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Tuesday, November 2, 2010

Financial mythology

This weekend I was commenting about the importance to develop a trading system to rely on.
It very much has to do with the urban legends surrounding us in the market.
We are ill equipped to deal with it if for reliable information we have to count on MSM.The confusion and variety of opinions just make it difficult to follow some kind of information.

Try to follow some iconfigures in the investment world, assuming that we can get reliable info.I think that the best in that case, will be to just pay attention to only one of them.

Different opinions out of five or six and we get lost.We start thinking who and when is going to fail in their views, and how fast really is reversing his/her strategy and we can end up with even more uncertainty.

Mark Hulbert made an article checking newsletters that he follows (several decades now) and started looking for editors who got the 2000's and 2007 crashes and 2009 melt up, and he got not even one.

Pretty sobbering and one of the reasons why I don't think that following news (at least closely) is too much of a help for me.

I'm thinking about the foreclosure mess few days ago and it's effect on the equity market.Almost nothing.

Treasury creating bonds and the FED buying it, huh?.Sounds like incestuos, like something really out of whack.
Mark to make believe.Banks getting money to just speculate like regular traders but against their clients.
Government giving incentives to send jobs oveseas, bond vigilantes that will protect the soundness of the government books castigating increasing deficits... what happen to them?

There's a lot of myths out there and to keep my head leveled I just consider most of it a farce.
That's why I try to stay away as much as I can from regular news, they don't inspire very much.

Regarding the equity market the trend looks too mechanical, not impulsive but stayed solid anyway.

I mentioned already that a pull back by nov 17 (i'll be alert couple days before and after too) is very possible.

Could be considered a reversal tomorrow, who knows, to me looks too neat.There's lots of people waiting for tomorrow probably because we all remember Sen. Scott Brown and what happened afterwards.Twice in a row, maybe not.

From an astrological point of view I keep thinking (or seeing) nov 17 like a important day if a reversal is going to occur.In that case we can get a 6% 8% down.But hardly before, if I'm not mistaken.

Of course a drop could happen anytime but to me if happens now should be shallower and short lived.
In my mind nothing change since Jan 2010 when I post my first comment ever on a blog when we make some kind of tournament about what was going to happen in the equity market in 2010.

If that view remains valid now is the time of blowing up the Lehman price levels.Will see.

Thank you

70 comments:

  1. Good morning!

    I tried to vote, against Pelosium, the densest element. But I found out I'm not a resident of California anymore, so I didn't qualify. I can vote in the national elections now only. Sigh.

    Please vote that woman out. Not that I want to influence your vote, but, well, I want to influence your vote. In this case.

    RE your post above: I don't think the Fed is buying directly from the Treasury. One of our James Bond types can qualify this, but I think

    1. Tarp is over. The USG didn't loan out all they could. Quite a lot has been paid back, except by GM, Fannie and Freddie, and F**2 were separately financed under a separate deal.
    2. The US Treasury issues bonds that are sold at auction to primary dealers and their partners. You can't buy one from the treasury. However, you can buy one from

    http://www.treasurydirect.gov/indiv/research/indepth/tbonds/res_tbond_rates.htm

    or from your bank, or from your TDAmeritrade trading company. When you do, you don't pay what the original dealer pays, you pay more. The dealers make a profit.
    3. The Fed may buy T-bonds from the dealers. This is done at auction. The Fed is limited to the amount they can buy. Basically, the Fed can't buy more than the amount they are getting from their current investments as they mature and are converted back to cash; they can invest this cash into the economy by buying the bonds from the dealers who can use the cash for other reasons--buying stuff, investing in stuff, hoarding copper, whatever.

    4. There may be a QE2 announced at any time by the Fed. This means the Fed will permit itself to print money and buy more of the treasury bonds back from dealers than they are currently doing. This will put more money into stuff, hoards of copper, or whatever the dealers want to invest in. These extra dollars mean the worth of the dollar goes down, because there are more of them available, so more gets charged by vendors when you go buy stuff. This makes imports more expensive. Since if you live in the US, the worth of the dollar doesn't matter much, because for US made stuff, it still costs the same.

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  2. @Rock,

    Or hoards of Cotton. Next time you buy T, remember who is resposible for higher price!

    I Can

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  3. Informative post on Minyanville about signs that this is a potential top:

    Market Repeating 10 Warning Signs of a Major Top

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  4. @ICan:

    Which do you think will be more: the extra $0.20 for the 8 ounces of cotton in my shirt, or the rising cost of overseas labor to make that shirt?

    I'm betting that as the BRIC countries become more wise to the low labor costs, you'll see wages rise. Like my old pals, Foxconn? Their overhead went up dramatically.

    Maybe some jobs may come back to the US with the cheaper dollar. Have to wait and see, but I hope so.

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  5. The foregone conclusion that the this is going to be a Republican sweep may be the catalyst for a top a few months in the making.

    Sell the news?

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  6. That's my double thesis - nearing major market top (but might zig-zag for while causing the most pain both ways) and possibly sell the news event coming soon.

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  7. It might be a good time to buy volatility.

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  8. Good thought, Denise. In what form? That dog, VXX or something else?

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  9. Easiest way other than options. This is a really nice play because volatility expands much faster than it contracts.

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  10. Isn't it? But if you think that the market is going down the vix will go up quite quickly. Plus the stop loss point is clearly defined and not far away.

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  11. That's true. Could be a good one to take a shot at as a quickie.

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  12. Or you could enter with a buy stop over the high of the past few days.

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  13. Maybe that too. Let me watch for a bit here.

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  14. Look at the April bottom, a buy stop would have gotten you in either at 19.40 or more conservatively at 21.00. It shot up to 31.00 in a matter of days. 50% profit.

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  15. Plus look how much lower the VXX is now than April. So much complacency in the market. No fear, as I have been saying for a month.

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  16. I would prefer to enter on a buy stop...

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  17. Dastro - Great post and well worth the read, thanks for sharing your insight.

    Busy morning (at work) best of luck to you all and remember vote early and vote often.

    Manyg Mutt

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  18. Dastro - Great article! Information overload affects us in all areas of our lives. Interesting that you wrote this for today on trading, as I heard a piece on NPR this morning on my way in to work on how text messaging and emails on phones are destroying traditional social lives. Last night, a friend of mine forwarded me the following article on on the topic as well. Long, but worth a read.

    Enough already: information overload

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  19. After the earnings report, a large investor left NEM. The stock dropped $2.

    I have seen when the earnings are good and the stock sells off, it often rebounds.

    Let's watch NEM. I'm thinking about starting a position in it, as soon as the big volume spikes stop.

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  20. @Thor: I'm really glad I met my wife before texting. I've heard horror stories about how it's making the usual rythms of the dating ritual impossible, as people expect the other person to be constantly and immediately available and responsive at all times. It also causes huge misunderstandings when two people who are starting a relationship over-rely on texting as means for communication with each other. Causes huge blow ups.

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  21. Manny - Hah, I've had a couple of those via IM myself! I don't know how the heavy traders filter out all the garbage out there.

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  22. Look at that market - we're so close. Break through? Or crash back down?

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  23. FYI - I Invited all the admins with a gmail email address to view analytics (traffic stuff). The invite would have come from anonymoustraders@gmail.com. If you didn't get an invite and have a gmail account and want to view the traffic data let me know and I'll add you.

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  24. @Thor,

    Break through, and then we'll what happens after that. But I think we go higher first.

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  25. April was Emmie's top wasn't it? Didn't he call that within a couple of points? Or was it the bottom for the year he was so close on?

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  26. No, it was the top. He nailed it within I think .20 or something silly like that.

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  27. @Rock

    I think of it as a cartoon...
    I envision a guy with loads of paper and ink making nice US government bonds and after a short ciruit through fiancial world (primary dealers and investors) another guy who, at the FED with paper and ink makes beautiful federal reserve notes (dollars) to buy them.


