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Stock market

Stock market crash prediction

Markets are hard to predict but economics give insight to the future direction of the stock market.

Update: The market has not crashed yet because the Fed keeps pumping money and might do so until after the 2020 election. It is political.

  1. macroeconomic data
  2. moving averages or trends analysis
  3. quantitative

I am getting a Ph.D. in Economics and I am partial to economic influences on the market. It would be irresponsible of me to claim I know the direction of the market, because I do not, however, I have some clues.

My tip is, do not listen to subjective information reported on the news, look at the macroeconomic data for the economy as a whole. The stock market is a leading indicator. It reflects the general future trend in the economy.

The relationship between the natural rate of interest compared to the market rate of interest

What you can trust – Economics and Interest rates

What you can trust is macroeconomic data which in the long-run will be accurate.  For example, the stock market will not perform when GDP growth rates are moving down, and real interest rates are movirfng up.

The macro indicator I trust the most is the interest rate.  More precisely the relationship between what is known as the natural rate of interest or the marginal productivity of capital in a moniless economy and the observed bank rate.

Federal Reserve econometric models try to estimate the natural rate of interest to determine its relation to the observable rate nominal rate of interest.

The data and the theory behind economic and stock market movements

When there is a disequilibrium in the money market govern by the relationship between the market and natural rate, this will create shocks in the real sector. The stock market is forward-looking and will try to anticipate this with a movement downward.

Practical stock market tip

Without getting technical, for practical applications for you, try simply to watch the interest rates set by the central bank. Analysis is in relation to the general health of the economy. What the trend and Do you think the moves by the Federal reserve are prudent to temper inflation or regardless do interest rate increases slow the

Stock market crash predictions

The following is a list of reasons the stock market, a leading economic indicator could decline.  The caveat being when this will be, today or in five years. The stock market is a good crystal ball for the economy because expectations are the driver. Therefore, if the economy is expected to slow, then movements in the equity market follow.

  • Interest rates – the biggest driver of the economy. Interest rates are the price of loanable funds and consumer spending.  Real Interest rates are increasing. Bank observed rates are not in line with the natural rate of interest. If the Federal Reserve interest rate increases continue the market will decline. We can stop here if we wanted to. It is almost that simple. I do not know the correlation studies to validate this hypothesis but this is what theory tells us. 
  • Political uncertainty – The country is divided so the political change is slow. Therefore they cannot address the real issue of the Federal Debt.
  • Unstatinable debt – Federal, State, and private debt is growing. The result is government debt crowds out private investment. Further, there is a question if interest on the debt can be paid in the future.
  • Inflation – Not the official CPI or PPI, things you see at the grocery store or at work, I am referring to real estate and the stock market.  Prices in the real estate market and stock market have inordinately increased to levels that might not collate to natural value or historic conservative levels.
  • Stock valuations are high – It depends what numbers you are looking at but according to Robert Shiller, price compared to cyclically adjusted earnings than 16, this means this the market is overvalued.
  • Monetary policy is ineffective –  The Federal Reserve have used its tools to stimulate the economy and is out of . Monetary stimulus is like pushing against the wind.
  • Fiscal policy is ineffective – The bulwark of fiscal stimulus is at a point now where the benefit of a is less because of the effect on real interest rates.
  • Ask yourself do you create anything – I do not know if I know too many Americans involved in the creation process, but rather moving paper and working on the computer. If Americans are pressing each other pants in a service economy, this is not a good sign. The US does create, it creates pharmaceuticals, defense-related and software. Only the last can be argued to add real value

Here is the reality about the direction of the market. Noone knows. Do not take counsel of your fears. Invest in a disciplined objective rational way. If you dollar cost average and invest for the long term you mitigate much of the risk.

You need to be objective and not emotional about your investment strategy.

Do not let emotions like fear govern your investment statgey.

The solution to stock market crash predictions

  • Follow interest rates, the market moves inversely to real interest rates –  When rates trend up in relation to the natural rate of interest,  you could move into more conservative investments.
  • Dollar cost average in and out of the market – Trust that the market is a positive sum game if you invest for the long-run and avoid sudden undiversified movements in and out unless you a  professional trader with AI backing your investment tactics.
  • Use a very good quantitative screen on your equities picks – I have mentioned valuengine.com and moneycentral.msn.com top ten picks many times. The reason is if your individual picks are good they will fall less if a crash comes and bounce back faster on the uptick.
  • Use a simple moving average to give you signals to exit the market – Moving averages are not a science but a general guide. They have gotten me out of major downturns like in 2007 and given me the green light to get back in.  Consider using something like a 12 month moving average on the S&P. It is a very broad technical indicator.
  • There is always more risk being out of the market than in – Whether market returns luck or skill, if you are in the market and have a plan for investing, a disciplined system, in the long run, you will make money because the market in a growing economy is a positive sum game.
  • Global markets and counter-cyclical markets – Markets move in tandem, however, some are countercyclical, research these markets.

Ask me if you have questions, I can not give investment advice but I can tell you from the perspective of an economist, what might happen based on my subjective personal observations.

