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Sol Palha, Alan Lunt,
Wayne Krautkramer, John
Tyler, Ole Bear
“Contrarian
Round Table” contributors discuss Sol
Palha Mechanical trading systems: a ray of light or a cavern of darkness?
There is a difference between
happiness and wisdom: We have been lead to believe that mechanical systems and to some point fundamental analysis are the necessary skills to master in order to prevail in the markets. In an abstract way fundamental analysis is nothing but mechanical system in disguise; the data is put forth in a standard manner and so anyone can decipher it with almost no effort. Mechanical trading systems put forth a set of rules and all one has to do is follow these rules; in essence all the players become nothing but robots following a routine. The paradox theory comes into effect now; it basically states that one will get exactly the opposite of what one chases. We all know that at any given time the masses must lose in order to be able to feed the big players. That’s why the 90/10 ratio has almost seen no variation; 90% representing the percentage of losers and 10% the percentage of winners. I could go on into great detail about why mechanical trading systems must and will fail and in the process put almost everyone to sleep. So in the interest of keeping you all awake I will keep it short and sweet. Let’s just pause for a second here and investigate the name “Mechanical.” One of the definitions by Merriam’s Webster online dictionary is “done as if by machine: seemingly uninfluenced by the mind or emotions” Notice the key words here uninfluenced by the mind or emotions. First of all the market is nothing but a composition of a million minds so using a system that’s based on the rules set forth by one man’s mind and worse still devoid of any mental influence is a recipe for disaster. Secondly the market place is nothing but a sweat pool of emotions; lust, greed, power, hate, fear etc swirling through the markets like a hurricane descending on village of huts ready to decimate everything in sight. The above definition of the word mechanical is enough to make you want to run from any such system. It’s virtually impossible for a mechanical system to last forever, since by design anything mechanical must and will break down at some given point in time. It’s rather amusing the terms we chose to represent the things we use or to define what side of the markets we are on. It’s almost as if we have nothing but a secret programmed desire to lose syndrome ingrained deep with our psyches. Bullish and bearish, we choose two of the most stupid, dumbest, irrational and easily angered animals to represent whether we think the market will go up and down. Then if we happen to be individuals that favour just one sector we come up with the term bugs as Internet bugs or gold bugs. Why such a disgusting animal to represent ones position and views. As we all know most humans react in an adverse way to bugs, the first thought that springs to mind is to crush them. Even examining the language we use in the market places illustrates further psychological issues; scalp, plunge, up thrust, perfect bottom, down thrust, flip, climactic sell off, etc. The worst part of all this is that we pass nothing new to the next generation. We simply reinforce these Neanderthal views, in fact branding them into the next generations memory more aptly describes the process. Is it any wonder then that we keep repeating the previous generation’s mistakes but do so in a much more grandiose manner? Just look at the speculative phase we have entered now (credit bubble, real estate bubble and so on) it makes all the mistakes our ancestors made pale in comparison. We leverage ourselves to the our necks with debt to buy goods we don’t need and use money we don’t have to pay for them; the real estate bubble is one classic example of madness and history repeating itself on a gigantic scale. Individuals take home equity loans against the rising values of their homes and use this to finance their extravagant lifestyles. Is there anything more insane, taking credit to buy something more on credit? Anyway getting back to the topic at hand; no one is taught to look at the markets as a game and study the mass mind and behaviour of individuals and then learn how to use a few TA tools that are open to subjective interpretation. By subjective interpretation we are referring to the statement that “beauty lies in the eye of the beholder.” Each individual should see something different when using such an indicator; this TA tool must never be allowed to become standardized. If it is, the end is near. The ones that learn to correctly master this tool will come out ahead, however since the method is not available in a standardized format this system could work almost indefinitely. In the end mechanical trading systems are reflective of our lifestyle and the way we are as group of individuals; the 9-5 rat race and the zombie like nation where everyone thinks and acts like one. A mechanical system is also reflective of the fact that most of us do not want to think, we want everything handed down to us and when we get whacked on the head we cry like babies. It is for this reason we never seem to learn from history but only look for ways to perpetuate the same mistakes on a flamboyant style. The only way to break from this way of thinking is to actually attempt to start thinking and using your mind. There is nothing wrong with making a mistake because you might actually learn something as a result of one; perpetuating someone else’s mistakes provides no clues for improvement but only rules for self-destruction. At the very least some customization should be attempted so that the system is adapted to ones own needs. It amazes me that the easiest and most effective system in the world is not studied or followed more widely. The system I am referring to is trend analysis; all you do is spot a new trend and stay on board till the trend ends. Trend analysis involves the drawing of simple lines; it takes a little practice but is worth its weight in platinum. So let’s look at what type of system can and will work in the markets. First of all one has to understand the difference between contrarian investing and investing based on Mass psychology. Contrarian investing is a very simple system as it basically involves taking a position against the masses. Mass psychology measures the frenzy periods or periods of extreme hate or disgust towards a specific sector or sectors, and then a position is taken during these extreme times. Furthermore it measures the level of euphoria in the camps of those that believe in the investment. In other words it will measure how many of the so-called contrarians are now extremely bullish and euphoric on a given sector. In most cases when a contrarian takes a position in a specific sector he is doing so as counter move to what the masses are doing. However the majority of the contrarians are still nervous and keep checking their positions rather frequently to make sure that at the very least the bottom is in. Once the sector starts to take off and produce returns they actually lose this nervousness and become very bullish; in other words they have now entered the euphoric phase. This is where mass psychology kicks in. At this point it will be time for the smart investor to bail out, you may not be selling at the top but you will be pretty close to it. So understanding mass psychology is really an important and integral part of a trading system. Second is to master several TA tools and make sure you do not use them in a standardized manner. Thirdly you need to understand be patient and disciplined. You have to understand that sometimes you might have to wait for months on end before you can take a position, however you could be rewarded in weeks for your patience.