    I know the federal reserve is semiprivate but still the operation reminds me some kind of soap opera's incestuous relation.

    Maybe I should buy a TV.

    @ Thor
    How do I access analytics?
    Dan

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  28. Cool thank you Thor.
    One question could the visitors means only one guy getting in and out of the site the whole damn day?

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  29. @Thor, Dss:

    I clicked on my Doors Break on Through to the Other side and set it on infinite loop.......

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  30. @Rock,

    Re wage cost rise in Ems, true. They rise right away. I know my farmer relatives in India are saying labour costs have already doubled. Food inflation is parabolic. Clothing inventory sitting in warehouses has doubled in price.

    But Bernanke said no inflation.

    I Can

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  31. @Thor,

    re visitors. Looking at flags, is that number, unique visitors or number of hits from that country?

    I Can

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  32. @I Can: Benny doesn't count food or energy price increases.

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  33. ICan - I'm not sure how that thing works. It does not mirror the analytics data but is close.

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  34. Manny - or home prices. We've got princes going all over the place, but according to the FEDs we have no inflation or deflation.

    They like to do the same thing with inflation numbers that they do with unemployment numbers. Just keep changing the way the data is collected and reported to hide all the crap they don't want people getting upset about.

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  35. @ICan:
    Other countries didn't like US exports. So the US is exporting inflation.....Let's see how EEMs like that!

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  36. @Rock,

    It's a long way for Wall St. to take printed U$Ds to Ems, create inflation there, so U.S. then export. Wouldn't it be easier just to give folks in the U.S. that same money, oh just handouts, and create demand here.

    I Can

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  37. I voted. Polling place was pretty busy but not busier than usual. I did get a choice of electronic over paper ballot so I was able to chose paper, unlike last election.

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  38. I guess somebody else really likes relative strength.

    Coming monday, you'll be able to track a stock against the performance of an ETF.

    See

    http://ir.nasdaq.com/releasedetail.cfm?ReleaseID=525264

    I can do this with my builds of TDAmeritrade StrategyDesk, but it's painful. I'm looking forward to seeing more how these work.

    You may want to check out the article. Especially if you like ETFs and try to figure out the best cows in the herd.

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  39. This is good. I'm leaning this way as well.

    http://www.ritholtz.com/blog/2010/11/greenhaus-on-us-elections-gridlock-not-good/

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  40. Manny - me too, especially not with what's we've got coming down the pike the next few years. Gridlock is going to kill us :-/

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  41. (Chart) Market keeps retesting 200 week simple moving average.

    www.fundmymutualfund.com

    I Can

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  42. Sugar is back at old highs. DGDF story.

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  43. Seems like a tepid day to me. Calm before the storm?

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  44. I'm surprised it managed to stay up all day.

    Manny - Can you imagine? Everything comes apart tomorrow after the elections?

    I still think everyone is just waiting to see what the new congress is going to do.

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  45. Just an FYI - I am thinking about getting a small postion of VXX.

    With the way the market has been going I don't think we will see a decline tomorrow, but I can't see VXX going down much more.

    Mutt

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  46. @Mutt,

    You can do anything you want if you use stops.

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  47. Denise - I have learned that lesson and a valuable one it is.

    Yes, Stops are important.

    Mutt

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  48. As a disclaimer, I am not recommending that you do the trade, only that if you decide to do it to use a protective stop.

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  49. Speaking of a disclaimer - we need one

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  50. Mutt - I've been hearing about some of the initiatives you guys are voting on up there - taxes for the uber wealthy, and the alcohol thing. Let me know how that goes.

    We have quite a few here in CA people are watching closely. Prop 19 of course, then there's the roll back of The Governator's green energy initiative put on the ballot by Texas oil companies, plus they're finally going to allow us to vote on how a budget is approved in CA - moving it to a simple majority rather than a super majority.

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  51. Hello all. Thks Dan. Here's another point that suggests a correction is close: insiders selling. This article at zerohedge had me investigate further to check if one can find a meaningful correlation between the official insider transactions and the markets.

