It?s been a couple of weeks and it is time to open up the old mailbag. Topics
I?ll cover now:
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The TED Spread
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How I?ve Been Protecting Investments
-
A Data Mining Tool For Those With Deep Pockets
-
The Importance Of Trading Experience
-
Screening For YTD Winners
-
It?s Time To Kill My Timing Indicator
-
What Will Bring Buyers & Confidence Back
-
Recommendations For Investing In The Market Now
-
How To Spot A Reversal Instead Of A Bounce
-
My Thought On The TIPS
-
Where I?m Keeping My Cash
-
Handling Gap Opens
-
Ramifications From The Ban On Shorting
-
Moving On After A Major Trading Loss
-
Leverage Kills
-
A Quick Review Of SmartStops
Q: I hear about TED spread everywhere. Do you
follow it? Is there a source to calculate it?
A: Until recently, I?ve never even heard of this indicator
but, as you suggest, now everyone is talking about it probably because it
provides a good read on how bad the credit crisis really is (see this article for example). I believe a number of websites
provide daily updates to it, but one I have personally book marked is at Bloomberg.
Q: My 401k is down over 30% and falling. I was
wondering how you were protecting your long term investments.
A: Three words - lots of cash. That?s true of both my
long-term and trading portfolios.
Although I really wish I could say it was due to smart market timing, but
that would be wrong. The reason why I?m in cash has nothing to do with
market-timing or skill, but sheer luck. As many of you already painfully know,
my entire life was in a major
transition this summer and I had to focus on other things which required
me to raise lots of cash whether I wanted to or not and irrespective of any of
my views about the upside or downside potential of the market. As it turns out,
that was a blessing because I?m sure it saved me from losing more money than I
would have otherwise.
If I were smart I would have deployed some large scale short positions (even
in my retirement portfolio) once that March through May counter-trend rally
failed as I thought it would (and related many times on this blog). That is one
of my biggest regrets of this year especially since it was so easy to identify
and I had a very high level of confidence that would happen. At a minimum, it
would have provided a nice hedge against my long-term investments that I had to
sell as stops were hit. I have no excuses for that mistake.
More recently, I made another mistake of thinking that the rally we saw from
the July lows had more upside potential than it turned out to have. I really
thought we?d see a move back to the upper end of the trend channel which is why
I raised the timing indicator back in July. The rotations we saw (away from
commodities and back into financials and homebuilders and the strength of the
U.S. dollar) led me to think that we were seeing an important, and positive
character change for the market and that was wrong. What it turned out to be was
a giant warning that we were entering a new and much scarier stage of the credit
crisis at the same time while the market was finally becoming aware of the fact
that yes, we are in a global recession and that the sins of the past (easy
credit, too much leverage, etc.) will have to be punished before we can really
move on.
As they say, its sometimes better to be lucky than good and that was
certainly the case for me this year. When my life went crazy, I raised tons of
cash across the board and that?s been a true lifesaver but it had nothing to do
with my market timing ability or lack thereof.
As for a quick update, more recently and especially this week (both on Monday
and yesterday), I?ve been putting cash to work and raising my level to exposure
to the market back to a more bullish/neutral position (50% cash/50% equities) in
my trading portfolio. Right now, I?m sitting in about 70% cash/30% equity so I
have a lot more cash to deploy and I plan to do so if and when we actually see
significant technical improvement that would set up for at least another
counter-trend trade. Like usual, I?ve been using ETFs like the ProShares
Ultra S&P500 ETF (SSO) to increase that
exposure so I can sell quickly if needed.
