Friday, January 7, 2011

1/8/11 Sophisticated Trap(per)

As investors and traders become more sophisticated, so must those entrusted with deterring them become better at designing and setting traps.

(a) Playing both ends. So the standard trap is to sell shares/run stops at market bottoms ahead of buying? The simplest variation is to run the play in reverse. Stack low volume rallies at market tops to lure ever larger crowds into 'the parlor.' Once set in place, the trap runs itself- early investors drunk on profits pull friends and colleagues down to Desolation Row.

(b) Different strokes for different folks. Traders are bullish on technology, but bearish on gold? Design the trap to simultaneously jack the NDQ and jam the XAU. No need to get too slick- traders accustomed to seeing both sectors move in unison will become trapped through a simple change-up.

27 comments:

  1. Well, I was just working on a lead post for TOF's big day tomorrow. So, let's hear you favorite weeding story. Preferable your own!

    We had a great wedding. It was at our house to save money. We hired a caterer for the food. A really great BBQ for everyone. All of the guests we wanted to share in our day were able to attend which made it all the more special. Everything went well until JB showed up drunk. Well, I almost wish we hadn't hired a video guy...

    http://www.youtube.com/watch?v=00fRau9GIBw

    ReplyDelete
  2. I don't know about 'traps'. It might seem like a trap, and I'm sure traders want to take profits and get in low on the next sector, but tech has been getting stronger for a while and the economy/employment/Euro has been playing havoc with the FX situation.

    Landry warned today about sector rotation. The indices are still fine in uptrends. They haven't broken down or even pushed the MA's offline, so I don't know if trap is the word.

    If you get in on pullbacks and then trade the trend, then a day like today is just a minor annoyance and you stick to your stops, just in case. So far we are looking for entries now.

    If you are trading in and out, it may look like a trap. If you trade trends it's an opportunity for do-overs on strong trending stocks.

    Some of my do-over list are over $5 stocks I bought at 3.95 and were previously $50 stocks. I'm looking forward long term. That's a hell of a return.

    I'm asking myself, does this feel like exuberance? I think traders are bullish, but exuberance is a bit strong. Every time we get a little tweak like today traders jump in and out and get short. All they do is add more to the eventual rally. That might be the real trap.

    ReplyDelete
  3. That JB is a pistol. Love it. I think this will illustrate why I married my wife.
    http://www.youtube.com/watch?v=ljA0adZuSTM&feature=related
    Bob

    ReplyDelete
  4. Big time lush. But we were ready for it :)

    ReplyDelete
  5. RB!!!! If only TOF could bee so lucky tomorrow night!

    ReplyDelete
  6. TOF- I'm sorry man. I know I promised to keep this quite, but I'm going to share the footage from you previously undisclosed FIRST wedding....

    http://www.youtube.com/watch?v=iDTl5AusQkM

    ReplyDelete
  7. AA - Oh, I'd forgotten AA earnings are scheduled for Monday...

    ReplyDelete
  8. CP- Maybe JB has the inside scope on AA?

    ReplyDelete
  9. Do you guys mean alcoholics anonymous? (AA)

    I was a dog convention in Ventura, CA and there was a 'gangbanger' wedding downstairs in the hotel (a Hilton) where someone was stabbed and the police were of course called.
    In FLA I suppose it would tend to be Cubans....
    Now THAT brings the reception to a screeching halt....

    ReplyDelete
  10. I wonder if Team evaluated his bride to be like he does a company.
    " She has a low PE with a large top line and a bottom line with lots of room for growth. Plus best of all she has a lot of cash on hand. I'm telling you this a long term hold."

    ReplyDelete
  11. I've mentioned before that I like to read the post close report by Patrick over at CC. The reason being, he is likely the best trader at CC.

    Tonight he explains precisely what is happening in the markets while succinctly channeling Landry and what I've been discussing lately:

    "I can’t help but wonder if all of us are becoming comfortably numb, convinced the mountain of funds being forced into the system will forever negate downside corrections, unwittingly setting the stage for a nasty sell off as we forgo prudent hedging techniques in a desperate attempt to up our performance.

    Those are the demons dancing around the heads of traders, but the rational logical ones will simply use stops on any upside plays-taking all the emotion out of the trade, freeing oneself to move on and hunt for the next best trade."

    Exactly Patrick.

    ReplyDelete
  12. Really Craig The longer we have a positive run the nastier the correction. I think it is healthy to have mini corrections. As far as stops i hope everyone has them and uses them. i will always have a mechanical stop. That is my insurance policy. I know I will be shaken out, but I think in the long run it will prevent a disaster. I was wondering if you were stopped out of your HDY position with that obvious stop run today. I am kicking myself for not entering when it rebroke $6.00. I watched an old Landry video yesterday at his site, I know he is a guru and made a lot of people a lot of money, but that BAM! stuff was quite irritating. WTF.
    RB

    ReplyDelete
  13. "Everything went well until JB showed up drunk. Well, I almost wish we hadn't hired a video guy..."

    Mark, that's what happens when you invite Russian guests to the wedding (the people in the video were speaking Russian) and give them too much vodka to drink! :) Actually, a drunk fight at a wedding is a good old Russian tradition -- a wedding will not be fun and memorable without it! And since everyone accepts rules of the game, there will be no hard feelings the next day. :)

    ReplyDelete
  14. HDY: No, my stops was at break even ($5.10) so I was able to add some of the first half I sold previously. It WAS a little irritating since I was kinda jazzed about it going from 5.10 to 6.85 in just a few days, but that's the beauty of Landry's looser stops.

    I get a kick out of the guy. I laughingly told my wife we would get a BAM on the video the other day when CAVM made a big run up.

    I think it's hilarious, but that might be because I associate it with making big bucks.

    I also like the fact that he's just a goofy regular guy, doesn't get all huffy and egotistical and gets a cranked up on mountain dew. Compared to BC he is way more helpful, available, open and friendly.
    So NOT a guru in that sense.

    The last couple of days he has been telling the service people to feel free to call or e-mail him and what to put in the subject box so he will see it and answer right away. Tonight he gave everyone his phone number on the webcast. So BAM is totally endearing to me, humorous even.

    ReplyDelete
  15. Check out the two recent articles by James Kostohryz:

    "Potential for Big Upside Economic Surprises for USA in 2011"
    http://www.minyanville.com/businessmarkets/articles/economy-us-economy-economic-predictions-us/1/3/2011/id/31944

    and

    "Rally Is Sustainable; Any Correction Should Be Shallow"
    http://www.minyanville.com/businessmarkets/articles/james-kostohryz-equity-market-rally-market/1/6/2011/id/32022?page=1

    Man, I need to read some David Rosenberg to stop my head from spinning!

    David Rosenberg recently wrote that the consensus view is always wrong, and so we won't get the 2.5-3% consensus growth in GDP. James Kostohryz agrees that the consensus is wrong, but he says the surprise will be GDP growth MUCH HIGHER than consensus! And you know what? James might be right -- we can't predict right now which way the consensus will be proven wrong.

    My original plan was to cover my shorts quickly during the "inevitable pullback" and go long until the end of QE2. But James is now saying that we WON'T get ANY noticeable correction until the end of QE2!

    What am I supposed to do now? If I close my shorts now, then correction will start the next day (I have a perfect track record of abandoning short positions right before major corrections). At the same time, if I hang onto my shorts, then the correction will really never come -- this has also been proven before. :(

    What do you guys make of these two articles?

    ReplyDelete
  16. I turn to some consolation from Rosenberg and here is what I read:

    At this point, we remind ourselves of Bob Farrell’s Rule Four: "Exponential rapidly rising or falling markets usually go further than you think." Well, while we are still not drinking the Kool Aid that the Fed has spiked in its punch bowl, only a fool would say that this overextended market can’t beven more extended in coming months.

    My head is spinning...

    ReplyDelete
  17. Finally, I found some sobering words as I was going through this week's Rosenberg's writings:

    ****
    I am hearing that the Fed is moving further away from entertaining the notion of a QE3 program in the second half of the year. Something the market will be grappling with in the second quarter, and I see that the second quarter may well offer up the best buying opportunity of the year since that is the quarter where the concern list will likely start to grow; lagged impact of China tightening shows through, big European refinancings, signs of no more QE, and the debt-ceiling issue hitting its peak.

    ReplyDelete
  18. And here is something even more interesting:

    *****



    The real kicker was the fact that personal income was revised up $46.3 billion in the second quarter. This was huge ― the Commerce Department found $46.3 billion for the consumer that it thought wasn’t there before. This made the difference between income being up at nearly a 6% annual rate that quarter and 3%. The newly found income carried some important spending momentum with it into the third quarter and this was really big in terms of influencing people’s perceptions of how the economy was performing. When double-dip risks were at their peak, it was when Q3 GDP was released initially and it showed a mere 1.6% annual growth rate, which was even weaker than the 1.7% print in Q2 (which was less than half the growth rate of Q1). Then Q3 GDP was revised up to 2% and then all the way to 2.6% and that is all she wrote as far as the double dip for 2010 was concerned. And it now looks like we are going to see something closer to 3.5% for Q4. So what happened was that consumers had more income than was thought previously and while (like the payroll tax cut for Q1) this is really just a LEVEL shift in earnings, there is an initial thrust to growth rates, at least for a few months. This is essentially the reason why, along with perhaps a moderate wealth effect from the stock market runup, the holiday shopping season surprised to the upside.

    This is a nice story. It explains why we were wrong on the Q3/Q4 double-dip scenario, but going forward, this income revision and its impact on spending can be considered yesterday’s story. As we said, there is the current payroll tax effect, but this will be contained to the first quarter and the one thing history teaches us is that tax cuts that are temporary in nature carry with them virtually no multiplier impact into the future. Look for Q2 of this year ― and likely Q3 as well ― to turn out to be as disappointing for the market, as was the case for these exact same quarters in 2010. In other words, look for a repeat except this time around we don’t have a Fed and a Congress that is going to pull another rabbit out of the hat during the summer and fall.

    Oh yes, we would be remiss if we did not mention the fact that this overbought equity market has already priced in this “bullish” first quarter scenario. What it hasn’t yet discounted are the hurdles that lie ahead in the second and third quarters of the year.

    ReplyDelete
  19. Now let's try to sum it all up. While it is hard to predict the economy, there is one thing we know for sure about the stock market: the majority of participants MUST get disappointed. Putting it another way: the consensus MUST be proven wrong. The consensus view right now is definitely bullish. So I don't think Bob Farrell's rule of exponentially rising markets going farther than we think actually applies here. The stock market has been rising linearly lately on the back of the steadily increasing bullishness, unlike the exponential explosions we see periodically in commodity markets, where a commodity keeps rising faster and faster to everyone's disbelief when perceptions of supply tightness appear in inelastic markets (such as oil). As such, it is highly improbable that the current rally will continue without any significant pullback (say more than 3% on S&P) for the next three months.

    Do you guys have other takeaways from the above articles by Kostohryz and Rosenberg?

    ReplyDelete
  20. David- Yes, my head is spinning after reading the articles. The market, could (and perhaps should) head a little higher to scare out any remaining bears, but my guess is the fall starts sooner rather than later. Somebody on the board asked the other day what could possibly cause the market to fall. Because of the global debt bubble, it is my belief that this is the riskiest period in history to be invested (long). The surprising thing is that NONE of this risk is reflected in sentiment, in hedge (P/C) readings, or in any of the fear indexes which currently have the lowest historical volatility in 30 years.(I posted an article earlier).

    For an indication of the proximity of a potential fall...

    1st chart on the page (self-explanatory)
    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3186525&cmd=show[s161053055]&disp=O

    7th chart down (VIX weekly)- Look at 15 level and possible "W" formation returning VIX to 50-80 level in 2011.
    http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3186525&cmd=show[s185608367]&disp=O

    From "The Global Debt Trap"

    "The Dangers Now Coming to a Head

    Nearly every advanced industrial nation on the planet is ensnared in the greatest debt trap of all time. The debt trap is not a far-off danger that we can worry about some other day. Nor is it merely a concern for armchair theorists.

    Quite the contrary, the debts are so large, so widespread, and so deeply entrenched around the world that virtually every policy decision by our leaders, every strategic move by investors, and every financial choice by billions of citizens is influenced, constrained, or driven by the need to compensate for, or the desire to escape from, the great trap that these debts have created."

    ReplyDelete
  21. (NewsCore) - Senate Majority Leader Harry Reid (D-Nev.) said Friday that the Tea Party movement will eventually “disappear” as soon as the economy gets better.

    Reid, who survived a tough Tea Party challenge from Republican Sharron Angle in November’s midterm elections, made the comments to NBC host David Gregory in an interview scheduled to be broadcast on “Meet The Press” Sunday.

    An excerpt of the interview was released Friday.

    “The Tea Party was born because of the economy. The economy is probably the worst it’s ever been, except for maybe the Great Depression,” Reid said when asked if he believed the movement would be a lasting force in American politics.

    “The Tea Party will disappear as soon as the economy gets better and the economy is getting better all the time.”

    ************

    What a turd.

    ReplyDelete
  22. "Do you guys have other takeaways from the above articles by Kostohryz and Rosenberg?"

    Don't listen to them. They are talking to INVESTORS or traders with ultra long term horizons. You are a trader with risk controls. Your FCX trade with the stops is well positioned imo. That is not to say it is a for sure winner, but you are limiting your risk. You say you have a target of 100( well with in reason on this stock) and your stops are at 118. So your risking $2.00 for a $15.00 gain. Is that worth the risk? Does not matter what those econ dudes think.
    Bob

    ReplyDelete
  23. RB- You and I would have a blast shooting the shit over a couple of beers! Too frickin funny man!

    ReplyDelete
  24. Just to be clear, my comment RB was to TOF's "evaluation" of his wife :)

    ReplyDelete
  25. Mark thanks. I just hope I don't cross the line. if i do everyone needs to tell me to stick it. Looking forward to that beer.

    ReplyDelete
  26. Craig on Landry: "I like the fact that he's just a goofy regular guy, doesn't get all huffy and egotistical and gets a cranked up on mountain dew. Compared to BC he is way more helpful, available, open and friendly.
    So NOT a guru in that sense.

    The last couple of days he has been telling the service people to feel free to call or e-mail him and what to put in the subject box so he will see it and answer right away. Tonight he gave everyone his phone number on the webcast. So BAM is totally endearing to me, humorous even."

    That really is impressive. I wonder how many subs he has. In addition i like the stocks he got you into. Sort of out of the news under the radar yet with high volume. Does he have a screening methodology or does he just look at thousands of charts? Well, what the hell. Why don't you call him up and ask him for me. :)
    Bob

    ReplyDelete