As irrigators lead water where
they want, as archers make their arrows straight,
© 2004 Sol
Palha
Alan Lunt Mechanical systems, a ray of light or a cavern of darkness? Any system is good for the time in which it was developed. In the early part of last century we had Dow theory, Elliot Wave and Fibonacci. They still have a place but they need revising to account for the new rule. The new rule is that money has no set value, not like under the gold standard where money was defined in terms of a base. Sure human emotion does follow set patterns, and to some extent median averages can follow those patterns. I am putting up a chart and you can put your own interpretations to it using whatever system is your favourite, there is only one interpretation I have. The Dow has already crashed and burned.
In terms of constant dollars based on 1990 the Dow hit a high of 7065. It lost about half of it’s value to hit 3669. Since then it has broken out of it’s down channel and is holding. In terms of constant dollars the Dow is valued today at 1.7 times its 1990 value, hardly a bull market. I read as many commentators as I can; many for them seek to find the correct count or ratio, the correct historical model. But until everything is based on a constant nothing will work properly for them. That is the joy of a fiat system; everything is hidden in plain view. When inflation, an increase of the money supply, is factored in we can see the evil of it. “Smoke and mirrors.” But this diatribe is about mechanical systems and do they work. I have tested nearly every indicator man has developed, some come close to perfect but are not to be relied on 100%. Mans emotions come in floods, extreme swings of mood in short periods, there are very few systems that can predict those mood changes and technical analysis is about prediction not history. My prediction is that the Fed will keep pumping the money supply at the current rate of 56 billion a month because M3 is dropping. Until money is lost to the system there will be no effect on the market. The fear is not there.
© 2004 Alan Lunt
Wayne Krautkramer MECHANICAL TRADING SYSTEMS! A BROKER’S BEST FRIEND!
WHAT IS A MECHANICAL TRADING SYSTEM? Mechanical trading systems are techniques that make trading decisions for you! You input the trading data, and the system generates a response that indicates the appropriate action. You buy, sell, or do nothing depending upon the formulas the system uses. The latest computer versions of these mechanical systems are complete "black box" operations. Turn the computer on, start the system, and it updates your data base, and generates trading recommendations, and places your orders directly to the brokers. Speed is of the essence in these hectic times. Every nanosecond counts when you are trading using five minute charts. HOW DO MECHANICAL TRADING SYSTEMS WORK? The most basic systems rely on moving averages. The more "sophisticated" systems use combinations of moving averages of both price and volume. The most "expensive" systems incorporate stochastics, which are the mathematical techniques for a non-linear science. These systems are reactive by design. If a stock or a commodity acts in a certain way, the system assumes that the stock or a commodity will continue to act that way. It generates this conclusion based on the formulas programmed into the system. Some" Black Boxes" also compute a large array of indicators in an attempt to increase "confidence" of an action recommendation. Most mechanical trading systems buy or sell "breakouts". The stock market calls these traders "momentum players." Their formulas assume a continuation of that movement. Should that movement fail to continue, the system will generate a loss, plus the commission cost. We must also recognize that most mechanical trading systems always have you invested in the market, either long or short! Their primary assumption is that the movement that created the breakout will continue. It therefore follows that you must take each trade to increase the chance of profits. Mechanical trading systems also require trading in many markets. This is an attempt to reduce total portfolio risk. Simultaneous long and short positions in many markets can reduce total risk, but it dramatically reduces profitability. The ultimate hedge results in no change. Trend following is the mission of mechanical trading systems. There have been many attempts to accomplish this goal. Defining the trend is the biggest hurdle. There is no universally accepted definition of a trend. Therefore, there is little agreement on how to follow the trend. CURVE FITTING or DATA MINING is the technique used to develop almost all mechanical trading systems. Christian Schaer of Agora Capital Services SA calls Curve Fitting a pernicious illusion! "Curve fitting, or data mining, is the "art" of drawing conclusions based on past information. When applied to an investment scheme, or trading strategy, history shows that (too) often such conclusions do not hold true once they are implemented. The end result is an unpredictable performance, often coming short of expectations. In people’s minds, the issue of curve fitting is mostly limited to systematic traders such as commodity trading advisors- who are perceived to build models by optimizing simulated past performance based on given assumptions." "This article argues that the trap of curve fitting occurs across a wide spectrum of investment activities and that most investors engage in curve fitting without know it" WHAT RESULTS DO MECHANICAL TRADING SYSTEMS ACHIEVE? We will first look at the daily charts for the last six months. This will give us some insight as to the actual profitability of momentum trading (acting on breakouts). We will use Mar Soybeans as one example for this discussion . We can assume that some mechanical trading systems bought Beans at 596 or higher in August. We may safely assume that these same systems sold Beans in September, at anywhere from a small to a large loss. Jan Crude Oil is our next example. We may assume that some systems gave a buy signal at $51 or better in Sept. They probably gave a sell signal at break even, or at a loss in Oct. Jan OJ is interesting. We must assume that many systems gave a buy signal on 10/01. We can assume a loss on this trade. Dec Cotton is revealing. Many systems bought at 48 or higher in August. Many sold at 47 or lower in September. Furthermore, many systems would have gone short at 47 or lower in September. This trade would have been covered, and you would have gone long at 47 or better in November. A look at the monthly March Wheat chart is more revealing. The latest CRB factbook discusses the much heralded " breakout " to the upside after many years of consolidation. A quick look at the monthly March wheat contract ( Use March to March basis! Not nearest month continuation charts!) reveals that the "breakout" was an fake. You would have bought March Wheat at 334 or better during July 2002. By April of 2003, March Wheat was selling at 279 ½. That is a loss of 54 ½ cents per contract, or $2700 plus commissions per contract! Of course you were using the margins recommended by your broker ($400 to $600), so you were forced out of the market by the margin calls. This assumes that you did not encounter "limit" moves, which lock you in until the market actually trades! Fortunately, other observers have described their experiences. Therefore, we are not dependant on any one person’s experience or biases. Bruce Babcock offers these observations: Mathematical analysis of commodity price data has shown that these price changes are primarily random with a small trend component. This scientific fact is extremely important to those desiring to pursue commodity trading in a rational, scientific manner. It means that any attempt to trade short-term patterns and methods not based on trend are doomed to failure. A good example of such a doomed method is Japanese Candlestick patterns. This theoretical conclusion is consistent with my previous research. Many years ago, just as Candlesticks came into vogue, I attempted to create a profitable trading system incorporating Candlesticks. I tried many patterns and many types of systems, all without success. I have never seen anyone else demonstrate the effectiveness of Candlesticks using objective rules either. Successful traders use a method that gives them a statistical edge. This edge must come from the tendency of commodity prices to trend. In the long term you can make money only by trading in synch with these trends. Thus, when prices are trending up, you should only buy. When prices are trending down, you should only sell. Turtletrader offers us this observation on breakouts: If you believe Trend Following is simply buying or selling a 20 day breakout, you are dead wrong. If you focus on breakouts as a Holy Grail, you’ve missed the point and are probably already on your way to losing your capital and, ultimately, your shirt. A trader who focuses on market entry only is in big trouble. Good trading is mostly money management or risk management. Keep in mind though, once you have the money management down, trading is 100% your personal discipline and psychology. For a discussion for on the effectiveness of STOP loss orders in money management, see DO STOP LOSS ORDERS LIMIT RISK? ABSOLUTELY, POSITIVELY, MAYBE! This article may be found at http://onlypill.tripod.com/factsthebrokersandfinancialreporterswonttellyou/id16.html Victor Niederhoffer claims that trend following is an illusion: Although Niederhoffer peruses the National Enquirer for insights into investor sentiment, he also uses less provocative trading methods. Niederhoffer makes money by finding small anomalies in the day-to-day ripples of markets for everything from currencies to coffee. He uses a statistical model to reveal how movement in one market might influence another, such as sugar affecting the price of soybeans. Most important, Niederhoffer is an inveterate contrarian. He feeds off panic, making short-term bets when prices get frothy. He condemns the common strategy of trend-following, which helped make his buddy George Soros super-rich. ''A delusion,'' he declares. Trying to read the future in chart patterns doesn't work, either. ''Deception,'' he insists. And when forces outside the natural order intervene in the markets, watch out. ''I think of governments as if they're run by a professional criminal class, taking from one set of pockets and putting into another,'' he says. The 53-year-old trader came by his unusual theories via a blue-chip education: squash champ at Harvard, finance doctorate at the University of Chicago, and an assistant professorship at the University of California at Berkeley. His transition to full-time trader is chronicled in a new autobiography, The Education of a Speculator. ''By paying attention to the little things, the nitty-gritty, the humdrum things in life,'' he says, ''you become a great speculator.'' Striker Trade Systems was candid enough to share this observation: Catscan was released in 1994. It used the same rules to trade 23 different commodity markets. It was a very unique, dual nature trading system. 99% of the current commodity trading systems are Trend Following systems. There is absolutely nothing wrong with that except for the fact that 70% of the time markets are not trending. Instead, they are in a Choppy mode. Trend following systems tend to get whipsawed to death in these Choppy time periods. Anthony W. Warren Ph.D reports: Trend-following methods typically utilize moving averages of closing price data for buy and sell signals. Often, the signals turn out to be false due to short-term market fluctuations. Here, longtime STOCKS & COMMODITIES contributor Anthony W. Warren, correcting one of the major drawbacks of moving averages, introduces a trend-following method that smoothes the data for trend identification and measures short-term price fluctuations to establish statistical boundaries. A final statement by Victor Niederhoffer and Laurel Kenner on trend following: Rule No. 1, carved in stone for all technical analysts, is that the trend is your friend. If ever there were a time that we could, along with the Cabot Market Letter, report the beauty of using a simple trend-following indicator that makes it "virtually impossible to miss a major market move," this would surely be that time. No wonder that 830 aspiring chart-readers, the most ever, registered for the Market Technicians Association’s annual competency exams on April 26 in Jupiter Beach, Fla. Granted that some users of trend following have achieved success. Doubtless their intelligence and insights are quite superior to our own. But it’s at times like this, when everything seems to be coming up roses for the trend followers’ theories and reputations, that it’s worthwhile to step back and consider some fundamental questions: Is their central rule, "The trend is your friend," valid? Might their reported results, good or bad, be best explained as due to chance? But first, a warning: We do not believe in trend-following. We are not members of the Market Technicians Association, or the International Federation of Technical Analysts or the TurtleTrader Trend Followers Hall of Fame. In fact, we are on the enemies list of such organizations. Another observation by Bruce Babcock. He gives a general warning to those individuals who are searching for winning trading techniques. One of the few real secrets in commodity trading is that most of what you read in books about how to trade does not work in the real world. Even books by respected authors are full of trading methods that lose money when put to the test. You may find this shocking, but almost no commodity authors demonstrate the effectiveness of the methods they advocate. The best you can hope for are some well-chosen examples or a few cursory tests.
