much

But there is only so much one human being can do, even when that being is more than human. Our employees along this new interface with Mort culture should reinforce your subliminal message. They should be “normal looking” and trained to mimic the Mort’s strange, emotional responses to external stimuli.

But the main purpose of any new personal contact with individual Morts is to address what is perhaps our biggest problem: the new belief of ordinary Americans that they now, finally, understand what we do. That our work should be as simple as “facilitating productive enterprise,” or “allocating capital.” They have lost their former awe; we must restore it.

Notice that they do not begrudge professional basketball players their vast salaries: they can see that those players are so unlike themselves as to constitute a different species. As our differences lie below the surface, they are harder for the Morts to perceive. Closer proximity to us, and our complexity, will solve this problem. They will soon weary of trying to comprehend what we do, and go looking for another outlet for their personal frustrations. Which brings me to my final thought…

Big Thought No. 3: Remind the Morts of their more natural resentments.

At the moment they mistrust us, perhaps even despise us, but their feelings toward us are new and thus shallow. They have had 30 years of training in hating their own government (the ultimate example of Mort irrationality). We must remind Morts that we share a common enemy: them.

Link: Goldman Trader Shares Three Big Ideas With Lloyd: Michael Lewis, Bloomberg, 1/29/2010.

Even without reading the news, Friday’s price action was predicted 2 days earlier.

Fluroescent Green Line has me interested again.

Historically, the first few trading days of January have been among the strongest for stock performance, because this is when individuals and pension plans add big chunks of new money to retirement accounts. Whether people follow their normal pattern and pump money into stocks in January can be a sign of the market’s prospects for the coming weeks, and even for the entire year.

If stocks rise in January, they often finish the year strongly. If stocks are weak during this normally propitious time, stocks tend to do poorly…

…In years when the Dow has risen in the first month of the year, the median rise for the rest of the year is 10.4%. In years when the Dow has fallen, the median rise for the next 11 months is just 0.28%.

Because of the inflows of new cash, January has seen stock advances 62% of the time since 1900, well above the average of 57% for all months.

In fact, November, December and January typically are the market’s strongest three-month stretch, as investors position themselves for the new year. Early December often is soft, possibly because tax-conscious investors are selling losing stocks to generate tax losses that they can balance against taxable gains in other stocks. If things are on a normal footing, that weakness should be over by late December, and stocks should be rising ahead of a strong January…

Link:
As Goes January, So Goes the Year?, E.S. Browning, Wall Street Journal, 1/4/2010. (Read Full Article)

Excerpts Copy + Paste:

Below are seven effects… that HFT has had on U.S. equity markets. Each is then followed with a suggestion or two about how we can adapt.

1. YOU WILL GET STOPPED OUT OF MORE POSITIONS

Average daily volume has skyrocketed 164 percent since 2005, according to NYSE data. Up to 73 percent of this volume is handled by algorithmic trading programs. One unpleasant side effect is that stocks touch more price points and may cause you to be stopped out of excellent positions.

Adapt: Use better stops…

[on a stock that breaks support]…Algo programs buy almost every new low because they bet that short-term shorts will get trapped and have to cover higher.

Adapt: Learn how to read the tape. Few retail and independent traders have developed the trading skills to read the tape. Reading the tape is the craft of watching Level II quotes and being able to determine a stock’s direction based on order flow. Although use of charts and technical analysis are important, they will only take you so far. It is harder to read the tape because of HFT, but it is a critical skill to develop nonetheless.

2. PAST PROVEN TRADING SETUPS WILL NO LONGER WORK

Certain trading plays are less effective now that algorithms exist. For example, it was once a high-percentage play to buy a stock when it broke out, making a significant new high. You would get long and play the momentum to the upside… Today, it rarely works. Meet the sell-the-new-high program turned on by high-frequency traders with more money and bullying power than you.

Lately, when a stock makes an important new high, it will inch even higher until a seller finally refuses to lift for higher ground. Immediately, the sell-the-new-high program will sell much lower than you bought. The longs are trapped and squeezed out of their positions.

Adapt: Change your entries. Shorting a new intraday low for a stock in a downtrend almost never works now, perhaps only if the Volatility Index (VIX) clears 45 again. So you must make the adjustment to short such a stock into an up move. But these stocks also tend to trade just a little higher than you would expect because so many more market participants are playing games.

