Trading Psychology.....Theory

[ducati998]

Trading psychology does not equate to "personal" psychology.
Individual psychology, must at this point be assumed to be a given. You cannot engage market psychology while still wrestling with your own.

Market psychology is the aggregate of all market participants represented not only in dollar terms.
That is to say, while money, in terms of a position bought or sold, has influence, in the ratio of the # of dollars placed, however, influences also exist that are independant of positions paid for. There are many examples, Politics, World events, Macro-economic events, Micro-economic events.............all the way down to an analysts recommendation on a particular industry or stock.

These influences may alter fundamental factors, or are purely speculative opinion, but irrespective, price moves, and often unexpectedly.

We have, of course, market participants in the form of traders, investors, commercials, etc. who have a $$ position in a variety of financial instruments.
Do they manage their position according to their individual plans?
What is their individual plan?
Is their individual plan based on what the market does?
Or completely seperate from the market?
Does this make a difference?
Can they be classified in any way?
Do the classifications reveal any relevant information that provides a useable edge?

Is the psychology of the market different from the individual?
In what respects?
Does this reveal any relevant facts?
Can they be utilised, while also maintaining adherence to your individual psychological, and or trading plan?

Cheers d998

 

[ducati998]

Market psychology as contrasted with Individual psychology.
Is there a difference?

Lets look at market psychology first.
We will have a gathering of likeminded individuals, viz. in aggregate wishing to derive profit in a variable timeframe.
If this is true, can we then expand on this idea and state......the sentiments and ideas of all the persons in the market take one and the same direction, and their conscious personality vanishes?

But, clearly, this is not true, as some are bullish, some are bearish, therefore, two opposed viewpoints are encapsulated within the market.
Is this again a true statement? Or must we further define market groups?
Well of course we have .....Investors, and Traders.
Are investors always bulls?
Traders we know can be bulls or bears, how does this switching of groups effect market groupings? What stimuli will effect the change in outlook?

Of course we have investment bankers...........what is their position?
The analysts associated, but distinct and seperate from the investment banks, whom they work for. What is their role within market psychology?

What about the owners of the exchanges? What influence can they exert on market psychology?
Easy Al and the Fed? Today markets followed or led Easy Al?

Politicians, involved, or influential, or part of the market psychology, thus infuenced, rather than providing leadership?

What quantitative and qualitative tools exist to assess or measure market psychology?
Do they work?
How?

cheers d998

 

[ducati998]

The Market or Psychological crowd.
What differentiates the market or psychological crowd, from a crowd on the beach, or on an underground platform?

Does the gathering of people in one place signify a psychological link, or can this link be established by seperate and remote individuals?
The answer would not be conclusive either way I suspect, however, one noticeable trait of a psychological crowd is the affectation of emotion upon them.

Do hetrogenous groups (stockmarket) display the same psychological traits as homogenous groups, such as sects, supporters, political, military, etc.

The most striking peculiarity presented by psychological groups is that whatever individuals form the group, however dissimilar their life experiences, occupations, character, intelligence, the fact that they have joined a group, linked, via a psychological thread, they come to possess a collective mind. This transforms their actions from their individual feelings,ideas, and emotions, into something very different.

Taking a concrete example, the stock, CPE, currently under analysis from both a technical and fundamental perspective.
We have currently a defined technical support level @ $15.
What has made it a support level?

Thoughts anyone?
cheers d998

 

[ducati998]

When individual responses are tested against group responses, differences appear.
If individuals, of a group, limited themselves to putting forward their own ideas, the net result would be an aggregate, or average of the group.

This would however not seem to be the case.
It would seem that new characteristics are formed. The individual that forms part of a group or crowd from purely numerical considerations, becomes braver, more confident, or conversely, fearful, indecisive, thus mirroring the groups persona.

This phenomena is of course witnessed in the market everyday. This sentiment is contagious. It is contagious to such a degree that the individual unthinkingly sacrifices his interests to the group interests.

This irrational behaviour is strengthened by herd behaviour. The individuals who might possess a personality strong enough to resist the suggestion, are too few in number, or $$, to struggle against the current, and as a result, will show realised, or unrealised losses.

Herd behaviour is driven by either lack of information, ( or more accurately, the lack of understanding ) so do what everyone else is doing, it must be ok.........or, the phenomena of market timing.

