Michael Covel

Trend Following is ranked #1 in the “Stocks” category, #1 in the “Options” category and #2 in the “Futures” category today at Amazon.com.

An excerpt from the white paper Emotional Intelligence and Performance:

“In his best-selling 1995 book, Emotional Intelligence, Daniel Goleman reported that research shows that conventional measures of intelligence - IQ - only account for 20% of a person’s success in life. For example, research on IQ and education shows that high IQ predicts 10 to 25% of grades in college. The percentage will vary depending on how we define success. Nonetheless, Goleman’s assertion begs the question: What accounts for the other 80%? Goleman and others have asserted that at least some of the missing ingredient lies in emotional intelligence - the capacity to acquire and apply emotional information.”

EQ is discussed extensively in Chaper 6 of Trend Following.

Ed Seykota on his web site offers insight into “trends”:

“All methods of defining trends compare various combinations of historical price points. All trends are historical, none are in the present. There is no way to determine the current trend, or even define what current trend might mean; we can only determine historical trends. The only way to measure a now-trend (one entirely in the moment of now) would be to take two points, both in the now and compute their difference. Motion, velocity and trend do not exist in the now. They do not appear in snapshots. Trend does not exist in the now and the phrase, “the trend” has no inherent meaning. When we speak of trends, we are speaking, necessarily, from some or another view of history. There is no such thing as a current trend. When we speak of trends we are necessarily projecting our own definitions.”

“The stock market is like sex. It feels the best just before it ends.”
Harvey Eisen
Dow and Jones: The Wizards of Wall Street
“Biography: A & E Television Network”

I found this video clip checking out Ed Seykota’s updates. It’s definitely worth watching.

BusinessWeek’s recent article on Jim Cramer was titled ‘The Mad Man Of Wall Street’. An excerpt:

“Cramer hits a button, and a haunted voice from above yells, “the house of pain!” to cue his cameramen to run to the right. From Cramer’s cartoonish-sound-effects console comes the roar of a bull. “O.K., home gamers, listen up: This is what the bottom looks like!” he hollers through a megaphone. “You need to start buying ’cause stocks are going to rise!” he says, later adding: “The Fed’s job, which is to kill the economy, is almost done! Pretty soon Greenspan is going to be in Sunrise Senior Living.”

Reading this article feels like a time transport back to the market froth of the dot com bubble in 1999. Everyone truly does get what they want.

From the Futures Industry Association comes an article about trading commodity indices and another article about commodity investing from a pension fund perspective.

Of course some will go to their dying grave whining, “but commodities are too risky.” If you think anything in life is “too risky”, whatever that means exactly, you are probably right for you.

Original promotional document from Long Term Capital Management (LTCM) at TurtleTrader.com.

Superfund, the Monaco-based hedge fund employing trend following methods, has produced an interesting video promo. Given the rather reserved nature of most firms, Christian Baha’s efforts to bring the masses into the world of professional hedge fund management is a new thing for Wall Street. Here is the promo piece (18.6 MG) and here is an interview with Baha (1.7 MG).

Hedge Fund Strategies, Performance, Risk and Disasters and their Prevention is a white paper worth examining. It is authored by William T. Ziemba.

Feedback received:

“…sometimes the “intuitive feelings” are right. Remember Jesse Livermore who had a hunch before the earthquake in San Francisco 1907 and sold big the shares of a railway company? Well, it was definitely an intuitive move. If you observe the markets for long, you develop sort of a sixth sense and you can guess even the weekly moves of stocks, although not 100% accurate. Sometimes hunches are good, but they cannot form a system.”

Intuition can definitely play a role in success. But the word “sometimes” is the problem here. “Sometimes” is not a term you can rely on. How do you quantify it? On top of that, why would it matter if you are 100% accurate or not? Trend followers, and other great traders of other styles, don’t sit around with the goal of being 100% right. Chasing “accuracy” as the Holy Grail is fool’s gold (MP3).

Ed Seykota includes a section on data verification at his web site.