 3. INSTITUTIONAL BUYING AND SELLING IS BETTER

When I began trading and there was a big buy order, say 50,000 shares, the buyer just cleared the offers until the order was filled. Today, we see much better buying.

Almost all big hedge funds or mutual funds possess passive algorithmic programs that can slowly fill an order, 100 shares at a time, without making any noise. The result is a slower up move.

And after an uptrend has been created, these buyers may just turn off their algorithms, let a stock drop and then restart the passive algorithms. Because of this, momentum trading has become less profitable at times and more difficult. (Again, a high VIX could change this.)

Adapt: Focus on buying into pullbacks. Wait for strong stocks—those that are trending up on an intraday basis—to pull back before you enter positions.

 4. FALSE BUY AND SELL SIGNALS WILL BE CREATED

False buy and sell signals may lead you to place trades that are nothing more than programs gone wild. On select days, HFT programs can go at each other like punks in a bar fight. A stock may triple its volume on a given day, close above previous resistance and signal a long to you. But remember, this may just be the bots doing their thing.

Adapt: Watch the Level II quotes to confirm information. Before entering a position, make sure you see real buyers and sellers on the tape.

 5. IT CAN BE DIFFICULT TO GET STOCKS AT CERTAIN PRICES

As high-frequency trading programs chisel your bids and offers, you have to recognize the situation. See my AIG rant at the beginning of the article.

Adapt: Place your orders at the prices you want and go make a sandwich. Don’t get lured into a match you cannot win against HFTs. Play your game on your terms or sit on your hands.

6. SLIPPAGE WILL INCREASE

Slippage is greater due to HFT, which seems contradictory to all that supposed new liquidity in the market.

Say you are long 1,000 shares and seek to exit a stock if it trades below an arbitrary price of $50.50 with a stop order at $50.49. The stock touches $50.49, and you expect this to be your fill price with some slight slippage to $50.48 and $50.47. Only it isn’t. It’s 100 shares at $50.48, 100 at $50.47, 200 at $50.45, 100 at $50.43, 100 at $50.41, 200 at $50.38 and, finally, 200 shares at $50.36.

Doing the math, that is an extra $63 out of your pocket that you were not expecting. And that was just one trade!

The programs are so fast and sensitive that they drop the bids for lower prices when they sense a sell order. Where you may have exited the whole thing for no lower than $50.48 before, HFT has now made you take another trip to the ATM after its latest pickpocket.

Adapt: Reduce your manual stops and enter limit orders. Limit orders give you the control over your exit price, minimizing the likelihood of slippage.

7. MORE OF THE V

One trader at my firm always chirps the following: “Beware of the V move.”

Trading 101 teaches us that when stocks break from an important level that they should continue in the direction of the break. For example, I was trading Visa (V) in October, and $77 was an important intraday level. Visa consolidated near $77 but then broke to the downside quickly trading to $76.

The fundamental trading play is to short: If V pops after it has failed at $77, then you short. Generally, if Visa trades down to $76 and jumps to $76.50, this is an opportunity to add to a short position. I saw what I needed, and the sellers beat the buyers at $77. Visa should have trended lower.

Well not so much in this market with these programs and in this trade. As Figure 3 demonstrates, Visa went right back to the battle area of $77. The V pattern can happen from time to time, but the frequency with which it occurs in today’s market has grown. When some of the HFT strategies are done cutting each other after this technical breakdown, then the stock just goes back to where it started. It makes no sense, but it’s reality.

Adapt: Be mentally agile while you trade. When your stock is trending, consider the possibility that a V move may be about to make an unwelcome visit.

Link:
Adapt to Survive High-Frequency Trading, Mike Bellafiore, Stocks, Futures, and Options Magazine, January 2010.

The U.S. stock market is poised to end 2009 with a comeback of historic proportions, with the Dow Jones Industrial Average up 61% from its March nadir and 20% for the year.

But the history of such rebounds suggests the biggest gains may already be over, making it hard to expect a blockbuster 2010….

