bluemele 

I had traded the last 2 holiday sessions with a live account. NEVER AGAIN. NEVER EVER EVER AGAIN. I made one trade while I was visiting in Vegas without a stop. I left for an hour and on something that I usually would make or break 300 bucks I came back to a 15K drawdown! (exited at -11K) Holiday trading is for people who really like to challenge themselves in my opinion. It could go up, down, all-around for the next 2 weeks and I don't think it will surprise anyone. For me, I will wait to see what happens at the end after Jan 1, and see if there is a BO play or some other form, but I am not live anymore so take it for what it is worth, little to nothing. I enjoy your sentiment journal.

Sorry to hear about the painful lesson, I can't say that I have a perfect record either. I will still trade until thursday but have scaled down and am very careful and more selective.
Your policy is a wise one though....better safe than sorry
Kbit

Are Torrid Tuesdays The New Merger Mondays?


While there is nothing quite like using correlation to imply causation, or predicting the future by observing self-fulfilling prophecies which work until they wipe everyone who blindly follows them, investors do enjoy observing technical patterns that lead to at least some incremental and tranistory beta.

Especially in this day and age of centrally planned alpha disintegration. And while many have noted historical phenomena which used to work in the old days, such as the "Merger Monday" effect, this was before the Obama administration decided it would be the best and last arbiter of what transactions should and shouldn't work.

As a result, Merger Monday were promptly forgotten. Also promptly forgotten were POMO days (at least for now), as every Fed bond purchase, has an equal and offsetting bond sale (inverse POMO). Granted once the Fed starts monetizing Italian bonds this will quickly change. But what about now? Well, as a trading desk advises us, using 2011 statistica data, "Torrid Tuesdays" just may be the new "Merger Monday."
To wit:

Looking back to 2011, Tuesday is a great day to own the Russell. Average move in the Russell on Tuesdays this year has been 43bps. This is a huge move, corresponding to 22% annualized return. If all you did all year was to buy the IWM on Monday at close and sell it Tuesday at close you would have made a 20% return.

4 out of the 11 times the Russell moved more than 4% in a day were on Tuesdays, including the two best days in the Russell (8/9 up 6.9% and 10/4 up 6.4%).

Conversely, there were no Tuesdays when the Russell was down 4% or more (out of 7 such days).

Of course, now that it is public, using the old faithful precepts of the wave function collapse, this self-fulfilling anomaly will no longer work. Or maybe it will work that much better if even more momo chasers go after it.

Who knows? Anyone crazy enough to want to put even a dollar of their money at risk in this joke of a market is welcome to try it. The rest of us will sternly contemplate the age old question: just how will the world grow when the marginal utility of debt is below 1, when capex is far lower than D&A, when asset bases do not generate enough cash flows to satisfy liabilities, and when the only solution is inflating our way out of every troublesome spot.

This is something that should have been explained here a bit more thoroughly – read: better – over recent days with my blinding bearish zeal to blame and so please accept my apologies.

Specifically, the break that looks more and more imminent in most equity charts via the “round down” does not need to be straight down considering it is coming on the apex of the Symmetrical Triangle discussed weeks ago in relation to the S&P and more recently around the Nasdaq Composite and the XLF.

This is something that should have been highlighted here more so as a possibility and one that may be behind today’s huge surge in the stock markets as shown below in the chart of the Nasdaq Composite.

As can be seen in the 6-month daily chart above, the Nasdaq Composite is “coiling” into the apex of that Symmetrical Triangle with many actually calling the pattern a coil as has been done here many times in the past. Such coiling represents technical consolidation and real world confusion as investors await information that will help to break the lack of clarity.

Relative to the Symmetrical Triangle above, you may agree with me that it appears to have equal chances of breaking toward its upside target of 3420 or its downside target of 1960 for a roughly 25% move in either direction.

However, let’s look at this same pattern in the context of a longer-term chart that showcases the Nasdaq Composite’s stunning trend of lower highs and this Symmetrical Triangle looks far more prone to a downside break and one that would bring in the possibility of an extreme Rounding Top as shown in the chart on the following page.