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Stock market

Buy on bad news – sell on good news – Stock trading

One of my first lessons in stock trading was not to panic sell. When rumors hit the street (now days the web),  I ignore them.  Some people like to make money off the bounce of a stock that has been hit by rumors and news, which are generally oversold. I have not tried in a long time.

Are you investing your money on emotion or strategy? That is the question you have to ask yourself the next time some news and rumors are circulating.

I am a gutless trader

Maybe it is because I did not have the courage, or I am not a short-term trader but a chess playing strategist. Not that I am a better person than people who do such  short-term speculation, rather based on experience, it is very hard to buy or sell stocks on a day-to-day or week to week basis. It really is not investing or the kind of investing I am good at. If you are let me know.

If you can make money off of bounces, more power to you. Further, if are one of the guys that can jump out of the market, right at the right moment based on news, you are a better investor than I. However, news is rarely black or white.

I use to set up Bloomberg and Reuters financial news feeds

I use to set up news feeds for the Portfolio managers in NYC and use to tell them, do not read the news, it will do no good.  I have never rarely sold a stock at the exact moment I should have. Instead I make a profit or reduce my loss by a percentage. I think moving averages or a system of investing is better.

Again why not trade on news and rumours, is this not investing? Hey I like to make money. I do not want to get into whether it is investing or not, but, as unless you have real information that other people do not (yet not considered insider information), making money off news is just speculation.

Because of my economics background I guess I believe the market has fairly efficient information. In the words of Stan Weinstein,  the tape tells all. You can see the information coming out on the charts before you read it on the web. Again the problem is there are a lot of guys out there living and breathing every tick of the price and trying to react in the same way.

Therefore, I have seen stocks go either way. I have seen stock rumors and news that turn out to be true and I should have bailed out, and did not. In contrast I have seem stocks news to leave the shorts in the dust.

Buy on bad news sell on good news

  • What I have learned is be more systematic in investing using quantitative investing and guidance from the charts, not reactionary.
  • Message boards and news feeds mean little compared to numbers.  I still read them mind you, just do not make major buy and sell decision off of them. I have been burned more by reading such things than not.

 

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Economics Stock market

The risks and rewards of penny stock investing

Penny stocks are a cognitive illusion. Not the penny stocks themselves mind you, they are real. However, your chances to make money from thinly traded, low-priced stocks with little liquid assets, working capital and a lot of dreams are the cognitive illusion. In other words, although there is a chance to get rich from trading stocks on the pink sheets, stocks under a dollar OTC or NASDAQ stocks trading for nothing, in most cases, it is a mirage and I would not bet the farm on it. This would be a boring post if that was all there is to it. However, there is a lesson that can be learned from penny stock investing.

For pennies you can have fun

At one level the investing theory is sound, and people who have interest in penny stocks at some level understand the idea of financial leverage. It is the idea of trying to amplify your returns with little capital applied.

Financial leverage is a way which many great investors got rich, like Warren Buffet. However, they did not do it with trading penny stocks. They did it with more sophisticated methods. Buffets did it with Insurance., you can read my article, how insurance companies make money.

Penny stock traders have the idea that, low price equities, under a dollar, have potential for large percentage gains with even a small movement in absolute price. For example, if a fifty cent stock goes to three dollars a share that is a 600% return on your money. Even if it goes to one dollar yo double your money. In theory this is correct.

The problem is statistically the rate of return on average does not match the normal equity market. Windfall profits are the exception rather than the rule. Even if you have some play money, expect to throw away more than you will get back. However, if you have 100,000 dollars in a portfolio and you want to risk a few thousand, go ahead, but I would active leverage with options, rather than penny stocks as I think this is closer to a zero sum game.

Why penny stocks do not yield a good return on average

  • Penny stocks that are scraps in the junk heap – Stocks beaten down this far can come back but more likely they are only attractive to junk men searching through rubbish. I do not know too many rich junk men in the real world.
  • Penny stocks that are the next artificial blood – When I was in Finance in Boston I would soften hear about these wizards working on the next big thing in technology or biotechnology. They had MIT or Harvard connections. Great ideas, even noble ideas, like artificial blood, that maybe someday will be a reality, but in a 12 month time horizon or even 36 month time frame, I personally never saw any of those great opportunities perform.
  • Penny stocks that are selling air – These companies that really do not have much going on but the dreams of the eccentric behind them. I think you would better off selling air. Sure, get some fresh mountain air from the Rocky mountains and compress it and sell it to people in LA or NYC. You would make more money then 99% of the stocks I have seen trading at pennies a share. I had a tried selling stock for some home gym he designed. I never saw it come to fruition. Even I personally and working on a few products. When I have mine out the door and selling I will let you know, but I prefer not to tot my horn, until this time.

Why Penny stocks move up

  • Pump and dump – the market builds excitement, often manipulated by some individuals then they are dumped. Micro cap fraud
  • Stocks sold illegally under schedule S internationally – Chop stocks

I understand why investing in penny stocks is tempting, because earning money though working for a living is harder and harder. If you could just profit from two ten baggers, that is buy two stocks in a row, that go from one to ten dollars; with ten thousand dollars you would have a million dollars. It could be done in a year.