    Putting barrons chart and a weekly SP500 chart side-by-side, I've found that insiders have had a good timing since the end of 2009. Data goes from Nov2009 to the end of Oct2010.

    See how the 2 insider selling peaks for that period (around 23/12/09 and 14/04/10) closely coincide with the 2 market corrections (SP500 1150print on 11/01/10 and 1214 on 15/04/10) we've had so far.

    More interesting is what we can predict from here:in the week to wednesday 27/10/10, we have what looks like a third peak, reminiscent of the one from april.

    Whatcha think?

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  52. Thor - Among other things if prop 19 passes it should help tourism. And I think a lot of states will follow suit.

    I voted NO on taking away the state run liquer stores.

    There are a few things I believe the state should run and regulate, just like if prop 19 does pass, it should be licsened by the state.

    And NO on the income tax, it only stays on the uber wealthy for 2 years before it can be brought down on the not so uber wealth.

    Plus we already has sales and property taxes and one of the highest gas taxes in the nation.

    ALL the money should be going back to the people not the corporate profits.

    Mangy Mutt

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  53. @Wolf (5:31)

    "Insiders Bailing with Extreme Haste". At Mike "Mish" Shedlock Global Economic Trend Analysis blog.

    Also, see trader Mark's post for 200 day Ema and tops.

    If everyone and their grandmother is thinking buy the rumor and sell the news re QE - do you think it will work out that way?.

    I Can

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  54. @Wolf

    I don't know what way is braking in the very short term (tomorrow or thursday).

    But what got me thinking is Jackson Hole's Bernanke speech Aug 27. I watch S&P 500 from that point on and think for a guy that doesn't have a sustainable clout with the markets he made a heck of a job.

    So I'm cautious with his actions.
    For the mid term I keep my view since January that this beast goes up.November to me looks like a chance for a decent correction but not a sure thing.
    I don't see a trend change for the time being.Of course in the future is going to come, not now.
    Dan

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  55. Obama visits SE Asia this week. 10 day trip which includes stop over in India.

    The cost of that trip is astonishing - $200 million/DAY - 10 day trip. WOW. In India, his stay at that hotel in Mumbai, where terrorists striked last year - the Taj Mahal hotel. 570 room hotel is completly booked for security entourage.

    That Taj Mahal hotel is owned by Tata - same Tata who donated money to Harvard.

    What a waste of taxpayers' money.

    I Can

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  56. @I Can: $200 million/DAY? Are you serious? That can't be right, can it?

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  57. @Mannwich,

    Yes, I read it in a Indian newspaper, then googled it. Yes!

    Try this one www.dailymail.co.uk

    I Can

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  58. Manny - I can believe that - think about it. ALL the planes, all the helicopters, probably an entire regiment of guards, all the cars, gas, etc.

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  59. @Jeff,

    The exchange rate is U$D = 44.50 INR. Indians think that's absurd. WTF !

    I know he is signing some trade deals, but still, that is reckless.

    I Can

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  60. I'm getting so tired of everyone having to label everything. Liberals, conservatives, austrians, keynsians, bears, bulls, libertarian leaning. What are you if you believe parts of all of these? I don't understand our obsession with trying to fit every peg into a slot. Is that an American thing? Or do they do this in other cultures as well?

    I fear it's going to be our downfall.

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  61. It's just a human thing, Thor. We prefer to neatly categorize everyone and everything. Makes things "easier" and tidier, at least that's how we perceive it. I catch myself doing it too and try hard not to.....

    You're right though - many of us are more complicated than that and have a little of everything in us, depending on the issues.

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  62. I agree, I Can. Totally reckless and ridiculous. Good post over at TBP:

    http://www.ritholtz.com/blog/2010/11/the-tragedy-of-the-obama-administration/

    What a shame. And sham.

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  63. Woohoo I voted! 83 degrees here tonight too, at least one thing will be nice tonight.

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