Relative to that potential Rounding Top, it is not the “round down” referred to above, but it is worth noting that particular Rounding Top marked in above has grown bigger and now carries a target of about 2350 and a level that, if breached to the downside, will confirm the Symmetrical Triangle to the downside.

In turn, this provides another reason to think that the Symmetrical Triangle will break down with its bearish presentation as a continuation pattern of the downtrend to precede it shown below.

In turn, if the Symmetrical Triangle does take the Nasdaq Composite down toward its downside target of 1960, it will breach the big Rounding Top’s level of confirmation at 2200 and it would be at that point that it would make sense to think about the big Rounding Top’s extreme target of 1500 for a more than 40% decline from current levels.

Let’s keep that pattern on the backburner for now, though, and focus on the Symmetrical Triangle that tells us that the Nasdaq Composite should trade sideways between 2525 and 2625 for a few days before making the big break that will be unmistakable in my view.

This puts our eye on early levels of confirmation on either side at 2450 and 2700 with either side having a shot but with the stronger technical case coming for a break to the downside due to those lower highs and the potential for the smaller Rounding Top to take the Nasdaq Composite down to confirm the Symmetrical Triangle to the downside.

It would seem the real world case is more in support of the break to the downside, too, considering how difficult it is to see any dramatically amazing news coming out in the next few weeks that would convince investors that the corporate profit picture has improved by leaps and bounds overnight as the eurozone sovereign debt and banking crisis healed itself magically.

Rather, it seems more likely that the stream of bad news out of the eurozone will continue and something that could push its mild recession into an actual global recession and something that would make the corporate profit outlook shrink.

In turn, it seems that both the technicals and the fundamentals suggest the break is coming and it is more likely than not to be down.

What is the slippage like in /TF?

ctmvas 

What is the slippage like in /TF?

Normally I don't really have slippage problems but on days like today you might loose a tick...that's about it
Actually there have been times with some entrys I get positive slippage. The point is that it has plenty of liquidity normally during regular market hours...after hours it is not good though so just be aware of that.

Notice where today bottomed out at...the top of the cloud and the TS....
By friday the chikou will be above price and this thing could blast off (?)
Like I said a while back, an entry could be put at about 752.5
The worst part of this which probably won't stop it anyway is that this is lining up at the worst possible time of the year to trade. Regardless of whether or not I do something here, it will be interesting to see what happens.

Just a couple spots to keep in mind tomorrow where we might get some action..752, 742, 728, 722
Tomorrow will be my last trading day for the year...as evidenced by todays action liquidity is drying up and it's not worth trading after tomorrow morning in my view. I will be watching what's going on from the sidelines after that.

Before I forget I want to wish everyone a Merry Christmas/Happy Hanukkah and a prosperous New Year.

Merry Christmas and Happy New Year!

Mike

Your Three Investing Opponents

By Barry Ritholtz

“Tough Year!”

We hear that around the office nearly every day – from professional traders to money managers to even the ‘most-hedged’ of the hedge fund community. This year’s markets have perplexed the best of them. Each week brings another event that sets up some confusing crosscurrent: call them reversals or head fakes or bear traps or (my personal favorite) the “fake-out break-out” – this volatile, trendless market has been unkind to Wall Street pros and Main Street investors alike.

Indeed, buy & hold investors have had more ups and downs this year than your average rollercoaster. The third and fourth quarters alone had more than a dozen market swings, ranging from 5 percent to more than 20 percent. Despite all of that action, the S&P 500 is essentially unchanged year-to-date. It doesn’t take much to push portfolios into the red these days.


Three Opponents in Investing

With markets more challenging than ever, individual investors need to understand exactly whom they are going up against when they step onto the field of battle. You have three opponents to consider whenever you invest.

The first is Mr. Market himself. He is, as Benjamin Graham described him, your eternal partner in investing. He is a patient if somewhat bipolar fellow. Subject to wild mood swings, he is always willing to offer you a bid or an ask. If you are a buyer, he is a seller – and vice versa. But do not mistake this for generosity: he is your opponent.