As for our retirement accounts, I?ve decided to remain mostly in cash
primarily because I?d like to take the opportunity to restructure and tweak that
portfolio as life returns back to normal. Again, this decision has more to do
with life circumstance, than pure market timing. I?ve planned for some time now
for my wife to take over the control and management of our long-term investments
in a structured lazy portfolio but we?ve yet to make that transition because
we?ve both been so busy with our new life in Utah and looking for more permanent
housing, but I still have plans for that to happen. Before that, however, I?d
like to do a little more research and perhaps a little more tweaking of the
composition based on what I discover. In the past year, I?ve read and come
across several strategies that I think would help improve the portfolios
performance, but until I actually take time to do some backtesting, I cannot
begin to utilize those strategies. As a top goal, I?d like to reduce the number
of passive/lazy portfolio positions while enhancing long-term returns, but
realistically it is going to take me several months to complete that kind of
research and with the market being in utter mayhem of late, any plans for that
research have been put on hold. Obviously, any changes we make will be detailed
at the website in a future post or Q&A and I?m hoping to do at least one
Q&A this fall with an expert on portfolio allocation that will provide some
helpful recommendations to help improve its overall performance now.
So, bottom line, I?ve been in cash primarily due to life circumstance than
great timing. If anything, I?ve made more than my fair share of mistakes this
year, but having little equity exposure has really helped. Indeed, I?ve been
very fortunate when all things are considered.
Q: The professional money managers must have
access to better tools for data mining and news. Are any of these available to
those of us with deep pockets?
A: Many of the tools available to professional portfolio
managers can be purchased by us if you really have a big budget. Just keep in
mind that the more money you allocate will not necessary translate into
increased profits. Frankly, with the internet most of us suffer from opinion and
information overload than not having access to enough information and data. That
said, I?m sure you can find services that offer data mining and news and one
I?ve been hearing some chatter about more recently is a service called SkyGrid which costs $500 per month. I have never tried
it, nor do I plan to at six grand per year.
Q: I am trying to teach myself trading setups.
Which books would you recommend?
A: My recommended reading list can be found here
which I will make an update to sometime this quarter, but in my opinion the very
best way to learn technical analysis and trading setups is through actual
experience. Practice makes perfect and while there is no perfection in trading,
there is no substitute for experience. That?s why I recommend people use
simulated (i.e. paper) trading portfolios for some time so they can gain that
experience. In addition, one of the reasons why I dedicate so much time to do
Q&A sessions with people like Jeff
White and Thomas Bulkowski is to help offer some different
starting points. These people have been successful and can help shorten the
learning curve, but always remember that there is no real substitute for
experience.
Q: I really liked your 2008
YTD Winners post and found it very useful to find great setups. My
question is where do you find this screener, so i may do my own research.
A: For that screen, and most of the performance based
screens you see at the website, I use Telechart which makes it very
easy. Through a PCF I can track a list of stocks, ETFs, etc. for different time
periods and then be able to scroll through each stock very quickly. However, you
can also utilize free screeners to accomplish the very same thing. The best free
screener, in my opinion, is offered at MSN Money.
Q: I have a question about the timing indicator. I
have been using the indicator to put in new money into the market and so far as
you can imagine I haven?t been doing great. I would appreciate if you can
explain how I can utilize the indicator as I haven?t had much success using it.
A: Everyone, including me, desires a simple and trustworthy
indication when to put money to work and sell, but that?s not so simple to do
especially since everyone?s strategy is so different and they implement
different time frames and holding strategies.
This website, unlike many, has a wide array of different kinds of investors
and traders and really any attempt on my part to provide a ?one-size-fits-all?
indicator that will be useful to most has been a mistake. For example, as I?ve
structured it, the timing indicator was focused with a more long-term
perspective (and I mean really long-term), but I know from the feedback I
receive that it is being used by those with very short-term time frames. If you
do that, especially without reading my daily posts (which have a more short-term
focus), that?s only going to result in some very poor returns as we?ve seen this
year.
