Michael Covel: News & Info.

A comment sent in from an old pro trader today. It is a comment he sent to an associate that he thought my readers might enjoy:

“This morning as I do every morning I checked on the “opening call” in the Hog market. These calls are often accompanied by comments from brokerage house analysts and I found today’s comments somewhat amusing. The comment was “price direction is uncertain due to the unknown direction of the cash market.” While I am not an English major I would assume this comment on some levels infers there are times when the movement of cash prices are “certain”! As I always say I seem to learn something every day! I continue to believe the best way to make money is by simply “following” the trend no matter what time frame you choose to be involved in!”

An interesting audio interview with Michael Mauboussin on NPR Radio. You will need Real Player.

I posted a comment the other day on hurricanes and prediction. One reader responded with a newsletter (PDF) from his firm put out in fall 2005. An excerpt:

As successful as the meteorological agencies have been in predicting the eventual scale of a cyclone, there is still a random element in this type of weather pattern. All the current early-warning models use a statistical distribution to model the hurricane characteristics and hence will always be vulnerable to statistical outliers. When this does occur, as in 2005, there is a tendency to seek explanations for these outliers from current events, for example global warming. People place too much faith in the predictive models used to forecast hurricanes and should rather be setup to react appropriately when these storms arrive.

Art Collins and Bob Pardo have written a new book titled “Beating the Financial Futures Market: Combining Small Biases into Powerful Money Making Strategies.” In the essence of full disclosure, I do have a book jacket quote on the back of Art’s book, so critics strike me down!

All trading books, including of course mine, can never be all things to all people. The trick is to find books that give a perspective that is not ‘pie in the sky’, but may actually bring forward multiple Aha Moments. Art is one of the few writers out there with the access to great traders able to pull this off. His multiple books are worth checking out.

Feedback received today:

Michael, I’ve been thinking recently about fundamental investors’, and really most of Wall Street’s rejection of trends in stock prices, and that bucking the trend is really the ticket to success. They may convince themselves of this fallacy, but in reality, anyone who is successful in the financial markets is a trend follower, even fundamental investors…There are certainly people who jump the gun and purchase an equity when they think it is “cheap” while everybody else thinks it’s “expensive.” But as time goes on, the sentiment regarding an investment opportunity that is decreasing in price will grow more positive and people will begin to purchase the equity. So fundamental investing really does not ignore trends. In fact, in order for fundamental investors to make money, they have to ride trends of market sentiment toward profitability. However, these fundamental investors are at a significant disadvantage to trend followers because while both essentially follow market sentiment (fundamental investors through financial statements, common knowledge, etc. and trend followers through price), trend followers have the added benefit of utilizing calculated risk so that a bad winning percentage, or better yet a bad trade, does not eat them alive. It also doesn’t hurt that price is a much more concrete and certain measurement than an amalgamation of all those subjective fundamental measurements.

Joe makes a good point. Fundamental traders, no matter how they arrive at their analysis and whether it is valid or not, still have to have at the end of the day “a trend” to profit. Without trend (unless you are a leveraged hedge fund selling options and we know how that often ends) you will have a mighty hard time finding profit over the course of a lifetime. The larger point in the comment above is that instead of trying to assemble all of the analysis that purports to tell you what price is doing, why not just go straight to the horse’s mouth and follow price from the beginning.

From the Tampa Tribune:

With cataclysmic predictions that hurricanes would swarm from the tropics like termites, no one thought 2006 would be the most tranquil season in a decade. Barring a last-second surprise from the tropics, the season will end Thursday with nine named storms, and only five of those hurricanes. This year is the first season since 1997 that only one storm nudged its way into the Gulf of Mexico. So what happened? Lots. Storms were starved for fuel after ingesting masses of dry Saharan dust and air over the Atlantic Ocean. Scientists say the storm-snuffing dust was more abundant than usual this year. In the season’s peak, storms were curving right like errant field goals. High pressure that normally hunkers near Bermuda shifted far eastward, and five storms rode the clockwise winds away from Florida. As they say about the stock market: Past results are no indication of future performance.

Food for thought:

NEW YORK — (AP) Does money buy happiness? The connection is complex, he says. But in fact, very rich people rate substantially higher in satisfaction with life than very poor people do, even within wealthy nations, he says. “There is overwhelming evidence that money buys happiness,” said economist Andrew Oswald of the University of Warwick in England. The main debate, he said, is how strong the effect is.

(more…)

Feedback:

Michael, thank you for writing Trend Following! I read your book while I was interning on a sales & trading desk (sadly it wasn’t required reading). Until I read Trend Following, I was always baffled by how analysts came to conclusions and how fundamentals were weighted and valued. Intuitively, I thought it rather absurd that the majority of analyst recommendations were BUY and that all SELL recommendations tended to come around the same time. I’m only 22 years old, but my goal is to learn as much as I can about trend following, practice it, hone my system, and eventually become a successful trend follower. Your website has been more helpful than my $200 college text books. Thanks!

While I appreciate the nice words, this email is really useful as a reminder about how little Wall Street has changed since the Dot Com Bomb 6 years ago. Here is a young guy making his way into the field and all he sees are people making predictions. And the only reason that the predictions never stop? The end user, the doctor, the attorney, the ‘get rich quick guy’ demands predictions. They love them! Human nature never changes!

Feedback:

Hey Michael, Hello, I am a mathematics and philosophy student at Michigan Tech University. I loved reading your book twice; I am going to read it a third time. I find the trend trading philosophy to be very stoic and the concept, rather simple yet eye-opening. Often I find myself teaching others about your style of trading and even debating with others about indicators (basically all indicators never stack up to price in the long run or any run for that matter)…When you say “turn your philosophies into computer code” what exactly do you mean by this. If I am more of a risk taker, make bigger bets that sort of deal?

Real straightforward. If your rule, for example, is to buy when a market makes a 100 day high - then make that a rule you can put into computer code. That’s it. Of course that can expand out to cover much more than my simple example.

Feedback from an old pro trader:

After over 30 years of being involved in the futures markets I have now come to the conclusion that the old cliche about trading being 90% mental is really true. As I have stated before Trend Following may not be everyone’s cup of tea either because of emotional or perhaps financial issues, but I can guarantee you one thing-trading AGAINST the trend in any time frame will lead to a very short and painful trading career be it hourly or weekly. I have been listening to some of my old “mental” tapes and here are the “Mental Levels” of trading successfully.

Unconscious Competence: Where I am now I don’t even think about “it” I just do “it”! There are no parts of my brain screaming, “Is this really a set up?” or “What if this does not work?” I have found myself in the “flow” and have accepted that losing trades simply put me closer to winning trades. I have also become more humble realizing what I had to go through to get “here” and the funny thing is that I truly feel I have only scratched the surface of what I have yet to know! Have a great trip to the Far East!