"Dear Ann Landers"

I received an email from a fellow participant on KaChing.com. The trader was seeking advice on how to become a better trader. This entry will have an "Ann Landers" feel to it. For visitors who are not on this SEC-registered soon-to-combine-fantasy-with-reality community, here is my post about all that.

Note that what was missing from my entry is how KaChing has changed my mindset and attitude. It has, in effect, and so far, made me a more focused investor.

I'm a newbie on Kaching and am eager to learn a lot more about trading. I've reset my portfolio a few times in the past two months (my first two) because I got cocky after a first month of 40% and lost basically all my gains and then some by betting the farm and getting it wrong. In hindsight, I think it's likely my 40% gain was just as lucky as my 50% fall. But I want to move beyond luck and start trading skillfully. I'm a bright guy but don't really know the best place to learn. I'm intrigued by Elliott Wave theory but some of the arguments against it make sense to me as well. I don't know much about technical analysis but am also interested to learn more. At root, I'm a fundamentals guy, but I've been burned both ways using fundamentals: some companies that seem to be financial nightmares (low cash, high debt, declining sales, high p/s, high peg, low roi, low roe, etc.) just keep going up while others that seem so sound and promising just plummet. I've fallen victim to the value trap as well. Other times, I've been right but not patient enough...I short at 20, it rises to 24, I take the loss and then it drops to 15 the next week. :)

The best success I seem to be having at present is riding momentum and getting out quickly. Yesterday and this morning I saw the severe uptick in C and BAC and figured the fundamentals haven't changed and they're basically insolvent so they HAVE to come down. I waited for the ticker to start dropping, shorted them heavily and made a killing before getting out. Now I see they're up nicely since then...and I don't understand why.

Anyhow, I write to you in admiration of your slow, steady gains, similar to those I see in Daniel Carroll's portfolio. I'd like to learn how to gain slowly and steadily and would love to ask you for a recommendation for how I might learn more. I'm curious how you pick stocks (technical, fundamental, value?) Any books or sites you'd recommend? Any advise would be much appreciated.

Thanks, [User's Name - protected for anonymity]

You are probably frustrated, both your inconsistency in trading and in trying to make sense in the market. You will be surprised to learn that YOU ARE NOT ALONE.

In fact, I created two groups on KaChing. One is called “Beginner's Guide to kaChing Trading“ (75 members). It serves to give back to the group, and to find users like you. That’s right. I’m looking out for newbies because you may have some fresh insight to bring to people like me. I often get direct questions or posts from the beginner’s group from users who express the same frustration.

The path to trading success was recently dominated by lucky traders (look up the tech bubble, 1999-2000). Trading based on fundamentals is almost irrelevant right now, but I believe that this phenomenon is temporary. It turns out that investors who want to “study” fundamentals will need to understand government policy. The Fed and the central banks around the world are applying Keynesian economic theory on a problem that requires more thought and foresight. I won’t get into the details of what solution will work, but I still agree that some kind of monetary policy is needed to save key institutions like AIG. Just last week, Citigroup and Bank of America were trading like insolvent banks. Even though they are technically insolvent, so are the global banks. This week, the CEO’s for both companies said they generated profits in January and February!

Why do I yammer on about economics (the economics text books were top sellers on Amazon recently, by the way!)? You are trying to rationalize the market when traditional accounting and fundamental laws do not apply….insolvent banks aren’t technically insolvent if there is someone ready to save them at all costs. It is my belief that fundamental analysis will not apply to as large a degree as you would want. Until the banking system is fixed (it will take longer than people realize) lending won’t resume to normal levels. Earnings will shrink for companies because of this, and such things as P/E will not be a reliable measure for security analysis.

Still, there are other figures you will need to look at for a company before you buy them. For example, I would suggest you look at debt/equity, book value excluding goodwill, and cash flow.

I won’t lie. This will take a lot of work.