Barron’s Online has a segment called “The Trader”. From the October 17th comes the following quotes:

“First, the inflation theme has gotten loud, almost as loud as the stern warnings by Federal Reserve officials that they will keep raising short-term rates to fight it. The concerns about high fuel prices and a hard-up consumer are a secret to no one by now. No one knows when the stock market will have fully accounted for a hawkish Fed and a dampened consumer-spending outlook, but it’s arguably closer now than it was a month ago. Minor clues: Stocks rallied Friday after the steep headline consumer inflation number (but moderate “core” number) and a decent retail-sales figure. Internal market dynamics have been lousy — many more stocks falling than rising, many more breakdowns than breakouts. At some point, short-term extremes are reached, and several measures of oversold conditions (such as the percentage of stocks below their short-term averages) suggest, at minimum, a lazy bounce in prices soon.”

The article continues:

“So, is it a similarly good time to buy into the contagion concerns? It’s hard to say, but what’s notable is that the brokerage names are not nearly as beaten-up as they were then. Both Goldman and the overall broker-dealer index were then off 16% from their highs. Now they’re only 6% off. Then, earnings fears were rife; today there’s much more confidence in the brokers’ numbers. In the neglected corners of the financial sector, though, there may be riper fruit, at least for a taste of short-term upside — especially if the broad market delivers a minor bounce.”

The article continues:

“All this alone doesn’t mean telecom will soon be seen as a font of riches by investors. But it does, perhaps, offer a chance to play for some reversion to a more typical historical relationship between these groups. As recently as April a recommendation to own telecoms while betting against utilities was made here. And it was proven just plain wrong, or horrendously early. But the divergences are even more dramatic now.”

I just don’t get the point of all of this. How is it useful other than as a historical reading of market activity for the past week? And how is that useful except as entertainment?

The lead story (and review) appearing in the October 2005 edition of Futures Japan Magazine is about about Trend Following: How Great Traders Make Millions in Up or Down Markets.

If you are not in Japan you will need the correct language support kit installed for your PDF reader.

Feedback from James O. Rohrbach:

“Michael, I stumbled on your site today. People say I am a trend follower. I say I am a market timer. I also say that in order to be a trend follower you must first identify a change in the trend. Check out my web page at http://www.investment-models.com. I am new at this game, I have only been timing the stock market for 34 years…So what is Trend Following?”

I enjoyed Jim’s sarcasm so I sent him my book to get his feedback. Later in Jim’s newsletter:

“I want spend a few minutes talking about what I read in a book that I had given to me. Michael Covel sent me an autographed copy of his book Trend Following: How Great Traders Make Millions in Up or Down Markets. I have only read a few pages so far but he zeroed in on the way I think. People say that I am a trend follower. I am, but I consider myself a Market Timer. In order to follow the trend you must first determine when the trend tuns up or down. So I provide a tool that trend followers need in order to be successful. Michael Covel has graciously allowed me to quote from his book in my Newsletter and I may do just that, from time to time.”

More on Jim

Consider:

“Charles Ellis’ Winning the Loser’s Game: Timeless Strategies for Successful Investing offers 10 core rules:

1. Never, never speculate.
2. Your home is not a stock.
3. Save lots more.
4. Brokers aren’t your friends.
5. Never trade commodities.
6. Avoid new and exciting deals.
7. Bonds also ride up and down.
8. Never invest for tax benefits.
9. Write goals and stick to them.
10. Never trust your emotions.”

Unilaterally telling people not to trade commodities is ignorant. Some alternate views on “commodities” can be found here, here and here.

The book Trend Following was added to the Harvard Business School Baker Library in July 2005.

From a reader today:

“I coudn’t come to terms with the “study ’till you drop to get a good job” approach so I figured in such a free society, there had to be something with an adrenaline rush most people couldn’t handle. After being forced to get a Bachelors in International Business, I started to look for such a job. I found a company called Swifttrade involved in daytrading and my adrenaline was rushing because I knew instantly it was for me…In any case, the site TurtleTrader.com points out that there is a difference between trend following and short-term trading, but isn’t the quality of a great trader his ability to adapt to changing environments?”

Answer.

From today:

“NEW YORK (AP) — Wall Street rallied to finish moderately higher Monday as nervous investors got some reassurance from General Motors Corp.’s new labor agreement and a favorable court ruling for cigarette makers. Technology stocks rebounded ahead of three major profit reports.”