He likes to make you look a fool. Sell him shares at a nice profit, and he happily takes their prices so much higher you are embarrassed to even mention them again. Buy something from him on the cheap, and he will show you exactly what cheap is. And perhaps most frustrating of all, Mr. Market has no ego – he does not care about being right or wrong; he only exists to separate the rubes from their money.

Yes, Mr. Market is a difficult opponent. But your next rivals are nearly as tough: they are everyone else buying or selling stocks.

Recall what Charles Ellis said when he was overseeing the $15-billion endowment fund at Yale University:

"Watch a pro football game, and it's obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, 'I don't want to play against those guys!'
“Well, 90% of stock market volume is done by institutions, and half of that is done by the world's 50 largest investment firms, deeply committed, vastly well prepared – the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either."

Ellis lays out the brutal truth: investing is a rough and tumble business. It doesn’t matter where these traders work – they may be on prop desks, mutual funds, hedge funds, or HFT shops – they employ an array of professional staff and technological tools to give themselves a significant edge. With billions at risk, they deploy anything that gives them even a slight advantage.

These are who individuals are doing battle with. Armed only with a PC, an internet connection, and CNBC muted in the background, investors face daunting odds. They are at a tactical disadvantage, outmanned and outgunned.
We Have Met the Enemy and They Is Us

That is even before we meet your third opponent, perhaps the most difficult one to conquer of all: You.
You are your own third opponent. And, you may be the opponent you understand the least of all three. It is more than time constraints, lack of discipline, and asymmetrical information that challenges you. The biggest disadvantage you have is that melon perched atop your 3rd opponent’s neck. It is your big ole brain, and unless you do something about it, it is going to lose all of your money for you.

See it? There. Sitting right behind your eyes and between your ears. That “thing” you hardly pay any attention to. You just assume it knows what it’s doing, works properly, doesn’t make too many mistakes. I hate to disabuse you of those lovely notions; but no, sorry, it does not work nearly as well as you assume. At least, not when it comes to investing. The wiring is an historical remnant, hardly functional for modern living.

It is overrun with desires, emotions, and blind spots. Its capacity for cognitive error is nearly endless. It was originally developed for entirely other purposes than risk assessment in capital markets. Indeed, when it comes to money, the way most investors use those 100 billion neurons or so of grey matter, they might as well not even bother using their brains at all.

Let me give you an example. Think of any year from 1990-2005. Off of the top of your head, take a guess how well your portfolio did that year. Write it down – this is important (that big dumb brain of yours cannot be trusted to be honest with itself). Now, pull your statement from that year and calculate your gains or losses.

How’d you do? Was the reality as good as you remembered? This is a phenomenon called selective retention. When it comes to details like this, you actually remember what you want to, not what factually occurred. Try it again. Only this time, do it for this year – 2011. Write it down. Go pull up your YTD performance online. We’ll wait.

Well, how did you do? Not nearly as well as you imagined, right? Welcome to the human race.
This sort of error is much more commonplace than you might imagine. If we ask any group of automobile owners how good their driving skills are, about 80% will say “Above average.” The same applies to how well we evaluate our own investing skills. Most of us think we are above average, and nearly all of us believe we are better than we actually are.

(Me personally, I am not an above-average driver. This is despite having taken numerous high-performance driving courses and spending a lot of time on various race tracks. I know this is true because my wife reminds me of it constantly.) [JM here – I am also in the bottom 25%, as my kids constantly remind me!])

As it turns out, there is a simple reason for this. The worse we are at any specific skill set, the harder it is for us to evaluate our own competency at it. This is called the Dunning–Kruger effect. This precise sort of cognitive deficit means that areas we are least skilled at – let’s use investing decisions as an example – also means we lack the ability to identify any investing shortcomings. As it turns out, the same skill set needed to be an outstanding investor is also necessary to have “metacognition” – the ability to objectively evaluate one’s own abilities. (This is also true in all other professions.)

