Tuesday, February 10, 2009

The Fleet Foxes, "Mykonos"

The RO Report, "No Squeeze" Edition

If you were bearish on this market all day and waiting for an opportunity to get short, you were likely frustrated. There was no bounce, no squeeze, just steady selling.

The internals were completely disgusting. The XLF was down 10%. Crude oil is pinned. We are poised precariously over the lows made about a week ago. After that, we go to the November lows.

I turned CNBC on today for the first time in months. I was all about listening to Geithner explain The Plan. I was unimpressed. I also wasn't big on the dog and pony show afterwards, when he did his live interview with Brian Williams and Steve Leisman.

It made me very afraid. I feel very dark.

There is no doubt in my mind now that we'll be revisiting those November lows soon. After that I'm not sure what the fuck is going to happen, but I don't think it will be pretty.

Despite all the gloom and doom, the RO had a great day and I repaired at least a little of the damage that I inflicted upon myself recently. Out of 30 traders today, 25 were gross positive or 83%. 16 traders made over $1,000 gross, and 3 lost over $1,000 gross. Solid numbers across the board. I was #13 of 30. Very happy.

NOTE: I am trying hard to get the history post up tomorrow. If it doesn't happen, it will be up Thursday.

"Lucky Pierre" - Trader Z, $18,168 on 228k shares traded.

2. Trader B, $17,141 on 335k shares traded.
3. Trader H*, $10,329 on 18,100 shares traded.
4. Trader P, $9,746 on 262k shares traded.
5. Trader C, $9,219 on 149k shares traded.

"Chambermaid" - Trader 10*, -$2,927 on 2,900 shares traded.

2. Trader 6*, -$2,618 on 100 shares traded.
3. Trader G, -$1,749 on 110k shares traded.
4. Trader U*, -$831 on 3,700 shares traded.
5. Trader 9*, -$498 on 2,000 shares traded.

This heatmap looks like a bad joke, but it's real.

Richard Dennis: Market Wizard

I read the Richard Dennis interview from Market Wizards during the tumult of last week. I can say surely, that had I listened to one particular message from the interview that I could have saved myself $5,000. Schwager asks what to do when things aren't going well. Dennis cautions that, "a certain amount of loss will affect your judgement, so you have to put some time between that loss and the next trade." Indeed.

Since my troubles from last week are still rather close-at-hand, I can say undoubtedly that my judgement was clearly affected by my losses.

For example, at one point last week, I was going to war with GS. Just shorting it over and over again because I thought the move up was overdone and that the stock should be going down. When I looked back on my trades in GS, I was surprised to see that it was perhaps the strongest stock on the exchange the day I was shorting. Was I expecting it to go from the strongest to the weakest or something? Hoping to get lucky?

That wouldn't have worked... according to Dennis, luck accounts for "absolutely zero" when it comes to trading success. Instead, it was like I entered into a little bubble of hate and GS was the only stock on the exchange to trade.

Furthermore, when I was involved with these "unlucky" trades, I couldn't imagine it going higher when it was trading $89. Then at $90 I thought, "it's just gonna pop above and scum back down to trap longs."

At $94, I don't remember what I was thinking, but I'm sure it was dark.

This illustrates another important point made by Dennis: "You should expect the unexpected in this business; expect the extreme. Don't think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I've been in this business, it is that the unexpected and the impossible happen every now and then."

Had I been able to take a couple steps back, clear my head and have some perspective on the trade, I could have saved myself thousands of dollars. If you get into this situation, take Dennis's advice. I'm not sure how much time needs to pass, but do something to clear your head, trade another stock and do something different than what you are doing.

It doesn't come as a surprise to hear that Dennis (like Marcus and Kovner) lost money initially. But despite his early setbacks, he had "a need to try to succeed." People ask what a trader needs to do well. Some people think you need a "good head for numbers" or "an ability to analyze data." That stuff won't hurt you. But first, a potential trader must have that desire to try to succeed on his own.

Dennis reserves a certain amount of vitriol for the stock market. He says stocks are "random" and that they didn't offer enough fundamental information to create a real trend to trade. Or, as he succinctly puts it, "There is not enough information, not enough fundamentals. Just nothing going on." 

Damn commodity traders!

But despite his adoration for commodity trading, he bemoaned the growth of computerized trend trading and all the resulting false breakouts he believed were due to too many people watching for the same patterns. He then made a rather dark prediction, "There will come a day when easily discovered and lightly conceived trend-following systems no longer work."

Man, I thought... everything I do is lightly conceived! But I also thought of Trader X, and his new patterns and this made a lot of sense. The patterns are constantly changing and it's our job as traders to find them.

His critique of Keynesianisam is interesting and oddly enough, timely given the current environment. "Keynesian economics was a solution to the problem of over-saving and under-consumption, which was a fair enough attempt to pull us out of the Great Depression. The problem now is the exact opposite: under-saving and over-consumption."

Market Wizards was published in 1989... can you imagine how much worse the problem of under-saving and over-consumption has grown in the last 20 years? The best you can say is the the near future should prove to be a very interesting time to live, though not necessarily comfortable.

Finally, Dennis throws at least one specific trading rule our way, and while I'm not a swing trader, it makes sense. He explains, "it is important not to have a short position with a loss on Friday if the market closes at a high, or a long position if it closes at a low."

Okay, with that I leave you to go and make a million bucks.