Michael Covel

If you followed the news on Freddie Mac (FRE) maybe you waited until it got to $7 a share to sell. From a trend trading perspective the price action said there was a problem long before the talking heads opened their mouth.

From Yahoo Finance today

NEW YORK (AP) — Wall Street tumbled Wednesday as investors grappled with renewed worries about the soundness of the financial sector. The major indexes fell more than 2 percent, including the Dow Jones industrial average, which lost more than 230 points.

Does that comment really hold water when you look at this chart? Has the Dow dropped 2000 points in short order? How could anyone possibly have an explanation for one day’s random market movement?

Michael Martin forwarded me this article with the excerpt:

In a televised speech today, Iranian president Mahmoud Ahmadinejad said that “at a time when the growth of consumption is lower than the growth of production and the market is full of oil, prices are rising and this trend is completely fake and imposed.” “It is very clear that visible and invisible hands are controlling prices in a fake way with political and economic aims.”

As Martin told me: “Crude’s move from $35 to $140 over the last 18 months is no fake move.”

Wall Street proverbs from the Freakonomics guys.

Jim Rohrbach writes today in his email newsletter:

“There are only two good feelings in investing. One is being in the market when it is going up, and the other is being out of the market when it is going down.”

Today when I watched the Dow drop 206 points, the S&P drop 23 points, and the Nasdaq drop 55 points, I felt good about being out of the market. Even if the market didn’t drop, it feels good being on the sidelines without having any money at risk. It is very relaxing. Today was a good day to be out of the market. So I am going to relax for awhile while I sit with 100% cash in Money Market Funds. I will be cheering the market down. If it cooperates and drives prices lower, I will be looking for the RIX [his indicator] to provide me with a nice buying opportunity. I hope the market gets out of it’s roller coaster ride and sticks with a down trend for awhile.

I just like his tone!

A MP3 on Warren Buffett, his shareholder meetings and derivatives.

Before he was writing for Trader Daily I had the chance to interview Michael Martin. Martin, who earlier trained under Ed Seykota, now works with a successful family office. Martin gave us a great body language example in the film using his arm as a trend pointing to the often irrelevancy of entry. He brings it all back to stop loss plans and risk management.

A white paper from Michael Mauboussin titled the “Failure of Arbitrage” (PDF).

A question and answer from a recent Trader Monthly interview with David Harding:

Q: Do you have strong opinions about the differences between money managers educated in mathematics versus those with liberal-arts degrees?

David Harding: Investment management has been, for years, run by arts graduates. That has been the tradition. We’re on the cusp now of it being run by science graduates. For a long time in the investment-banking business in England, you needed to go to one of the top WASPy, blue-chip institutions to find your way into the money world. This was equivalent to your Ivy League in the U.S. But George Soros went to England after the war, looked around after getting a job in banking and asked, “Who are these f—wits?” before heading to America. In America, he found a small number of clever people in finance, and that’s why he started a hedge fund there. I don’t know if America is better overall than England, necessarily, but it certainly is more meritocratic.

At the panel I moderated today in Paris Peter Borish put the concept of a stop loss into terms everyone can grasp. He called it a “prenup” with the market. You have to know your downside, his simple but crucial point.

A recent academic study (PDF) on point blindness:

Millions of Americans pay attention to US stock market news. They get this news from many sources. Print outlets, 24-hour news networks, and thousands of websites provide scores of financial reports. Many of these reports focus on the rises and falls of major stock indices. As Robert Shiller puts it, “Nothing beats the stock market for sheer frequency of interesting news items.” One reason for increased attention to the stock market is a dramatic shift in responsibility for the post-work well being of American workers. Part of the shift is from employers to workers. Participation in defined benefit plans (e.g., pensions) has dropped significantly over the past two decades while participation in defined contribution plans (e.g., IRAs, 401(k)s and 403(b)s) has skyrocketed. A parallel shift from government to workers is also occurring due to growing doubts about the extent to which Americans can count on Social Security for retirement income. As the 2007 Annual Report of the Social Security Administration states: “The financial condition of the Social Security and Medicare programs remains problematic; we believe their currently projected long run growth rates are not sustainable under current financing arrangements. Social Security’s current annual surpluses of tax income over expenditures will soon begin to decline and then turn into rapidly growing deficits as the baby boom generation retires…. The longer we wait to address these challenges, the more limited will be the options available, the greater will be the required adjustments, and the more severe the potential detrimental economic impact on our nation.” Where recent generations looked to employers or government for post-work guarantees of income, younger and middle-age workers have a different future ahead. Their future financial security is more likely to depend on their own and others’ investment decisions. As a result, what Americans believe about the stock market is important – not just to their own financial futures but also to governments and others whose assistance will be sought if scores of people make bad investment choices simultaneously. For these and other reasons, the conclusions Americans draw from stock market news have important implications.

A complicated way of saying to turn off Cramer.

A reader forwarded a PDF copy of a very old Jesse Livermore title. Worth checking out to see relevance for today.

Barry Ritholtz brings up the notion of Google’s black box and how it might affect the firm’s fundamentals. For me it is further confirmation as to why the only real thing you can know is the traded price each and every day.

Can anyone decipher this for me? I can’t tell where he is trying to go exactly. My (2) books, as but an example, don’t cover traders with “uncertainty of exit schemes”.

One reader writes:

Hi Michael, I read the article you linked to and was thinking it was another mathematician over-optimizing everything in sight, then I read the date it was published - 1st April 2008! So I guess it’s a case of take your pick really….Matt

Barbara Dixon, a student of master trend follower Richard Donchian, writes in 1974:

Technical Analysis is based on market action, or price. The theory derives from basic economics. The price of a commodity at a given time is determined by the supply, the demand, the general economic outlook, the weather, the political climate, the optimism or pessimism of the population, and other factors. The technician looks only at the price, since by itself it represents one side of the equation and thus encompasses all the other inputs. The technician mentally substitutes the words “buy” for demand and “sell” for supply. Thus, when corn increases in price, the technician says that buying – demand – is increasing and that the price is going up. The trend follower makes no attempt to forecast the extent of a price move. His basic tenet is that once a trend begins, it has a tendency to persist in the same direction for some time. He devises precise rules to determine what, to his mind, constitutes a trend and identifies the situation when a trend has finished or reversed. He then further disciplines his thoughts into a strict set of conditions for entering and exiting the market. He acts on these rules (his “system”) to the exclusion of all other market factors. In so doing, a trend follower removes, hopefully, emotional judgmental influences from his individual market decisions.

Not exactly dated wisdom!

The piper comes calling if you play with fire.

I did a TD Ameritrade Webcast yesterday with 300+ people. Will post shortly.

If Bear Stearns can go to zero, a stock anyone could buy with no restrictions, tell me again the point of government regulation that limits who can buy a particular hedge fund or not? It seems like the current market situation is proof positive that people should be able to diversify into assets that the government otherwise has prevented them from owning.

The chart shows that the “price” was indicating a problem long before we got to today.

An article of mine published on TradingMarkets.com yesterday.

Ouch.

I was forwarded this article with this comment:

“Sue because you lost money in your 401k?”

Is that what the article says? I don’t read it that way. The suit issue revolves around negligence, not losses.

A chart to consider from China. I am not saying it will end like this or this, but it could.

A take on the proposed mega merger. The YHOO trend was definitely not up!

An excerpt:

Paul Navone is one of those quiet millionaires next door. His friends had no idea he had money until he started giving it away — $1 million to a college and another $1 million to a prep school. The 78-year-old retiree never made more than $11 an hour while working in the New Jersey mills, according to a story by Joe Logan in the Philadelphia Inquirer, and to this day Navone buys his clothing at thrift stores, and doesn’t have a TV or a phone.

More.