Although I?ve been thinking about ways to improve it, if not add more
time-frame based indicators, but ultimately I think do so would be dishonest and
not hit the key objectives I?ve set for this website this year. In reality, by
providing indicators of this nature all I would really be doing is using
indicators I?ve discussed before and you can access elsewhere (like the T2108
for example) and then call it as my very own ?timing indicator.? I could even
hire a graphic artist to make the timing indicator look special and unique to
the website as other websites do but I don?t think that is helpful to you in the
long run and I don?t feel right in doing that because it strays away from the
overall mission of this website. Much like I?ve been doing all year long, I want
to move completely away from dispensing advice or telling others what I think
they should or should not do. Instead, I want to empower you to do this on your
own, in your own way, taking full advantage of your skills and talents. Ideally,
I want you to see the same sorts of indicators I do and then make your own
conclusions and learn from the experience. Just providing a ?kirk report timing
indicator? falls well short of that even if it does a wonderful job (which it
hasn?t).
For what it is worth, one of the reasons I asked Jason
Goepfert to do a Q&A earlier this year was to help lend some
perspective on how to do this and share the indicators both he and I use for
market timing. I hope to do more of the same in the months ahead as I discuss
indicators and my analysis of the market every day. In my opinion, that?s far
more useful than any timing indicator I could create or share because it allows
you to access and evaluate the same sorts of indicators I would use to develop
any kind of timing indicator I would share at the website. Again, I?d rather
show you how to go about creating your own and interpret the best tried-and-true
indicators available to you, than provide you one to blindly use and ultimately
depend on in your strategies.
To this end, I?ll make an extra special effort to highlight some more
indicators that you can put into your toolbox as we navigate this market. I know
that may not inspire people to continue to pay me the $50 bucks a year to access
the website and stay a member, but at all times I want what is best for you and
right now the current timing indicator, as your question suggests is falling
well short of that goal and it is time to kill the timing indicator for once and
for all.
Q: What do you think will bring the ?buyers? and
?confidence? back into the market? Given what we all know and fear by now, will
a rate cut even do the trick?
A: Since we?ve all become chartists, I think the first step
would simply be for stocks to stop moving lower. We need some technical
improvement before all of the sidelined cash feels even remotely comfortable
with putting money to work. Now, the more difficult question really is what will
serve as a catalyst. Many are hoping that the bailout deal will be enough, but
if that is true, that will be the first time a government intervention has
worked for longer than just a few trading weeks.
In my opinion, bottom line earnings must come in better than expected and the
forward guidance must stay relatively optimistic. Large-scale buybacks, the
return of M&A activity, and new sector leadership (especially when new
investment themes emerge that draw in widescale investor interest) would be very
helpful. An easing in credit will likely relieve some fears even though the
entire world remains far too credit dependent for its own good. One of the main
reasons why I remain against the bailout bill is that I want to see America
weaned entirely away from its dependency on credit and easy money, but I don?t
think that is possible until there is simply no other choice. America is
addicted to debt and only until the well is dry, will they figure out that the
path to a better economy is through other means. Yes, a rate cut would probably
help in the short-term, if no other reason to help mortgage refinancing but keep
in mind that by doing so the Fed will become virtually powerless to do anything
else. I don?t know about you, but I always like to have some options left to
offset anything that comes our way and with the Fed and government throwing the
whole house and the kitchen sink at the market and the economy, there remains a
very scary prospect if and when that doesn?t work. All along they?ve tried
everything they can to avoid a recession and bear market, but we?re having both
all the same. Indeed, no matter what steps they take, market and economic cycles
still happen.
Q: In view of the horrible performance of the
Stock Screen Machine do you have any advice for investing in the current
situation?
A: If you?re investing and thinking long-term, the screens
will continue to point you toward good opportunities as they always have. Yes,
the performance has been rough lately but markets do go down at times taking
both the good and bad with it. No one said this game is easy or that markets
always go up.
