Monday, June 26, 2006

Watch list for week of 6-26-06, writing contest extended



A small list like this means not too many stocks are consolidating at support.

Due to several requests, I've decided to continue accepting entries for my writing contest for three weeks, so the deadline for submission is Monday, July 17. The prize is a copy of Victor Niederhoffer's latest book: "Practical Speculation" shipped from amazon.com to your house. For all the details, please see the link.

Thursday, June 22, 2006

Reply to a reader regarding overnight risk during the 2003 bull

"About your observation about there being a big premium that daytraders miss by not holding overnight risk. You should take a closer look at your data. Re-run the spreadsheet and this time start from about September 2002. You will see the relationship almost breaks down. Shorting overnight or going long over night yields more or less the same return. Before 2002, the point you made on your blog was quite valid. The interesting question then is why this relationship changed. Presumably, the answer is because most daytraders were eliminated by the bubble bursting." - sc

This is a great observation, but it only shows half of what is going on here. September 2002 was a major market bottom, so let's also look at the results for the person who carried risk through the entire period, September 2002 until present.
  • Buying the close and selling the open: $100,000 becomes $100,598.40
  • Buying and holding: $100,000 becomes $171,178.80


This tells us that the public was not willing to pay a premium for overnight liquidity. We might conclude that they were frequently getting out of positions and taking small gains because they were willing to pay premiums (higher prices) to people who for the most part bought and held and in doing so improved liquidity over a four year timespan. The people who did most of their buying near the market bottom bought when supply was relatively abundant and demand was relatively scarce...

Wednesday, June 21, 2006

Criticism of Daytrading Followup

"To play devil's advocate...if your test shows the tide is against daytraders and against investors. Is the tide with those brave souls willing to hold overnight and dump their holdings the next day? Hold short-term? Long-term? What criteria are you using to determine the tide is with if you trade like yourself? Are you adjusting your exits depending on certain conditions? Scaling out? If so, possibly daytraders and investors can and most likely are doing the same. Plus, your test is only showing one instrument. What happens if you choose a different one? What happens if you diversify across several instruments. Or diversify across time? I could go on and on. There are so many ways to skin this cat...that it's very hard to discount one methodology over another." -- Michael Taylor

This is a great subject for writing about because it is hard to pin down all the angles. I can't resist ;-) Rather than process of elimination, let's discuss some of the important factors that all market participants must deal with because no matter what strategy you use, they are a factor. Off the top of my head some important ones are:
  • commission
  • bid-ask spread
  • margin interest
  • taxes
  • slippage
  • gaps
  • dividends
  • money market interest
  • interest on short positions
  • dividends paid out for short positions


Every trader should have a good understanding of how these factors affect each of their strategies and tactics. I bolded the two that I feel are immediately relevant to my previous post regarding daytrading and "investing". Before I tear into these strategies again, let me say that each has their place for a well rounded and properly capitalized trader.

Most people have probably given some thought to whether or not they feel that market prices have an infinite fractal dimensionality or not. In otherwords, if I show you a chart of continuous prices I grabbed at random that doesn't have labels on the time axis and price axis, could you make a good guess about what time horizon and price range you were looking at? Could you do it repeatedly with any accuracy? For me, the answer is no. So I assume that daytraders in general are in fact trading the same kinds of chart patterns and price trends that I am, just on a different scale. The daytrader could employ twice as much leverage as I could, but he would also be paying the same bid-ask spread as I would have to. Regardless of how much leverage he chose to use, he's paying the spread on the whole thing, and when expressed as a percentage of his average profits, the bid-ask spread takes a ridiculously larger chunk of his profits using the same chart trading techniques! The daytrader also has a higher turnover, which means more chances for commission and slippage to eat into the profits.

"Ah," you might say, "but the daytrader could avoid the spread by using limit orders." That is correct, you can choose the time of your trade or the price of your trade, but the two are mutually exclusive. So our limit ordering daytrader can't even be sure that he will get the positions that his strategy requires him to have. Also, the best trades have a funny way of not quite getting to your limit anyway. There is no shortcut around the bid-ask spread that doesn't penalize you in another equally sinister way.

Let's not forget gaps. There is a mutually exclusive relationship to explore here as well, and it is all about liquidity. It is a fact that people will pay a premium to reduce their risk. If you can provide liquidity for these people and are good at selectively managing the risks involved, you will be paid a premium. Carrying stock positions overnight is one way of providing liquidity to people in aggregate. Any trader who's thought deeply about it understands that when he is successful in his trading operations, it just so happens that he has improved the liquidity of the market. He has bought when both supply was abundant and demand was scarce. He has sold when supply was both relatively scarce and demand relatively abundant. Buy uncertainty and sell hope.

All these things are the tide that I'm talking about. It is quite convenient that you can see it on the price series of the QQQQ. I'm not saying that you can't be successful daytrading because there are zillions of people who are, but they are grinding it out in an uphill battle for reasons that are fundamental to the way markets work. On top of that, daytrading takes a LOT of time that could be spent on things equally as gratifying. I like the easy road.

Monday, June 19, 2006

Watch list for week of 6-19-06

I'm convinced that the long-term market trend is down and that we're experiencing the first bear rally. The naz gained almost 3% on Thursday. That's the kind of stuff you see in bear markets. I'm out of almost all long positions, and will be closing the rest out over the next two to four weeks. I'll be shorting opportunistically, but not aggressively yet. Before I show my computer generated watch list, let me point out the two scariest charts and the two best charts I've seen all week:

Scary:
HANS
NTRI

Best:
LBIX
AERTA

Here's the highlights from my market homework software this weekend:


By the way, if you are a daytrader or an "investor", don't even bother to email me. Also, if you have some pay_for_stock_tips service, don't email me.