Unlike Garrison Keillor’s Lake Wobegon, where all of the children are above average, the bell curve in investing is quite damning. By definition, all investors cannot be above average. Indeed, the odds are high that, like most investors, you will underperform the broad market this year. But it is more than just this year – “underperformance” is not merely a 2011 phenomenon. The statistics suggest that 4 out of 5 of you underperformed last year, and the same number will underperform next year, too.

Underperformance is not a disease suffered only by retail investors – the pros succumb as well. In fact, about 4 out of 5 mutual fund managers underperform their benchmarks every year. These managers engage in many of the same errors that Main Street investors make. They overtrade, they engage in “groupthink,” they freeze up, some have been even known to sell in a panic. (Do any of these sound familiar to you?)

These kinds of errors seem to be hardwired in us. Humans have evolved to survive in competitive conditions. We developed instincts and survival skills, and passed those on to our descendants. The genetic makeup of our species contains all sorts of elements that were honed over millions of years to give us an edge in surviving long enough to procreate and pass our genes along to our progeny. Our automatic reactions in times of panic are a result of that development arc.

This leads to a variety of problems when it comes to investing in equities: our instincts often betray us. To do well in the capital markets requires developing skills that very often are the opposite of what our survival instincts are telling us. Our emotions compound the problem, often compelling us to make changes at the worst possible times. The panic selling at market lows and greedy chasing as we head into tops are a reflection of these factors.

The sort of grinding market we had in 2011 only exacerbates investor aggravation, and therefore increases poor decision making. Facts and logic go out the window, and thinking gets replaced with naked emotions. We get annoyed, angry, frightened, frustrated – and that does not help returns. Indeed, our evolutionary “flight or fight” response developed for a reason – it helped keep us alive out on the savannah. But the adrenaline necessary to fight a Cro-Magnon or flee from a sabre-toothed tiger does not help us in the capital markets. Indeed, study after study suggests our own wetware works against us; the emotions that helped keep us alive on the plains now hinder our investment performance.

The problem, as it turns out, lies primarily in those large mammalian brains of ours. Our wiring evolved for a specific set of survival challenges, most of which no longer exist. We have cognitive deficits that are by-products of that. Much of our decision making comes with cognitive errors “secretly” built in. We are often unaware we even have these (for lack of a better word) defects. These cognitive foibles are one of the main reasons that, when it comes to investing, we humans just ain’t built for it.
We Are Tool Makers

But we are not helpless. These large mammalian brains of ours can do a whole lot more than merely overreact to stimulus. We think up new ideas, ponder new tools, and create new technologies. Indeed, our ability to innovate is one of the factors that separates us from the rest of the animal kingdom.

As investors, we can use our big brains to compensate for our known limitations. This means creating tools to help us make better decisions. When battling Mr. Market – as tough as any Cro-Magnon or sabre-toothed tiger – it helps to be able to make informed decisions coolly and objectively. If we can manage our emotions and prevent them from causing us to make decisions out of panic or greed, then our investing results will improve dramatically.

So stop being your own third opponent. Jiu jitsu yourself, and learn how to outwit your evolutionary legacy. Use that big ole melon for a change. You just might see some improvement in your portfolio performance.
Individual Investors Have Certain Advantages Over Institutions

One final thought. Smaller investors do not realize that they possess quite a few strategic advantages – if only they would take advantage of them. Consider these small-investor pluses:
• No benchmark to meet quarterly (or monthly), so you can have longer-term time horizons and different goals
• You can enter or exit a position without impacting markets.
• There is no public scrutiny of your holdings and no disclosures required, so you don’t have to worry about someone taking your ideas.
• You don’t have to limit yourself to just the largest stocks or worry about position size (this is huge).
• Cost structure, fees, and taxes are within your control.
• You can reverse errors without professional consequences – you don’t get fired for admitting a mistake.
• You can have longer-term time horizons and different goals.

And with those thoughts, good luck and good trading in 2012!

Well this is taking longer than seemed likely to me just a week or two ago with “this” meaning the big – and it will be unforgettably big – break to hit equities with “big” meaning a likely move of 30%+ up or down in months if not weeks. Clearly my view on how this break will come is bearish right now with almost all equity charts carrying major topping patterns that should cause a significant decline.

