From Yahoo:

Symptoms: Constant worry about global economic deterioration combined with irrational reactions to unpredictable news.

Diagnosis: Angry and bearish behavior tempered by news-paralysis or news-fatigue.

Here’s my psychoanalysis of the market, which I believe is more accurate than my medical opinion.

The market has one goal, one reason for ‘living.’ It’s to separate as many people as possible from their money. He doesn’t always win, but over the decades he’s found the most effective ways to separate most from as much money as possible. He’s got a tackle box full of baits and lures to bait and switch unassuming investors.

The market is smarter than the collective of all investors and analysts because it knows at any given time what the collective ‘Wall Street wisdom’ thinks and does. If the market sees Wall Street is bullish, it will go down and vice versa.

The market will not be told by the media what to do and laughs at assessments like the following from the media (taken from this week):

AP on Monday: ‘Stocks jump on hopes for a Europe fix’

Reuters on Tuesday: ‘Stocks pop on Europe hope’

AP on Wednesday: ‘Stocks are closing lower, ending a three-day winning streak, as investors worry about Europe.’

Bloomberg on Thursday: ‘Stocks advance on jobless claims’ (since when does the market care about jobs anymore. Wasn’t there any Greece news?).

As the media worries about day-to-day news, the market is working on its next move. Like a good chess player, it’s thinking who knows how many moves ahead. Only those who understand the market’s psyche have a small shot of outsmarting it.

He correctly notes that news is schizophrenic. Nothing new there. His solution beyond the bonehead notion that market psyche can be understood? This pearl:

“Resistance points and support levels.”

That is no solution.

Trend following is the winning strategy, but hardly anyone talks of it.

I can’t imagine going to a rally to complain someone has more money than me. If I join them (as the sign asks), what do I get except hanging around with other miserable people? One solution to the cartoon and video below? Read The Fountainhead (Ayn Rand) and Linchpin (Seth Godin).

Shout to Jim Byers for cartoon idea.

From local reports about a 6th grade football player banned for scoring too much:

Like Jimerson, Hill attended Wilson Intermediate School and dominated the football field so thoroughly, the league invoked what came to be known as the Madre Hill Rule. Once Hill scored three touchdowns, if his team had a 14-point lead, officials banned him from scoring any more touchdowns.

If my team couldn’t stop the kid from scoring, so what. We lose. Making rules to halt excellence? Yes, America, your problems are staring back at you in the mirror.

This is just not part of the reactive trend following world.

300 to 110 is the decline in Netflix, but in July Cramer rationalized it all:

Feedback in:

My name is Ryan, I’m 28 years old, and have been trend following and learning about trend following since April 2009. I didn’t know about trend following in 2008 so I lost big, and then asked myself “Who made money in 2008?” I found out through your books that trend followers are the ones who won big, and have been winning big for decades. Today, I went with my retired parents to meet with their two “professional” brokers and the five of us had an intense discussion. When we all sat down in the brokers’ office I asked them if they have ever heard of David Harding, John W. Henry, Keith Campbell, Salem Abraham, and all the other top trend followers. They didn’t know of any of them, so I talked to them about John W. Henry and how he has traded for 25+ years and now owns the Boston Red Sox. I went on to explain to them that trend followers make money in BOTH bull and bear markets. I told them trend followers were profitable in 2008, 2000-2003, 1987, and 1929. I explained to the two brokers that every trader needs a trend to make money and be profitable. After all of that was out of the way, I showed my parents their portfolio which is managed by the two brokers. My parents learned that the brokers are down about 6% for them Y-T-D. When I started asking the two brokers tough questions like, “How much have you made my parents in the past 10-12 years?” They just sat there and said “Well we have a 0% return and we may even be down a little” I said, “But you still took a management fee from them every year in the past 10-12 years without making them any return at all, right?” This is when the two brokers started to get angry and upset. I asked them, “If you bought a stock for $100 and it went to $90, what would you do?” They said, “Well, it depends on the company and the fundamentals.” I said, “What would you do if that stock lost 20% and went to $80?” They said, “Well it depends on the fundamentals of the company and the market at the time.” Another thing I asked them was, “Why do you own BAC, GS, C, JPM, and other financials when they are all trending down?” They told me, “Well you have to understand Ryan, we believe that financials are in an uptrend, C has more cash on hand than the stock price its worth, and that just wont last, it has to go higher from here because all of the fundamentals are positive.” I told them about an exit strategy, “When C was $60 in 2007-2008 and it went to $50 then to $40 then to $30, you had to realize something was wrong? After C went to $20, $15, $10, the public said Wait a minute! This is C! It can’t go lower! It will be saved by the government!” Then ultimately it went to 97 cents. The final thing said about their BAC position was (that they bought at $9 and its now $6), “Try telling Warren Buffett that BAC isn’t a good buy, he just bought $5 billion of it.” I said, “Oh yes! the same Warren Buffett who got bailed out in 2008, and would have been history if it wasn’t for a government bailout.” When that was said, one of the brokers got up and said, “I’m going to dismiss myself from this meeting because it’s not going anywhere.” So in the end one broker was left with me and my parents telling us how great fundamentals are etc, etc, etc. I hope that I opened my parents eyes to what has really been going on with their investments, and sadly, since the trend is down in stocks they might lose a lot of money before they see the light. You would think that going through two bear markets in the past 11 years with no return and paying management fees every year they would learn. I hope they do, so one day my family can be wealthy using trend following. I, however, will be ready for this new bear market and will embrace it. I will be profitable thanks to Michael and his books and film. Ryan

