Michael Covel: News & Info.

Michael J. Martinez, an AP Business Writer, offered commentary about today’s market movement:

“Stocks extended their gains into a second day Wednesday as investors digested a jump in the second-quarter gross domestic product while keeping a close eye on falling oil prices. The tech-dominated Nasdaq composite index posted an especially robust advance. Investors saw the Commerce Department report, which said the nation’s GDP grew 3.3 percent from April to June, as fairly good news, with a few caveats. While the GDP figure was revised upward from a previous estimate of 2.8 percent, it still marked the slowest period of economic growth since the first quarter of 2003. Consumer spending, however, grew at an annual rate of just 1.6 percent in the second quarter, the lowest level in three years. Economists fear uncomfortably high crude prices, which topped $50 per barrel Tuesday, could further hamper consumer spending.”

How can any one possibly attribute one day’s price movement, which is most likely random, to all of these great sounding fundamental factors? If you are relying on any of these economic variables for your buy and sell signals — you are in trouble.

Speculators are not the bad guys:

“Some people think of speculative traders as gamblers; they earn too much money and provide no economic value. But to avoid crises, markets must have liquidity suppliers who react quickly, who take contrarian positions when doing so seems imprudent, who search out unoccupied habitats and populate those habitats to provide the diversity that is necessary, and who focus on risk taking and risk management.”
Richard M. Bookstaber
AIMR/CFA Institute

We can’t avoid risk. It doesn’t go away. Consider:

“Markets are an evolving ecology. New risks arise all the time.”
Andrew Lo
CFA Magazine

The key to ‘risk’ is to make sure you have a plan to deal with the ups and downs before you start taking those risky behaviors.

Ken Hoover writes in IBD:

“In his day, Jack Dreyfus was head and shoulders above every other mutual fund manager. In the 12 years he ran Dreyfus Fund, it returned 604%. That was 102 percentage points better than the next best fund. The Dow Jones Industrial Average was up 346% in the same period, according to a 1964 Life Magazine article published at roughly the time he stepped down as fund manager. How did he do it? He read charts. “A stock would be middling along for a while, then it would bust out on the upside. That was usually pretty bullish,” Dreyfus said. That’s when he would buy. Dreyfus will be 91 in August. He still goes to his office overlooking Central Park in New York every day…”

Be careful when you hear the word ‘chartist’. There is no universal definition. Some folks think it means looking at a chart and making predictions. Others properly see it as technical trend followers do: another way of describing reacting to ‘price’ movement.

“The only two tests of a really good trading book are: Will it help you make money? Will it help you cut your losses. Trend Following passes both tests with flying colors. It has a clarity that is compelling. While it discounts what I regard to be the useful role of macro analysis in understanding the origins of trends, it nonetheless reinforces the most important rule in sound trading — trade with the trend — in a way that triumphs. Last take: If you are a quote junkie like me, the quotes alone are worth the modest admission price.”
Peter Navarro
Professor of Economics and Public Policy
Graduate School of Management
University of California, Irvine
Author of When the Market Moves, Will You Be Ready?

Millburn Ridgefield Corporation offers on their site this view of correlation:

Including the Millburn Diversified Portfolio in a portfolio of traditional investments, such as U.S. stocks, U.S. bonds and international stocks may bring the substantial benefits of an attractive return, as well as added diversification. This diversification benefit is observable anecdotally in the adjacent table of annual returns (in which Millburn frequently had high returns in years where traditional assets performed poorly), and statistically in the nearly zero correlation of Millburn’s returns with those of traditional assets.”

Depending on your objective, trend following trading offers additional benefits beyond absolute returns.

“On Enron Web site: ‘Most of the things we do have never been done before.’ The most dramatic of those “things” involved turning a $90 per share blue-chip company into a 25 cent per share pile of dust.”
Steve Zwick
Futures Magazine

Brett Steenbarger recently released a great checklist for traders: PDF.

“…although it’s important to have an effective trading methodology, it is equally important to develop a methodology to determine how much capital to risk. A trader that risks too much increases their chance that they will not survive long enough to realize the long run benefits of a valid trading strategy. Risking too little creates the possibility that a trading methodology may not realize its’ full potential. Therefore, while a positive expectation may be a minimal requirement to trade successfully, the way in which you are able to exploit that positive expectation will largely determine your success as a trader.”
Dave Stendahl

“Reasonable people adapt themselves to the world. Unreasonable people attempt to adapt the world to themselves. All progress, therefore, depends on unreasonable people.”
George Bernard Shaw