Futures Truth
Reports...Do the FT Rankings Constantly Change Have you ever tried to pass up a rope? I have spent the last two days trying to analyze the Feb/March issue of Futures Truth. I would like to share my conclusions with your readers to start a discussion. I know we are all looking for the perfect system which works on all commodities with similar rules and parameters, but are we really looking for the impossible. The very best systems in Futures Truth were only good on a maximum of 4 commodities, and if you throw out such things as Pork Bellies, Live Cattle, Soybeans and Eurodollars, then no system was any good on more than three commodities. The best systems all had three or less unrelated commodities at the top of their lists. I thought that a good trend following system would test well on all the Currencies because they are very good trending markets. None of the systems tested well on more than one currency. No system worked well on any two commodities in the same group with the possible exception of Gold and Copper. They both tested very well under Welles Wilder's Volatility Movement System. There was no system that tested both T-Bonds and T-Notes, but they should test similar on a system. As I expected, the few systems that tested well on the S&P 500 were very poor on all other commodities. On non-trending markets like the S&P 500, Wheat, Lumber, Silver, Gold, etc., there probably is no perfect system to handle the random nature of these markets. So what I am trying to say is that there can never be only one perfect system for all markets. You need one type of system for trending markets; one type for random walk markets and one type of system for commodities that trend for a few months and then go into a trading range. In all three systems you would need an indicator like the ADX from Wilder's Directional Movement to tell when to shift gears from trending to trading range or to random markets when you should stop trading for now. Another surprise from my analysis is that pattern recognition systems don't test well in related markets. Arnold's Pattern Probability System (PPS) tested well on the Jap Yen, Lumber & T-Bonds - all totally unrelated markets. This reminds me of something that Hulbert said about his one-year ratings on stock market newsletters and their track record After over 10-years of tracking all the best timers, he finally realized that his six month and one year rankings were almost totally worthless. It seems last year's Guru is this year's goat. There's no consistency from one year to next, and you can't make money following last year's expert. This leads to one last conclusion - Futures Truth rankings continually change and I think this happens because all these systems are curve-fitted. If you test any one system's across 36 commodities and stock indexes, you should get the traditional bell shaped curve results which means that 10% or three commodities would test very good, and 10% would test very poorly and the balance of 80% would fall in the middle inside the bell curve. This might explain why only 3 or 4 commodities test well on any one system and why they are totally unrelated. They probably found an algorithm and then curve-fitted it until they got good results in 10% of the commodities. These price histories will never repeat the same way and systems are doomed to fail. Look at an old Futures Truth and see how many systems are still around, or even compare the "Top 10 since Release Date" with the "Top 10 for the past 12 Months". Only 4 out of 10 in the "Top 10 since Release" are in the current list of "Top 10 for past 12 months." Louis Mendelsohn made the following points about curve fitting, while giving a speech at a Harvard Business School Alumni Club Dinner: "Of course, the underlying assumption is that history repeats itself, that somehow by looking at past data, by doing some work on the past information, by modeling a market in that respect, you're going to be able to make money in the future. Needless to say, that's an assumption that hasn't fully proven itself in the real world. Nevertheless, that's all that analysts and traders have to go by. Unfortunately there's really not much new in the mass-marketed trading software area. Most of the technical indicators that are in software today are really rehashes of technical indicators that have existed for many years, for decades in fact, since the 70's at least, and early 80's." "Examples are things like moving averages. While they are very good at identifying trends, they by their very nature tend to lag the market. Of course there's been a great effort over the years by technical analysts in the futures markets to try to tweak out the moving averages, to try to reduce the lag in their response to the market. They've done that with various efforts like weighted moving averages, exponential moving averages." "There's been a tremendous effort by technical analysts trying to tweak out these various technical indicators that have been used for decades. Even displaced moving averages, which I find kind of interesting because basically it is taking like a 5 day moving average and computing it's value as of tonight's close and then just displacing it out, maybe 2 days or 4 days, into the future and making the assumption that the value 4 days from today is going to always be what today's value is". "It is an extremely primitive forecast that's being made. But at least, I saw, there, an effort towards forecasting rather than always looking at trend following. We're at least beginning to start to look at some form of trend anticipation, or being able to look at price anticipation, looking forward rather than just backwards. I felt, of course, that there had to be better solutions to the problem than just using things like displaced moving averages." "And, of course, there are other limitations that exist in technical analysis software today. The whole problem of curve fitting with system testing, which you may or may not be familiar with. Basically it relates to the fact that you can take a trading system, whatever that system may be, it could be as simple as a 5 day moving average crossing a 10 day moving average, and you're long when the short average is above the long, and vice-versa. You might tweak out the sizes of moving averages to optimize them to a specific market." The CFTC has declared war on fraudulent mechanical trading systems:
Commodity
Futures Trading Commission Office of External Affairs (202)
418-5080 Three Lafayette Centre 1155 21st Street, NW
Washington, DC 20581 SUMMARY We are forced to stay with what we "KNOW " to succeed in business. Thankfully, we do know the following:
FORGET THE DRAMA! TRADE WITH THE TREND AND PROSPER!
