I was approached by a guy at the Traders Expo after my talk on Friday in Las Vegas. He wanted to talk about his belief that he could trade based on his gut feel, using his intuition as a decision-maker. He mentioned a recent book on the subject and noted that some had made ‘gut’ feel market calls recently.

Try as I might he would not accept that trading off his intuition was problematic, and not much better (if at all) over flipping coins. For all the ‘trade-from-the-seat-of-your-pants-hunch-gut-feel’ traders out there, can you please show me one legitimate track record based on this type of decision-making? Just one will do.

Spoiler: There isn’t one.

A nice group of 300+ for a talk on Friday. Thanks to Nell Sloane and Kim Laube at MF Global (Capital Trading Group), and Barbara Schmidt-Bailey at CME, for making the event happen:

Only a 45 minute conversation, but went well.

Sunday afternoon presentation in Las Vegas:

One higher resolution shot.

Many trend following positions across currencies, financials and assorted commodities reversed in the last few days. Exit signals aplenty. Further, parallels between the U.S. and Japan continue to look more interesting.

Don’t guess though. Have rules, or don’t play. If you don’t have rules you can always find education (there are others beyond my firm) and come back to play another day. The markets will be there. Opportunity is not fleeting.

The letter.

John Hussman writes:

“From my perspective, an “economic recovery” that requires a tripling in the Fed’s balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal stimulus to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a “standard” economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as Maiden Lane that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory “wealth effect” to propagate spending patterns that were inappropriate in the first place. It is a bizarre notion that a credit crisis can be solved by bailing out lenders while doing nothing about the obligations on the borrower side. Think about it – what we have said to lenders is, here you have these homeowners who can’t pay for their houses. Foreclose on them, sell the homes at half the price, and the public will make you whole (largely through Treasury bailouts to Fannie and Freddie, made necessary by Federal Reserve purchases of these securities). Heck, if the public is going to be on the hook anyway, at least notice that at equivalent cost to the public, the mortgage could simply be written down to half its value, with the homeowner now able to pay the balance off and the lender getting the public handout to make up the difference. But of course, that would reward the homeowner. So instead, we simply make the lenders whole while people lose their homes and foreclosure investors flip the homes at a profit in return for providing liquidity at the auction. That way, the same amount of public funds can be spent through the back door without Congress even getting involved.”

Great line caught at Ritholtz.com:

In 1914, John Alexander Smith, Professor of Moral Philosophy at Oxford, addressed the first session of his two-year lecture course as follows: “Gentlemen, you are now about to embark on a course of studies that (will) form a noble adventure…Let me make this clear to you…nothing that you will learn in the course of your studies will be of the slightest possible use to you in after life — save only this — that if you work hard and intelligently, you should be able to detect when a man is talking rot, and that, in my view, is the main, if not the sole purpose of education.”

Feedback in:

Dear Mr. Covel, I have just purchased your book “Trend Following” from Amazon, and as I live in Scotland I was wondering if your book has the same relevance to the UK markets as it does to the US markets. Kind Regards, Stephen Brown

Trend following is a universal strategy for all markets. It is not country specific. Further, some of the most successful trend followers are London-based.

Note: My clients are in 73 countries (see animation) and my books have been translated into 8+ languages.

An end of the world announcement was forwarded to me yesterday (and dated yesterday). An excerpt:

“I can’t exactly explain why but I feel even worse at the gut level about the markets right now. This is one of those intuitions that advise caution that I wrote about… They only come every few years and today was the strongest feeling I’ve ever had. We might even see a test of the post crash lows of 670 again before the market comes back. In short, be careful and keep your stops tight would be my advice. If you are not at least an expert amateur trader I’d get out and get to safe cash investments. You can always get back in in a few weeks or months if things stabilize and the risk goes down.”

More from the same announcement:

“The market may do fine. This is not a prediction of decline. It is a statement that if there is a decline, it could get ugly very quickly. Use great caution over the next few days or weeks!”

And more:

“If any of you have a lot of money in the stock market. I’d suggest that now is a very good time to go to cash. 100% cash. If I were you I’d sell everything in my 401K etc. Sell mutual funds, etc. Individual stocks etc. The market is ripe for a correction and it could get ugly again. My intuition tells me that it could get worse than we’ve seen in recent memory. I don’t generally make predictions and this isn’t a prediction exactly as the price could certainly go higher. The issue is that the risk/reward for staying in is wrong. The upside is much smaller than the downside and the market has just failed to exceed the highs of April of this year. Historically that is not a good sign. I just thought I’d let my friends who are not traders know. Don’t put the money in corporate bonds either. Put it in U.S. guaranteed funds or Treasury Bills preferably. Definitely Avoid Gold!!!! And I would not wait until tomorrow [Nov 11, 2010]. It could cost you a lot.”

Some questions spring to mind after reading this drivel:

1. How do you objectively measure the ‘strongest feeling’ you have ever had?

2. What is the definition of ‘stabilization’ that you are using?

3. What is the definition of ‘risk’ that you are using?

4. How will you know to get back in over the weeks and months to come?

5. What is the definition of ‘ugly’?

My head is spinning at the absolute idiocy of this writing. Bottom line, flipping coins is not how people accumulate wealth.