As a long-term investor, I would recommend that you focus your time and
energy on stocks with wide moats, positive earnings and cash growth, outright
sector leadership, and extremely attractive valuations (like attractive
price-to-sales ratios). The stock screen machine is full of companies that meet
those qualifications. I?d also now recommend devoting 5% of your portfolio to
speculative oversold positions that will help you outperform when the market
eventually recovers. As a true long-term investor, you should be excited about
this market more than any other time over the past few years. In fact, you
should be jumping for joy over this market. I know that sounds incredibly
stupid, but it will prove helpful to you. With crisis comes opportunity,
especially those with long-term time horizons. Please don?t forget that. Warren
Buffett understands this quite well and that?s why he has made so much money
over his career.
As for short-term trading/investing, I recommend being focused on the
technicals and treat every stock with a ?show me the money? approach. That?s
especially true with any stock showing up in the stock screen machine. What I
mean by that is that every stock you buy, you should expect it to go down until
it proves that it can be a winner. That means scaling into positions (1/3 buy
now and the other 2/3 after the stock moves higher with protective trailing
stops). If you?re strategies still aren?t working and showing good returns, that
also means you need to reduce the size of your positions and remain in capital
preservation mode until they do. If needed, you can also simply step aside until
conditions improve and/or your strategies/screens show improvement. There?s no
requirement that you trade or invest in every market, especially this one.
That said, no matter if your approach is long or short-term, I don?t think
you should stick your head in sand and give up on the market. I know this market
is doing that to a lot of people right now and for good reason. Few people can
be nimble enough to capture every rally and decline and the thought of buying
and holding anything longer than a day seems like pure financial suicide. But
like usual, we need to resist those temptations of fear and despair. I know it
is not easy now, but ultimately this atmosphere should motivate you to become
even more focused on the market. Opportunities await for those who do.
Ultimately, all of us should be more excited about the market right now than we
have for many, many years.
Q: How do you determine if a reversal is a
reversal, not a bounce?
A: Hindsight is always 20/20 and you?ll never know for sure
until the stock?s technicals improve to the point that it confirms that a true
reversal is underway. That?s why when I talk about stocks and do chart reviews,
I often talk about looking for confirmation. You?ll notice that I often say that
I?m looking for specific price levels to be reached, moving averages to be
reclaimed, and/or to new trend channels develop following a decline. All of
these will help you spot true reversals than stocks only showing a short-term
bounce. In addition, when you?re looking through charts of bouncing stocks, what
I ultimately try to do is figure a specific price point (sometimes using average true range) that the stock should not trade to
and hold unless something really has improved for the position.
Q: iShares Lehman TIPS Bond Fund ETF (TIP) reached its 52 week high around March/April
this year. It has been on a steady decline ever since. What do you make of this
trend?
A: Many think it confirms the deflationary thesis, but I?m
no economist nor do I try to evaluate the market from an economic lens. As I?ve
said, I?m much more concerned with market perception than anything else. When I
see this chart, what I see is yet another place I can?t hide cash as I did
earlier this year.
Q: Simple question. Where are you keeping your
cash?
A: It depends on the account, but I?ve been using some of
the Treasury Bond ETFs like the iShares Lehman 1-3 Year Treasury Bond Fund
ETF (SHY) and iShares Lehman 20+ Year
Treasury Bond Fund ETF (TLT) to hold cash
in my brokerage accounts. Beyond that, everything else is under FDIC protection.
My hope is that we?ll be able to buy a home soon which will take a lot of that
cash out of play, but we?ve not been successful in that regard yet.
Q: Do you know of an available search tool where
one can list all the ETF?s to which an individual stock belongs (as part of that
ETF?s holdings)? While tracking a particular stock, it would be nice to see if
any ETF?s currently have that stock as part of its holdings and to see what like
kind companies are also part of that ETF portfolio.
A: Although it may not be entirely comprehensive, iShares
offers a fund
screener than allows you to type in a ticker symbol and then pull up all
of the ETFs under their control that the stock belongs to as part of that ETF?s
holdings. Other funds may offer the same, but I?d start there.