© 2004
Wayne N. Krautkramer John
Tyler MTS better than guess? Mechanical trading systems (MTSs) sound like a good idea: a winning formula is incorporated into a set of rules or a piece of software, and all you have to do is follow it to make money. That’s what the promoters would like us to believe: an endless cascade of cash generated by their system.
Do any, in my own experience, work ? A most definite YES. Some are computer programs, and others are knowledge and rule based like our own Nifty 50 Trading System. There is no such thing as a foolproof system. A fool can find unique ways to misuse a system that has taken decades to develop. Greed can make fools of us all! I can only speak with the authority of personal experience on The Nifty 50 System. It has been back tested to 1920, and I’m currently working on a set of tutorials starting with the Dow Industrials from 1900.In real time it has been profitable since 1998, and each year owners of the system are sent an update. It is not the Holy Grail however for a number of reasons- Why many don’t work There are MTMs that just use incorrect methodology or were optimized for a market dominated by a certain characteristic e.g. high volatility. This market characteristic then changes, so the system no longer produces profits. The most common reason is that the system just doesn’t suit the trader: There are too many trades. Some generate 200 trades a week. Great for the brokers and automatons, but not for humans. There are not enough trades to occupy the trader. Traders like to occupy themselves and think that the harder they work, the more money they’ll make. In my experience, the majority of traders will benefit from slowing down. This means waiting longer before entering a trade, and once in, being prepared to sit it out – at least as far as stocks are concerned. Time should be our friend and not foe. Systems may only be appropriate for certain markets and certain stocks. I emphasize to our traders that in illiquid stocks, the technical signals may not be accurate as they rely on accurate sampling. It takes discipline and nerve to stay with a system. Many just don’t want to put in the time required to learn a system, and some just find it difficult because of undeveloped computer skills and atrophied mental capacity. These can be overcome, new skills learnt and the brain sharpened again, but that’s hard in a world of instant fix answers. What is the role of an MTS? For many traders, an MTS has no role whatsoever if they want an instant fix and an effortless stream of riches. If such a system were to exist, the market would soon discount it. Nature abhors excess and deals with it in her own way, even if it means destroying the user with their own success. They are ideal for many however who are either starting out or lost their way.
© 2004
John Tyler CEO
Ole Bear, AKA Gale Bullock I Believe in Santa Claus It has absolutely amazed me that Mr. Greenspan has been able to re-inflate the DOW Jones Averages including Transports, Utilities, and the Industrials. He has failed, however, to get the NASDAQ Bubble back over 5,000. Some magic wand Mr. Greenspan has. Through the world of the repurchase agreements, the Working Group on Financial Markets, and the Big Boys diddling with the futures markets, “all that money on the side” appears to have been put to good use in a Great Secular Bear Market. Of course Bob Bernanke has been busy in the back room printing all that money on the side they so eloquently talk about on CNBC Bubble Vision, while that McTeer at the Dallas FED urges folks to hold hands and buy a brand spanking new SUV that eats gasoline. Greenspan says real estate cannot be a markets bubble, because all real estate markets are local. In a similar vein of Fool’s Gold, he urges folks to commit Hari Kari by taking out an ARM mortgage loan so they can save all that money in a rising interest rate environment. The great illusion is that the Bull has been reborn. Some pundits have even had their head handed back to them on a silver platter, much like John the Baptist. We suspect most mechanical systems will work fairly well in the short term and the short view, whether one is a proponent of Elliot Wave, DOW Theory, or just plain Technical Analysis. There is something in this market for everyone. Google.com at $175.40 per share today, defies my imagination and reason. Of course $300/share for JDS Uniphase at the height of the NASDAQ Bubble seems like a fairy tale when we are now in its LA LA LAND of $3 and change/share! This is what I call a chain saw massacre. Bright Beam of Light for Day, Pivot, and Swing Traders with Google at $175.40/Share Let’s look at the DOW Industrials containing 30 stocks:
We have been to the Abyss and done a hop scotch over it, apparently. Whether one uses Wave Analysis, TA, Pivot Analysis, Dow Theory, Martin Weiss Theory, our your own brand of market and chart analysis that works for you, there is money to be made in the above chart. Today’s FOMC at the FED gave us another 25 basis points in the FED Funds Rate, now at 2.25% and the mumbo jumbo from DA FED on the CNBC Bubble Vision is all about “Balanced Risks.” The truth in the above chart is that there is no such thing as “balanced risk,” when family money, and my money is on the line in this market with me as the “caretaker” of the family cash. One is damned if they do, and damned if they don’t. The savvy trend is your friend trader, using whatever mechanical trading system they use, can still make money buying and selling stocks… if that is all they are doing 8 AM to 5 PM. This is what I call baby sitting the market and one’s money, investment capital, and profits [in order to make money and avoid trading losses]. A lot of my global markets guru friends are doing quite well in the gambling casino with their mechanical systems, even though they are smart enough to understand that a Great Secular Bear Market exists for generally 10 to 12 years. These guys earn my respect and admiration for having very little fear. These rascals have the ability to stare at the Black Bear in the Dark Cavern and reflect the light of the Bear’s eyes and teeth into their mechanical system. That’s a feat of magic in our view! That is NO FEAR, and in our view the RED BADGE OF COURAGE! – should they get a little mauled… The Cavern of Darkness – Rogue Waves, Don’t Buy Treasuries, and Fannie Mae I think everyone is too sanguine about this de facto competitive devaluation by the US. To me, this is very serious, and a very dangerous policy pursued by the US. I've never heard any central bank telling the world not to buy their assets. But this was essentially what Alan Greenspan said in his Frankfurt speech on November 19. We are now talking about a gradual sell-off in US Treasuries that would take yields on 10-year notes to 5.0%. But if the world really were convinced by Greenspan, why would bond yields stop at 5%? Why should US equities be spared? – Stephen Li Jen from Debating the Dollar Anyone with half a bird-brain knows that Greenspan told folks at his speech November 19, 2004 in Frankfurt, Germany, not to buy US Treasuries in a “daunting and measured balanced risk” FED$PEAK-EASE to weaken the US Dollar. John Mauldin’s “Outside the Box” editorial Debating the Dollar is a most interesting read, and full of good stuff in this Cavern of Darkness. Thanks, John! What was the all time high on the DOW Industrials? About 11,600 to somewhere about 11,800, wudn’t it? Heck, I don’t remember, as that’s Ancient Wall Street History Class 101! Let’s Assume 11,800, shall we? I measure currency destruction by the FED and Bernanke’s printing press in the so-called inflation of real estate prices [novices and idiots call it realty price appreciation – See: Blitzkrieg Essay #5 – Ponzi and Electricity]. Let’s assume that realty in all markets of the USA appreciated [currency destruction, or inflation] 10% per year since Year 2000. That’s four years. 11,800 would coincide with the top of the morning, and the top of the DOW. Assuming compound interest like your typical banker [11,800 x 1.1 x 1.1 x 1.1 x 1.1 = 17,276], the DOW should be at 17,276 today. Sorry, Charlie, It Ain’t! OK! Assume your realty market’s not so hot. Let’s use 5% appreciation [measure of currency destruction]! Doing new math [11,800 x 1.05 x 1.05 x 1.05 x 1.05 = 14,343]! Sorry, Charlie, It Ain’t! Ye Gads Gerome! Gee Whiz! I just love playing with a Hewlett Packard 12-C Financial Calculator! This is what I call the time value of money, albeit paper. The point is, if the mechanical systems huggers, are doing pretty short trades as they baby sit their capital, profits, and money, they probably are making some pocket change for the risk they are taking. If their trades are not short term, effectively they could be losing their long-term assets in their mechanical system model – Time Value Money-Wise. Now, that’s a true Cavern of Darkness with a lot of risk when DA FED actually controls the Financial Markets, including real estate which cannot be a markets bubble, since it is all local. Sir Alan, give me a break, Pal. I ain’t stupid, and, Nope! – I like my Gonads and my Feet [shooting oneself in the foot, if you miss and hit a more vital spot! Big Ouch!]. I will also steer clear of an ARM mortgage just as I would avoid going into a city infested with rats with fleas [hummm, the FED could be infested?] carrying the Black Death! Rogue Waves? See: Jim Puplava’s Perfect Financial Storm Series Fannie Mae? See: Realty Reality for our favorite fudge candy. Call It a Rap, Put the Moon to Bed, and Boogie On, Baby! We recognize the ability to play the casino on Wall Street. Some Folks [Pundits] can make money buying and selling stocks when these folks’ only pre-occupation is baby-sitting their capital, profits, losses, and the markets -- whether they are reading tana leaves, tea leaves, used coffee grounds, chicken entrails, or a mechanical trading system that works for them. To be sure, there are profits to be made, in coming inches to eyeball with the glint of light in the Great Secular Black Bear in this Cavern of Darkness. I applaud their courage, tenacity, bravery, and skill. They have more Gonads than I, since the bulk of my portfolios belong to folks over 75 years of age who can only tolerate minimal risk. I won’t risk the Family Jewels on a trading model given the circumstances of the Family Trust. But, it can be done, if the trader can sell at the pre-ascribed set trading loss to recover capital. Mechanical Systems to me are like Baby Sitting 101, in our view, when I have another job to do to take care of making my income. Besides, when there’s a rigged DA FED controlled Gambling Casino, why bet and play, and lose your capital? I take a more holistic approach to the markets for the portfolios I manage. I recognize that at any time I wake up, any stock or mutual fund [Eliot Spitzer, read me, Baby!], can get hammered on the news, insider fraud, accounting irregularities, or a financial melt-down. I understand the destruction of the current money system [Federal Reserve Notes] and the FED’s role in manipulating the heavy metals markets, because I follow Midas Bill Murphy and www.gata.org. I believe in ownership of physical heavy metal as part of my investment strategy. I believe that I cannot play options with any degree of certainty because of the FED and its Wall Street Shenanigans. What should go down does not, and they snick my money. Playing the Bull, makes no sense in a Great Secular Bear Market. Moving money off-shore to alternative currencies in numbered accounts makes sense, in addition to goldgrams at www.goldmoney.com. Being in a trading house money market fund exposed to the GSEs’ ability to use money market fund intermediation is pointing the loaded .45 Colt at my Feet. I prefer cash only US Treasuries [I can only lose how much Bernanke prints!]