… Early in the rally, the gains were fueled by the realization that the financial system and the economy would escape total meltdown. But then signs of an improving economy and company earnings that consistently bettered expectations took hold, helping drive market gains.

The biggest worry for many investors is whether the rise in stocks reflects an overly optimistic view of what lies ahead for the economy.

For the stock rally to endure, investors say, the U.S. economy must avoid slipping back into recession — a “double-dip” scenario — and start adding jobs. Companies also will need to deliver earnings fueled by better sales, rather than by the aggressive cost-cutting that many undertook in 2009….

You can read the whole thing through the link below.

Last year around this time, I had a conversation with a Private Equity Director over dinner about the stock market. He was convinced that we would end this year lower. I was a bit more optimistic and convinced my argument was better than his. It looks like I win. =P

Link: 2009: Banner Year for Stocks, Joanne Slater, Wall Street Journal, 12/31/09.

Copy + Paste from Bloomberg (my highlights in blue):

Nov. 20 (Bloomberg) — Brandon Adams, who teaches behavioral finance at Harvard University’s Department of Economics, says some of the best candidates for Wall Street trading jobs are the professional card players at FullTiltPoker.com and similar Web sites.

“They’ve essentially been the survivors in the system, a very difficult system where 95 percent of people lose money,” the 30-year-old Adams, who plays at the site, said in a telephone interview. “Anyone smart enough and disciplined enough to survive that system is probably going to do very well in the trading world.”

An increasing number of hedge funds and brokerages are scrutinizing professional poker to find talent and analytical tools, according to financial recruiters including Options Group, a New York-based executive-search company. Susquehanna International Group LLP, the Bala Cynwyd, Pennsylvania-based options and equity trading company, uses poker to teach strategic thinking.

“Someone who has made a successful living as a poker player for a few years would more likely be a good trader than someone who hasn’t,” said Aaron Brown, a 53-year-old former poker pro who is now a risk manager at AQR Capital Management LLC in Greenwich, Connecticut, which oversees $23 billion. “They know to push when they have the edge and they know how not to bust, and that’s a tough combination to find.”

Skill Sets

Skills that define successful traders — rational approach toward risk, speedy decision-making under pressure, discipline and a well-trained memory — are the same ones that separate elite poker players from ones known as “dead money,” financial recruiters say.

After the World Series of Poker started in Las Vegas four months ago, Options Group recruiter Simon Satanovsky said he received a hedge-fund request for online poker players with no financial experience. He wouldn’t identify the client.

“Before, we were asking about GPA or the Math/Physics Olympiad,” Satanovsky, a former Russian national bridge champion, said in a telephone interview. “Now, we’re asking questions about poker successes.”

Satanovsky said Wall Street firms and recruiters have been paying increasing attention to poker players as job candidates since 2003, when amateur Chris Moneymaker beat hundreds of professionals to win the World Series of Poker’s No-Limit Texas Hold ‘Em main event.

The Right Game

Adams, who has taught at Harvard in Cambridge, Massachusetts, each spring since 2003, said disciplined poker players can be spotted on sites such as Full Tilt and PokerStars.com waiting for particular games, not tempted by those outside their area of expertise or financial comfort level.

Their self-control and confidence would be useful in trading where large profits are possible, the probability of going broke high and the competition formidable, he said. Adams cited as an example a trader who notices a slight imperfection in the way options are being priced, then works to come up with the proper bet per trade.

“In poker, people are used to not sitting back and waiting for the fat pitch,” Adams said. “They’re used to skirting the edge of ruin and they learn the tools of how to do that.”

Susquehanna has been using poker to teach its new traders since it was founded in 1987, said Pat McCauley, who heads the privately held firm’s trader-development program.

College Friends

The company’s founders played the game as college friends at the State University of New York-Binghamton. Susquehanna has held in-house poker tournaments to recruit traders and monitor decision-making skills.

The trainees learn to use information they see in the marketplace to infer what motivates others, helping them make better prices. It’s the same way poker pro Phil Ivey, considered among the game’s greats, makes bets based on what he sees among his opponents, McCauley said.

“What professional poker players are really good at is taking this information that’s relatively subjective, quantifying it and making it objective, and that’s what trading is about,” McCauley said.

The ability to write complex poker algorithms, which either run poker Web sites or try to beat them, will get hedge funds interested, said Todd Fahey, a recruiter who specializes in quantitative finance at New York-based Exemplar Partners.

“There have been a few guys that I’ve placed in the industry that come from the poker software side of the house,” Fahey said in a telephone interview. “Two Sigma, D.E. Shaw and any of your larger computationally-based hedge funds are going to want to see people like this.”

Two Sigma Investments LLC and D.E. Shaw Group, both based in New York, declined to comment.

Begleiter’s Try

The worlds of poker and finance often intersect. Steven Begleiter, who headed corporate strategy at Bear Stearns Cos. before its 2008 collapse, earned $1.6 million earlier this month with a sixth-place finish in the main event. Greenlight Capital LLC founder David Einhorn was 18th in 2006. The annual “Wall Street Poker Night,” benefiting Math for America, was started by billionaire James Simons, the founder of hedge-fund firm Renaissance Technologies Corp. This April, the $5,000 buy-in tournament drew 100 entrants — 90 percent from hedge funds or other Wall Street jobs — raising $1.3 million.

Even though poker players make good traders, they aren’t necessarily good with their own investments, said Adams, adding that he is almost “famously unsuccessful” as an investor.

“Poker players are lazy and they’re gossipers,” he said. “If you look at the way they trade, they tend to latch onto other people’s ideas.”

Texas Hold ‘Em

One person who has chosen poker over finance is Joe Cada, who this month outlasted Begleiter and Ivey at the main event final table. Cada, who plays the game professionally, was first among 6,494 entrants and took home the $8.55 million top prize, giving half to financial backers Cliff Josephy and Eric Haber, poker pros with Wall Street backgrounds. The Texas Hold ‘Em contest had a $10,000 entry fee.

“As a little kid, I used to watch the stock markets day in and day out,” Cada, 22, said in an interview. “My parents always thought I was going to get into banking or become a stockbroker because I was really good with math and logic, and I was obsessed with money.”

Cada said he plans to remain a poker pro. AQR’s Brown, the author of “The Poker Face of Wall Street” and a life-long player, long ago gave up the game professionally after a couple years of trying.

“I eventually decided finance was easier,” he said.

To contact the reporter on this story: Mason Levinson in New York at mlevinson@bloomberg.net.

Link: Harvard Poker Pro Says Texas Hold ‘Em Can Teach Traders to Fold, Mason Levinson, Bloomberg, 11/20/2009.

Haven’t done an equity trading post in a while. So, here is one instrument I’ve been playing with.

Disclosure: Do not currently own FAS.

Enjoy.

High-frequency trading from Marketplace on Vimeo.

Just as markets used to hang on Mr Soros’s every move, they are now keen followers of Mr Paulson. He does not see the economy reaching bottom this year and is still a net short-seller of financial firms. More encouragingly, he has started buying up bombed-out mortgage securities. The number-crunching that told him subprime-linked paper was overvalued now suggests that some previously AAA-rated tranches are a bargain. He talks of distressed debt—mortgages, leveraged loans and the debt of bankrupt firms—as a $10 trillion opportunity.

At some point, his “number-one focus” will be to provide equity to recapitalise sick but viable banks. He is already dipping his toe in: his latest vehicle, the Recovery Fund, recently took a 25% stake in IndyMac, a Californian bank that the government seized last July. But the timing of any bigger push is uncertain. Mr Paulson is acutely aware of the costs of moving too early: those who have bought into financial firms since the start of the crisis have lost, on average, 80% of their investment. Still, in these dire times it is comforting to know that such a smart investor believes there will be something worth saving.

Link:  The Long and the Short, The Economist, 3/12/09

Why? …. because it determines the profitability of a trade. Generally, trading on order flow (longer term) will yield much better gains than trading on momentum (shorter term).

What? … order flow is what the ”big money” is doing. Individual traders are best served by piggy backing on insitutional moves.

How? … by paying attention to a stock’s price action and its moving averages on the 15-minute, hourly, and daily charts. When all three are moving in the same direction, it’s due to order flow.

When the price is moving against the larger trend, it is due to momentum, and only good for a quick scalp… like today.

Looking at the S&P 500 ($SPX):

Daily Chart: Simple Moving Average is Down.

Hourly Chart: Simple Moving Average is Down.

15-minute Chart: Simple Moving Average is Up?!

Today. Using Fast Stochastics to confirm Buy and Sell activity.

Excerpt from John Murphy’s (1997? ) seminar, Applying Technical Method to Today’s Trading.

“For those of you that trade the futures markets, there are a lot of other things outside the future markets that you should be following. But, I guess my bigger message is… for those of you that aren’t in the futures markets, whether you trade them or not, the futures markets have a tremendous impact on what happens in the other markets.

I keep pointing out to the Wall Street crowd for example, that if you’re going to trade stocks, you have to know what’s happening in the futures markets, because they affect inflation, they affect interest rates, they affect stock groups, and they play a tremendously important part in the whole financial spectrum.”

Link:  John Murphy’s seminar, Applying Technical Method to Today’s Trading.
You can watch all 90-minutes of it for free at Ino.com (link above)

In this 90-minute video, veteran market analyst John Murphy explains how he looks at the markets using non- traditional methods. Using sector rotation, John will guide you through his thought process in selecting markets to trade. You will also get to see John`s intermarket analysis in action and just how commodities can put a drag or a rocket under a stock. John further explains the relationship between the U.S. Dollar and Gold prices.

Topics (and my notes) -

• John Murphy: Started off in stocks, then futures, then back to stocks.
• A Different Approach
• March Bonds: First half of 1996, prices went down. Around May, it went up. 200DMA – good indicator of trends. Generally see a weak first half and a strong second half.
• CRB Index: Commodity Index. Commodities do move in trends. In the first half of 1996, commodities were strong. However, in the second half of the year, starting in May, it was weak. This chart is the reverse of the Bonds chart. In general, commodity prices and bond prices tend to move in opposite directions. For example, commodities up, bonds down.
• Leading Indicator:  Commodities are a leading indicator (warning sign) of inflation. When commodity markets get to high in price, typically, there are concerns that the Fed will raise interest rates. If you are a bond trader or are just interested in tracking interest rates, you must know what is going on in the commodity pits. The normal relationship is that bonds and commodities should move in the opposite direction.
• Ratio Chart: Relative Strength Chart. Dividing the CRB Index by the Bond Prices. When the line goes up, commodity prices are outperforming bonds. To trade the spread, long commodities and short bonds. In May, you want to do the opposite. This ratio is a good economic indicator. When the line is moving up, economy is strengthening. It is also good for assett allocation in the stock market.
• Sector Rotation: Prior to May, when the ratio was rising, and inflation was building up, you wanted to be in commodity stocks (copper and metals). After May, when commodity prices peaked and the Fed talked about raising interest rates, want to rotate money to the financial stocks.
• Bond Influence: Generally, stocks are influenced by bonds, and do best when bond prices are rising (positive coorelation).
• Food Stocks: Corn vs. Food stocks (ADM). When price of corn drops, the price of ADM goes up.
• Copper and Metal Stocks: How individual commodity (Copper) affect whole stock groups (Metals). Very often, the stock leads the commodities, but commodities still influence the stock. These markets (copper and aluminum) are good economic indicators – they are not influenced by the weather.
• Oil Index: Transportation stocks influenced by the price of oil. Oil Index (XOI) vs. Crude Oil. The stock leads the price of the commodity. Oil stock trader has to watch the price of oil.
• Natural Gas vs Stocks: Stock prices lead the commodity price. Look at the divergence. When they stop moving in the same direction, it is a warning of some type. Natural Gas stocks go up, why not natural gas? Eventually, natural gas catches up.
• Financial Stocks: Historically, rising financial stocks are good for bonds; they lead.
• Aluminum Shares: London Aluminum. Looking at 1995 to 1996. Rising prices of Aluminum shares (S&P index, include such stocks like AA) led the price of London Aluminum (commodity). Can act as an economic indicator. If these commodities are tied to the economy, then if aluminum is going up, wouldn’t that imply economic strength, which would put upward pressure on interest rates. Higher interest rates diminish bond prices. There should also be strength in the US dollar. If US rates are moving higher relative to overseas rates, it is bullish for the dollar. So, the strength of the dollar is tied to the increase in Aluminum shares. Still, need to look how the Aluminum shares are doing relative to the overall market – look at the relative strength chart (vs. S&P 500). Draw a trend line off of the releative strength chart to identify the breakout and timing to rotate into that sector.
• Mutual Funds: There are mutual finds (like Fidelity Select Energy fund) that match sectors. Can’t buy the index, but can buy the mutual fund. You can apply technical analysis to these funds.
• Mutual Funds Gold: Fidelity Select precious metals.
• Gold/Dollar Relationship: Basic intermarket principle. When the dollar is very strong, gold is normally very weak.
• Gold vs Russell 2000 Index: The rising dollar also affects the Russell 2000 Index (small stocks). Small stocks do better when the US dollar is strong; they are primarily domestic. Large stocks have international exposure.
• John Wraps It Up: Point:  The futures market has a tremendous impact on the other markets. If you trade stocks, you must know what is going on in the futures.
• Q&A: The Visual Investor (his book) was written for the general audience.  Generally speaking, John Murphy uses the 50 (10wk) and the 200 (40wk) DMA when looking at a stock chart. When looking at Futures, uses 20 and 40DMA.

