This and That and the Other

I have made the case for the market, there's not much I can add to it accept to update it and look for or manage positions.

There are some really nasty structural defects in the market that I think will exacerbate a real panic decline which is what most of us like to think of when we think "bear market", but did you know on average there are just about as many up days as down days in a bear market? Then of course Wall Street will try to keep you guessing if you are really in a bear market or if you may be near the bottom of one; how do you think traders felt just 2 and a half months after the initial 1929 market crash when the market rallied for the next 5 MONTHS and gained about +45%? How many do you think may have thought, those 2.5 months of crash were just a fluke, especially after a bull market of about 8 years that gained almost 500%?

Did you know there were at least 5 (more depending on how you count them) of these bear market rallies like that first one mentioned above? 

My question to you is this, looking back at the most easily identifiable bear market in equities, "Do you think you would have had the fortitude to reap the reward of approx. 346 points of a possible 386?"Or do you think watching the market day after day for 5 months push higher and higher may have scared you out of your positions? Even if you had the benefit of multiple objective sources that all pointed the same direction, which established the direction of highest probabilities?

What about this?

After the initial decline and what looks like capitulation volume possibly calling an end to the decline, and BEFORE the counter trend rally I mentioned above, what about a month of higher highs knowing the market had gained 500% before this 2.5 month anomaly?

Yes, trading is hard and Wall Street is there to make it even harder because someone has to lose in a zero sum game for someone to win.

I'm just trying to point out a few things, like how narrow our view can be sometimes, this is the 1929 crash in full.

To ride that bear down seems pretty easy when you look at it like this, but I just showed you a month long period and a 5 month period, had you exited out of fear at the end of that, you would have missed the rest of the gains from 300 points to about 44 points. It always seems so much harder when you're in the middle of a day and the market is up half a percent and you feel panicked. This is the hardest lesson I ever taught in my years of teaching trading, to get people to look at historical charts with emotion, to understand how you would have felt, to understand what is normal and what is not.

What if you had this 3C chart back then? 

Knowing this chart confirmed most of that huge rally and then seeing a change in character at the white arrow where price suddenly saw a huge increase in the upside Rate of Change and 3C started telling you distribution was taking place? Unfortunately we can't see what the 6 other timeframes we use had to say back then, I wish I knew, but knowing this  (which does not show how far the DOW actually fell to the right), would you have been able to use the data because I haven't heard of too many other indicators that predicted the reversal?

This is why I quote people who are smarted than I am and who can say it far better than I ever will be able to, respected traders like Jesse Livermore, a man who was a notorious bear during this period and known for bear raids, known for making his vast fortune (3 times) selling the market short (not that I am saying I'm a perpetual bear, I just want to be on the right side of the major move).

It's advice like this that is so easy to dismiss when you are too close to events or your risk management is not up to par, but looking back historically, there's a reason this man is considered the "World's Greatest Trader...

I think rather than talk about the little things which we already know (of course I'll cover anything relevant), maybe it's good to contemplate some advice from those who we can learn from.

For instance...

“I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that.”

Even with HFTs and all of the other changes, 2007/2008 bore a lot of resemblance to 1929 in a scaled way, but as I always say, the market is fractal in nature for the very same reason he says there's essentially, "Nothing new under the sun".

I'm sure you've heard the full version of this one...

“Money is made by sitting, not trading.”

“It was never my thinking that made the big money for me, it always was sitting.”

“Men who can both be right and sit tight are uncommon.” (We'll deal with this again)

If we consider those quotes, it's clear what he's saying, once you know the probabilities, stick with them, but how? This is where the lesson is yours to learn, what prevents you from "Sitting"? Too big of a position size? Too tight of a stop? Emotions? A partner who doesn't support your trading? Unrealistic expectations of how much money you need and how much money you can make trading for a living?

This one is hard for even me to contemplate...

 “Don’t give me timing, give me time.”

I understand this is in the same category as the above, however one of my things is trying to nail down the timing, but I do understand the quote in this context. When I did NOTHING else but trade (that means no additional income which can be a very stressful job), I blew up an options portfolio because as you've probably heard me say, I was using them exactly the way Wall Street designed the derivative products and the house always wins.

It wasn't until I started doing the exact opposite of the allure of options, for instance spending more and buying quality over spending less and buying quantity or buying expirations that were in many cases, 10 times longer than I anticipated needing, that I finally was able to use options as a tool when needed.  You always here the stories of option trade jackpots, hitting the timing just right with a large supply of out of the money options and a 500% gain, but you don't hear the rest of the story or see how it ends. With options, I've learned to try to get the best timing possible, but the most important thing to my success with them is to have enough time on the contracts, that's what made the biggest difference .

How about these two...

 “Nobody can catch all the fluctuations.”

 “The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

What can we learn and apply? For me, patience is a big part and having good reason to enter, exit or otherwise change or leave a position alone.

I've made the mistake of making too many trades, when I first started trading full-time I didn't have a supportive spouse, I felt I HAD to show her I could make a regular paycheck so I turned away from my then chosen method of swing trading as I may have to wait weeks for the gains and started day trading. I was able to make some money, but at 100-200 trades a week, my transaction costs alone could have easily paid all of my bills for the month.

As you saw today, earlier there was some evidence for opening some new trades, but it wasn't enough. In the past, I can't say I would have had that same discipline or patience, in fact on of the hardest things for me to stop doing was chasing trades, the hardest thing for me to do was learn to take a trade even when price and popular opinion as well as my own emotions were totally against it.  However I learned that these positions gave me some of the best entries and they actually had the least risk. I suppose you could say I not only had to learn patience, but I had to learn to trust in faith and probabilities because there's no (LEGAL) greater edge than the best, objective case you can make for probabilities.

