The Week Ahead...

I have to say, I try to convey general market concepts that we witness time and time again and in every timeframe as the market tends to be fractal in that way. I like to make evidence based decisions, I don't like to try to predict or fill my analysis with opinion. I'm really amazed and proud how many of our members have not only understood these concepts and embraced them, but are able to offer high probability situations that we need to be on the look out for, evidence will confirm the possibilities and we decide how to move forward from there and still we have a good edge on the market, retail and price so we're still ahead of the game.

In looking at futures tonight I'm not convinced of anything regarding the Euro, $USD and $AUD (although it seems to me $AUD sees near term weakness as there are good signals there.) The Yen however which has had an increasingly strong gravitational pull on the market largely due to carry pairs, looks very much like it is really getting ready for a strong move higher which would be largely market negative. This is entirely consistent with the "Currency Crisis posts" (both can be found at the preceding link) that centered almost exclusively on the Yen's increasing influence in the market and not in a positive way as well as the $USD's increasingly bullish position (again not market positive).

However what I do see in the Equity Index futures tonight is entirely consistent with the distribution signals of Thursday and Friday and here's where market concepts come in to play.

The reason for a bounce/rally in an environment of declining fundamentals as well as market breadth and the evidence that helps confirm them (increased volatility, extreme moves that are meant to change market sentiment from one side to the other as well as increasing unpredictability and increased ATR) is almost ALWAYS to achieve a goal, it is nothing like the goal that would seem obvious, for instance new highs in the SPX would seem there's market confidence, few would see that as a bull trap in which Wall Street is trying to create that confidence to sell in to and sell short in to, but then again, few have given much thought to how different it is for "us" to move in and out of a trade vs. the way Wall St. must move in and out due to sheer size and the fact that if they give away their position all is lost (price goes against their position, the market goes against their position and predatory HFTs attack them).

The concept here and that we have proof of is to create confidence iin the market, to create retail buying, the demand and higher prices needed by Wall Street to sell large positions and start new large short positions in to, they need retail believing in the rally and buying it to do all of this so it is not surprising to get new SPX highs before a weekend when it can be pasted all over the news and entice retail, it's not surprising that centennial marks like 1600 are hit as the human mind gravitates toward whole numbers. It is not surprising that we have seen distribution signals in to this move because it just confirms exactly what we thought the move was for and that was well before it started when the signals of it getting ready to start were becoming obvious.

The question really is, where do we buy in to the reversal that is the second part or the real part of this concept? I have mentioned the distribution signals are there, but two days I held off from entering new shorts and both days I was proven correct as the market moved higher because there were a series of red flags telling me, "Something isn't right, we are not there yet, be patient".

Leading indicators told me the same, consider High Yield Credit making a new high on Thursday in to the market close, a clear signal Friday would not be a down day. This doesn't mean we want to buy the market Thursday because it was a LONG way from giving strong confirmation signals of a high probability trade, this is where we pick and choose our battles and wait for the high probability/low risk trade to set up, not just the direction of greatest probability, that doesn't always make for a profitable or smart trade.

The one thing that has not escaped my notice is that many of the long term Leading Indicators are in the worst position I have seen them in ever (very market negative), but their near term versions have not yet turned and that can take some time or market volatility (market chop-big moves up and down such as Wednesday and Thursday of last week).

The other thing I noticed is even with SPX $1600, the thing Smart Money needed the most, Retail buying, did not elicit the kind of volume that the move was designed to create, this was the entire basis for the move, to allow smart money the demand they need to move positions and start new ones.

Part of me has wondered if we get market chop, if we head higher trying to get retail to bite or if the, "He who sells first, sells best" concept takes hold on Wall Street and something like AAPL happens, every large fund is trying to sell at once knocking 300 plus points off AAPL and about -40%, when one moves they all move.

Then one of our members who has embraced the concepts sent me his theory, I put the concepts out based on observation and try to show you the proof and you embrace them and make them part of your thinking and trading (if I do my job well). Here's what he suggested and them more I think about it, the more it makes sense.

Retail didn't give Wall Street the volume and excitement about the new high that Wall Street really needed, so why keep beating a dead horse, if SPX $1600+ didn't do it, what will another 10 points do, especially when it's becoming very obvious that it is very difficult for them to manipulate the market up as we have seen in the SPY Arbitrage and confirmed with our Leading Indicators.