Technical analysis is a skill that improves with experience and study. Always be a student and keep learning. – John Murphy

You can read/download it here:

berkshireletter 2009

Link: http://www.berkshirehathaway.com/letters/2008ltr.pdf

Since the S&P just broke the 741 Support level (established November of last year), now is as good a time as any to say This is BAD!

According to John Murphy:

If the support level is violated, then a trend reversal from up to down is likely… As a benchmark, some chartists use a 3% penetration as a criteria for major support and resistance levels [to reverse roles]. Shorter term support and resistance areas would probably require a much smaller number, like 1%…It’s important to remember, however, that support and resistance areas only reverse roles when the market moves far enough away to convince the market participants that they have made a mistake. The farther away the market moves, the more convnced they become.

From Investopedia:

Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you’re bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support.  

Sources:
Investopedia on Support and Resistance

For those looking for a good book on Technical Analysis, I highly recommend Technical Analysis of the Financial Markets by John J. Murphy. Almost every serious trader has read this book.
If free is your thing, you can read it online using google (link).

The activity in the nation’s banks suggests that investors believe they are circling the drain, zombies needing only a blow to the head once and for all, or facing an imminent restructuring at the hands of the government. Once again, the market ended lower, and once again, the financial sector bore the brunt of the losses…

It should be noted, however, that some of the trading reflects upcoming options expiry Friday. “Today into tomorrow is a different scenario for banks because of expiration tomorrow. When they are down the whole month going into expiration, you have the continued leap down into expiration,” said Dave Rovelli, managing director of U.S. equity trading for Canaccord Adams. Options activity puts pressure on the underlying stocks as traders attempt to push an option to its strike price, possibly even by shorting the security — it’s not an accident, Mr. Rovelli noted, that these stocks hit a bottom on Nov. 20 and Nov. 21 of last year, just before expiration.

Link:
Four at Four: Banks Get Blasted — Again , David Gaffen, Wall Street Journal, 2/19/09

Triple The Upside/Downside On Financials
The Direxion Financial Bull 3X Shares ETF (NYSE:FAS) is designed to return three times the performance of the Russell 1000 Financial Services Index (“Financial Index”). The underlying financial services index is a capital weighted index of financial service providers ranging from large capitalization banks, like Wells Fargo (NYSE:WFC) and Goldman Sachs (NYSE:GS), to insurance providers, like Aflac (NYSE:AFL) and Allstate (NYSE:ALL). True to form, the FAS ETF carried out its mission and posted a negative return in slight excess of 64% for year-to-date ended February 11, while the Russell 1000 Financial Services Index declined approximately 22% over the same period. (These funds seem simple, but more goes on behind the scenes. Read Dissecting Leveraged ETF Returns to learn more.)

How Does It Work?
The FAS ETF will invest a minimum of 80% of its net assets in long positions of the individual securities that make up the Financial Index. The fund also invests in financial instruments that provide leveraged and unleveraged exposure to the Financial Index, thus, creating the ability for returns of the underlying index to be tripled. The balance of the net assets are held in money market instruments.