Thanks! But keep in mind, bull OR bear, be ready.

Feedback in:

Thank you so much for sharing the story of the turtles to the world! I just purchased a copy of your book “The Complete TurtleTrader“, and am currently halfway through it. It definitely is an enjoyable and inspiring read! So far it has provided for me a perspective in trading that’s simple, agreeable (especially the ‘Now’ and being ‘Present’ tips, almost to the point of being zen-like), and (most importantly) makes sense amidst a lot of confusing trading books out there. It also sparked up in me to try Forex and stocks trading with some of my savings. I have tried doing Forex [nameless broker] before, but couldn’t stick to it, what with a lack of context to back me up. I also bought a copy of your book “Trend Following” and am still searching bookstores here for your “Trend Commandments“, hoping that they would serve as guides for a beginner trader.

Thanks!

Mike Moody, CMT, SVP, Senior Portfolio Manager, at Dorsey, Wright Money Management writes about my new book Trend Commandments:

Like all of Michael Covel’s prior books, Trend Commandments is well-written. The first time through, I read it in one sitting. However, it is quite different in style and intent from Trend Following and The Complete TurtleTrader. “Trend Following” introduced an unfamiliar approach to trading, to many people for the first time. This book is about more than the tenets and background of trend following. “Trend Commandments” is an inspirational piece and exhorts the reader to stop making excuses and go out and do something about it. This book is also about mindset and motivation.

Trend following is not complicated. Mr. Covel points out that you need answers to only five questions: 1) what market do you buy or sell at any time? 2) how much of a market do you buy or sell at any time? 3) when do you buy or sell a market? 4) when do you get out of a losing position? and 5) when do you get out of a winning position?

The tough part of trend following is in the doing. Mr. Covel discusses the discipline required and the psychological mindset needed in a very entertaining and systematic way. In approximately 60 short chapters, he hits on nearly every trend following topic imaginable—from many different angles. There’s tremendous throughness here, which may bother some readers, but it’s mostly because so many parts of the trend following mindset are interrelated. When you see something and you think to yourself ”didn’t he just say that a couple of chapters ago?” you’ll find that it wasn’t quite the same and that he is simply exploring a closely related topic from another angle.

When I say it is both thorough and entertaining, you still might not have the right idea. The bibliography ranges from Bill James to Seth Godin to Ludwig von Mises. There are citations ranging from the movie The Matrix to the Greek philosopher Epictetus to the Smashing Pumpkins—and that’s just in the first two chapters. That might give you a better flavor for how much fun this book is to read.

Beyond just a discussion of risk and reward and the tenets behind trend following, Covel’s argument is essentially a moral one about initiative, self-reliance, and accountability—things that are sorely lacking in our culture today. Without a strong moral core, you’re not going to succeed in anything, least of all investing.

In short, the book covers the waterfront on trend following and Covel makes his points well. If you don’t understand trend following as an investment approach after reading this book, well, maybe the light is never going to come on for you.

In a world awash in fundamental forecasts, self-appointed gurus, false prophets, efficient marketeers, modern portfolio theorists, high-volume gong-ringing market commentators, and a public (along with much of the investment industry) striving for safety in the middle of the herd, going it alone as a trend follower is certainly the road less taken. And that may make all the difference.

Thanks Mike!