An alternative theory... What if they knock the market down and they draw in the willing and ready shorts? There are plenty who know this market is a house of cards and some who realize the F_E_D is carving out their exit from accommodative policy, if you have kept up with F_E_D and F_O_M_C announcements since Sept. 13, 2012, it's almost impossible not to see that. Shorts are more than willing to step in, especially after so many have been burnt, market breadth and many other basic indicators they have access to show this market is as Ron Paul called it this weekend, "A House of Cards". We have the volatility to create a convincing downside move, a good 2+% move will change sentiment real quick.

So we have our shorts in the market in pretty large size, since retail wouldn't bit to give Wall St. the buy-side volume, what's the difference if the buying comes from excited longs or scared shorts who have to "BUY TO COVER"? The keyword is "Buy". On the tape there's absolutely no difference between buying and buying to cover, both are buying, but perhaps with excited shorts scared off in another volatile move to the upside, Wall Street can get the volume they need.

This would also give leading indicators plenty of time to diverge short term like I think they need to do and as we have seen them start to do.

So far this is nothing more than theory, but one which we can confirm and one which we can use to our advantage. Whichever way this plays out, we'll be using evidence based methods to make our decisions ahead of the crowd, this just happens to be a particularly brilliant use of the volatility, the unpredictability, the large ATR and true market sentiment or at least sentiment that is more widely believed than another 100 S&P points to the upside.

If this is the case, there are several short term plays we can make a good chunk of change on and really know where the perfect spot to back up the truck and load up on positions truly is. I'm very proud to see members understand the concepts so well that they can really understand what Wall St. needs, what their options are to get that and what the market conditions are that would allow it.

Of course this is a theory for now, but one that is well thought out, that understands the market dynamics and the games Wall Street plays and personally, I like it a lot, this is truly, "Thinking like a Crook". However, as always, we'll let the market confirm or tell us where the probabilities are and take positions based on that.

As of tonight, even though the 3C Market Index charts look horrible, ES for CONTEXT (even though many markets in the model are not open yet), shows a positive differential.

 However, what could be more perfect than a setup I drew on a daily candlestick chart of HYG (which will move similar to the market, if not lead it a little) on Friday in this post.

Whether it's HYG or the SPX doesn't matter, but a candle gapping up on the open and then closing lower on the close, creating a bearish engulfing pattern would be perfect for this set up, it would also allow us fantastic positioning to play a strong short term options or leveraged ETF pay as we could short in to strength as long as we have high probability signals backing that up.

Again, I don't want to get too caught up in a scenario that I'm blinded to other possibilities and I don't want you to either, but I do want to present this idea so you better understand the concept, the objective and how there's more than 1 way to get there and how we can use it to our benefit both short and long term.

As always, if anything changes tonight while I'm awake, I'll update, otherwise I'll see you in the a.m.

Have a fantastic week ahead.

Keeping a Market Journal

Since I have more tasks than time, I'll probably place this as a link in multiple articles, but I wanted to get started.

There's a quote many of you may be familiar with, "Show me a trader that keeps good records and I'll show you a profitable trader"

I've never been particularly organized and I've NEVER been one to journal, however I did receive immense benefits in keeping a Market Journal (I call it a market journal now rather than a trade journal because I think keeping track of trades is one thing, but a real journal is something else).

I don't know for sure because I've never done it and I know that there's no one reason that can cover every one's reason for doing something, but it seems to me that when keeping a personal journal, whether one realizes it or not, sometimes I think by simply acknowledging our feelings about events through the day and in our lives is therapeutic in a way. I think saying an emotion you are feeling out loud such as, "I'm jealous" actually takes some of the power away from the emotion, you aren't fooling yourself, you aren't hiding from it or making excuses, you are acknowledging it and in doing so, I believe you take some of the negative power away from that emotion. I think personal journals act in a very similar way, we right down and acknowledge our thoughts and feelings.

I have found when a friend is in need and wants advice, the best advice I EVER give is to be quiet and let my friend talk, by the end of their talk I can usually point out, "I think you answered your own question, maybe it's not an easy answer, but it's not an easy problem, but in talking, you answered it"; so the concept is very similar.