Link: The Joys And Pains Of 3X Returns (FAS, FAZ, TYH), Gregory Davis, 2/17/09

SIX STEPS that every trader needs to know to succeed in the markets.

Step 1: A move begins with the sponsors (smart traders) who have insider knowledge as it relates to a particular stock or market. This information will move a market up or down depending on the insiders’ information. These buyers are smart, very smart, and recognize trading/investment opportunities very early in the markup cycle.

Step 2: Days, weeks, or sometimes months after a move has started, there is a brief mention in the electronic media (radio, cable, TV) or on one of the internet chat boards that a market has moved. The public hears for the first time and begins to get interested, but does not buy.

Step 3: A blurb of information appears in print media. The move also begins getting more exposure on blogs and internet message boards. The public starts paying a little more attention, and will buy a little bit.

Step 4: Wall Street and LaSalle Street brokers go into full hype mode and hawk the market to their customers. The public begins buying in greater volume.

Step 5: A full-blown front-page article appears about the particular stock or market in one of the major financial newspapers, magazines, or financial websites. This is often six months after the fact and after a market has shown its greatest appreciation. There is often heavy public buying, even a possible frenzy, as all media, brokers, and so-called “gurus” start to tout the market.

Step 6: As step 5 gets underway, the sponsors or smart traders begin to move out of the market and take their profits off the table.

The Final Step: The move ends, the market falls, and investors lose money.

Link: Six Insider Steps that every trader needs to know, Adam Hewison.

1) Must have a Game Plan. There is a business saying, If you fail to plan, you plan to fail. I will not go into all of the planning theories here, but understand that planning is important. Before entering a single trade, I have to come up with and write down five important numbers for the ticker symbol: 

The first number is my i) Targeted Return On Investment (ROI). At minimum, I seek 10% and at most, 30%. Though it depends on the market condition, it is necessary to have a clear goal to drive towards. To get my return, I digest news headlines, study charts, and stare at technical indicators (<add link to post>) to identify suitable ii) Entry Prices and iii) Exit Price Ranges.

Not all trades will be successful. No one wins them all. If they say they do, they’re lying to you, and you should tell them they’re a dumbass. As such, it is important to not only prepare yourself to take some losses but to expect them. What iv) Percentage Loss on Investment can you endure and still sleep at night? Myself, I am comfortable with spending between 5 to 10% for the thrill of the game. To control my losses, I enter Stop Loss orders right after my intial (limit) Buy order. The v) Stop Loss Price is an ugly number, but it is necessary to calculate it when determining your entry price.

2) Must have Discipline to follow through on the Game Plan. Rather than let greed or fear dictate my trading, I focus my energy to exercise discipline and carry out the Game Plan. That means not hoping losers will rebound, but cutting my losses like I planned to. It also means locking in profits and not worrying about leaving money on the table. Normally, the Game Plan would be sound and crafted with thought and careful consideration to everything. 

3) Diversify with non-correlating assets. To some, diversifying means having a mixture of stocks, bonds, and cash equivalents. Myself, I gravitate more towards stocks. As such, diversify then means holding stocks from different sectors (i.e. Financials, Energy, Technology, Healthcare, etc.) that are not generally dependent upon each other. Note, this rule does not really apply to day traders who generally close out positions everyday. 

4) Trade in the major trends. If a stock is trending up, I go long and later sell. I will not short it. You can watch what happened to Le Chiffre in the movie, Casino Royale, to see what could happen if you do! Conversely, if a stock is trending down, Short orders are due.

5) Research always. In general, fundamental analysis becomes more important the longer one holds a position (think, investors like Warren Buffett). Technical analysis is key for day traders and swing traders (like me) who are in and out of positions many times a week. Nevertheless, it is important to be aware of what is going on in the world and of the general economic environment.

When it comes to triple leveraged ETFs, I tread with caution. However, one that keeps on tickling my pickle is FAS. It is an exchange traded fund (ETF) that seeks daily investment results of 300% of the price performance of the Financial Select Sector Index (“Financial Index”). The Fund seeks to create long positions by investing at least 80% of its net assets in the equity securities that comprise the Financial Index.