What if the political debates end up being pointless? What if electing your politician–on the right or left–makes no difference? What if there really is no ability to galvanize with your neighbor to fight some kind of a good fight? What if our greatest invention–the Internet–is eliminating the need for human beings at a breathtaking, accelerating and irreversible rate? What if self-preservation–once the happy thoughts and Kumbaya hugs are finished–really is the number one goal? What will you do if all of my what ifs are true?

Note: I am optimistic and passionate to an extreme, but many are oblivious to reality. My optimism doesn’t carry over for those wandering through the desert with no clue. If you are missing the clue, there is time. However, you better hurry.

John Thomas, The Mad Hedge Fund Trader, writes on Monday, September 26, 2011:

I have never seen a single word cost me so much money. That word would be “significant”, the word that the Federal Reserve added to the language in its recent release about the current risks to the economy. To the market, this translates into down 1,000 points on the Dow. For copper it means shedding 50 cents per pound. And for the (TBT) it converts into down five points. Ouch, and double ouch!!

The newsletter business is a great one to be in, except when it isn’t. My workload is so staggering that when the slightest thing goes wrong, it all falls apart like a house of cards. Right when the Dow had plunged 500 points and NASDAQ was bleeding 100 points, the price action melted my computer. I quickly batted out a backup letter for Friday, which is why I was talking about the wonderful world of ETF’s when we were facing Armageddon. I then spent the rest of the afternoon using my best Hindi trying to get Dell to fix my machines from Bangalore.

I called the market action going into the Fed release dead on, the S&P rallying all the way up to a healthy 1,220. Over the past six weeks, the 1200 handle has been as rare as a sighting of a blue footed boobie in the middle of the Sahara Desert. I was also accurate in forecasting a post statement rally. Only my timing was off. Instead of giving me a whole day with which I could pound all asset classes at the upper end of their recent rallies, especially stocks, oil, and the euro, the spurt lasted all of 27 seconds. That is how long it took the big hedge funds to mobilize billions of dollars with which to decimate the indexes.

It was a perfect “RISK OFF” day. Shares suffered their worst week in three years. Crude splashed $9. The industrial metals were shoveled under the carpet. Junk went back to the dump. The Euro was slashed four cents; the Ausie dollar touched 96 cents, down a whopping 15 cents since July. All of a sudden Uncle Buck was everybody’s favorite relative. Even Apple was down $20. My goodness!

The carnage was global in nature. Commodity based countries and their currencies took the biggest hit, with Russia (RSX) down 11% in a single day. Emerging markets (EEM) outperformed developed ones in the downside, as investors suddenly grew homesick and took their money with them. It seems that an economy downshifting from 6% growth to zero generates a more dramatic trip south than one slowing from 2% to zero. This is the usual pattern. Looking at the charts, the emerging markets are already deep into bear market territory.

Somebody has got this all completely wrong. I have never seen a greater disconnect between the financial markets and the real economy, which the data releases show is continuing to improve. Even on takedown Thursday, the leading economic indicators for August showed a surprisingly strong 0.3%.

This all means that October is shaping up to be a very interesting month, as one of two things has to happen. The data will catch up with reality and show a dramatic decline with the September releases, in which case the recent collapse of asset prices has been fully justified. Or the data continues their modest rate of improvement, meaning that traders have just laid a huge egg. That would trigger a huge short covering rally that could take us into year end, possibly tacking on up to 27% in the S&P 500.

I vote for the latter. Watch those weekly jobless claims, which come out every. Thursday morning at 9:30 EST!

That folks is the reason trend following works. I will let others break his analysis down, but let me emphasize–the great traders don’t spend their days thinking like this. Not at all.

An excerpt from an article titled How to Protect Young Investors From a Baby Boom Bust:

Not all younger investors are fleeing in panic. “I’ll probably just ride it out — if it’s not great at first, we probably won’t be pulling much out anyway,” says 30-year-old Ruth Recktenwald, a Silicon Valley semiconductor technician. “If we take a loss, then we take a loss.” Recktenwald and her husband annually invest in their 401(k)s, IRAs and Roth IRA accounts, and allocate their money to nothing riskier than broad-based index funds. They’re following the traditional advice that young investors should aggressively seek returns, allocating most of their portfolios in equities.

Ride it out?
Not pull much out?
Index funds?
Traditional advice?

You live one time. Just once. So why make ass-backwards decisions with your money?

Note: One solution.

Not sure what to do? Reading financial news daily for your next move? Panicked? Here is a solution: Trend Commandments and The Little Book of Trading. That is content you will never hear on CNBC.