A market journal is VERY similar in this concept, but it is meant to make you a better trader and being a better trader isn't about knowing the newest, trendiest trading technique or indicator, it's about finding what works for you personally. 

I can give the exact same trade to 10 different people, all have the same information, I can even tell them when to exit that trade and I can guarantee, there will be 10 different results from profits to losses.

Many of you know that I not only taught Technical Analysis for the Public Education System's "Adult Education" program, but I also acted as a trade advisor for 2 accounts in the area of $500,000 before any margin. I didn't trade the accounts personally, I gave the ideas, when to enter and what size (risk management). I found one of the two missed great trades and profits because he had a very low tolerance for risk, he's sometimes told me he entered a trade, but actually never did or entered in a size so small that there was no way to overcome the transaction costs and slippage or he'd make the stop much tighter than I recommended and in the end took a series of losses on these trades that he would have been better off just staying out of totally.

The other gentleman was very similar, but in some respects the opposite, he had no concept of risk. If I told him, "I'd buy 500 shares of XYX stock right now with a stop at $49.91" he'd think, "If 500 shares is good, than 5,000 shares must be better". Then I'd get a phone call that he has this $5000 intraday loss and wants to know if he should sell. I'd look at the stock and see a normal intraday move for that stock's volatility and wonder how a tiny $500 intraday draw down could possibly be $5,000 and he'd admit he bought 10 times more shares. I'd explain there's a reason I said 500 shares and that he needed to respect risk and not put half of his portfolio in one trade, then I'd go on to tell him that the stock is acting perfectly normal, there's nothing wrong with the trade based on evidence and the only fear over the trade was a position size way too big. The next day he's admit he sold at a $5,000 loss the first day in the trade (which was often the intraday low and just before the trade took off to the upside and worked as expected). Not only did he take a loss, but did so on a trade that worked perfectly, he's do this over and over again because there was a greed element that did not match up with his risk tolerance at all, this was incredibly frustrating because he'd do it over and over again and make up his own position sizes and stops just to enter a bigger trade than was responsible, a $500 day intraday swing on a $50,000 position was nothing to be concerned about, but a $5,000 intraday swing was the panic button for him.

In any case, I've always considered myself and always will, a lifelong student of the markets, never an expert or guru. I didn't know this and you might not either, but on Wall Street, the large investment houses have full-time psychologists for their traders, it's true! When a trader got in to a funk as we all do from time to time, they'd talk to the psychologist and identify something in the trader's past that he might be experiencing now that keeps him/her from performing well. For example, when I traded full-time and exclusively with no other source of income, for a living, I managed to easily lose an options account because I treated options the same way as 90% of all of the options positions that expire worthless every month, as a "Hail-Mary, lottery ticket". Options are in fact a Wall Street derivative product and like most derivatives, they are designed like Las Vegas, a win can be very addicting, but play long enough and the house always wins. Options are supremely organized to appeal to human greed and we often use them to try to make big gains, increase a small account quickly or make up for a big loss quickly and that's the appeal and trap of options.

I found for years I wouldn't touch options until I figured out how to use them in the exact opposite way that Wall Street wanted me to use them. I did the exact opposite of most people, I bought quality, in the money and with plenty of time and paid a higher price for it, but saw much better results, but for the longest time, the negative memory and emotion of my first experience with options effected my trading in not using this "tool" that can be at times, a great tool, not an exclusive tool, but a good tool for the job.

While trading for a living, I started keeping a journal to find out why I had so many winning trades, but my account benefited so little from them, one thing I found was very interesting.

For more than a decade, I wanted nothing more than to be a full-time trader, I finally got my chance, but did so with far too small of an account and I knew it at the time, if any of my students asked if they should do the same, I'd do everything I could to talk them out of it. Yes, I knew, but this was my chance and I was taking it. After keeping some records of trades for a month, I went back and looked, I was going great with the trades, lots of wins, small losses, good percentage moves, but, my trading size was way too small to overcome the transaction costs, slippage and other business costs.  Now if you have a character flaw or weakness, nothing will expose it faster and in a more painful way than the market. If you can't take responsibility for your own trades, you'll always have someone to blame, but you WILL NEVER BE A PROFITABLE TRADER! One thing I was good at from the time I was 8 years old or so was being VERY honest with myself. I looked at what was going on in my account and I knew instantly, I knew all along, it just took seeing it on paper to really seal the deal...