Q: With the big gap opens, a lot of stocks I track
triggered buy points. I did not buy any because 1. I typically do not trade in
the 1st half hour and 2. There were extreme circumstances causing the gap open.
How do you re-adjust possible entry point after such and extreme moves like we
saw in many stocks last Friday and last week?
A: I really recommend (as others have as well) that you
employ the use of long-term and multiple time frames in the charts you use to
determine entries and exits. Right now, I?m evaluating stocks on a 3 to 5 day
time frame more than any other time to reduce the volatility and erroneous
trading we?re seeing out there. This will be unnatural for you to do at first,
but I think you?ll discover that the best entries and exits will match up in
several time frames, not just one.
Q: If there are many traders who specialize in
shorting stocks and the government prevents them from shorting their favorites
for a few weeks, do they take a break from shorting or just shift to another
industry? Where is the short money going now? Also curious as to what might
happen when the restriction is lifted.
A: Imagine creating and relying on a trading strategy that
all of the sudden the government says is illegal to do. That?s what?s happening
out there right now and its wreak havoc for many. The traders simply have a
choice but to alter their strategies or focus, or simply wait or move onto other
kinds of trades and different sectors. I think with everything going on right
now, most are simply retrenching and moving to a cash position which is not
helping the market but some think that we?ll see bear raids on other sectors
(like retailers for example soon). As for what happens after the ban is lifted,
my gut says that the fear of what may happen is worse than reality. Remember,
the market hates unknowns and uncertainty much more than they hate bad news. Bad
news can be dealt with and discounted, but uncertainty creates fear and
confusion and that?s never good for stocks.
Q: I very foolishly did not set stops (I?ve been
short the financials) and I have lost over 60% of my portfolio and over 90% of
18 months worth of trading profits. I am extremely discouraged and my confidence
is completely shaken. I know that I should at the very least take a break for a
week or two. Do you have any advice? My last full time job was in the mortgage
industry and I am burnt out on sales but have no college degree or other
marketable skills. My apologies for the negativity of the email but am really
just hoping for some advice.
A: I?m sorry to hear about your experience recently. I know
that?s painful and it is going to take a lot of time to overcome the feelings
you have right now (not to mention lost capital).
The first step when disaster strikes is to stop the bleeding. If you?re
exposed to the market, you have to close out all of your positions no matter
what you think about the market or those stocks. You have to wipe the slate
clean before you can move on.
Second, my recommendation to you is to take some time off and let the
emotions work through your system. No one can trade well after taking a hit of
this nature as it will cloud your judgment and most likely increase your losses.
In addition, I would also resist the urge to spend a lot of time dwelling on the
mistakes you?ve made as that won?t be helpful to you right now. Only after a
great deal of time, will you be able to look back and figure out what when wrong
and why and how you can prevent this from occurring again.
Once the pain subsides (and that will take time), I would then permit
yourself just one day and only one day to ponder about the events that unfolded.
After doing that, I would then make a promise to yourself never to think about
those trades again no matter what. That will be tough to do and require a lot of
discipline, but this is a confidence game and without confidence, you have
nothing. Trading requires you to trust your instincts and strategies completely,
or you won?t be able to function at the same level that you achieved your prior
success.
After that day of reckoning and promise making, then I would begin the
process of starting over and paper trading. This will help build and repair your
confidence which will return. In fact, you?ll ultimately become a much smarter
trader as a result from this experience even though it seems like the end of the
world right now. In addition, although I don?t know anything about your
financial position, no matter what your goals are you should always have
alternative streams of income flowing into your bank accounts. A trader that
does not have income coming in from several sources at a time, through thick or
thin, no matter what the market does or does not do is a failure waiting to
happen. At a minimum, I would develop that alternative stream of income now
while you are on the mend so that when you can return to trading, you?ll
approach the market from a position of power, rather than need. Those who need
the market to perform in a specific way are always going to be subject to poor
decision making at the worst times and I think that?s why a lot of individual
traders ultimately fail. Trading to pay for the mortgage, so to speak, is a
tough way to make a living and any way you can prevent yourself for falling trap
to that, the better off you and your trading will be.