This was why I created “Intelligent Investing” on kaChing. It’s now 180 members strong.
This is a second group I created to share ideas on security analysis.

In terms of your trading, it sounds to me that you are chasing trends, applying various trading “methods” to them to rationalize your positions, only to then get “faked” by the market. You are also day-trading. There are quite a number of day traders on this site, but it was one of the founders/owners of kaChing who posted numerous times that statistically, day traders end up losing in the long run, and that investors with a longer term horizon will last.

Pure technical traders ignore fundamentals. They look at charts alone and ignore fundamentals. The fact you look at them is contradictory to your desire to trade on fundamentals.

I employ technical analysis to a small degree in stock market analysis. I use the basics of this using such things as MACD, moving averages, support and resistance. Again, some swear that technical analysis means nothing, but if the market is efficient (“Efficient Market Theory”) then at the very least, the charts will tell me such things as where things might trade to or whether trends are forming. If everyone else is using charting to trade, then one needs to add this tool to stock market analysis. Note that charting analysis is the weakest form of support for this theory.

You should check out the book "A Random Walk down Wall Street" by Burton G. Malkiel. He discusses Efficient Market Theory. On p.174 the author states that:

Even the legendary Benjamin Graham, heralded as the father of fundamental security analysis, reluctantly came to the conclusion that fundamental security analysis could no longer be counted on to produce superior investment returns.
...the situation has changed...
...investors would be better off in an index fund rather than investing in an actively managed equity mutual fund...

It is my intent to last in both the virtual and real trading world. I have grown a following and I hope that some of those followers will eventually invest in me. That is, the followers will tie a portion of their assets to mirror my investment positions on the site. My advice to you is to keep doing what you are doing: invest in yourself (learn), and then invest in the market. Keep making mistakes. Learn. Reset (after all it is just play money). You will know you reached the next level when you become less emotionally attached to the market and see things for what they are from an objective level.

(Yada yada yada on the usual disclaimers: trade at your own peril, take responsibility and ownership on your own actions...)

Why Platinum?

Don Vialoux, a technical analyst I follow, appeared on bnn.ca. Below is a highlight of his picks. The video links are below.

"The Claymore Oil Sands ETF is benefiting from strength in crude oil prices, up over 30% from their late December lows. Technically, units appear to be forming a double bottom pattern with support near $9.50. Seasonal influences are positive until the end of May. Target price is $14.

The Platinum ETF is benefiting from growing demand in the Far East where auto sales and production are rising (Platinum is used in catalytic converters). Technically, Platinum has established an intermediate uptrend. Strength relative to gold and other precious metals is positive. Seasonal strength continues until May. Target price is $33 U.S.

The Claymore BRIC ETF tracks the equity markets of Brazil, Russia, India and China. The Chinese equity market has established an intermediate uptrend in response to its economic stimulation program. The Chinese are buyers of commodities such as copper and crude oil. Brazil and Russia are selling these commodities to China. Seasonal influences on BRIC equity markets are positive until May. Target price is $20.00."

http://watch.bnn.ca/market-call/march-2009/market-call-march-10-2009/#clip148272

http://watch.bnn.ca/market-call/march-2009/market-call-march-10-2009/#clip148274

Caution!
This entry is not a solicitation or advice to buy the above securities. It is best to listen to the rationale behind the recommendations.

Reminiscences of a Trade Spectator

From the Vancouver Financial Forum
Author's Site: TradeSystemGuru.com
Having trouble accessing? Document link: http://docs.google.com/Present?docid=dhh5cchp_13c65bw43t&skipauth=true

Notes from TechTalk: A Bottom to the Endless Pit?

Don Vialoux is a Chartered Market Technician who runs TimingTheMarket.ca. He received an interesting question on his daily blog.