I wanted to be a full-time trader so bad that I started with about 1/3rd of the VERY minimum I'd recommend, therefore as to not lose my trading capital, I entered positions that were of such small position size, even if I had a double, it would scarcely move my portfolio's P/L trendline. I found that when I first started trading, I was day trading because my ex-wife was VERY unsupportive and I wanted to show her that I could produce a weekly paycheck, even though I was not at all suited to day trading. I had on average 200 transactions a week and was at least breaking even or making some money, but if I took the commission costs alone each week and counted those as income (as they were a large part of my P/L), I would have been making on average, just shy of an extra $1,000 a week, I needed about $4k a month to cover my bills and old income!

I knew I had to get over my fear of losing my trading capital otherwise I was going to lose my chance, I had to place bigger trading positions. Truthfully to do this though, I REALLY needed to get back to trading in a way I was most comfortable, a way I had the most confidence in and a way that made the trading costs a smaller percentage of my P/L.

My marriage wasn't going well for a number of years and trading put that extra bit of stress that really snapped something as my ex-wife was also Hungarian (like my current wife who is 110% supportive of anything I do) and grew up believing you work at the same job your entire life, you don't take chances and you certainly don't take that kind of money and put it in the market. My breakthrough came as a result of my declining marriage, I told her that while she was with me in the US, she wasn't really there as she would remind me of every day, "The only reason I'm in the US is because of you- I gave up my homeland and my family for you", even though she got her citizenship several years after we divorced and stayed in the US until very recently (she had left Hungary to come to the US for 1 year at 18 years old and never went back-she was VERY close, in fact detrimentally close to her family who had done everything they could to break up our marriage for nearly 10-years to bring her home). I finally told her, "I think you need to go home to Hungary, to be with your family and take as much time as you need, but if you come back, then you come back for the right reasons-because you want your life here with me."

To make an excruciatingly long story short, I had found out that she had an affair while she was in Hungary and while she stole money and constantly lied to me, especially about her parents, I NEVER would have EVER suspected she'd do that. For me, there are 3 reasons for a divorce and that was one of them; before she could even return I had moved all of her things out and got a divorce lawyer. However, this isn't the point.

The point is, with her now gone, I no longer had the pressure to try to deliver a weekly paycheck so she'd feel more comfortable about me trading, I took out enough money from savings to pay a month's worth of bills and I traded the market the way I thought it should be traded, rather than what I thought she needed me to do. I had trades of several weeks, VERY low commissions as I had 5% of the trades and made good money, I solved my problem... at least until the divorce part came.

In any case, I found a journal to be VERY helpful in solving other problems. I knew of a trader who could take $5,000 and turn it in to $100,000 faster than you could blink an eye, then at $100,000 he'd blow up every time. There's a saying I believe 100% and it comes from a trader, but you see it everywhere in life from who we marry to how we let people treat us; "You don't always get what you want, but you do get what you need", even if what you need is not good for you.  Think about the women who marry men who are emotionally or otherwise abusive because their fathers' were, it's definitely not what they want, but it is what they know, what they have been habituated to, what they are comfortable with. Men do the same, we marry overbearing, domineering women because they are similar to our mothers. You can probably think of 1,000 examples of this, well this was the same thing this trader was going through, maybe it was a self-worth problem, he was comfortable with so much success, but after that didn't feel worthy of any more- I really don't know, but you can't explain how many times he did this as being mere chance.

Keeping a market journal is a way for you to teach yourself, for you to peel back one layer of onion at a time in a way and pace you are comfortable with, to forget the newest fad in trading or what people say the best stop is and base it on what you are most comfortable and most successful with. There are 1,000 different ways to trade, you are not suited to each one. I don't care one bit that someone has a lot of success as a swing trader, if I don't have the exact same feelings about risk, adrenaline rushes many traders enter trades for, holding time, etc, I won't be as good as the other person is even if I copy everything the pother person does because one day I might not be able to take the risk and close the trade where they can and profit from the trade.