Market timing is a conscious disregard for information, or understanding.
It is a decision to determine which way the wind blows, and through this anticipation, join the herd as close to a reversal point as possible, and leave the herd, just prior, to the next reversal point.

As a strategy it will require 2 components to allow any degree of success.
Knowledge of the herd, what motivates them, scares them, confuses them.
The herds Leadership. Who can manipulate them, why they would manipulate them., when would they manipulate them..........and what they cannot do.

Most importantly, how once you join the herd, you are part of the herd until you leave.
How susceptible are you to the herd psychology, can you recognise the Leaders moves?
Can you spot the moves that are nothing to do with the leader at all, but drive the leader?

cheers d998

 

[spunkyblonde]

thanks D998 ...intersting points on the herd mentality ..and market leaders ......often the contrarian is laughed at .. but is later proved to be prudent compared to the herd

 

[ducati998]

spunkyblonde,

Contrarianism, one of those funny little words that everybody always feels applies to themselves. And actually very relevant to this thread. Obviously, within the herd, there are no Contrarians.

Ironically, the most herdlike of all technical traders are the so called darksiders........or P&V specialists. From their own definition, they follow PRICE to exclusion, irrespective of anyother study or consideration.
Interestingly, this brainwashed behaviour is looked upon as an elevated consciousness, or trading persona.

Yet, if some of the evidence is considered, it becomes rather obvious that in point of fact all that is really being accomplished is technical analysis using scalping methodology.
Take one example.......the placing of stoplosses.

1....If darksiding was as successful a methodology as promoted by its adherents, you of course would not require a stoploss at all, as your enhanced trading persona would never place you in a trade that could lose you money. A stoploss by definition proves that the entry is speculative, and as such subjective.

2....Scalping is reversion to the mean, within timeframes that scalping is attempted. As such, realtime $TICK and TRIN are much more useful for scalping entries. However, if you watch intr-day charts long enough, your pattern recognition skills will improve, exactly the same as playing golf everyday will eventually improve your game, nothing mystical.

Now, in contrast, a Contrarian is someone who based on whatever analysis you choose, has an opinion that is different to the vast majority........and irrespective of what the herd do, or do not do, will initiate, and maintain his position, no stoplosses for this gentleman.

Now, obviously, some contrarians are stupid people, and take the opposite side just through obstinancy, they do not last in the market. Others, however, through analysis, thought and intelligence come to different conclusions from the same data that is available to all, and are proven right, not because they were necessarily contrarian, but because they were right.

The herd follows the leader, the leader however does not have the herds best interests at heart, he has his best interests at heart.
Thus TA, is really the study of herds, and leaders, understanding how the leader tries to manipulate the herd, and seeing how successfully he can do so.

Therefore, to understand the psychology of TA, you are looking at the tools available to the leaders of the herds with which he can provide his leadership, maintain control, and profit from the herd............bleed them a little.

cheers d998

 

[ducati998]

Just before moving on with the theory of crowd psychology, I have been reading through the "BASEMENT" thread, and it would seem that Socrates really muddied the waters, and made the whole concept much more difficult than it actually is .........from an individual perspective.

The UNCONSCIOUS.
When talking about abstract terms and ideas, it really helps to define and clarify as best you can, what it is exactly you are referring to.

There will be numerous forms of the subconscious, or unconscious, each with discrete anatomy, and physiological systems, subsystems.

We have the "Musculoskeletal" subconscious, that comprises the Thalamus, Basal Ganglia, Cerebellum.
We have the entire Gastrointestinal tract, that is "reflex" or subconscious in anatomy and physiology.

But as traders, the one that we are interested in is really the "Cognitive" subconscious.
This system is comprised of the Cortex, Thalamus, Limbic, and Reticular systems.

What we are interested in exploiting, from a trading perspective is memory, and types of memory.

1...Short term
2...Long term

Short term, relatively unimportant to the discussion.
Long term memory refers to the memory of an unlimited amount of memoranda, for a variable period ( minutes to years )
Long term memory involves two memory systems.
1...Explicit memory
2...Implicit memory

Explicit memory supports the learning and retention of facts and the conscious recollection of prior events. Thus, is CONSCIOUSLY accessed.
There are 2 subtypes of Explicit memory, 1....Episodic, 2....Semantic.

