Bring On The
Light?
In this
section of Long and Short Reports, we're gonna have a little
fun. I'll be discussing a variety of topics that should
broaden your knowledge of the markets and the way they
work. I'll "tell it like it is". I'm gonna try to
put you in a position of understanding that'll enable you to
see through the propaganda and thereby make big bucks.
After a couple of years of reading this column, you'll either
think I'm crazy, or you'll become a market cynic who'll rival
the best of them. Whether you're a market pro
(Pros…don't get ticked that I'm giving away the trade secrets)
or a new player, we hope you'll definitely get a little
sunshine here. So Kick Back!! Put on
the sunglasses! The light's gonna be bright in this
room!
A Simple, But Effective Technical
Model
September 16, 2002
We have been frequently asked about a simple
model that can be established to indicate primary trend
guidelines on either a daily or an hourly configuration.
Our model is much more complex than this, but we will say that
the most simple and accurate trading foundation, in our
opinion, can be constructed with a system weighted towards a
stochastics model programmed at 21%K, 14%D, and a simple
moving average configuration of 9/15/45. We believe the
street primarily works with such numbers as well.
If you do nothing more, learn to read
stochastics and you should become a better trader. It is
also very important to juxtapose hourly vs. daily
configurations for swing trading. Hourly vs. 15 min
configurations should be used for daytrading. If you do
these simple things, you will become better than 95% of all
traders in the market. As you master the ability to view
such models, you can add weightings to such indicators and
oscillators as Bollinger Bands (we prefer a 20 segment model),
On Balance Volume, MACD, trendlines (lightly weighted in
our model, as there are far too many trendline traders in the
market and the boys take them out constantly), RSI, etc.
We assess them all, but we are overweighted with our
stochastics view. We believe it gives a reasonable
assessment of inventory control intentions at first
glance.
Although this sounds a bit crazy, there is an
old trader's axiom that should not be discarded. "When
in doubt, go with your gut, and never second guess it".
I was once told this by a T/A co-worker/friend who had been
the head of West Coast trading for Merrill Lynch during part
of his career. I will not get into what I
personally believe is "your gut" at this time, but he was
certainly right. One's internal "intuition" should
not be overuled by the rationalization that tends to come from
what you want at the moment. Don't let any personal
agendas or current trading positions overule or influence what
you know to be the truth. It is the toughest fight
you'll face as a trader, and one that we all lose from time to
time.
Take Them
Up to Take Them Down
Part 1
Let us start this out
by talking about a very basic concept. The boys, who run
this show of shows called the stock market, would like for you
to believe prices are set by you, the public. They
insinuate, through the massive propaganda they throw your way,
that strong demand for shares causes prices to rise, and lack
of demand for shares, or selling pressure, causes prices to
fall. Let me say this in reply: Give me a
break!
Many of you have come
to know of the accuracy of my price predictions by following
the T/A interpretation I posted under the alias, ljvmauck, on
the message board community at Raging Bull during 2001.
My T/A posts have been so accurate, that many times I was
surprised at the results, myself.
The prognostications were often correct to the dollar on
my index calls, and to the penny, or even the tenth of a penny
in the case of sub 20-cent stocks.
During the course of
my interaction with both bulls and bears of various stocks
traded on the OTC Bulletin Board, many would often ask me how
I did it. Of course, a great timing model was most of
it, but one can look at all the indicators, oscillators,
moving averages, chart patterns, fibinacci numbers, and
trendlines, yet still miss the call if they aren't looking for
the one thing that determines most reversals of short term
trends: manipulation.
No, you don't need to
rub your eyes. I have written it. The market is
rigged---especially over the short term. The
reason my interpretation of T/A is so accurate is because I
look for the places in the price trends at which manipulation
must take place in order for inventories to become balanced,
or manageable.
The specialists and
the market makers are in business to take your money.
They like having nice homes, boats, yachts, and fancy
cars. They hope they can convince you to pay for these
niceties as well. They get to play the game with the
cards face up. Many of you play
blindfolded.