That is only my interpretation, however, and even though the charts look just a bit more bearish to me after today’s trading than on Friday with at least a 5% decline down on the sideways trend seeming imminent and one that should have little to do with the big break, it is starting to strike me just how lopsidedly bearish my position is at this moment around risk.

Take for instance a few recent titles:

- S&P’s H&S: Rough Ride Ahead for Risk,
- XLF’s Bear P Points to 40% Decline,
- Dow’s Diamond to Bring Out the Bear,
- Copper May Fall By 40%,
- Silver Looks Set to Slide By 40%,
- QLD Looks Outright Ugly, and,
- Corn: The Cruel Correction Is Coming.

None of these titles are for shock value or sensationalism, rather each is just what the respective chart is telling me and it almost never occurs to me to temper what a chart is telling me as you may noticed. This means that right now the risk asset charts are talking about a correction, or some might even call it a crash, in the months ahead and so it makes sense to discuss it.

That being said, it did occur to me today just far in the bear camp my interpretation is despite wanting to be a bull as an optimist by nature, not to mention how it will be painful to watch another recession, and so it seems to make sense to make sure that you are completely aware of both the technical bull and bear cases around risk.

It does not matter what this chartist thinks the charts are saying. It only matters what the charts are saying and charts are always talking bull and bear considering there are always two sides to a market.

For this reason, if possible, the tone of these notes may go a bit more neutral until it makes sense to be bullish or bearish by the levels.

Is this possible? Probably not considering how outrageously bad, even shockingly bad, so many of the charts look across various risk asset classes look, but you have my promise to try to be a better chartist to you by always telling the complete tale of any chart.

In the spirit of keeping to this promise properly but one that may go on break for about three days after tonight, let’s look at one chart in a more bullish light and one in a more bearish light.

Starting out with the more bullish chart and this is turning out to be a problem but let me keep looking, the truth is a crash is probably coming as the number of charts looked at increases, but one of those mixed message charts just popped into mind and that is HYG.

As you can see below, this high-yield bond ETF is close to taking out its last high and it is well above the generously-drawn Bear Fan Lines that would begin to prove any sort of reversal of its long-term uptrend.

Above its last high at $90.31 and HYG may be telling us that the risk assets are going 30% higher in 2012 and beyond and a message that will not be ignored even by this bear. In fact, such an upside breaching would cause me to treat each and every chart with kid gloves and that is to say with great caution around seeing all bull and bear aspects.

What would take HYG up 30% higher potentially in 2012 is an unmarked Inverse Head and Shoulders pattern that confirms right around $91 for a target of about $103. Relative to the bear side of HYG’s more bullish chart, it is actually not so apparent right now and has to be projected into a gentle Rounding Top that confirms around $75 for a target of about $60.

And now let’s turn to the more bearish chart and among the runner ups are AAPL, AGU, the CRB Index, GE, GOOG, the Nasdaq Composite, the Russell 2000 and the S&P and it goes on and on, but let’s settle on the good old XLF.

What makes the chart of the XLF just so bearish is the ability to connect the trend of lower highs born of 2007’s peak to the XLF’s new trend of lower highs born of this past February as was noted in a weekly note here as early as this past May as its major Spike Bottom of 2009 appears to be failing.

Compounding that bearish look of the XLF’s 10-year daily chart is that likely Bear Pennant drawn in toward the right and a pattern that confirms fully at $10.95 for a very generous target of $8. Unless the XLF rises above about $14.50, its charts are overwhelmingly bearish.

However, let’s look at the bull case in the XLF’s bearish charts and it comes down to a potential Inverse Head and Shoulders pattern within that Bear Pennant. It confirms at $14.50 for a target of about $17.

When these bull and bear aspects are viewed around today’s close in the XLF, it presents a 30% upside case to a 40% downside case and something that seems to skew the risk-to-reward profile toward the former and something worth noting.

But irrespective of how that bull and bear battle is broken, 2012 will begin with a bang because of it.