Episodic memory is the memory of personally experienced facts and events with special spatial and temporal localisation, such as eating spagehetti in a restaurant down the Old Kent Rd. Episodic memory is localised to the circuitary that links the medial temporal cortex and diencephalon.

Semantic memory, refers to memory of culturally and educationally acquired encyclopedic knowledge, such as the meaning of words, arithmetical facts, and historical and geographic information. Semantic memory is localised to the left temporal cortex, the frontal association cortex, and the cingulate area.

The cholinergic system ( neurotransmitter ) seems to be necessary for an intact explicit memory. Alzheimers Disease, results in a disruption of function in the cholinergic projection system, thus resulting in a striking reduction in the aquisition, and accessing of information from the explicit knowledge systems.

Cognitive subconscious, or IMPLICIT ( Procedural ) Memory.
Implicit memory supports the learning and retention of skills.
It is the memory of experience-affected behaviours, that are performed UNCONSCIOUSLY.
It includes skill learning, ( musculoskeletal ) driving a car, simple conditioning, responding to an alarm clock, and PRIMING, such as completing a three-letter stem with a word that has been presented previously or recognising a word, picture,pattern, etc, faster, more accurately, because of PRIOR EXPOSURE.

Implicit memory for skill learning is localised to the cerebellum ( musculoskeletal ) basal ganglia, and frontal association cortex.

Immediate access to memory, both conscious and subconscious is a function of the electrically transiant alteration at the synapse, longer-term memory results in an alteration of the number of synapses, and their protein construction ( CREB )

The speed and ease of access, to this subconscious zone, and the increased function ie. "trading in the zone," is a function of practice, and reinforcement, that will alter the neuroanatomy viz, alter the # and construction of synapses, thus providing increased function............so much for esoteric methodologies.

cheers d998

 

[spunkyblonde]

spunkyblonde,

Contrarianism, one of those funny little words that everybody always feels applies to themselves. And actually very relevant to this thread. Obviously, within the herd, there are no Contrarians.

Ironically, the most herdlike of all technical traders are the so called darksiders........or P&V specialists. From their own definition, they follow PRICE to exclusion, irrespective of anyother study or consideration.
Interestingly, this brainwashed behaviour is looked upon as an elevated consciousness, or trading persona.

Yet, if some of the evidence is considered, it becomes rather obvious that in point of fact all that is really being accomplished is technical analysis using scalping methodology.
Take one example.......the placing of stoplosses.

1....If darksiding was as successful a methodology as promoted by its adherents, you of course would not require a stoploss at all, as your enhanced trading persona would never place you in a trade that could lose you money. A stoploss by definition proves that the entry is speculative, and as such subjective.

2....Scalping is reversion to the mean, within timeframes that scalping is attempted. As such, realtime $TICK and TRIN are much more useful for scalping entries. However, if you watch intr-day charts long enough, your pattern recognition skills will improve, exactly the same as playing golf everyday will eventually improve your game, nothing mystical.

Now, in contrast, a Contrarian is someone who based on whatever analysis you choose, has an opinion that is different to the vast majority........and irrespective of what the herd do, or do not do, will initiate, and maintain his position, no stoplosses for this gentleman.

Now, obviously, some contrarians are stupid people, and take the opposite side just through obstinancy, they do not last in the market. Others, however, through analysis, thought and intelligence come to different conclusions from the same data that is available to all, and are proven right, not because they were necessarily contrarian, but because they were right.

The herd follows the leader, the leader however does not have the herds best interests at heart, he has his best interests at heart.
Thus TA, is really the study of herds, and leaders, understanding how the leader tries to manipulate the herd, and seeing how successfully he can do so.

Therefore, to understand the psychology of TA, you are looking at the tools available to the leaders of the herds with which he can provide his leadership, maintain control, and profit from the herd............bleed them a little.

cheers d998

...thanks ducati998... that was a great post ... a agree tradeing is a mental state of sometimes ijnoreing the thing we have learnt as we grew up .. thus as a trader .. we try to go by our own t/a paramiters rather than the one's society has prev taught us ... ..cheers ..sally

 

[ducati998]

Can the Herd ever be allowed to win?
If, the herd could, or were allowed to win, would the markets still function as they have?

For the market makers to be profitable, they on "net" have to make money to stay in business, and to make the market. It is fairly safe to assume therefore, that, as very rarely do you hear of a Specialist, or MM, going out of business, that they are net winners on the daily traded volume.

Where does this leave the herd?
Food for thought.
d998

 

[ducati998]

Some further thoughts on the herd.

Do groups of people who witness an event, in this case, market prices, actually act on their observation, analysis, or upon what is presented to them?

Certainly the evidence from other walks of life would suggest that individuals placed into a group environment tend to echo the most dominant member. In the market, under general conditions, these are the market makers.

In all honesty, are the market makers going to make spotting their true purpose and thus your ability to profit from short-term speculative moves, ( noise ), easy?
I would suggest not. They will manipulate the herd in the direction that will fulfil the requirements of the "book".

Whether the emotions by the herd are good for your position, or bad, they are nonetheless simple, and exaggerated.
The simplicity and exaggeration of the herds sentiments result in absolute certainity, and will set off in one extreme. A suspicion, that XYZ may have an effect, or that ABC is now slowing will convert itself very quickly into incontrovertible fact. But, just as quickly, this emotion can be manipulated, as the information that drives the herd is the information provided by the market leaders, and they can, if required move the herd 180*

This is easily possible, as the herd you see believes implicitly that the herd is the best and most efficient arbiter of information. This was formally named as Efficient Market Theory.
So, of course, if "price" starts to reverse, so the herd starts to reverse, as the herd must be right.

Chicken and the egg, which came first?
Price and volume, which came first?

food for thought
d998

 

[spunkyblonde]

chicken or the egg ..??? hmm good question .. both answers have valid arguements .. as 4 price or volume question .. idd say it may depend on what trade type u are doing ,,eg
daytrade+volume
position trade =price
sally ..

 

[ducati998]

The Reasoning Power of the Market, and some thoughts on Speculation and Investment.

The market herd, do not enjoy being described as gamblers. That implies luck, or irrational behaviour, or just plain laziness as the work required to profit, is just not forthcoming.

Therefore, everyday, without fail, the market commentators will provide rationales for the days action. My current example uses oil, and the price of it as a basis for all sorts of market machinations. This lends logical reasoning, an opinion based on economic events, or political events to the random action of prices through the day.

Are prices random?

This type of reasoning however is very superficial, and plays into the two seperate forms of speculation. The third form, is a quantitative based speculation.

Type 1 Speculation is best exemplified by P&V speculation. Speculation on PRICE movement pure and simple. Patterns in price, having predictive power to predict prices in the near future.

Type 2 Speculation, is exemplified by my example of CPE. That is speculation of EVENTS acting as a catalyst for change in price, ( better, or worse )

Type 3 Speculation is one that I have yet to encounter on these boards, and that is a speculation based on the STRUCTURE.

Are all 3 forms of speculation created equal?
Can they, or should they, be mixed into a hybrid form of speculation?

There was a question asking for the difference between SPECULATION and INVESTMENT.
If we look at market based operations as the medium from which we are trying to profit, then the following becomes clear as a definition of difference.

Speculation is the attempt to TIME the market.
Investment is the attempt to PRICE the market.

This brings up an interesting disconnect. If you agree that Speculation is the attempt to time the market, and PRICE is in point of fact irrelevant, what is the obsession with PRICE?
It holds no logical relevance to the price speculator at all. How, if the speculator is trying to TIME the market, does the speculator use the variable of time? The daytrader, will look to minimise to the smallest increment possible his TIME in the market, thus, in seeking to time the market, he shrinks his chance to the absolute tightest margin that he can.
Longer-term trend following systems are far more logical in this respect, and try to allow for the time element in their use of time.

Investment, which seeks to price the market, uses price in a logical, rational and quantitative way to arrive at a value based on analysis of facts. TIME is then used to allow this quantitative assessment to find said value.

cheers d998

 

[Mayfly]

Hi d998,

FWIW, I reckon Toby Plummer’s Forecasting Financial Markets: The Psychological Dynamics of Successful Investing is one of the best books that I’ve read on this subject.

Linda Bradford Raschke rates it too, so you could say that it comes highly recommended.

It’s got to be worth a look?

HTH

Cheers

Mayfly

 

[ducati998]

Mayfly,
Actually I have never read it. So I shall buy it and read it. Always on the lookout for new books.
Cheers d998

 

[ducati998]

TIME,

Always a little controversial. Most people have their own opinions on this aspect, and generally they are quite strong ones.

We have some very broad definitions in addition to the individual views.
We have the "Time in the market"
"Timing the market"
And, the Gann, and Astrology practitioners.

Psychology and Time.
There are some very definite psychological traits that show up in the attitudes and methodologies of ones chosen timeframe, and underlying beliefs.

Timeframes are generally correlated with the psychology of RISK.
That is to say, how you perceive risk, has a large influence on the timeframe that you choose to trade.

Now, and I generalise a little here, the more risk averse you are, the shorter the timeframe, that is generally advocated. Therefore,If the trader is very risk averse, they daytrade, so as to be flat overnight.

Does this make logical sense?
Daytrading is the highest risk trading there is, from a position of trying to make it profitable.
You have to be RIGHT every-day, sometimes several times a day. And if you should be wrong, you have to be out very quickly, so as not to carry ever increasing risk. This playing of momentum and sentiment is hard, and very risky, you are guessing based on whatever analysis you employ that you can guess right.

Contrasted to the swing-trader, who, has more time in which to make trading decisions, can run looser stops, but always has the risk of the BIG SURPRISE overnight. He is also guessing, but his margin of being right or wrong is not as exacting, and gives him greater time in the trade to allow a trade to develop.

Contrasted with the Fundies, who are the most relaxed of all, content to hold mabe for a year or longer, as their risk is not market risk but business risk.

Time, and how it relates to trading psychology, is also tied up with, the time required to make money............REWARD. At times, especially if you earn your living daytrading the pressure to do something, is an increase in the risk daytrading engenders.
Time to allow a trade to develop is not really an option. It must perform. If it does nothing much, then you must exit, and that is an opportunity cost as well as a cost on brokerage etc. ( although @ $2 a side, I won't harp on too much ) Can you be expected to make pots of cash overnight?

Most I think would agree that overnight, you will not make enough money to retire on.
This is however the psychology of the daytrader. Everyday he will make money. Everyday.
Is this a realistic expectation? How many trades, and they have to be profitable trades, can you make in one day? How much will you make on each trade? How much of your capital is exposed? These are important parametres, they will impact directly on your profitability For a very small minority it may well be. It is far easier however to let time work for you rather than against you

As we have seen with CPE, it's done nothing much for a couple of weeks, and currently showing about $0.90 profit in the one trade still open, and a closed $630 loss on the other.
Could it all go pear shaped and collapse to $0.00 tomorrow? It's possible, but unlikely. However, it is easily managed, EOD. You could easily manage 20-30 trades like this. Your position size could control your going to zero exposure, but still have 100% of capital employed, everyday. Make no mistake, to make money, you must have Capital exposure.

But this is always the sticking point for daytraders. What if it went to zero.
And on that basis they assume the risk of daytrading that minimises the going to zero scenario, but a stock can still be suspended intra-day, and if you are in.....YOU ARE IN, and have to deal with the outcome when trading resumes.

The swing trader, assumes the "zero" risk, but is compensated by much larger profit moves, if the trade moves in his favour. And this is where time really counts,as a generalisation, the longer you can stay in a trade, the better your return...........(this discussion does not take into account exits)

And the Fundies?
We do better than both.

cheers d998

 

[ducati998]

An alternative view.


The Street.com
Trade what works, avoid what doesn't


By Alan Farley 4/7/2005

Welcome back to the school of what works now.

It must be a characteristic of human nature to believe in endless bull markets and other fairy tales. My hate mail rose exponentially after I ratcheted up my bearish outlook last month. In reality, nothing happened in the first quarter that supports a return to the benign conditions we saw two years ago. That's just a pure and simple fact.

Let's start the discussion with trades that aren't working. This list is quite long, given the sharp whipsaws we've experienced in recent weeks. At a minimum, it highlights the considerable risk of the current environment for traders and investors.

The litany of broken trades
At the top of the rogues list sits the common breakout trade. New highs have dried up considerably this year, while new lows have hit multimonth peaks. This means you're probably getting ripped apart if you're chasing breakouts, especially in high-beta issues.

It's also been dangerous to buy simple pullbacks in ongoing uptrends. This popular strategy has turned viciously on its devotees this year. This is a consequence of broad cycle dominance. Let me explain how this works.

Markets get pushed around by cycles within cycles. In quiet times, price swings easily between short-term support and resistance. In volatile periods, short-term cycles lift and larger-scale movement predominates. This lets prices rip through common levels because the forces at work are extremely powerful.