"Know thyself", that's the best trading advice you'll ever get and it's a lifelong journey, not a one time event as we experience new things every day. You might fail at trading 1 certain stock every time and it may all be psychological because you had a traumatic experience you hardly remember or never connected to your current trades.

I can tell you this... For 3 decades my grandfather told my grandmother, "Louis, you are killing me and after I die when they open me up, their going to find a BRAIN TUMOR killed me, that's what you're doing, you're giving me a brain tumor!" My grandfather lived to 90, my grandmother on the other hand died at 57, can you guess what killed her? A Brain Tumor! Chance? Well not too many years ago my mother (whose mother died of the brain tumor), her brother (my uncle) and myself opened a small cafe, my mother worked every day we owned it, 7 days a week. It was too much for anyone and she kept saying, "This cafe is going to give me cancer". We all warned her not to say such things and at 63 she had never had cancer, we decided to sell the cafe and two months before we sold it my mother was diagnosed with Ovarian Cancer (apparently when they did a hysterectomy when she had hers many years ago, they'd leave a small part of the ovary in to help with menopause years later, well this partial ovary had a cancer the size of a golf ball), luckily she beat it and she's been clear ever since, but I'm very careful about negative associations, I believe this extends to trading and its why I always tell members not to kick themselves on a trade that didn't go their way, learn what you can and move on, but don't make it personal-you have no idea how it will effect you later on.

Keeping a Journal...

I don't have time to get in to all of the particulars right now, but simply writing down what you paid, when you bought and when and what you sold for is useless for our purposes.

I'm going to give you some elements I found to be of value because in a way, we are acting as our own professional trading psychologists like they have on Wall Street.

First, details are super important,  you can look back on a chart of the stock and the overall market 3 or 6 months from now, but you rarely can remember how you felt and what the market sentiment was on that day you placed the trade so not only how you  felt about the trade, but what the overall market sentiment was like, how you felt about it, what propaganda the mainstream financial press was putting out, etc. It's important to record your mental state that day, did you just have a string of losing trades and maybe entered this trade a bit larger than normal to try to make the losses back quickly? Did you feel at the time you might be over-trading? Did you feel confident? Were you on a winning streak? Did you feel good overall? Did you have a fight with a significant other and were really not feeling good or not concentrating as well as you'd normally do? Was this a trade outside of what you normally found comfortable? None of these answers tells you anything right now, but it's exceptionally important that you are as honest as you can be and that you record as much detail so when you look back at that day a year from now, you  can feel the way you felt that day.

Print out a chart of the trade and even the market (SPX or NASDAQ) when you entered and why you entered, not what someone else thought, but what you thought even if it was about what someone else thought-remember, we have to be responsible for our own trades if we ever want to be successful and although this may sound strange, I have run in to people who are perfectly fine and almost seem to need to lose money, but they also need someone to blame. They are just as happy losing money if they have someone to blame as they are if they make money. Record why you entered, what your risk management was and why. Add as many details as possible, again, you want to be able to recreate that day a year from now, not just the market or the stock, but you personally.

Then when you close the trade, do the exact same, everything about the market, the stock/trade, your state of mind,  sentiment in the market, if you closed it because you were scared of losing a significant profit, if you had a good profit and lost it because you thought you could make more, everything that is subjective is important, but also everything that is objective. If you stayed in the trade longer than you should have, why? Did you have some objective information that led you to make that decision.

I think you get the gist. Now, learning.

You can't learn anything from any of this if you are still emotional about the trade, if you are still upset or still feeling like a million bucks, some time needs to pass both for your emotional state and to see what happened after in the market. I'd say you need at least a month, but maybe 3 months, maybe 6 months, however long it takes so you can look at all of this information objectively-as if it were someone else's trade you were analyzing.

First this creates discipline and in recording the information, you might find a reason you shouldn't enter the trade and save yourself time and money, but discipline, whether risk management or a journal of every trade is important in the market.

After you have looked at a dozen or so of these former trades, you'll start to see where you are successful and where you aren't, you can start to emphasize your strengths and try to understand and create new rules to deal with your weaknesses. You'll find events outside of trading that effect your performance, it could be as simple as how much sleep you got. In many cases you'll find you were over-trading to try to make up for a loss, you might even find you are revenge trading, trying to make  up the loss in the stock you lost the money in although there might have been better trades to make that money back. This is a process, but there's no book or course that will teach you more about trading and the trading that is most appropriate for your personality than this- TRUST ME. 