. When one recognizes that the FED has destroyed at least 95% of the purchasing power of the 1913 US Dollar, that the FED will do anything to perpetuate their Ponzi Shell Game of Paper Funnie Monie and the Financial Markets, this all is one big rigged Gambling Casino Crap Game that I can’t play in with short term trading mechanisms, since I don’t want to baby sit Family Money every waking minute. I have a Life and a Future! Some would say that I am just a Chicken. Perhaps, so. Cluck, Cluck, Cluck! Denouement Interesting essay on www.mises.org. I direct y’all to Sean Corrigan’s The Saga of John Law and Richard Cantillon. A most interesting read. We would also direct to this scribe of Reg Howe: Déjà Vu: Central Banks at the Abyss, which was fortuitously posted on 7 December 2004. We view the financial markets as a cavern of darkness, a deep dank black hole that sucks in the believers cash for the long term pivot play. In this black hole are a multiplicity of players waiting to fleece the investor of their hard earned cash if they don’t carry a flashlight or lit candle to illuminate their trading model. Given the real returns to Wall Street gambling with the current destruction of the paper money system, short term gains can be made, however, the long term prospects of doubling one’s money are Fool’s Gold in our view. The best trading mechanism for pivot plays in the financial markets will include several delta hedges that include physical ownership of real money, aka gold and silver bullion. The DOW at 14,000? The DOW at 17,000? Possible, perhaps. But why take the risk in such a black hole of Calcutta? Besides, I would rather believe in Santa Claus than financial markets acting freely for my money. Baby sitting, in our view is just too much work. Been there, and done that getting all of my portfolios to safe positions.
© 2004 Ole Bear Art
Soukup Mechanical systems - Are they a ray of light or a cavern of darkness What an interesting question that the Contrarian Roundtable has decided to address. The above question is being asked in the context of an observation written as " To many people have been fooled into following a mechanical system or a newsletter that follows one, only to lose their pants and their shirts." Before that question can be examined, in order to generate a correct answer, it is necessary to address two other questions. Once done, we are prepared to talk about light beams and dark caves as the roundtable members polymorph into quantum-mechanical physicists dressed up as spelunkers. We are spelunkers because we are going into a dark cave. We are quantum-mechanical physicists because we are carrying a electric torch ( flashlight); which is a quantum mechanical device. A long rope with lots of knots will get us into the cave and then serve as our abacus to do calculations. If you want to think of the rope with knots as your trusty newsletter or your computerized trading software, that's fine. Its a really good rope with plenty of knots for everybody to hold on too and do the calcs. Chris Laird and myself built it many moons ago, so we could proceed to "do the cave thing on a vast range of subjects." Also, somebody is going to have to strap on a waistband that carries "THE POUCH". Now at this point in time, because I am the only guy at the Roundtable who knows what's in "THE POUCH" I guess I should carry it; a grim task that I do not relish. "Wait a second." says Sol Palha. "I second the motion." says Alan Lunt. "What was the question that got seconded?" says John Tyler. "Oh" says Sol. "Grim task!! What's in THE POUCH?" and "Is this going to hurt anyone?" says, Sol. "Yeah" says John. "'We want to know before we go! Harump.... Harump.... All this stuff about rays of light and dark caves with stinky bat dung, pools or water that have fish with big sharp teeth and of all things NO EYES, spiders running everywhere, slippery rocks, holes with no bottoms,...almost wish we never asked the dumb ...errr.. Brilliant question." "Yeah, and what about the poisonous snakes!! Don't forget the snakes, Art. Be a heck of a way to go." says Alan. Alan silently thinks to himself..."Hmmm...maybe the pouch is a med kit???" Well Roundtable, to answer the TWO questions that were seconded before they were asked: No, I am not going to tell you what is in "THE POUCH"; at least not yet; and YES you are probably going to be hurt, but the bright side is that the pain will probably only last forever. Besides, Mary Puplava is standing at the top of the cave doing what Mary does best; and as far as question go I would like to say that there is no such thing as a dumb question or a brilliant question. There are only dumb answers. "Which is?" says Sol and John and Alan in unison. Why hosting this Contrarian Roundtable you see; and of course praying. "Oh yes. I see. Hosting the roundtable. Thanks, Mary. Without your wonderful support we would not be here" says All. "Say" says Sol, "What's Mary praying about?" Well, In addition to holding onto the rope so we can climb out later, she is praying "Please,please,please... Whatever happens from this point on and until they all come back, please do not let events unfold in a manner that will compel Art to open the pouch to perform the grim task." "Gee" says John Tyler. "Sounds like we are supposed to be more fearful of the pouch than anything else in the cave...I mean bat dung, blind fish, spiders and all." "Yes! Of course!" says Alan Lunt. "By being most fearful of what Art has in the pouch, nothing in the cave can bother us, and we can all do the quantum thing; find out why people are losing their shirts as good quantum-mechanical physicists should." "Wow" says Sol. "You have nothing to fear but fear itself; and Art's got it in the pouch! Time to Rock and Roll. I got the flashli.... err TORCH, so I'll go first. John, Alan, take shotgun along with the other roundtable members, Art bring up the rear." As the Contrarian Roundtable ropes down into the cavern of darkness, I take the time to remind Mary that this is a good time to start praying. In fact, it would be a real good time for all the readers of this article to