Also the action or the need to get back losses quickly, this is a business, there are business costs and not every business will survive, that's just truth. However a surefire way to destroy your business is by making it personal and treating it like gambling.

Those are just a few things to chew over and there's no right answer for everyone and you may disagree, but I think someone so successful that JP Morgan himself had to ask Jesse to stop shorting the market to prevent a collapse of the banking sector and economy in 1907, deserves to be contemplated.

For my part, we all know what the recent Investor Intelligence Percentage of Bears has been, all time lows, we also know that Investor Intelligence is one of about 3-4 sources that is used to construct "Dumb Money " indicators, essentially, when dumb money is at extremes like this, you want to be on the other side of the boat.

Since I have always kept only a tracking portfolio because of time constraints and because I want to keep track of all ideas put out there, it's not an optimal representation of what a real model portfolio would look like, having 20-60 stocks in a portfolio is not my idea of trading, it's over-diversification in my view. However, at times as you know, especially when there's been a significant shift in the market, I like to see how the tracking portfolios are doing vs the bulk of traders, in other words, see how our positions measure up against the crowd.

I only recently started a "Trading Portfolio" mainly to see if I can maintain my level of commitment to the site while trading my own portfolio without risking my money due to not having time to pay enough attention. I've long considered this, there are several issues that I have had to consider such as trust of members that I'm not front-running a trade in a small cap and then putting it out for the membership, I think I can do that with timestamps to prove that the idea was given to members before I acted on it. One of the other issues is the "Follow" issue, I don't want a portfolio like that to become a "Follow me" portfolio because there's no idea that I'd put out and wouldn't trade, but I may not have room to trade an idea, that doesn't mean it's any less of a good idea. I'm sure you get the point.

So I'm seeing how it is going and I'll likely start a small portfolio because I don't want to miss the opportunities this market is giving and going to give which I think will be historic, a small portfolio will alleviate some of the "Front running" concerns and I think it would be a good lesson in risk management which the new site has some new additions like the 2% rule calculator because small portfolios with larger transaction costs are by far the hardest challenge. I'll see how it goes, but I'm thinking as soon as I wrap up the transient marital issues later this month (if you know what I mean) I'll likely move forward with the new site opening.

In the mean time, I did check today to see how the positions we set up in advance fared against the crowd.

THE TRADING PORTFOLIO IS ONLY 9-DAYS OLD, there are no options used, just equities and ETFs, I run about 6 positions on average and so far that portfolio is up +13.7% since 9-days ago.

To put that in perspective, the median performance for all hedge funds is 6% as of November for the year, if I wrapped it up for the year right now I'd double their average  performance and these guys make 2-3% in management fees and 20-50% in incentive fees for profitable trades above the high water mark.

I was surprised that none of the tracking portfolios had huge gains, yet they outperformed the group by a wide margin.


 I first heard of this site because MIT had a trading contest using it and it's one of the most realistic with margin maintenance, trade slippage, interest, transaction costs, etc. Unfortunately it was only after I had opened a good number of positions I found out that you can't see anything else other than another member's rank and last trade unless you pay a monthly fee, I should have checked it for webmaster tools, but since then I've found no other substitute outside of a spreadsheet which can't give all of the same reality based functions without a lot more programming know how then I have. CBOE also has a pretty interesting site, but there's no way for me to migrate open positions to the new site without opening new trades and that defeats the purpose.

The portfolios performance below starts with the trading portfolio which was just opened. The "Rank" is versus all other players on the site for the timeframe seen to the left (weekly/monthly), I've actually won numerous times which is supposed to come with a cash prize, but I've never seen that. The "Return" is for the same time period and it shows the SPX's return for the same.

Below that (blue) you can find out how many other contestants there are, for example, the Trading Portfolio at the top ranked #57, below you can see that is 57 of 6,527 other "players".

You'll also see the options tracking portfolio which I keep separate and the Core position portfolio.

The point of sharing this is not bragging rights, I've had much higher scores and not shared them, it's when we have transitional moments because it shows me how we did vs. the crowd so in a way, it's a sort of "Sentiment" indicator. On a week like this where the trading portfolio places in the top .008%, I can see we were on the right track while the majority were pursuing a different course.

Keep in mind that all of these except the newest "Trading " portfolio are WAY over diversified for me (I can achieve diversification with 5-6 positions without killing performance), I'd never run a true portfolio like that as your winners represent a very small fraction, but when the entire portfolio does well, I know we have good stock selection.

On average our "Core Shorts" have been outperforming the SPX by a 7:1 margin on down days, (if the SPX is down 1%, the entire tracking portfolio is down -7%) which is fantastic.

*See below for additional comments

Trading Portfolio Weekly

Options Tracking Portfolio

Options Tracking Portfolio

Core Position Tracking Portfolio

Core Position Tracking Portfolio 

I have a board meeting to attend in which I'm making a $160,000 decision for the community as Treasurer and Secretary (In FL, a corporation only needs a President and Secretary, they are must haves).

I'll take another look at the market and emails when I get back, but I think pondering some of the quotes from above may be a very useful exercise.

When the new site is online, we have a ton of new tools and features that will open your eyes to your trading, trading in general and lots of other details you'll find no where else as well as new features like the Risk Management (@% Rule) Risk Calculator and much, much more.