What does ‘rallied’ mean?
What does ‘moderately higher’ mean?
What does ‘nervous investors’ mean?
What does ‘rebounded ahead’ mean?

This headline sounds like the fine work of a skilled Ivy League graduate. Unfortunately it is useless in helping to answer these questions:

* How do you determine what market to buy or sell at any time?
* How much of a market do you buy or sell at any time?
* How do you determine when you buy or sell a market?
* How do you determine when you get out of a losing position?
* How do you determine when you get out of a winning position?

You might say, “That’s not the point of such commentary - to answer those questions.” Then what is the point of the AP peddling stuff like this off to millions of eager eyeballs?

The following excerpt is from the article Socially Responsible Investing: It’s a Sin:

“Contrary to that statement by the Nobel Prize-winning economist, companies are increasingly being judged not on their fundamentals, but on the morality of their business practices. In fact, investing based on the ethical merits of a company is arguably one of the fastest growing trends in the investment industry. So-called socially responsible investors put their hard-earned money to work only in a select group of companies that they deem morally worthy of their investment. So it’s clear that by limiting the universe of possible investments to only those that meet certain ethical guidelines, investors are constraining their performance. In portfolio theory jargon, this limitation results in a lower efficient frontier for social-based investors. In other words, the $2 trillion attempting to do well by doing good is, in reality, paying an ethical premium for average performance. In a world where money and returns matter, that seems criminal.”

Trend followers, like all great traders, take the opportunities that come along. If you refuse to trade a market for subjective moral reasons, someone else will trade and will make money.

Tricycle Asset Management Corporation has a good deal of interesting multimedia content at their site. Here are some slides (1, 2, 3, 4) from a Graham Capital presentation. They also have many MP3 audio roundtables featuring top trend followers.

A good read from Ben Stein called Why Is Everyone Losing Sleep Over Oil and Gas Stocks?

A random email arrived today in my “in” box:

“Gold has hit an 18 year high of $481.50/oz. last seen in 1987. This even though inflation has remained rather subdued. Frequently you will see a market move without any clear fundamental indication of why such a move should occur only to have that reason revealed later. Although there may be buying by some investors as a hedge against the possibility of a surge in inflation this does not appear to be the major cause of the strong bull move in gold since there has not been a corresponding down move in the bond market. A true believer in the inflation story would short bonds and buy gold. Instead bonds just like stocks have been stuck in a trading range. A more plausible reason may be that the oil producing nations are plowing their profits into the gold market as a hedge against the instability in that region. We may also be seeing buying by China as they may be planning to establish a gold backed economy. This would be a prudent long term move by the Chinese as their main competitor on the world stage (the U.S.) debases their currency with uncontrolled spending. Investors should include gold in their portfolio mix as that market remains in a long term Secular Bull Market. My stock of choice remains Newmont Mining (NEM $47.07).”

It is simply amazing that people listen to and act on such “talk”. When you talk like this there is no need for accountability as the story being told always has multiple outcomes laid out…hence the teller is never “wrong”.

This report from The Economist contains the following excerpt:

“Beyond worries over market stability, might an even greater danger be lying in wait? Mr Hooper proposes a doomsday scenario. Some day, advances in natural-language processing and statistical analysis might lead to robo-traders capable of analysing news feeds, deciding which shares to buy and sell, and devising their own strategies. Given that companies are very keen to patent their algorithms, it is quite possible that just one company could then emerge as the victor in this algorithmic arms race, says Mr Hooper. This outcome would create a particularly challenging problem for regulators. “It is a possibility that you could have an unfair advantage and there would be nothing governments could do about it,” he says. It is an interesting idea. But it seems unlikely, since there are so many possible trading strategies, and unlike simpler problems in computing (such as sorting a list) it is doubtful that there will turn out to be a single trading algorithm that outperforms all others. Yet perhaps such a suggestion should not come as a surprise. For whenever robots are being discussed–even if they are merely the software-based, share-trading variety–the idea that humans will lose their jobs and the robots will take over the world always seems to be lurking in the background.”

“The energy isn’t in the idea; it’s in the execution.”

Think about it.