Somebody might ask, so I feel like I should explain why I'm not going to hawk daytraders' websites. There are two reasons. Daytraders fight the tide if they are going long, which can be seen on this very simple trading system that buys the QQQQ at the open and sells out at the close:




The starting balance was $100,000, and ending balance is $18,914. Where did all our daytrader's money go? Simple. It went to the traders who bought and sold to the daytraders, ie. the ones who took overnight risk and avoided intra-day movement. It might occur that the daytrader should be shorting and cover at the close, but that is also less than optimal due to the inability of a short position to compound as it moves in your favor.

Anybody who wants to reproduce the spreadsheet above can download the price data into excel from this link at yahoo finance, sort the price data in ascending order by date, and use this formula in column J: =J1*(E2/B2) . Put the starting balance in the header row of column J, and you're set.

I can't wail on the daytraders without wailing on the investors. So how did they do over the same period? By buying and holding over the entire period, the $100,000 account is worth $76,192.37. A lot better than the daytrader, but a sharp stick in the eye for seven years worth of "investing". The investor figures his money would have doubled in seven years. Every seven it doubles, right? It never works out that way.

The point is that you have to have an edge, and if you aren't looking for one then don't come here. If I haven't pissed you off yet, then I probably don't mind if you email me.

To tell the truth, I'm thinking of taking a break from this blog. There are so many reasons why, but to name a few:

1) The market has turned long-term bearish.
2) I got ZERO responses to my writing contest.
3) I keep getting more and more annoying emails from people starting investing or daytrading websites and less email from legitimate traders.
4) There's no point in trying to help people make good strategic choices. The public cannot ever "solve" the market. As I get closer and closer to it, I find I have less and less to say to the public about it.
5) It is tiring to keep up with an exponentially growing community when the quality will never get any better than it was.
6) Almost all the blogs I used to love reading are either posting 12 times a day instead of maybe once or twice, switched to daytrading, moved to a pay site, or they don't post anymore. Maybe I'm the one who's crazy, but either way I just don't feel like there's much left here for me.
7) The "evil scientist hibernation" instinct is starting to become overpowering. I have more clarity now than I've had in about three years. When I'm working on my software, the only conscious thoughts that interrupt my concentration is that none of my other work matters. I've got to start cutting out other things, and this blog is one of them.

I like formulating my discretionary trading plan on here each week, it keeps me organized and disciplined. I haven't missed a weekly strategy plan posted to the blog in well over a year and I think I'm at the point where I don't need the blog anymore to maintain it, sort of like when you're a kid and you're ready to take the training wheels off the bike. I might discontinue the "weekly watch list" postings because it will give me more time to focus on improving my strategy and computer programs, and doing some real writing about trading instead of just snippets to the blog.

Monday, June 12, 2006

Watch list for week of 6-12-06

This correction has become more severe than I anticipated. It seems that a lot of bulls capitulated on Thursday, along with some margin call liquidation. If Friday had been an up day then I would have a little more confidence in long positions. I think this bull might be close to its last legs, but I cannot be certain yet so I am still net long. My watch list this week looks far better than it has for months. It has been a while since such high relative strength stocks have consolidated long enough to meet the criteria my market homework software looks for.

I'll probably be re-allocating some of my portfolio from the worse looking positions into better looking consolidations on the list below. I've had GIGM since I posted about it in March and added to it again this past Thursday morning. I'll add even more shares if it breaks out from its current consolidation.

Monday, June 05, 2006

Watch list for week of 6-5-06

Everybody probably thought I was nuts last Monday morning when I said we were in a short-term rally and the naz closed down like 40 points. I didn't sell a thing that day. Like I've said before: most days your best move is to do nothing. It was for me, the naz ended the week up 9 points; its second consecutive up week. In fact, on Wednesday morning I bought some TZOO shares just above its 50-day SMA. TZOO hasn't broken out yet, and sure enough it made an appearance on my market homework software this weekend as a buy candidate. I'll be adding to that TZOO position if it does in fact break out.

I'll be watching the nasdaq very closely over the next month because it has made a significant lower low, taking out the low put in at the beginning of the year. I don't sell profitable long term trend trades when the naz is having a correction off of a fresh higher high, even if the pullback is extreme like this one in May, but I will be closing out those positions if the naz makes a consecutive lower high and lower low, completing a bearish head and shoulders chart pattern. This is the period of the short-term market cycle I love right now because you can make a bet either way on contracting stocks and you will win as long as you realize any losses quickly. Most of my bets over the next couple weeks will be on the long side, but after that, I suspect on the short side.

At the end of April I mentioned on the blog being up about 60% for 2006. In fact, I was up as high as 69% before the correction occured, but I was already unloading my weaker holdings. So how did I hold up through this recent correction? The gain in my discretionary stock trading account for 2006 has shrunken to 32%. Maybe I shouldn't be talking about this on here though because I don't want it to turn into a competition, but I do want to inspire people to learn about my style of discretionary trading and to strive for better emotional control and psychological discipline.

Well, the premier of Korgoth just came on cartoon network for the second time tonite and it actually looks kind of cool. I missed it earlier tonite but I'm going to watch it now, so I'm done talking ;)

Here are the highlights from my market homework software this weekend: