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Day Trading May Be the Best Strategy at This Point

Great day for the firm today.  The first part of the day provided ample trading opportunity and we were able to take advantage of the action.  I felt conviction in the early to middle part of the rally in the positions in the Consumer/Health Care book as I noticed that most of our shorts were working in our favor as well as our longs.  To recap, the short positions currently in the Consumer/Health Care book are: SMRT, WHR, F, SPG, KIM, DEXO, BG, KR.  Particularly unusual for our firm portfolio was that at one point in the day, every single book was green, including our futures account, which we use as our hedge book.  I took a screenshot to document this pretty much unprecedented event:

 

Anyway, enough about our firm’s performance.  The market today traded on legit volume for an August day (and was higher than Monday and Tuesday’s volumes).  With the markets closing up small, the daily chart in the Spooz is shaping up to look like we are about to make one of those “fake out” moves higher, meaning we’re bound to see another substantial sell off after the rally.  Clearly, the market is still on shaky legs.  An interesting comment from John Stoltzfus, market strategist at Ticonderoga, that the market is being dominated by a “What have you done for me lately?” attitude: “We live from economic data point to economic data point.  That will probably continue at least until the end of the summer as we wait for some kind of catalyst that would give the market better definition.”  That is precisely what we have been seeing lately.  Market predictions, especially shorter term ones, have been difficult lately amidst the choppiness and we have voiced on this desk multiple times that day trading just might be the best strategy at this point.


HFL Portfolio Recap: 8-18-2010

The Hedge Fund Live portfolio had a decent day today outperforming the broad market.  The book closed the day up 19 basis points outpacing the S&P 500 which was up 15 basis points but lagged the Russell 2000 which closed the day up 30 basis points.

The top performers on the day were CREE, POT, IMAX, AAPL, and VCLK.  CREE continues to grind up off the low’s with another strong day closing up 2.42%.  POT was strong for the second day after receiving the bid from BHP Billiton,  IMAX and VCLK both had strong days closing up 2.10% and 1.69%, respectively.  AAPL had a decent day closing up 44 basis points at 253.07.

The losers were GOOG, SMRT, ATLS, and MA.  GOOG was the major laggard all day and failed to get off the mat all day, selling accelerated into the close to end the day at 482 down 1.78%.  SMRT a short we have put on over the last few days was up 1.62% and we covered a portion of the short.  ATLS and MA were down 79 and 57 basis points, respectively.

We went out with the same exposure as we came into the  day with as the market continues to show uncertainty and we remain hedged.


THE PRICE OF WHORES AND POT

The story goes that the fellow sitting in the bar approached an attractive young woman inquiring if she would sleep with him for $100.  Outraged, she shouted “Certainly, NOT!”  He apologized profusely, begging her forgiveness, imploring her to allow him to buy her a drink to amend his transgression.  She cautiously accepted his gesture of reconciliation and began conversation.  After the tension subsided, and they became comfortable with one another he quipped, “Would you have considered my proposition if instead I had offered a million dollars?”  She smiled and confessed, “I suppose for a million dollars I would have agreed,” To which he responded, “Good, now that we have established your character, we are only quibbling about the price.”

 Yesterday the board of directors at Potash promptly rejected the advances of BHP Billiton, protesting what they described as a “lowball” offer for a company they insisted was of much greater value alone.  “The lady doth protest too much, methinks.”  As Jeremy Frommer mentioned yesterday, eventually, “It is just a function of price.”


Trade to Win

The Technology/Telecom book was up 76 basis points today underperforming the NASDAQ Composite and XLK which were up 1.26% and 1.08%, respectively.  The winners in AAPL, CREE, and GOOG while the losers were our lone short ELNK and the various stocks I attempted to day trade but was shaken out of before the market ripped higher.

After the close I was talking to Mosk about my trading and he asked me to think hard about what I did wrong and how I can improve on it and not make the same mistake the next time.  This conversation led my to a quote from Jack Schwager.  For those of you who don’t know Jack Schwager he is a renowed financial author who has written the Market Wizards series.

His quote is as follows: “In one experiment, subjects were given a hypothetical choice between a sure $3,000 gain versus an 80 percent chance of a $4,000 gain and a 20 percent chance of not getting anything. The vast majority of people preferred the sure $3000 gain, even though the other alternative had a higher expected gain (0.80 X $4,000 = $3,200). Then they flipped the question around and gave people a choice between a certain loss of $3,000 versus an 80 percent chance of losing $4,000 and a 20 percent chance of not losing anything. In this case, the vast majority chose to gamble and take the 80 percent chance of a $4,000 loss, even though the expected loss would be $3,200.  In both cases, people made irrational choices because they selected the alternative with the worse expected gain or greater expected loss. Why? Because the experiment reflects a quirk in human behavior in regards to risk and gain: people are risk averse when it comes to gains, but risk takers when it comes to avoiding a loss. And this relates very much to trading. It is exactly the quirk in human psychology that causes people to let their losses run and cut their profits short. So the old cliché of let your profits run and cut your losses short is actually the exact opposite of what human nature tends to do.”