Yes, this takes some time, but a lot less than a 2 -year degree in trading and it will be immensely more specific to you personally. Many things you find, you will have expected and known about, but just seeing it on paper will finally help you overcome it, I promise you you will find other pattern that you never knew existed and are so far away from trading you'd never suspect them.

More than anything, this HAS TO BE A POSITIVE EXPERIENCE, DON'T EVER USE WHAT YOU FIND TO SAY, "OH DAMN, I KNEW I WAS DOING THAT, WHY DO I KEEP DOING THAT!" That is not only not helpful, it can be downright more damaging because you are reinforcing negative stereo-types or personal feelings you have about yourself, NEVER DO THAT.

It's best if you can look at this as if it were someone else and you were looking for patterns to help that person put. You can start recording more specific emotions and facts to deal with more specific problems like risk management, again, sometimes all you need to do is to see it, to essentially take the power away by saying it out loud. Sometimes it's seeing the pattern over and over and sometimes it's a total surprise that can't be denied.

Just keep in mind that you aren't trying to justify good or bad things so you must record EVERY trade. The market will give you as many reasons as you want to justify any opinion you have at any point in time, bullish or bearish, it is only by unbiased, objective data can we put the pieces of highest probabilities together, it's the same with this.

Finally, just like your life evolves every day, your trading and even more, the market will evolve. There are many Buddhists monks that spend a lifetime in meditation and self-reflection to achieve "Nirvana"  and many will never do so. You not only have your own past, present and future to understand, but the market as well, which is like one of the most complex, diverse and dynamic living organisms (each of millions of cells making it up are individual traders, changing and morphing every day) you'll ever see so this is a lifelong process, just like it is for the monks, but again, show me a trader who keeps good records and I'll show you a ....

Years ago I wrote this,  "Zen and the Art on Investing".  You may enjoy it, I haven't read it for years, but I believe it's still relevant, the bottom line is I believe trading is one of the most spiritual experiences one can engage in, you'll learn more about yourself through trading that I think almost any other method, that is, if you have the honesty and desire to know which can only benefit your trading.

Now to complete the other 19 hours of tasks I have over the next 7.5!

The Right Tool For the Trade-Being Flexible

This Sunday morning I did something I rarely have time to do, I checked out the news and even though I still have 20 hours of work to fit in to the rest of today, I thought it was important to see what was going on with the overnight strikes by the Israeli airforce in Syria for the second time this week for one reason, there's nothing the market hates more than uncertainty and thus the Wall Street maxim, "When the Missiles Fly, It's Time to Buy", which is greatly misunderstood. This has nothing to do with economic changes because of war or war time manufacturing adding to GDP, it has to do with removing uncertainty. In the build up to war the market doesn't know how to discount the unknowable, once a war actually starts after months of saber rattling, the market can proceed to discount as uncertainty has been removed. Right now, I suspect we are entering a period of uncertainty, not huge as Syria posing any threat to Israel is hardly likely, but the Russians have a deep-watrer port in Syria, how will the Iranians respond? What about Israels' neighbors to the north which showed the world the Israeli army is not as infallible as the Middle East had assumed for decades before the conflict (if you ask me, Israel would have been much better off staying out of that conflict than breaking their decades old reputation for being "unbeatable").

In any case I did some light perusing of some other sights and while not reading the entire articles, I did find tow that reminded me of something I remind all of you of, but sometimes wonder if you really take me serious. One was an article by Seth Klarman with the central theme being, "When the market is making new highs, despite all of the economic indicators pointing the other way and momentum traders (as some might say we have become recently) are trumpeting their successes while sweeping aside their failures, the market Looks easy, but this in fact is when "Investing is at it's hardest".

Here's one excerpt... (My emphasis in red)

"Most U.S. investors today have a clear opinion about what everyone else has no choice but to do. Which is to say, with bonds yielding next to nothing, the only way investors have a chance of earning a return is to buy stocks. Everyone knows this, and is counting on it to remain the case. While economist David Rosenberg at Gluskin Sheff believes government actions could be directly or indirectly responsible for as many as 500 points in the S&P 500, or 30% of its current valuation, traders have confidence in Ben Bemanke because betting that his policies will drive equities higher bas been a profitable wager. Bernanke, likewise, is undoubtedly pleased with these speculators for abetting his goal of asset price inflation,though we all know that he will not call them first when he decides to reverse direction on QE. Then, the rush for the exits will be madness, as today' s "clarity" will have dissolved, leaving only great uncertainty and probably significant losses.

Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals--recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.-- isthe riskiest environment of all."

I don't want members to lose sight of this truth. I've showed you the 3C charts, the Leading Indicators and especially, Market Breadt-all of which warn of exactly what Seth says above. We take what the market offers and we use the best tool for the job, however we can't box ourselves in to thinking things will always remain the same.

I believe this site has been on the leading edge of documenting the F_E_D's "Slow Boil the Frog" approach to backing out of QE and exceptional policy accommodation, few took the F_O_M_C's words this week to heart as serious as they were, but the F_O_M_C can always point back to this week's statement (which I said was the next logical step in backing away from policy accommodation) and say, "It was all right there in front of you, if you chose to ignore it, woe to you".

Seth Continues with something I've been trying to balance between "being ready" and "not let long term planning cause too much short term damage" and indeed if you have been following our short term trades, you are not only hedged, but quite profitable even while building longer term positions that are clearly necessary. I often quote one of the greatest investors/traders of the last century, Jesse Livermore in which I paraphrase, "It wasn't me being right that made me money, lots of people were right, it was my ability to sit that made me money"  What Jesse was referring to might be summed up as , "The Courage of His Convictions". He clearly acknowledges others saw the same thing as him, but they were run out of their positions by things like "The S&P all Time Highs" and "This time it's different, we have Bernanke".

However as any of us who have studied bubbles going back to the 17th century with the: Dutch Tulip-Mania, the 18th Century Mississippi Bubble, the 18th century South Seas Company, the 20th Century "Roaring Twenties" bull market, the more recent Japanese Bubble Economy, and the much more recent Tech Revolution of the 1990's and finally the Great Housing Bubble most recently; would know, in each of these cases the sentence, "This time it's different" always accompanies and justifies a bubble, only in retrospect can we see how ridiculous they were. The Internet boom and Tech Revolution had one of the best cases for really being different, it connected the world, created an entire new class of business, moved economies away from traditional manufacturing in to high tech and held and still holds so much potential, yet it burst.

Who would have thought that after the Tech Revolution that Housing would lead the next bull market? I actually have proof of at least 1.5 years of 3C accumulation of Home Builders during the 2000 Tech meltdown with these companies gaining 2500 to 5000%. Housing, aside from a few volatile moves up and down in regions, was never seen as a great means to achieve superior gains, yet in my area, in my personal experience, our home which was bought for $129k in late 1999 was sold to us for $205k in 2003 and by 2005 appraised for $450k based on the land alone, the house would have been torn down! I knew this was a bubble and some of my closest friends and their housewives-turned real estate speculators made $100k in 3 months or less and then took on two properties at once, all the while trying to get me to join them, telling me, "This time it's different, there's no more room to build houses in Florida, they've reached the Everglades; the property here now is all there will ever be. This is a real, tangible asset! Interest rates... blah, blah blah". Then a month later the bottom fell out, one of my best friends was left with 3 mortgages as they held their own and the 2 investment properties that they were sure would come back in value only to see the $450k they paid for each based on their HELOCs from their primary home and first investment property of the two, fall in value to $175k today and they still own at least 1, renting it out for nearly a $1,000 a month loss!

The point is, with bubbles, "It's never different", everything reverts to the mean given time and usually overshoots it.

So Seth continues...

"[O]nly a small number of investors maintain the fortitude and client confidence to pursue long-term investment success even at the price of short-term underperformance. Most investors feel the hefty weight of short-term performance expectations, forcing them to take up marginal or highly speculative investments that we shun. When markets are rising, such investments may perform well, which means that our unwavering patience and discipline sometimes impairs our results and makes us appear overly cautious. The payoff from a risk-averse, long-term orientation is--just that--long term. It is measurable only over the span of many years, over one or more market cycles.