However, everyone wants to do that. But have such a good run with a cheap stock, is like making a hole in one on the golf course. You can not base your life on it. Better is to prefect your game in a more rounded fashion and if you do get a stock that rises to ten times for what you guy it for, be thankful. I have, but it was when I was younger and I made a fortune, only to lose most of it. It was a painful lesson.

If you want to play with a little of your risk capital I think Leaps or long-term equity options are better vehicles for leverage. The are also low.

Have I ever owned a penny stock? Sure in my 30 plus years of investing in the stock market I have owned a number, mostly at the start of my investing career. I did not buy them mind you, they were low price stocks that hit the pink sheets and went bankrupt, belly up. I was young and brash and thought buying low-priced stocks under 10 dollars would amplify my returns. I was always looking for something exotic and cutting edge.

What is the lesson we can learn from Penny stocks? – Leverage

Although most penny stock junkies will most likely never get rich they do teach a lesson. Leverage a key investing idea to amplify your returns. You can turn a small amount of investment capital into large returns. All you really need is a system of investing that does average, or even below average but consistently. Read my posts on quantitative investing and how to invest with logic.

  • It is better to have a system that is consistent and below average, but leveraged than a system than going for a home run in the market with a hot stock.
Categories
Stock market

Stock market and sunspots

Is there a correlation between sunspot activity on the sun and the stock market?  Yes.  Further, if  such a technical theory has a spokesperson who says it with confidence and a track record, people listen. However, for me personally, the correlation has no meaning. I would also imagine for a serious stock traders, it is more of a coincidental, but, let the fact be told there is connection and a good one at that. That is the purpose of this post, to look at the correlation.

  • Upward trending market are observed – when sun spot activity and solar intensity is high, there is usually a bull market.
  • Downward trending market are observed – when sun spot activity and solar activity is low, there is usually a bear market.
  • Sunspots and social trends – sunspot watchers point out solar activity affects human mood and emotions, they contend using Occam’s razor it is a good hypothesis.  I believe there is no way to make a meaningful comparison and it is coincidental.
  • As an economist –  who is a fan of Austrian economics and social behavior, there is no way quantitatively to predict human action that simply, if at all, based on an exogenous variable from the cosmos.

Does the sun affect human behavior? Yes. What about aggregate trends like the equity markets?

 The next major stock market crisis in 2013

This is according to former Goldman analysis and current stock market prognosticator and technical analyst  Charles Nenner believes based on solar trends we are in for another big drop in two years. Charles Nenner has been right in the past mind you, most not worthy about 2007, perhaps the only reason he has any attention.

  • Based on solar activity he believes the stock market will muddle through the next couple of years until a drop in 2013.
  • You can explore NASA website yourself and read about solar activity trends and the stock market , OK maybe they do not mention equity trends.

The following video is interesting to watch generally, not just about money-making.

Do what you like with the information, consider it maybe one more arrow in your quiver or ignore it, but I personally think market trends are hard to predict using any methodology, especially when expectations are factored in. This is why I prefer to look at the trend line as a whole and then drilling down to quantitative picks. On the other, hand I am writing about it as it sparks my curiosity a bit. In some fantasy world, I  would love to think like with Elliot wave or a Fibonacci sequence numbers there is an easier way to make money buying and selling stocks (I would never ever, go for something like  astrology and the stock market). But I always beam down to reality and return to the brick and mortar methods like outlined by Stan Weinstein or quantitative research companies.

So my question to you is, do you feel Wall Street is influenced by powers in the universe unseen or do you believe like Hans Solo in Star Wars IV ‘ who boldly states ‘ There’s no … energy field that controls my destiny’?

 

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Stock market

When and why economic predictions and models misguide our investing

Can economics or investing be predicted? Of all the great economic and financial investing geniuses getting paid 100s of millions of dollars, few really predicted the crisis. Nor did the leaders of the US government or the US Central bank run by PhD economists. Political leaders understand money and markets, that is they only work if they are free.

Use intuition and quantitative methods to see the future but realize all methods have limits

The US government or Wall Street bankers, ” market wizards”, if you may, who watch out for us and protect us from economic boom and bust cycles, did not have the wisdom to see and prevent the crisis.

Why? Economics is a ground up thing, not top down. There are many intangible factors and more important human experience is multi layered and stratified. If you put faith in the one dimensional, you will get burned.

Investment firms used large-scale models and super computers with variables and correlations, multicollinearity, exogenous and endogenous, all tested for relevancy, but still the crash caught most by surprise. Wall Street universally got it wrong.

I am so not impressed by any investment mangager, Harvard, Yale, Uiversity of Chicago, Ivy leaguer brain children with a title or VP and an impressive home and nice cars on the gold coast in Connecticut.

In fact these suits are mildly annoying because of their arrogance/brain ratio. It is all fake and litle wisdom there.  Why did their silicon tea leaves fail to predict the economic future and global collapse?

Economists, bank managers, analysts and rating agencies, journalists and philosophers have disseminated a faith in the precise ‘scientific’ predictability of the economy and the possibility of steering it completely untroubled by the irrational factors, the dangers and side-effects at the world everywhere. But it has now been proved that no mathematical extrapolation and economic-sociological models can predict economic developments with certainty, indeed that all calculations rest on certain assumptions that in fact are unusually excessively optimistic and credulous about progress. – Hans Kung

Too much faith in the tangible – Basically people have too much faith in science and computers and most of all experts.

Yes, even me, if you read my posts I use a combination of quanitative valuations and Stan Weintein moving averages, combined with cost averaging for manaeging my personal portfolio. I wanted to get a PhD in mathimatical economics and build econometric models. I thought I found the way when I was at the university studying math and economics.

  • However, technology and systems can and do fail partially once the system is figured out other people learn about it and the system loses power, but also because life is dynamic. Life is an art not a science.

As mathematical methods and models seem to improve, the system will change as more people become aware of the predictions and it will lose its power- the Pareto principle. We all can not be winners.

If you understand life is an art and use science only as a tool, then you will be better off. If you use technology coupled with human intuition and insight you will profit. Like in the movie Limitness – about a man who amassed a fortune by making conections others could not see, using technology on. Fill your life with meaning and purpose in your actions and use technology and models with insight and  I believe life will reward you .

Triump of spirit over techonology -Think about the little myth of Star Wars when empire put too much faith in technology (the deathstar), while the real future of the galaxy was being determined at a another level, that is a spiritual one. Often times George Lucas would show three battles taking place simultaneously, one one the ground with real people, one in space with machines and the important one taking place between two Jedi. And the latter mattered the most.

  • Believe that reality is more multi layered and complex than just  economic numbers, if you want to see the future of where the economy is going. At the very least your life will be richer in other ways.

We should not give up quantitative methods for predicting economic cycles or investments – However, we should understand not everything is in our control. It is better to take the attitude that ‘it is only money’. That money and economics is not on par with human relationships, love, family, charity and caring about others.

Use ideas like Stan Weinstein and quantitative analysis  but the drum I have always beaten is if you want to make money and predict the future, consider technique that build your intuition like image steaming or even a Warren Buffet methods of looks around and seeing what is going on.

 

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Stock market

Stock market and leading economic indicator

I believe in getting a sense of the direction of the stock market using trend analysis.  I use trend analysis to determine if I should be in the stock market or not, specifically the 12 month moving average against the S&P 500 index.

However, one of the problems with trend analysis is it sometimes give your false signals. The price of the index will break the trend. Then the index will snap back with a vengeance. In fact, when it does you can lose 5% of your initial price position. This is a risk with all systems. No system is full proof or air tight and it never will be. The purpose of this post is to put some subjectivity into trend analysis, by viewing it in conjunction with the economy as a whole, or more precisely the tangible evidence of economic activity, that is with the other economic indicators.

Stock market trends should be viewed against other economic indicators if the trend is uncertain

Does this break the spirit the whole point of using something like moving averages? Maybe, but I think flash traders and computerized trading sometimes adds an extra level of volatility and false signals, and what can I say I am not a purist.

What I do (lately) is try to look at the tend against the economy as a whole as manifest by the other economic indicators. The Conference board, a non government agency has for the last fifty years had a good track record with predicting economic business cycles with it simple set of indicators they feel are relevant. This is not insider information, but I am surprised at how few investors really look at the data and understand how important it is.

Note, these are not the only indicators out there. There are many others, but these are a start, as the major and minor indicators are discussed.

Why look at these indicators?  Given the fact that the stock market is a pretty good leading indicator of the economy as a whole. Rarely do bulls precede recessions and conversely rarely do bears precede strong recoveries. The lag time is about six months. That is if the economy is going to be down in six months time, then the stock market will start to falter. If you could see the future of GDP in six months you will have a pretty good ideas of where the stock market will go. Therefore, if you are unsure of what is going on, pour over the economic data yourself and make your own call about the health of the economy. I am a believer there are not experts in life and many great economist mis-predict the direction of the economy. Therefore, believe in yourself and your ability to see patterns in this data.

A trend is three

I like simple rules so here is one. What constitutes a trend when you are looking at broad economic indicators? A trend is three. That means if you have three months of negative GDP (a current indicator), that means the economy is probably trending to a recession.  One or two months is iffy, but three, then we are most likely going down. Also for a trend to reverse, it would have to be three months of growth.

  • Therefore, if you feel GDP, which is a current indicator, not a leading or lagging indicator is going down in six months time, and the market index has broken the trend line, this is the time to start dollar cost averaging your positions out.
  • However, if you feel the economy still has some life and even growth in it, despite the fact the index price has broken down below the moving average, then I personally would not sell. I would wait a while and see what is happening.

How do you know where the economy as a whole is going?

Beside the noise in the media, look yourself at the aggregate of the ten leading economics indicators. To look at the conference boards ten business cycle indicators go here -> Leading economic indicators. Then go to the USA and you can analysis the data yourself instead of hearing it recycled from the press. If the data on that page is too convoluted, then sure read up on the summary of this data via other people, but first take a stab at it yourself.

Perhaps this post has raised more questions then it has answered. However, when I was in school I took a course just in economic indicators. At the time I was amazed by the power and simplicity of this data. I was loading up on other courses in mathematical economics as I was considering a PhD in economics.  However, this little elective course on leading and lagging indicators impressed me.  I used it and of course like all systems after it was working, for me for a while, I forgot about it, and stopped using it or only causally listening on other people’s analysis of the data.

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Stock market

Online stock trading and banking – how protect yourself

I do all my banking and stock trading online. In fact, I have not been in a bank or brokerage house well, for as long as I can remember. I pay bills, make stock trades, pay by visa and bank cards and transfer money all on the web.  How do I personally improve my online financial transaction security?

Besides the obvious things like:

  • creating a strong password that is unique from my other passwords
  • having anti-virus, and a firewall installed
  • only using https connections with 128 bit encryptions
  • making sure that you do not every click on email links or forms even from your bank or brokerage service, instead go to the site directly and log in.

A real story of a banking hack – My friend who is an IT professional in Boston was hacked. In fact he deals with pretty high level information. How did they get is banking information? He logged in from an e-mail link that looked very official. I know a little about hacking and you can make an email link look like anything you want, it is child’s play.  There is no real way to tell the difference. I traced  the hack to some Chinese university students and we were able to avert money being taken.

My secret for online trading and banking security and Why Online financial transactions need to be secure

There is no way I would use Windows for doing my online banking and stock trading or online purchases.  It is like biking without a helmet. It is like not using protection when you go clubbing (protection for your ears from the loud music of course).  Windows security has improved a lot, but still I hear about people getting passwords stolen and accounts cleared out or money taken in drips and drabs without their knowledge. Online security hacks and identity theft are not uncommon. Therefore the purpose of this post is to give you one good idea to lessen the chance you will have financial headaches. In fact if you did this one thing, I could say you can put any financial security worries to rest when it comes to online money.

Banking and stock trading is a new world. You no longer read the Wall Street Journal and call your broker. The onus for everything today from financial research, transactions and security is on you.

How to protect your online banking and brokerage accounts

  • I use windows for most everyday things. Windows is great.  But when I do banking, money transfers, online purchases and password sensitive work, I use Puppy Linux. Puppy Linux for online stock trading and banking is the solution.   It is free and you can set it up in about ten minutes. It gives you a significant increase in security for your online financial transactions.

Browsers are getting more secure IE, Chrome, Firefox or Opera are all good. TOR is even better, but not needed for most people. What is needed is a secure OS like PuppyLinux.

Bruce van der Graaf  cyber criminal expert says when doing financial transactions:

The first rule, he said, was to never click on hyperlinks to the banking site and the second was to avoid Microsoft Windows.

Money floating in the clouds – Online stock trading and banking is done in the clouds. That is once the OS is running, you click on your browser icon, and spend most of your time online researching, moving averages and equity values. This is cloud living. I do it. I live in Europe and in my flat I trade on my US accounts and move money around the world all from my laptop.

Taking it is step further, I have my OS on my pen drive and carry it in my pocket to my friend’s house when we do stock trading brainstorming sessions. I do not even bring my computer. It is the life.

How I trade stocks

I use Puppy Linux booted of a USB stick. It loads my whole OS into RAM and nothing is saved unless I want it to be. It is almost impossible to get a virus or key logger on this type of set up.  I can use my browser and be confident that is my other security measures are in place, I am not being tracked or hacked. It takes seconds to boot up and is the fastest OS today, so this also increases productivity. Time is money.

Maybe it could in some crazy way be hacked but, for most financial online criminals it is all about path of least resistance. metaphorically speaking, few online financial bandits will go through the trouble to take money from a bank that is under double lockdown when the bank next door has its doors open and the security guard is asleep in his rocker.

How do I keep track of this information when moving from on computer or system to the next?

All your information can be transferred via your browsers (256 encryption and secured). Let me explain. With most browsers like Chrome and Firefox they have a sync option. That means say you use Windows  normally and all your passwords and bookmarks are stored. With the Sync option when you are on Puppy Linux all this is automatically copied.

How does this system protect your money and online trading?

In contrast Windows or even MAC or other Linux systems load the OS on your hard drive. This means is a program installs the next time you boot up, it is secretly on your computer collecting information like passwords and you do not even know it.

It could have resulted from a link you clicked on or a Java hole that is open. You will not even know it.

The result is maybe small amounts of money are transferred out from something like a WalMart charge, so you do not even notice it, or your identity is stolen. Or someone does a stock trade from your account. It all happens. There are a number of serious  events that could unfold and make your financial life a headache.

In contrast, when I shut down my computer with Puppy everything is gone. My whole OS is deleted. Nothing is left. All OS files are wiped clean.

  • It takes less than ten seconds to boot Puppy Linux so why not take this extra step of security? After I did my main research on Windows and I want to do a stock trade I just reboot with Puppy do trades and transactions and exit.
Categories
Stock market

Stock market investing tips – notes from a trader

The purpose of this post is to give you some ideas trading stocks. The first investing tips presented here are general, but useful. At the end of the post I give you some of my own stock trading habits or notes in a more specific way.

Mind map of investing ideas that work

One thing that always annoyed me about talking to traders over the years , when I was in the business was, no one gave me the real secret formula, that secret sauce recipe. The reason they did not give their treasured secretes was not only their arrogance (many) and trying to make you think they were something special (again the majority), but also another reason. That is, trading is a personal neurological experience.

Like learning a computer game, you need to expose your brain to countless scenarios and patterns before you can move up a level. Each person’s brain is different and will interact with his external world in a different way and interpret signals differently. These are subtle nuances that make the difference in your brains to interpret it as a buy or sell signal.

You have to learn the market in a specific sense yourself. While other people’s advice is general is good, the important work is done by and learned as a tactical (and tactile) experience level. Hands on and ground up comes with the territory of learning to trade stocks.

Buy and hold is a lie – This post is to convey some general advice I have learned about trading stocks. One of my underlying premises is buy and hold does not work like it is touted. There are decades that go by an stocks do not recover. For me that is a long time, a lot of opportunity cost. Buy and hold is not the way to go. Better is to study market timing, trading and long-term investing.

Bulls are found in unexpected places. This picture of golden bull was one street up from my flat in Krakow, Poland.

Ideas for learning to trade in stocks

  • Study endless amounts of charts – Looking at charts does not cost you anything. You can just look at them for fun, study them and track them over time. If you want to research it, you can, take screen shots of the ones you like (using the ctrl + prtsc key on your PC and pasting it into an image program). Then date it, make a note as to your ideas about the chart, and store it in folders and in go back to them and see if your predictions and ideas were valid. There are other ways to do this of course, but this is the caveman simple approach and I like it. Or just sit back and relax and look at charts.
  • Look at charts from historic time periods – then formulate ideas from them charts and see where they are today. Use historical charts to predict today. See if you were right.
  • Read books on trading and market timing – look at the books objectively. Research the author and see where he is now and if he is really making money or just making money on the books.
  • For fun watch financial news and experts – Of much lesser importance and more for downtime is, watch CNBC when they have technical experts on . A lot of them get too complicated and do not add value. However, you can compare it to your system of technical signals. Read the Wall Street Journal online . Do this for fun and if you have time. A lot of news is sensationalized and to promote fear and panic. The WSJ is pretty grounded reporting. Nothing in there will get you rich at first glance, but it does not hurt as your brain will start to subconsciously pick up things with habitual reading.
  • Understand the basic technical tools but choose one to master – Think of a technical tool this way. It means nothing. Any system or book you read on the subject is just a tool. I believe Mozart could write good music not matter which pen he used to put the notes on the sheet. Just choose your favorite and master it. This does not take long but understand the value of oscillators like RSI and MACD. Take a look at volatility envelopes like Bollinger bands. Choose your favorite tools and master them, this is better than being a jack of all trades. I believe in the simple moving average. Why? It is simple. Lagged and weighted moving averages are also interesting but I prefer the SMA and work from there. The good news is you do not have to be a genius like Mozart to master technical trading, you just need to do what all artists of the past did. They studied with patience and went over and over the techniques of master’s that preceded them.

The most important questions in trading:

  • What determines a trend reversal? All money-making can be said to be about identifying the trend and when it changes. It does not matter what tools you are using, candle sticks or chaos theory of investing, it all is about trends and reversals. Of course the rate of return depends on the velocity of the trend but even that does not matter if you have a reasonable arsenal of tools to discern the trend.
  • What is the historical behavior of the stock or asset you are looking at? Stocks are like people, they have a nature like a personality. Each stock is different and has a different volatility and history. Some are flashy and erratic and some are stable and domestic. Get to understand how and why an asset behaves like it does. Does it respond to the sector’s strength or is it a news driven high flier or maybe quietly makes money with no one noticing. Does the stock take time to develop a base or does it never have a time of flat and is erratic.

A metaphor for learning to trade stocks

Becoming good at trading is like being good at chess. You can just play and you will improve. Other people like to read books and learn from others, I also watch videos, but a combination of all is the best. If I were to choose one method, it would be looking at countless charts for fun. Your brain will start to understand pattern intuitively. It will be like driving. When you first start everything is complicated and new, then it becomes second nature and you develop your own style.

Why I do not use the 200 day moving average

It is simple, the Pareto principle. Since 80% (lets say) of the moving average traders consider stocks 50 day moving average (or shorter) and the 200 day moving average, I choose something else, like the 12 month moving average. I like to zig when others zag, But more importantly I think a longer time horizon gives less false break outs or break down of the trend.

Notes to myself – Things I keep in mind when looking at moving averages
  • I am only play the market when the S&P is positive – I am not a maverick, and do not like to buck the trend. If the S&P is trending down in the long run, I watch NetFlix and relax.
  • Choose stable stocks – I do not choose stocks on headlines but price behavior. When I use to set up the Bloomberg trading system and other news information systems on Wall Street I use to tell people, I pay little heed to the news. They were shocked, but it is true. I like to choose stocks that do not have huge swings and certainly not news makers per say. I know people say no risk no reward but I prefer stocks I can look at and have a history of working with the 12 month SMA on a 3 year time horizon. If the stock prices danced around the moving average in the past it will do this in the future.
  • Learn from an economist – The Economist Alfred Marshall said ‘ nature does not take great leaps’. If you understand this you will save yourself some heart aches. Whenever a company runs to high from the moving average it is over bought or over sold. It usually pulls back after some consolidation. I like stocks that stay just above the SMA. If a stock is making great leaps either way, it is unnatural.
  • Trend line not just the moving average needs to be up – I do not buy stocks that break out above the trend line if the trend line is still down. I like to see the actual line to be either flat or moving up. Again this is not a day trader’s strategy but rather a long-term investor. Ideal it would be great to see a stock with a long base that breaks out. But how many times can you find the ideal. The longer the base the higher the pyramid.
  • I purchase stocks that have a quantitative buy signal – If you have read my website you know I like confirmation from fundamentals, not only technical. You need to narrow the universe.
  • I like to trade the same stocks – I often buy and sell the same stocks. Why? I get to know them. They are like old friends. For example, CNI or Canadian National Rail, I got interested in for various reasons, but not that I have traded it for a few years, I understand the business better and the trends in the market. Therefore, although I do not sit on the board of directors, I feel like I understand the business better than just some random stock giving me a signal. I also know some software companies because I write software. I understand the business on a more personal level. My universe of stocks are always expanding but I can not be an expert in every stock. But I can get to know a few and their cycles and patterns, so when they come on my radar, I trade them.
  • Do I use mechanical stops? – I prefer mental stops. I do not know why, I have just done it this way.
  • How many stocks do I have in my portfolio? – At times I have over 20 stocks, but I find this is too hard to track for a sole trader. I would rather watch a few stocks carefully. I do not trade full-time for my profession but rather to let my capital work for me.
  • I dollar cost average in – I rarely put the whole kitten kaboodle on the line at one time. I do not know if I ever have. I tend to ease in and out of potions. It makes it less risky.
  • I understand reality – You are never going to buy an equity on the day the stock hits its low and sell it when it hits the high and starts its downward descent. I do not mind riding it up but selling when it has taken a dip and breaks though the moving average, even if this is not the absolute high. I am not greedy.
  • Transactions cost are not a factor in trading – Since we are all using discount brokers these days, do not worry about transaction costs, they are small and come off your tax cost basis. It is better to worry about taking large percentage losses.
  • I do not always sell the second a stock crosses the MA – If the trend is still intact I sometimes give it time. I know it is not a mechanical trading strategy but I do it.
  • IRA trading – as long as you do not risk the farm, trading in tax differed accounts are ideal, this is so capital gain taxes do not eat into your profits.
  • Two tier diversification –  You can achieve diversification by holding stocks and money markets. It might not be as effective as diversifying across asset classes, but it is simpler.
  • I have scores of other trading tips – But it is best to save them for other posts.

The bottom line is investing in stocks are not zero sum. If your investment strategy is stock trading 2.0 that is use the leverage of other people’s knowledge and in particular quantitative investing screens, you in theory should at least do as well as the index, and maybe even better. Why reinvent the wheel? Start your trading with a base off of other people’s empirically tested ideas and research with references, and then trader from there based on your own lessons, brain and style.

Categories
Stock market

Trend analysis – Limitless

Technical analysis 101

This post is to inspire you to consider trend analysis when trying to predict financial markets.

Trend Analysis is seeing order in chaos – the film Limitless

Trend analysis is a tricky thing when economic indicators give you mixed signals. However, consider one of the ideas found in a film (Hollywood is sometimes a great place to get inspiration, Wall Street for example).  I watched the movie ‘Limitless’ the other night (recommended). If you watch this it will inspire you to at least consider trend analysis.

It was about a guy (Bradley Cooper) who used NTZ, a pill, which could make you significantly smarter. He used his increase in IQ to make cognitive leaps and see order and patterns, where others saw chaos in stock market price movements. He made a fortune. People were amazed by his ability to put seemingly unrelated pieces of data together and form a meaningful hypothesis that others could not see.

This is your brain, it tries to fight entropy by creating order from chaos. It connects seemingly unrelated signals to yield a meaningful pattern. Some brains do it better than others. That is one reason why some people are rich and others have less.

  • If you want a natural way to help your brain make a cognitive leap, in a similar way, write me and I can tell you. In theory it will help you in an intuitive way like it help the hero of the film ‘Limitless’.

Making sense of the random walk down Wall street

If you want to make money in stocks you have to do the same. At least be open to the possibility that your brain can do this. You have the ability, I believe everyone has.  That is discover patterns where others see nothing.  That is the real trick. To determine the stock market trend, when others only see mixed economic signals. There is always a trend by the way. The history has just not revealed itself yet.

If you are discouraged by the economy, do not be and  lets look at the current situation in our economy in a more realistic way.

Mixed Economic signals are the new trend

I know people will say, I remember when a boom was a boom and a recession was 18 months. It was clear to anyone who observed the economy that an economic cycle has definition. The problem in today’s economy is nothing is clear. Nothing is straight forward.

If the housing or job market is good one month, then the next month some other economic indicator will show something to the contrary. In a world of economic hypochondriacs, every indicator is a sign of a turning point or a new trend or economic collapse is on the way. What to do, is the question.

Reality of market trends

Look, here is the reality,  there have been many times just as confusing.  I remember when things were more certain like the 1960s and the roaring 80s, and I remember when things were equally uncertain, like the stagflation of the 70s. In fact, from 1969 to 1981 the stock market basically was flat.

The 1990s had a pretty clear trend until it was broken and then the 00s also trended with a nice strong signal before hand when it was going to break the market trend.

So the question is today, looking at the stock market, is the new trend chaos, confusion, a flat market? My take on it is a definitive ‘no’. There is order and a pattern underneath this chaos and you do not need to do fractal analysis or any higher level mathematics to see a pattern. It is up to you to discover it. I use my own set of tools but they might not be the best in the world. But they work for me.

Where to start when looking at patterns? Smart people make complex things elegantly simple (E=MC2), less intelligent people complicate things unnecessarily. There is a power and elegance in simplicity, if and only if the formula is correct. This is a hint. Before you dig out every exotic arrow in your quiver, look first at some tools that are simple and time-tested. Also use your intuition or start to train it.

Hence, even if at first glance you see no trend, so what, look at it from another angle, take a break, read more about technical analysis.

I think everything trends and nothing is truly random. You simply need to be able to discern the pattern, the signal from the noise. If alas this is too chaotic for you and you do not have the patience for trend analysis, try quantitative investing.

Demographic, political and unforeseen influences on the market

Endogenous or exogenous variables hit market psychology like meteors in our atmosphere. It does not matter. What matters is the trend and turning points.

Granted there are huge demographic and political movements world-wide that spice things up a bit, but it should not affect your ability to make money on a systematic basis. Here is my take on it. There is always a market somewhere that is trending. It might not be the Dow or the S&P or they may not be trending up. But some market is trending. If not the market, a sector.

Stan Weinstein‘s book, dealt with how to make money in a bull or bear market. If all markets are truly flat  markets, use only quantitative picks.

You should not worry too much about political economic events on the news, unless it is interesting for you. It is for me. But these news reports should not sway your investment decisions.

Find the trend where ever it is and invest with a system. Use your brain with its own unique connections and patterns formed over your lifetime to find pattern in the market. You do not need to know if NZT real or fake. Why? In the film the older wiser investor (De Niro), made investment choices the old fashion way with work and intuition and he did pretty well. My recommendation is believe in yourself and start studying trend analysis, especially things that have been statistically proven.

Categories
Stock market

Wall Street the Movie – 1929

Wall Street film

Here is a Wall Street movie on the great crash of 1929. It is worth the investment in time just based on old photos. If you have an interest in Economic history than I do, then you will like it. If you have an interest in the stock market, you will love it.

It is not as flashy as Wall Street 2 the movie but you can watch for free a very professional production another Wall Street movie for free online. See how many parallels you can find for today.

I worked in downtown Manhattan in the roaring 80s. It was a lot of fun. Seeing the history at any period, not just the crash and the Great Depression is interesting. It is the center of the world. Think about it at any given time; most of the public assets of the world on the auction block.

Credit boom, asset speculation and Wall Street crash. Is this 1929 or 2007, you decide. The causes of the great depression are clear now that we lived through the great recession (or still living though it).  It took this experience to understand the past better.

How to fix the crisis, recession, crash

What is unclear is the remedy to many. I am clearly in the camp to allow the markets to work.

  • Get rid of the Fed
  • Balance the Budget
  • Reduce taxes
  • Gold Standard

This is not only based on my experience studying the history of economics but also my observation.

I have to pay my taxes soon. This money, to me, goes into a black hole. I have never received any real benefit from the government. Someone else takes my money and distributes it to another person. I would instead do this via charity, than force.

In Europe, at least I get free health care, pension, and University education, etc. In the USA I pay. I would either prefer a real European social state or a free market that would allow things in the USA to be cheaper and pay scales to be higher.

Since we are talking about America, not France, I think for the American way of thinking, free-market capitalism still is the best solution. That includes letting greedy banks fall, and deflation happen. I know it sounds radical, but it is in line with many great economists.

Wall Street or Main street – money never sleeps

Today you do not need to be on Wall Street to make money. It is like web 2.0; you do not need to have a blue suit and white shirt and work for IBM like in the 1960s to make money. You can do it in your home, working online, for example. The world is becoming decentralized, and so is the transmission of information. You can have the edge over the greedy Wall Street bankers with information and knowledge. Stop thinking like an old school investor or businessman from 1929 or 2007.

There is unlimited amount of money you can make trading stock and being an owner of a process. It does not have to be like outlined in the Wall Street 2 the movie or this above PBS film on Wall Street 1929.  If you invest with your eyes open you can make money in stocks. You can avoid the pitfalls of most professional investors.