Single-digit stocks have also been a disaster for months now. I've been avoiding them completely, with just a few exceptions I'll discuss in a few moments. As a group, these speculative plays topped out over a year ago and have shown few signs of life since that time.

Many investors still hold single-digit stocks at considerable losses. They found out the hard way that these issues can drop 25% to 50%, but still maintain bullish characteristics. Hope springs eternal and small stock shareholders are natural optimists, but buying power in this group tends to evolve in long and undependable cycles.

So that's my quick list of losing strategies. Let's throw a match on them so we can get down to the business of making money in this tough market.

Winners of today's trading
Let's start with the obvious: energy and basic-materials

These issues have been big movers for months, and will continue to provide buying opportunities when other sectors fall apart. But they've become tougher trades in recent weeks because the public is jumping all over them. That's not likely to change any time in the near future.

The lagging equity performance, compared to the underlying futures and spot prices, points to a natural consequence of the crowd's participation. But these sectors represent hundreds of liquid issues, with all kinds of price patterns. Finding good trades can be as simple as identifying sub-sectors that respond well to the overnight markets. Technical Analysis
There are many popular trades that aren't working in the current environment.


But energy stocks continue to offer some solid outperformance.


Select single-digit stocks also offer compelling trading points.



My recent efforts have been focused on day trading Exxon Mobil (XOM, news, msgs) and Valero Energy (VLO, news, msgs), two megacap refiners. Exxon is a relatively low-volatility stock that swings through 25-cent pivots. Valero is a trading monster that moves 2 to 3 points on a quiet day. Its heavy-duty action reminds me of a 1998 tech stock.

Here are some energy and basic-materials stocks with short-term bullish outlooks: Monsanto (MON, news, msgs), Diamond Offshore Drilling (DO, news, msgs) and Vintage Petroleum (VPI, news, msgs).

Speaking of day trading, I heard from an angry reader when I mentioned the success of this strategy in a recent column. The writer fumed he was a big gun at a popular day-trading house, and that all the big guns there lost money in the first quarter. The truth is he hadn't taken responsibility for his failure to adapt to the 2005 markets.

Moving on, it's also clear that short sales are working better now than any time since 2002. But my focus crawls like a turtle from the long to the short side as a favored strategy. The reason being my methodology relies on breakdowns through longer-term averages and doesn't short stocks near their highs.

My watch lists finally show a clear preference for selling the market. But a lot depends on how the indices deal with current price levels. Technical readings are still oversold despite Friday's collapse, making short-selling a higher-risk enterprise. We saw one aspect of this danger in Wednesday's vertical rally.

Now here are a few stocks setting up well on the short side: Knight-Ridder (KRI, news, msgs), Veritas Software (VRTS, news, msgs) and LandAmerica Financial Group (LFG, news, msgs).

Singles offer big hits
Finally, let's get back to single-digit stocks. While most sectors are getting sold, low-price energy stocks are doing extremely well. Clearly, chat rooms and stock boards have discovered these volatile issues, which in turn have become momentum magnets.

In fact, many of these stocks went straight up when crude oil jumped to a new high last week. This means they're extremely overbought and could pull back at any time. So the best plan is to exercise patience and wait for a lower-risk buying opportunity.

Traders wanting to play in the small-stock fast lane can take a look at U.S. Energy (USEG, news, msgs), Evergreen Solar (ESLR, news, msgs) and Parallel Petroleum (PLLL, news, msgs).

Please note that due to factors including low market capitalization and/or insufficient public float, we consider U.S. Energy, Evergreen Solar and Parallel Petroleum to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.


At the time of publication, Farley was long U.S. Energy and Evergreen Solar, although holdings can change at any time. Alan Farley is a professional trader and author of "The Master Swing Trader." Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to [email protected]. TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com. Click here to read our conflicts and disclosure policy.

 

[ducati998]

It is interesting to note that the speculative traders are jumping on, or have been jumping on energy and oil.

As a value investor, oil for me was about 9mths ago.
The value for me is long gone.
I am now looking at other sectors, and looking to build a position that will return me profit, but provides me with the safety of principal, and also has lost the volatility that can be problematical in holding onto positions.

That is not to say Oil and energy stocks won't go higher, they most probably will. The 2 keys to profiting from the market, are a good entry, and a satisfactory exit. You will generally never get the absolute bottom, nor the absolute top, unless you get lucky now and then, but thats really not the objective. ...................The objective is not to lose money.