Our willingness to invest amidst failing markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance. Buying as prices are falling can look stupid until sellers are exhausted and buyers who held back cannot effectively deploy capital except at much higher prices. Our resolve in holding cash balances--sometimes very large ones--absent compelling opportunity is another potential performance drag.

But we know that in a world in which being anti-fragile is good, what doesn't kill you can make you stronger. Short-term underperforrnance doesn't trouble us; indeed, because it is the price that must sometimes be paid for longer-term outperformance, it doesn't even enter into our list of concerns. Patience and discipline can make you look foolishly out of touch until they make you look prudent and even prescient. Holding significant, low or even zero-yielding cash can seem ridiculous until you are one of the few with buying power amidst a sudden downdraft. Avoiding leverage may seem overly conservative until it becomes the only sane course. Concentrating your portfolio in the most compelling opportunities and avoiding over diversification for its own sake may sometimes lead to short-term underperformance, but eventually it pays off in outperformance."

This is the thrust of what Jesse Livermore was saying, many knew what he knew, but few had the conviction to keep their focus on the big picture and real opportunities, "The sitting is what made me money".

While I FIRMLY believe our biggest edge over Wall Street is our ability to pick and choose our battles and to be able to more nimbly navigate the market, this edge is only useful if you know when to deploy it. So I do believe in what Seth says above with the caveat that I think by using the right tools and staying nimble, we can have the best of both worlds. This is why I say so often that we must use the "Right tool for the trade" and why it is CRUCIAL not to box yourself in to some self-defined version of a certain kind of trader. (I.E.: I'm a Swing Trader, I'm a Momentum Trader, I'm an Options Trader", I'm an Investor"). We need to be comfortable in playing all of these roles and truly use the right tool for the job. Right now, the market volatility allows us to take great short term signals and use options in a way that few use them to take advantage of this short term, highly volatile chop that few position or swing traders can make any money in as is evident by our ranking. I don't post our ranking as bragging rights, I post it to show how few people knew the right course to take, we certainly are not making huge options plays and putting it all on black to get to that ranking, we are making consistent trades and using the traps of options to our advantage or at least understand them enough not to fall victim to them.

At the same time, when it's appropriate, we are building longer term positions that aren't using leverage, that are entering shorts at high prices and good signals, these will pay off in time in a huge way, until then our short term trades more than hedge any short term underperformance in building longer term equity shorts, in fact they more than hedge, they create a substantial profit, but don't assume this is all we do, all we know and the market will remain this way forever. We will have to change tools for the trade and in some cases we are already doing that. As Seth mentioned above, market performance can't be measured in days, weeks or even months and risk management is what allows you to survive long enough to let your forward thinking plans come to fruition. "Don't fall in to the ego-trap of boxing yourself in as 1 type of trader, as "I'm a momentum trader" is very fashionable at the time, be flexible, be ready to use different tools for different trades and understand more than anything, the market may be one of the most dynamic organisms the planet has ever seen (except maybe my ex-wife- I brought out the best in her -wink, wink...).

The second article I found interesting came from PIMCO's number 2, Mohamed El Erian... 

The article can be found here.

The Introduction to the article is basically what attracted me to it, because it is our same plight, I'll leave this portion as simple as the introduction...

"The world is awash in contradiction with stocks rising to new highs as interest rates reflect a slowing economy. It is an upside down world according to PIMCO's Mohamed El-Erian. As Lance Roberts annotates, the moustaced maestro explains individuals are both excited and anxious. They are excited by the rally in the markets as they see their portfolios increase in values but at the same timed overwhelmingly concerned about the economic future. It is a world with an enormous contrast between the markets and the real economy. That is the world we are navigating and it is incredibly unusual. This is why it is an unloved rally. His discussion at the recent Strategic Investment Conference is about a simple framework to reconcile these issues. The long term view matters greatly - but the short term matters also."

I think that sums up what we are trying to do based on what we see on a shorter and longer term scale, there are opportunities in both. I just post this a reminder  to make sure you embrace your edge over Wall Street and pick and choose your battles, stay nimble, don't box yourself in as any particular trader-type (we are here to make money, not stroke our egos), stay on top of risk management and understand that nothing stays the same, it's "Never Different This Time".