With almost everyone’s attention on the United States’ financial institutions, playing FAS is a very quick way to yield an incredible amount of money in a very short period of time, or conversely, a frightening way to wipe out wealth.

In any case, this morning, while going through my watch list, I noticed a big drop in FAS at the stock market open. Scouring all of the relevant news outlets for a brief minute, I could not find a fundamental reason why the market would sell off. So, I watched the chart for a bit, as well as the Bid and Ask orders come through. Noticing an initial support around $8, I took the plunge and started a position at $8.03. Soon after, I was in the green with a plan to make another 20%. However, as the day progressed I saw my position drop and drop and drop. A serious WTF?! moment.

With additional capital to play with, I took on additional shares (1/2 the original order) at $7.60. I was confident that the stock would reach my exit price, and figured I should average down my cost basis (now at $7.89).

Toward the end of the day, news dropped on the wire that the government was working on a plan to help out homeowners with problem loans. That triggered a surge of buying volume to enter the marketplace. FAS followed and went up to close at $8.70,  creating a respectable +10% in paper profits. =)

Again, my goal is to yield at least 20% before I exit the position. Cheers!

Yesterday morning, while going through my watch list, I found UYG trading below $3.00 a share. Granted, the financial sector deserved to be beaten down but not this much, especially since the U.S. government made it clear they were near a plan to save these institutions, and were not looking to nationalize banks.

Anyhow, looking at the technical indicators I performed a quick analysis. Short-term, the chart looked pretty neutral, with a faint of bullishness. After gauging the risk:reward ratio, I took a long position in UYG with a limit order for some shares at $2.90; it was trading in the $2.92-2.95 range. My plan was to exit around $3.50 for a 20% return, or cut my losses if the stock hit $2.65 (~9%).

As I watched the price fluctuate and eventually head up for a moment, it took great discipline to not modify my order to execute at market price. Eventually, after 5 minutes or so, patience paid off. Immediately after my order was filled, the stock shot up and my position ended the day  11%.

Today, on the heels of news that the government would announce plans to fix the banking system next Monday, the market experienced a short-covering rally. Consequently, my plan was coming to fruition a lot quicker than anticipated. I thought about holding the stocks over the weekend, but I already had a plan and needed to stick with it so I placed my order and exited the position at $3.56 for a 22.76% return. Not bad, huh? =) 

Paulson Advantage Plus, the largest of his funds, returned 37.6% net of fees on $7B in assets. For the coming year, he says…

We remain bearish on the outlook for the U.S. economy and believe the recession will extend into late 2009 and likely into 2010. The sharp contraction in the global economy, the instability of the global financial system and the ongoing credit contraction are unlikely to be resolved in the first half of 2009. While the U.S. stimulus package will likely cushion the decline we don’t think it can halt the downturn and will likely have longer term negative consequences..

For all of the itty-bitty details, this is a must-read.

Source:  John Paulson’s Funds Shine in the Gloom,  NYTimes Dealbook

Related Article: The Man Who Made Too Much, Gary Weiss for Portfolio Magazine, Feb 2009

If a bank were to sell its “bad” assets into a “bad bank,” it would still be left with lower earnings power from higher losses on “good loans” and the requirement to build reserves, lower earnings power from lower assets and a higher legacy expense structure, or both…The greatest unknown regarding the “bad bank” is at what price the gov’t would pay for “toxic assets.” If the government elects to pay fair market value, the banks will likely not elect to participate as capital hits would be too dear; however, if the gov’t pays above market, the burden on an increasingly “taxed” taxpayer grows…We would be most encouraged by banks selling “crown jewel” assets to cover their own losses. We believe private capital will readily invest in businesses that make money and grow. However, the banks do not fit this description. We remain cautious on the group.

Source:
Meredith Whitney: A Bad Bank Won’t Save Banks, by John Carney, Clusterstock, 1/29/09

Yesterday, the markets advanced in anticipation that the U.S. government was near a plan to fix the crap economy. Near the peak of buying, I concluded my UYG swing trade for a nice +14% ROI.

After hours, the Democrat-controlled U.S. House of Representatives passed a pricey $819 billion stimulus plan with no Republican support. Today, the market sold off.