From http://www.timingthemarket.ca/techtalk/2009/02/23/tech-talk-for-monday-february-23rd-2009/

Question from Mike:
So it looks like the DOW will break the inter-day low set in November, a new low. I was wondering how does volume come into play in defining a bottom? I believe Don mentioned that the official “bottom” was set in October when the volume reached 10 Billion shares on the S&P. I am confused with all these bottoms, the market keeps sinking. Can anyone present some clarity?

Hi Mike from Winnipeg:
A lot depends on the benchmark that is used when looking at a market. For example, an overview of all stocks listed on U.S. exchanges indicates that most stocks hit their low on October 10th.

The Wilshire 5000 Index and the Russell 3000 Index (i.e. indices based on stocks that are part of the broadly based U.S. equities market) reached their low on November 20th. The S&P 500 Index, an index that tracks 500 big cap stocks in the U.S. reached a low on November 20th.

The Dow Jones Industrial Average, an index that tracks 30 of the largest U.S. based companies in the world broke to an inter-day low on Friday. Of all the indices, the Dow Jones Industrial Average as a price weighted index is the least reliable benchmark: It is narrowly focused and its computation leaves much to be desired. For example, if Citigroup doubled, it would have the same impact on the Average as 2.5% increase in IBM.

The top 10 high priced stocks in the Dow dominate the performance of the Average. Performance of the top 10 Dow Industrial stocks is not a very good benchmark for the U.S. equity market.

Why mention the Dow Jones Industrial Average in Tech Talk reports? Because it’s the most frequently quoted benchmark quoted by the media.


Don also commented on the credit freeze. Investors can watch bank stocks rise and fall, but the two figures he mentioned are all that matter right now:

No progress was made last week to alleviate the U.S. credit freeze

• The yields on one month, three month, two year, five year, ten year and thirty year treasuries were virtually unchanged
• The TED spread and LIBOR were virtually unchanged.
  

Don's Market Summary:

Chances of a recover by North American equity markets into spring from current oversold levels are good. However, upside potential probably is limited to highs reached early in January. Ultimately, the next upside move into spring will prove to be a rally in a bear market. Selected sectors with favourable technical, fundamental and seasonal prospects remain attractive.

Full Article here: http://www.timingthemarket.ca/techtalk/2009/02/23/tech-talk-for-monday-february-23rd-2009/

Christmas Rally?

I asked Don Vialoux if he thought the recent rally was convincing.

Question: Don, the DJIA’s rally looks suspicious. The volume has declined each time the index has gone up. Does this mean the index is base building? Is it vulnerable to a correction back to support lines @ 7,449?

Answer: Hi, Chrispycrunch. I would love to confirm that the November 20th lows set by most major North American equity indices was the bottom, but insufficient time has lapsed to make that call. Lots of volatility in both directions.

Equity markets continue to respond irrationally. Meanwhile, glimmers of hope continue to surface. Sector rotation with positive breakouts above base building patterns have occurred during the past few trading days.

The first sector to break was gold. Utilities started to break earlier this week. Infrastructure started to break yesterday. U.S. energy surprisingly is close to breaking out (e.g. XLE). On the other hand, credit conditions remain frozen in the U.S. The yield on 10 year U.S. Treasuries touched an all time low yesterday.

Best guess is that the November 20th lows likely will be tested in early December(possibly a 50% retracement of recent gains as tax loss selling pressures take hold). Chances of a year end rally are above average this year. Favourable anticipation of the U.S. regime change on January 20th will help the bulls. The annual re-balancing of balanced funds and pension plans late in December and early January will help equity markets.

The big question is, ” Will this next intermediate upside move be a recovery rally in a bear market or the start of new secular uptrend?”. At this stage, Tech Talk is leaning toward the former scenario. The charts will let us know. I have a hunch that “Timing the market” by playing intermediate swings lasting 2-8 months will become more important during the next few years.

http://www.timingthemarket.ca/techtalk/2008/11/27/tech-talk-for-thursday-november-27th-2008/#comment-1852

Bullish on Gold

The US Dollar is showing signs of fatigue and is beginning to roll over. This is a bullish signal for gold. Goldcorp, for example rallied by over 70% in the last 3 weeks.

Barrick Gold: reached the magic 38.2% Fibonacci line before retreating. If the stock is able to rally past this, it will act as a support @ $36.70.


The US Dollar may correct by up to 10%:


Don Vialoux Video on Gold @ ~ 7 min :
http://watch.bnn.ca/market-call/november-2008/market-call-november-24-2008/#clip115420

Is the Stock Market Going Nowhere for 10-15 Years?

I have copied an article from the most recent ChartWatchers newsletter. It suggests the market will go nowhere for 10-15 years. Despite the negative argument that will be presented to you, the last few trading days have been positive.

My Counter-argument:

Is this at least a short-term positive trend? The Volatility Index has dropped, suggesting October's wild swings will not be repeated in the near term. In addition, a rally to at least the 200 day moving average may take place. I asked Don Vialoux, technical analyst for http://timingthemarket.ca/ about his thoughts on the matter. My concern was that stocks were rallying but the volume was not convincing. My argument was that the rally would not hold up. This was his response:

Technicals currently imply an intermediate recovery within a bear market. Reasonable technical targets are to 200 day moving averages. In most cases, a return to a 200 day moving average from current levels will provide an attractive return. Best guess based on current technical data on broadly based North American equity indices is that equity markets will continue to advance until near the end of January. The charts will help to fine tune the timing.

The Article:

ChartWatchers...The StockCharts.com Newsletter

Carl Swenlin | DecisionPoint

To access/subscribe to the source of this article, click on this link:

http://stockcharts.com/help/doku.php?id=support:chartwatchers

CHANGING WITH THE MARKET

When the market changes, we must change our tactics, strategies, and analysis techniques to accommodate the new market conditions. This is not a new idea, but it is one that is not very widely recognized, particularly when applied to the long-term. In recent writings I have emphasized that we are in a bear market, and that we must play by bear market rules. Overbought conditions will usually signal a price tops, and oversold conditions can often see prices slip lower to even more oversold conditions. When making these comments, my focus has been on the cyclical bull and bear markets. What I want to address in this article are the secular forces of which we must be aware.

On the chart below I have identified the five secular trends that have occurred in the last 80-plus years. First is the 1929-1932 Bear Market, which, although it was short, saw the market decline 90%. Next was a secular bull market that lasted from 1932 to 1966, which overlaps with the consolidation of the 1960s an 1970s. In the early 1980s another secular bull market began which peaked in 2000 (basis the S&P 500). Finally, we seem to have entered another consolidation phase that could last another 10 to 15 years.

I began my market studies in the early 1980s, before the big bull market took off, and I learned from the guys who learned all they knew from the market action of the 1960s and 1970s. Applying those rules to the new bull market was confusing, frustrating, and unprofitable. While I didn't participate in those markets, it is easy to imagine the bewilderment of those who, educated in the bull market of the 1920s, took the elevator all the way down to the basement starting in 1929.

The long bull market after the 1932 bottom was missed by most of those traumatized by the crash, but it trained a whole new group of analysts who learned that the market always goes up . . . until everything they knew was proven wrong by a 20-year consolidation. Finally, the battle cry of the 1980s and 1990s bull, "this time it's different," was learned well by those who ultimately ate the 50% decline of 2000-2002.

Unfortunately, it takes time to unlearn the lessons of the heady 1980s and 1990s, and we can still observe people using bogus valuation models that only work in bull markets. We still see people trying to pick bottoms, and we still see people who think that a stock is under valued because it is down 70%. By the time this current secular market phase is over, people will have learned all new rules, that will not apply to the next 20 years.

Whether or not I have correctly identified the current secular market phase as a consolidation remains to be seen, but I am certain that we are no longer operating on the rules of the last secular bull market.