The boys know you are
all becoming very trend conscious. As long as it's all
going up, you feel safe and secure. You are overwhelmed
by the greed factor. You might even buy more, or jump in
for the first time because you're afraid to miss the
party.
On the other hand, if
prices are going down, you tend to let fear overtake
you. You sell because you're afraid of losing your
profits, or worse yet, your original principle. At the
very least, you might put off buying something you like
because you see it trending lower and you want to wait until
you see a reversal take place in the downward trend before you
commit your hard earned dollars. This they know, and it
is this from which they make their living.
The stock market
moves from hour to hour under the guiding principle of the
boys trying to manipulate your emotions enough to get some of
your money.
Take
Them Up To Take Them Down
Part
2
So how do they do
it? How do the boys who run the show of shows have
the power to literally move markets enough to affect people's
emotions and thereby get them to behave exactly as they
would like for them to behave ? After all,
the market is huge. Billions of dollars worth of
stock trade every day on the NYSE alone.
You've all heard the saying. "No one man or group can
move the market." Or can they?
Well, let me say
this. It's really not that difficult for them.
You, the individual investor or professional trader,
and other participants in the market, such
as mutual fund money managers, or pension fund managers,
have become willing allies in helping the
boys to accomplish their goals. Let
us start this discussion by talking about mutual
funds and mutual fund money managers.
Mutual
Funds:
Individual investors
have turned the mutual fund industry into a monster. For
over 15 years there has been a tremendous sales effort to
place your money into the hands of a few decision makers, and
to take it out of the hands of you, the retail client,
and your respective individual
broker.
There are many
reasons for this. The first and foremost reason is that
when you invest your money into a mutual fund, you tend to
leave it there. The fund charges management fees, and
you pay those fees whether the performance of the fund has
been positive or negative. The fund, in turn, pays a
share of those fees to the brokerage firm that is the "broker
of record for the fund". These fees are referred to a
"trailers" or "trailing commissions". Brokerage
operations have fixed costs. In years
past, brokerage firms tended to depend primarily on
commissions billed for trades (either through mark-ups or
actual commission charges) or investment banking fees for
their primary sources of revenue. This worked very well
as long as the market was doing well. The moment the
market slowed in trading volume, however, the revenue stream
for the industry would fall off the cliff. It thus
became the policy of the industry to attempt to cover fixed
costs of operations with fee-based business. It is more
reliable.
I once attended a
meeting that was being conducted for some of
Dallas' top producers, and it was specifically stated that the
firm had arrived at the point wherein 70% of the costs of
operations were being covered by fee-based business. The
goal, of course, was for fee-based business to eventually more
than cover the cost of operating the entire firm, and we were
told the firm would achieve that goal one way or the
other.
Incentives are given
to brokers to encourage their clients to invest their funds
into programs that charge fixed fees. In most cases,
those programs are managed not by the broker and his
individual client, but by a money manager. This
takes the funds and the decisions with respect to investing
them, out of the hands of the client and his broker, and puts
them into the hands of a third party. This accomplishes
the goal of increasing fee-based business, and also makes it
far less likely that the firm will become encumbered by
excessive litigation costs. Clients often sue their
brokers and the firm for losses when the market falls, but
they usually do not sue the firm if their mutual fund loses
money.
The cost of
litigation is a big problem. The USA has a
litigious society. Modern psychology teaches people that
they are "victims". If something goes wrong, it's never
the fault of the injured party. Someone must have done
this to them, right? The mind-set of many Americans is
to "sue the bastards" if something goes wrong. When the
firm gets sued, the client may not win, but the cost of
defending the lawsuit will be high.
Therefore, in an effort to keep cost of litigation at a
minimum, brokers are often given special incentives to
encourage you to place your funds within some type of managed
money progam.
This effort has been
very successful. Although I have followed and traded the
market for many years, I did not officially enter the
securities profession until 1987. At that time,
the mutual fund industry was growing, but was
nowhere near the size it is today. Fidelity
Magellan was the largest mutual fund. In 1987,
The Magellan Fund was managed by the
now-famous, Peter Lynch. I am writing from memory,
but as I recall, its net asset
value was approximately 15 billion dollars.
