"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
-
Sun Tzu

Sunday, December 21, 2008

A Lesson from History

The oldest book ever written about the stock market business is Joseph Penso de la Vega's "Confusion de Confusiones". In his masterpiece, Vega describes the action of the world's oldest stock market in Amsterdam at the end of the seventeenth century. It is amazing to see how his observations are still valid today. The following paragraph from his work summarizes one of my core trading believes pretty well, so I'm tempted to print it out and post it on top of my desk:

"The expectation of an event creates a much deeper impression upon the exchange than the event itself. Only the shrewd observer who makes it his business to watch these things conscientiously, without blind passion and irritating stubbornness, will hit upon the right thing innumerable times, though not always."

Translation into modern terms:

- Buy the rumor, sell the fact
- Trading is a business, not a hobby
- You need to be open and ready to change your stance immediately
- Trading is a "probability game", where you are wrong quite often

So if you want to improve your trading, read the old masters. Most of the new books are derivatives anyways.

Thursday, December 18, 2008

An Important Bullish Sign: Declining ATR

Market volatility is usually highest at turning points. A way to measure it is through the Average True Range (ATR). Since a couple of weeks, we see a very encouraging sign of market action: a decline in the ATR. The market doesn't act that nervous anymore.


I expect uncertainty to come back later in Q1 2009 when people realize that the housing market will not recover soon and the hyper of Obamas inaugauration is over. Until then, we keep trading on the long side (Exception: Apple!).

Sunday, December 14, 2008

Game Plan Week of Dec 15 2008: Keep Going...

Not much has changed compared to last week. We still see some underlying bullishness in the market, notably through strong price action on negative news. Hedge fund scandal, Big 3 bailout failure couldn't bring down the market. I have no clue who is buying right now, but there obviously ARE buyers out there. The only caveat: too many people seem short term bullish.

Yet, I keep sticking with my long positions (until we get into the 950 area on the S&P), keeping in mind that my trades are pure momentum plays at this point. Only exception: ENER, which is in a decelerating downtrend. I bought at resistance on declining downside momentum. Let's see how this plays out if oil continues to rise.

We took some profits on JEC last week after a 100% run up. Momentum's still strong, though.

The current economic environment favors defensive plays, such as consumer staples and dividend plays. I don't think, these stocks are the way to go in the current rally. As you know, steel, infrastructure and consumer discretionary have recently done well and I don't expect that to change in the short term. Nevertheless, I'm looking into some tech plays. I see some interesting turnarounds (in terms of charts) in ADBE, AMZN, BID, CRM, and HPQ.

Friday, December 12, 2008

Sunday, December 7, 2008

Game Plan Week of Dec 8 2008

The discrepancy between market action and economic outlook is amazing: the US economy is shedding jobs in a pace, which hasn't been seen since the seventies and the stock market is rallying on these extremely negative news. We've since this pattern since some weeks, though, and it is not easy to interpret. Maybe the market envisions a recovery of the economy in the second half of 2009, which I doubt will happen. But actually: I don't care. The recent DOW trading range of 9500/7500 is wide enough for some short term long trades. We have seen interesting relative strength on high volume some in home builders (PHM) and some infrastructure (JEC) plays. It might be profitable to play that upward momentum for a couple of days. So despite the fact that I put up some long positions, I believe we will come back down, maybe in the 1st quarter of 2009 when the market realizes that economic recovery won't happen before 2010.

Wednesday, December 3, 2008

Let's talk China...

Last week, I talked about my bullish stance onChina. Reason was the massive intervention of the Chinese government and the recent relative strenght of the Chinese market. To be honnest: I'm not so optimistic anymore.

The government shows too much activity in a too short period of time (interest rate cuts, spending program, currency intervention: all that happened in the last four weeks!). To me, that looks a little bit more like panic by a government who has zero experience with the current economic environment. You can also expect any news from China being filtered and estimates being on the "optimistic" side. What does the recent collapse of oil prices mean for domestic demand in China? It's probably lower than you think.

I don't know what is really going on there, but I believe in the "cockroach principle": if you see one bug, there is probably a whole population behind your kitchen counter.

I'll keep following the FXI chart for weakness and shorting opportunities.

Tuesday, December 2, 2008

Last week: I had my doubts...

I have to admit, despite my bullish comments last week, I had some doubts in the market. The only postive sign was the ignorance of major bearish economic data. On the other hand, two observations added to my bearish thoughts:

- Prices were rising on lower volume. The 20% gain in the major indexes converted the oversold conditions right to overbought.


- Index price charts show that marekts are in a nice down trending channel. This thesis has been supported by yesterdays price action:
On the bottom line, I decided last week to add some postions on the short side (BX, DELL, DISH, all charts with nice down trends) and I think I'm probably not done yet. I'm looking into shorting some agriculture as well as food plays. Statistically, we shouldn't expect a fourth down month in a row. But: we need a positive catalyst and I'm afraid upcoming interest rate cuts in the US and Europe wouldn't be surprising any more and have been priced in.
Also note that deleveraging still seems to take place, based on the large drop in the final trading hour on Monday (institutions tend to buy/sell their postions at the end of the trading day). In addition, investors might be motivated to harvest year ends losses for tax reasons.