Playing the momentum game is tough, and from the previous article, it would seem even the pro's are struggling in the chop that has predominated much of this year.

cheers d998

 

[ducati998]

The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.Is there any thing whereof it may be said, see thisis new? It hath been already of old time, which was before us.....................Ecclesiastes

This biblical wisdom has particular relevance to the Stock market, and Financial markets generally. The quote delineates the principal of continuity.
Continuity in the sense of regarding securities markets and the values that they attain, and return to over a long period of years.

The simple point being that, if a securities market goes up a great deal, it will also come down a great deal, but, to levels that we had previously been accustomed.

Chartists will refer to Support / Resistance, Fundamentalists will refer to levels of value.
Either way, there is repeating and overwhelming tendancy to fluctuate above and below a central value or rate of return.

For those interested in trading with the trend, identifying the market cycle would seem to be a logical starting point.

For chartists, putting up a 100yr chart makes for quite an interesting starting point.
But, also comparing major market crashes, "29 - "34, "72 - "75, "00, - "03 and how they compared in the longer term.

For those that prefer a more quantitative based methodology,

Year...................................P/E.....................................................10yr Return
1898...................................21.4...........................................................9.2%
1900.................................20.7............................................................7.1%
1929.................................22.0.............................................................( 0.1% )
1959.................................18.6..............................................................7.8%
1962................................18.6...............................................................9.9%
1965...............................23.7................................................................3.3%
1972...............................18.6................................................................6.7%
1992...............................20.4...............................................................9.3%
Today.............................14.4..................................................................?


Year……………1999……………2000………….2001…………2002………….2003……….2004

Closing Price11497………….10787...…….....10021…………8341….…….10453………10783
Earned Year…$57.20…………$66.71…………$52.89………..$55.26………$66.60……..$74.84
Average (3)…………………………………………$58.91………………………………………$65.57
Dividend Year……………..........$0.73………….$0.74………….$0.82………..$0.88………$0.96
Bond Interest..6.43%…………5.11%…………5.03%…………3.82%………4.26%………4.22%

Ratio’s……………………………………………………………………………………………………….
P/E………….20.9………………16.1…………18.94………….15.09…………15.69………14.4
P/E (3)……………………………………………17.01…………………………………………16.44
Earnings Yield5%.......................6%...................5%..................7%......................6%....................7%
3YRS Earnings Yield………………………….6%…………………………………………....…6%
Dividend Yield…………………7%....................7%...................10%...................8%..................9%
StockY/BY..…0.78…………….1.17…………...0.99…………..1.83…………1.41…….....…1.42
Div.Yield/Bond Yield................1.37…………...0.72…………...2.62…………..1.88………...2.13


I would say that sentiment is tending more to the Bearish currently, oil, depreciating $, Current account deficits, war, corporate malfeseance, etc.
Did the indices fall far enough to cause total depair in 2002?
Certainly as far as NASDAQ went, I'd say definitely yes, and the NASDAQ contained the largest amount of dross companies as well.

So if history is a guide, then......................??
cheers d998

 

[ducati998]

Just a little piece on Hedge Funds.
Looks like they had a difficult time last year, and these are the pro's, whatever that means.

Traditionally hedge funds have been available only to the super rich and large investments funds. Some funds required individuals to invest a minimum of 250,000 USD and have a minimum net worth of 1M USD. Now the first retail hedge fund has entered the market looking to allow the average investor access to hedge funds. Quadriga Asset Management, a Monaco based hedge fund with more than 2B USD under management, has begun offering individual investors shares in their 'Superfund' for a minimum 5,000 USD investment. Quadriga has even signed up former President Bill Clinton to promote the new offering.

Before investors rush to pour money into the new hedge funds, it would be wise to review their recent performance. According to the Hennessee Group, which monitors 3,500 hedge funds, the average hedge fund returned 8.3% in 2004 compared to the S&P 500 which reported a gain of 10.9% over the same period. Hedge funds have outperformed the S&P 500 from 1987 - 2004 returning an average gain of 14.9% per year compared to 11.9% for the index. It's also important to note that hedge funds can be more expensive than traditional investment vehicles. A fund manager typically charges a front-end load of 1% - 2% and also takes an average of 20% of all profits.