After reading this quote my conclusion is clear, I’m trading not to lose rather than trading to win.  When you see an A setup and you take a position embrace the risk and the reward.  When you have the conviction size up and let the trade work.  Trade to win and never trade to not lose, fear kills in this game and I have to force myself to rid myself of this fear or I will never be able to generate substantial profits and my losers will continue to outweigh my winners.


HFL Portfolio Recap: 8-17-2010

The Hedge Fund Live portfolio lagged the market today as the broad indexes moved higher.  The book closed the day up 12 basis points versus an S&P 500 which was up 1.22% and the Russell 2000 which closed the day up 1.72%.  We added some value to the long side today taking our net exposure up to 2.6% after going out net short yesterday.  Our gross exposure stays below 50% as the market continues to show uncertainty.

The winners in the book were AAPL, CREE, XIDE, IMAX, and GOO.  AAPL had a strong day today closing up 1.75%, erasing yesterday’s losses.  CREE powered forward today closing up 3.02% at 58.50 75 cents off the highs.  CREE has been bleeding lower following earnings and was in desperate need of a day like today.  Tomorrow will be an important day as we look for CREE to show continued strength and find a base above $56.  XIDE was up 4.22% as it moves back towards $5 and IMAX showed strength closing the day up 3%.  That’s two days of strong performance in a row for IMAX as it closed above the 200 SMA.  GOOG rounds out the top five closing up 1% at 490.52.

The losers in the book were the futures, WHR, SPG, BEN, and BG.  Although the loss in the futures was our biggest loser it could have been much worse but do solid intra-day trading and good covers we only lost 12 basis points in the hedge.  WHR, SPG, BEN and BG were all up with the market and we lost some cash since we are short.


Market Catalysts of the Day

Time to push higher as we’ve been in an oscillating market, but on a shaky uptrend with a series of higher highs on the daily chart of the S&Ps.  The market reacted positively to the economic data released today.  Housing starts rose 1.7% m/m although building permits fell 3.1% m/m.  Building permits are viewed as a leading indicator so I will clearly be expecting sell offs in the near term future as opposed to a slow grind higher.  Industrial Production also rose 1% m/m, which was stronger than the expected 0.5%.  PPI numbers helped the day out as well with a 0.3% increase m/m vs. the expected 0.2%.  It was the first time since March of this year that producer prices rose.  I believe (or hope) that we have now come to the point in this economy where the market will react favorably to data as long as it is not substantially weaker than expected, i.e., a slight miss will be seen as a relief for investors.  Company specific news also propped up the market today as HD and WMT reported better than expected earnings.  The headline of the day was around POT as the company rejected an unsolicited takeover bid worth ~$130/share, or $38.49B.  This move on the part of POT suggests that the bid undervalues the company; POT obviously rallied hard off this news and, in addition, other names in the Ag space demonstrated strength.  M&A news around PTV served as another catalyst for the market as Reynolds Group Holdings announced it will buy PTV for ~$33.25/share, or $4.4B; including debt, the deal is worth ~$6B.

I don’t think M&A season is ready to get kickstarted just yet.  So again, I’ll reiterate that we will have to wait until the summer is over and for volume to pick up in order to really see where the market wants to go.  We have seen time and again that the market can rip lower in a matter of one day, quickly erasing gains made over several trading days.


can we test two important levels in two days?

After that close that is the question on my mind and on the desk. What a start to the day as we rallied off of M&A news and some not horrible economic numbers all the way to 1098.50, up a massive 22 handles from the previous close, but then 1:30 pm came and something strange happened; the S&P ‘s sold off a full 10 handles into the close.

This market is brutal, we test levels every couple of days and we tested one today around 1100 after testing a low of 1066 yesterday. Can we test lows again tomorrow? I certainly would not bet against it (I have no positions on in my pad, so I am not betting either way).

All I know is that I am exhausted and this market is horribly tough, although I restarted my streak today (please refer to my blog from this morning) and in a nice positive way.

Who knows where we close tomorrow, or where we open or what the overnight session does, I can’t try to predict anymore, just trade what I see. So I will be patient and make the right trade at the right time and hopefully run the winning streak up to two.

Have a great night.

Mosk


Stock Market Battle Continues as New Battlefront is Opened

Look back over my blogs, I have been wrong on timing, but not the substance I believe drives the market forward. Today the bulls have opened a new front on the battle line. An M&A deal. This was not just a laboriously planned, 2 party negotiation and lots of hugging it out. This an unsolicited bid. Pot is going on the defense and I assure you a higher bid is coming. But this is just one part of the building process that forms the foundation for a new bull market. This will not be the last deal you see in the near term.

Bank reform is over. The headlines are out and the doomsayers have quieted down their predictions of the demise of the values of the US banks. I say we buy them. I will be buying a small position in JPM, BAC, MS and GS. I will tuck them away and 2 years from now marvel at the return.

Soon we will begin the final battlefront of this F’d up year in the markets. Soon we will see the beginning of the relentless Republican and Democrat bashing by both sides of the divided press, as they are the weapons of choice for their squalid war of words between the parties.

The signs I am seeing, though I continue to be in the minority, encourage me. I am optimistic while those around me believe the market is destined for a day of reckoning.

My prediction remains the same. I expect the S&P to close the year with a 1275 type level, perhaps even higher. If I am wrong it mat be by a couple of months but not by a couple of 100 points.


One for All and All for One!

Yesterday’s Webinar discussion of socialism reminds me of one of the core principles that attract me to Hedge Fund LIVE, the notion of “Collective Intelligence.”  With apologies to Marx, Engels, and Adam Smith, I will take the liberty to ignore the arguments on political economy in favor of a simplistic consideration of one of the more humanistic elements in the common perception of socialism.  The concept can be encapsulated in the notion of a collective effort for the collective good.  Take as example how individual Amish join together to raise a barn for a neighbor with the understanding that neighbors will likewise convene when it is in their personal interest.  Similarly, a collective intelligence of traders leverages their available intellectual capital to compound each individual’s insight to opportunities, facts, and opinions.  Whether principal or freshman, intern or CEO, all receive and provide intelligence, “from each according to his ability, to each according to his need.”  Again, sorry, Karl.

The power of the Internet has further enabled this socialistic opportunity for individual traders beyond those that can form a conventional collective around a physical trading desk.  Tools such as Skype, instant messaging, and webinars with real-time audio and video invite like-minded yet diverse independent traders to participate as what Moskowitz has envisioned as a “community of traders.”  (“Mosk” will cringe at the notion of being coupled with the founder of Communism, but his boss may find it entertaining!)  His notion of this community of traders found emergence among a handful of his former students who nearly a year later continue to work as a collective on a daily basis to target individual profit opportunities.  When the on-line day trading training sessions ended, three of us decided to continue working through a conference call each day to share the input, encouragement, and camaraderie of one another.  We rescued solidarity from the solitude of trading alone.

 We greeted this decision with enthusiasm, recalling the slogan we all knew from childhood, “One for all and all for one!”  We considered referring to ourselves as the Three Musketeers, until Kevin asserted that it should not be Musketeers, but rather “Market-eers.”  And so we began, and continue today, working daily as a collective intelligence, much like a good natured version of the Borg (for you Star Trek Next Generation fans).  We now number four, having added the Costa Rican Canadian, plus an honorary German Marketeer in Tokyo.  By electronic extension, our collective intelligence is supplemented by Hedge Fund LIVE and by further extension, the community of traders that shares Membership and participation in the Live Member Chat.

 So whether Amish, Borg, or Marketeer, a core value of socialism to unite a collective effort for the collective good can benefit the foundation of pure capitalism to maximize profit.  We emerged as a practical reality born of the conceptual notion of Mark’s “community of traders.”  Perhaps we should call ourselves The MARK-eteers…


The good trading streak ends abruptly

I have been on a very good streak of trading, making money in 9 of the last 10 days. Consistency is one thing that separates the winner from the loser in the long run of trading and is what I teach my students right from the beginning, better to make $50 a day, then one day be up, the next down and so on.

When you achieve a level of consistency in your returns the benefits are exponential from a confidence persepective as well as from your actual dollars in your account. Consistency allows you to enhance your share size which in turn allows you to make more money. This is the path that every trader needs to go down if they are going to make it in this great business.

The trader that lacks consistency will never be comfortable stepping up their share size as their confidence will never build the base that is unshakable in the face of a losing session.

So yesterday I lost money and as of 10:45 I was with 7% of my daily stop limit. I took my time and managed to make back some money before the end of the day but it was still a losing session and now I need to begin a new streak. When you are consistent there is actually a liberation in a losing day as this takes some pressure off yet your confidence is unshakable so you just start the next day knowing that a new streak is quickly about to get started.

In hiring traders I will take a trader that makes money 15 out of 20 days even if that trader only makes 50% of another trader that swings bigger and has wider P&L moves. Every desk needs both types of traders but for my money the trader that shows consistent returns over the long term will always be better off than the trader that just feels comfortable taking big risk, looking for the “lottery ticket” kind of trade.

So my streak is over but now I have a new goal and that is to get 10 out of 10 for the rest of this month. Keep following me on my blogs and see how I do.

Happy Trading!