Although 15 billion dollars is still a considerable sum, that
size fund would not be considered to be especially large
today. The amount of money that can enter
the equity markets, by way of fund purchases each
month, can exceed the 1987 size of
Magellan! This money is a target of the boys
who run the show. They want a piece of it, and you have
made it possible for them to get it. Many of you are
very fickle, and this they know.
Take Them
Up To Take Them Down
Part 3
The
I Want It Now Syndrome
Fast foods, microwave
ovens, frozen dinners, transcontinental flights on jet
aircraft, instant news reporting, high speed computers, the
Internet, real time quotes, cellular phones, satellite
television, and video on demand. The nature of 21st
century Americans is to seek and find instant gratification in
almost all aspects of daily existance. The I want it
now syndrome, which has penetrated the psychology of
modern man, has led many to have little patience to wait
for the completion of anything.
This
psychology, which is resultant from a life of instant
this and instant that, has also increasingly become a major
force in affecting the decisions of participants in the stock
market. The concept of momentum
investing, a style through which one's
investment strategy is intended to produce
fast, positive results, has made itself to become
the driving force behind the
absurd over-pricing of some sectors of the market, and
what amounts to ridiculous valuation disparities between
so-called hot stocks and cold stocks.
The idea of buying a stock simply because it is "going up" and
selling a stock merely because it is "going down",
has become so popular that many professional money managers
have not been able to avoid falling into
the practice.
Why is this so?
People want their returns now. The industry has
reacted to the nature of investors, and has put many
money managers on notice that the ability to perform with
their peers, will oft-times be the difference between keeping
their jobs and losing them.
Here's a brief
breakdown of the problem:
1. The
institutionalization of the market has increased the
preponderance on one directional moves on individual stocks
and indexes.. There are fewer decision makers buying and
selling on a daily basis. The move toward public
investment in mutual funds has created easy pickings for the
boys.
2. Investors
are very fickle. Often times led by their brokers (who
may or may not have a financial incentive to so advise),
investors will take money away from a fund
manager who returns less than average profits during the
course of a year. If the fund loses investor dollars to
another fund, or worse yet to another fund family, the
manager's bonus is most certainly at stake, and his job may be
on the line. This problem of losing investors is a
serious one to a fund family. Its revenues are derived
through the collection of management fees. If the fund
family has less money under management, it's profits are at
stake, and it's stock price, or the stock price of it's parent
company will decline. Everyone who works for that
company will then lose.
3. In an effort
to deal with the problem of being outperformed by other funds
that use dissimilar strategies, managers of funds have engaged
in the practice of style drift. Style drift is
the act of ignoring your professed strategy, and pursuing
whatever is hot in an attempt to capture above average
returns. It is not uncommon, for example, to find
a mid-cap value fund that owns Intel, or a large cap fund
that owns stocks like Q-Logic. Remember, the real
benchmark for most fund managers is to perform as well or
better than their peers. It doesn't matter if they lose
money or make it. They just need to perform in
line.
4. Individual
investors do not know what their funds own from one day to the
next. They are only concerned with the daily net asset
value of their investments. They receive a quarterly
report which lists the fund's holdings on the last day of the
month. There is no opportunity for them to second guess
daily buy/sell decisions.
5. The
Street knows the above conditions exist. This
is the best of all possible worlds for the boys that call the
shots. Why? It's a little bit akin to the dog
track (the mechanical hare leads the dogs). If you
know that your customers have to follow your lead, or lose
their jobs by ignoring trends, you can set the stage and
set the pace. You now have fewer decision makers to
influence, and those decisions makers do not want to be
outperformed. A good
example of how this can work is found in many of today's
current short selling targets. A look at those issues
will reveal that they are primarily institutionally
held. If the stocks start falling, the money managers
blow them out. Predictions of well-being, or doom and
gloom for a company's stock price can become a self-fufiling
prophecy, because of the nature of the system.
In other words, the
very nature of the system that has been created over the past
15 years has insured that the system will not work, and those
who attempt to manipulate the market now have a very easy time
in doing so
To Be
Continued...
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