pray along with Mary. We are going to need it. Half Way Point. As the party rests a bit half way down the cave, we find questions scribbled on the wall. Sol does not turn on the torch as we still have a little light from above. John and Alan notice that all the readers have come along with us and are murmuring and humming. Casting a glance at each other, they say nothing. The readers are probably just reacting to the first whiff of bat dung and assume they will adjust in a moment. Alan thinks that he heard one of the readers whisper "peas,peas,peas," but because of the strange way sound echo's then muffles, he can't be sure. Besides, Art is looking at the questions and explaining. Question 1 - Is there any system that has ever been effective? Question 2 - Is there is such a thing as a "black box system"? For Question 1 the answer is yes. An example is a scissors, a closed mechanical cyclic system, which always performs as long as the critical parameters of the system remain within limits. The parameters are sharp blade edges, un-broken pivot point, strong hand to provide the energy for cyclic repeat. Snip,snip,snip goes the scissors to the front-page of your newspaper. Look kids, a bunch of paper dolls to dress up the Christmas tree. For Question 2 the answer is yes. An example is a red-tipped paper "match", or as the Germans like to say, a "lucifier.” Has-du-ein-lucifer-bitte?,,, Do-you-have-a-match-please? A lucifer is an example of an open non-cyclic "black box" mechanical system. An input of friction to the red-tip, an brief output of fire and light, a gentle wisp of smoke as a reminder of its past. Something happened here. I started out with a red tip and ended up with a black tip. An input to the black box system and an output from the black box system. Trying to figure out what is inside the black-box system is what research is all about. So with two examples we now know that "systems are effective" and "black box systems exist". And more examples can be searched on the net after we get out of the cave. With everyone rested and Q1 and Q2 answered the readers start climbing back up the rope. They see that the way down is getting darker, the passage is narrowing, and by now they have heard something about a pouch, a fearful pouch, a pouch full of fear, and the "peas,peas,peas" guy is insisting that the Roundtable guys were talking about a "pouch potato." Whatever the rumor was, a few decide to stay at the half way resting area, and shout up to the top what they manage to hear. The Roundtable proceeds to the BOTTOM. At this point voices and names all blend together and it is just a stream of sound when anyone speaks. No one can tell who said what, so we all agree to speak slowly with plenty of pause time between sentences. Plenty of think time between sentences. Bottom of Cave. We are now ready for the headline question........ "Mechanical systems - Are they a ray of light or a cavern of darkness?" Strange as it may be, the mechanical systems question has five answers. FIVE answers you say!!! Wait a second, that's impossible. I only see TWO choices in the question! How can 1+1=5? Well, when it comes to math, 1+1=2. But the way the question is stated, it allows for 5 events; because a two choice "OR" question has 4 knowable events and 1 NON-knowable event. In order to understand the 5 events, I will reduce and restate the question; always keeping in mind that we are doing this in order to find out why "To many people have been fooled into following a mechanical system or a newsletter that follows one, only to lose their pants and their shirts." MECHSYS equals "A" "OR" "B". MECHSYS equals "NO ray of light" or "cavern of BRIGHTNESS" <--FIRST knowable event. MECHSYS is 0 0 <--FIRST knowable event....reduced view. MECHSYS equals "NO ray of light" or "cavern of darkness" <--Second knowable event. MECHSYS is 0 1 <--Second knowable event....reduced view. MECHSYS equals "ray of light" or "cavern of BRIGHTNESS" <--Third knowable event. MECHSYS is 1 0 <--Third knowable event....reduced view. MECHSYS equals "ray of light" or "cavern of darkness" <--Fourth knowable event. MECHSYS is 1 1 <--Fourth knowable event....reduced view. MECHSYS equals Fifth non-knowable event. MECHSYS is x x ? <--Fifth NON-knowable event....reduced view. x means we do not care what the bit settings are. ? is the NON-knowable event. The first 4 events are knowable and we will now name them. Event 1 is called OFF-Bright. The flashlight is off, but the cave is glowing with light. Event 2 is called Cavern of Darkness. The flashlight is still off, and we can not see anything. Event 3 is called Light-Bright. With a ray of light now present, the cave is also glowing brightly. Event 4 is called Light-Dark. With a ray of light now present, but the cave is now dark. Notice how the Fourth knowable event is also an output that you can get from the word "AND". MECHSYS is 1 and 1 MECHSYS is "ray of light" AND "cavern of darkness". The torch is turned on. We heard a "click." We all assume that Sol turned on the torch, because he was carrying it when we started into the cave. Everyone hears a swishing sound and thinks it bats or something, but I know it is just Sol busy waving the torch; wondering how come he cannot see a light beam, and how come when he shines it at what he knows to be a cave wall, there is no reflection. Lost in thought, no one wants to admit that the torch is on but the cave is dark (according to EVENT number 4) so everyone pretends that the cave is bright (according to EVENT number 3); and it is so. The conversation continues. Man, This rope and knot calculator is really neat. I can feel the 0 or 0. Yeah, And I can feel the 0 or 1. Me too, I can feel the 1 or 0. And I can feel the 1 or 1. On top of that I KNOW that as I feel the 1 or 1, it is also a 1 AND 1. At least for a moment, until it changes. Which gives me a real big problem. How so? Well my math says 1 OR 1 = 1, but 1 AND 1=2, but 1 only get 1 out, so the AND is kind of like an ADD, < |