As always, I?m here to help. I?ve made every mistake out there and done so
many times as many you already know by reading my blog. But, we?ll get through
this difficult time and find new, if not better ways to prosper.
Q: I got this from John Mauldin?s weekly
newsletter: ?For such a price, we had better get a new regulatory scheme which
requires reduced leverage. Want to get really mad? Up until 2003, all investment
banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave
five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet
you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three
down.? As Barry Ritholtz wrote: ?So while the SEC runs around reinstating short
selling rules, and clueless pension fund managers mindlessly point to the wrong
issue, we learn that it was the SEC who was in large part responsible for the
reckless leverage that led to the current crisis.? (Don?t get me started on
blaming the short sellers. Let?s not blame the people who leveraged up their
companies 40 to 1 with bad investments.)? Can we trust those jokers to get
things right?
A: No, we cannot. But, we can trust that the market itself
will do what it needs to do. Leverage kills. Always has, and always will. This
lesson is not new, but every once in awhile, we are served a cold hard reminder.
I just wished for everyone?s sake that those not involved aren?t hurt the most
which is what is likely to occur. When I said that I was against
the bailout and wanted ?Rome To Burn,? I felt bad about saying that
because I realize that a lot of tough days are ahead for many people. I?m very
fortunate and frankly I benefit the most if this market goes right down the
toilet because I?ll be in the position to pick up the pieces and profit the most
for what happens after that. But, others simply won?t and that?s deeply
troubling to me on so many different levels.
Q: You?ve stressed the importance of using
trailing stops/exits. What?s your take on smartstops?
A: I signed up for their free service (which offers 5 stops
per day) so I could answer your question and have spent only an hour or so
reviewing the offering. It probably is not enough time to offer a really great
comparison, but I can share a few thoughts about it.
In short, SmartStops is a online service that basically will provide both
long and short-term stop levels based on some volatility or average true range
computation. At first glance, the positives from the service is that you can be
sent email alerts once the stops have been triggered and if you use their
optional BrokerLink service with Ameritrade you can set it so that it
automatically sells selected stocks when their SmartStops are triggered. This
will likely increase the number of trades you make and overall commission fees
(especially if you use their short-term stops versus long-term), but for those
who never utilize stops in any shape, manner, or form, this service could prove
quite useful. At a minimum, it provides a basic trailing stop strategy that will
help protect against large scale losses which is the key. I also like the fact
that they provide both short and long-term stops so you can vary the stop based
on your overall approach.
For example, let?s take a look at Potash from their perspective. Although I
know the chart is small, here you can see both long and short-term stops and
sell signals created through their service both during the uptrend and downtrend
cycle:
Obviously, the short-term stops generate more signals due to the tighter
stop. In addition, notice that this service only provides sell signals. It does
not generate buy signals of any sort, so it is up to you to determine the right
point of entry. Contrast that with Teresa Lo?s universal stops which provide both buy and sell signals
and, in my opinion, a nicer looking chart and offers real-time feedback. It is
also only $50 bucks for a lifetime license providing that you use TradeStation
or Esignal.
I also like the RMI indicator (bottom window) which helps detect a major
trend change (green to red) which is not possible through SmartStops. Notice,
for example, in the chart of Potash that a key character change occurred which
would have been something you had to take notice of if you were long the stock.
I also appreciate that I can adjust the InVivo indicator as well as use it in
conjunction with other technical analysis studies at the same time which gives
me more flexibility and confidence. But, both services offer investors the
opportunity to manage their exits in an unbiased and disciplined manner and, as
most people know, knowing when to sell is always the more difficult part of the
trade.