So what's the difference between a hedge fund and a mutual fund besides the fees? While most mutual funds attempt to beat a certain market index, a hedge fund attempts to achieve an 'absolute return'. To achieve the highest absolute return while also reducing exposure to loss and market volatility, hedge funds use several aggressive techniques not commonly found in the mutual fund industry. These techniques include the use of short selling, options, exotic derivatives, currency trading and the use of large amounts of leverage or debt. Perhaps the most important difference for individual investors is the fact that hedge funds are not required to register with the SEC and are not obligated to report financial information like mutual funds.

 

[ducati998]

Earnings season..................full of lots of interesting little psychological quirks.


Our tip for earnings season:
Get ready for a lot of bull
Profit reporting period is daunting, especially when companies blame a late Super Bowl for a fall in margins. Here are some tips to help you avoid getting trampled in the coming stampede.


For more than 11 months of the year the Spanish city of Pamplona enjoys a quiet existence. Then suddenly one summer morning hundreds of drunken locals and tourists are tearing through the center of town chased by a bunch of wild bulls.

On Wall Street this happens four times a year, during the festival called earnings season.

Between April 11 and May 7, at least 1,943 companies listed on U.S. stock markets will report their quarterly sales and profits. In the week of April 25 alone, at least 826 companies will issue reports.

In the days before consensus estimates -- a relatively recent phenomenon -- and real-time information for individual investors, earnings season was just a matter of studying the most recent balance sheet. Now there's profit and revenue comparison to consensus numbers from Thomson First Call, Reuters Estimates and Zacks, not to mention the company's own guidance.

The amount of numbers and analyst jargon can be daunting. So as you wade through the swamp of announcements, pre-announcements (a practical impossibility), upside and downside guidance, EBITDA, non-GAAP and fully diluted shares excluding non-recurring items on a pro-forma basis, here are some tips to keep in mind:


Beating the Street ain't what it's cracked up to be. If a company reports profit a penny or two ahead of expectations, that's not impressive. It's merely normal. Analysts are predicting first-quarter profits will rise 8.2% from the same quarter a year ago, says Michael Thompson, director of research at Thomson Financial. But analysts tend to lowball these days and, since companies beat the profit target by 3%, on average, actual earnings growth will likely be 11%, Thompson told CNBC's "Squawk Box."


The bottom line isn't always the bottom line. Profit is still the headline number, but anybody who's ever invested in technology knows how an unpleasant surprise in revenues can move a stock.

Most industries have a specific number Wall Street likes to look at: Sales at stores open at least a year for retailers, revenue per available room for lodging, license revenue for software companies. If you're unsure about what's important, check out stories on the previous quarter's results, paying attention to what analysts highlighted. Listening to earnings conference calls can be great way to gauge the buy and sell-side sentiment for a company. You can find the time, date and number for a call on the company's Web site, or through press releases.


Beware the company that doth protest too much. If a company misses expectations by a wide margin, or worse yet their own guidance, and comes out crowing about its record quarter, alarm bells should be ringing. For example, Corn Products (CPO, news, msgs) missed the Reuters Estimates fourth-quarter profit consensus by 16 cents per share. The first quote in the press release was: "2004 was an excellent year for our company, with record sales, operating income, net income and earnings per share." On Tuesday, the company warned first-quarter profit will be 35% to 40% lower than the year-ago period and the stock, sending shares down as much as 20%.

"Record quarter" means nothing, by the way. It's commonplace for growing companies to post record results every three months.

One more point on the topic: If a company comes up short on Street estimates and hasn't warned, the effect on the stock will be ugly.


Be skeptical of the excuses offered for unpleasant results. When it comes to explaining weak results, companies are like students without homework. They'll try anything. A favorite excuse is adverse weather. One day corporations might take the fact that weather is unpredictable into their business planning, but until then a heat wave or a snow storm are the perfect culprits for a drop in sales.

Holidays and major sporting events also get their share of blame. Wendy's (WEN, news, msgs) blamed a March Easter for a profit warning. Tweeter (TWTR, news, msgs) somehow pinned weak first-quarter comparable sales on the Super Bowl shifting from February to January. They neglected to mention that the Super Bowl was also played in February last year, the comparable period. And shouldn't any sales weakness in January be made up for by Super Bowl sales in February anyway?

In other words, don't be afraid to say "Don't give me that!"

-- Kim Khan