Trader’s Narrative

Well, is it?

That’s what a lot of people are wondering (which has the built in assumption that this is a bear market rally and not the real thing). To get some perspective on this, I decided to look at a long term view of the Nasdaq Composite Bullish Percent Index.

If you’re unfamiliar with this type of index, it is created by looking at what percentage of the components of an index (in this case the Nasdaq Composite) are exhibiting a certain bullish pattern according to point and figure charting. To see how I use this as an indicator, check out: How to Time the Market with Bullish Percent Charts.

Here’s the long term chart of the Nasdaq Composite compared to its Bullish Percent Index:

By the way, I used the Nasdaq Composite because it is very broad with about 3000 components and it excludes a lot of the junk found in the NYSE (CEFs, convertible debentures, ETFs, preferred stocks, rights, warrants, etc.) which can skew the index, especially because of their sensitivity to interest rates.

The chart shows the tech bear market and the latest one which started in late 2007. Almost every single bear market rally top was flagged by the Bullish Percent Index (BPI) - indicated by the red down arrows. It also did a good job of finding exhaustion points during the good times - with one important exception.

The red box shows the span of time that the BPI went above 60% and stayed there. During this time, the normal relationship we otherwise see between the two charts broke down. The only argument I could think of to explain this, is that this time period was the start of a new (albeit short lived) bull market. All kinds of indicators, breadth readings and overbought metrics went into the red zone and stayed there as the stock market powered ahead - seemingly oblivious to them.

The other difference between this most recent bear market and the last is that the counter rallies we’ve seen this time around have been much less powerful than before. As you can see marked by the orange down arrows, they don’t even reach 50% BPI.

The latest BPI reached slightly higher than 62% - that the highest since early 2007 and before than, early 2004. Obviously, this latest run up is different from the previous ones. Going back to 1996 (not shown on the chart) it was rare for the Nasdaq Composite Bullish Percent Index to reach or exceed 50%. So this level is clearly significant.

So what we have to consider is, if this is just a run of the mill bear market rally, then it is over. But if it the real thing, similar to what we saw in 2003 (the red box) then the market will confound everyone and keep going higher.

According to the long term market direction guide known as the Coppock Curve, the Nasdaq is already on a buy signal (from last month). But since it tends to whipsaw much more than the Standard & Poor’s 500 Index (SPX), I’m waiting until it gives a signal. There are only 8 more trading days left in the month and if the S&P 500 can stay above 874 (3.74% lower from Tuesday’s close) then the Coppock Curve curls up.

Freebies & Giveaways
All the SkyGrid invitations are now gone! I warned you they would go fast. If you happened to miss the train, try your luck at the latest giveaway worth more than a $1000 US (courtesy of the Trader’s Business Plan). Best of all, even if you don’t win the grand prize, you don’t walk away empty handed!

I’ve been meaning to get to this but things have been hectic so it has had to wait for a quiet Sunday afternoon. Last month was the third month that I’ve raffled off a book to my readers. The previous ones were Tim Syke’s “American Hedge Fund” and “Hedge Fund Trading Secrets” by Robert Dorfman. Keeping the hedge fund theme, the latest book giveaway was about hedge fund due diligence.

In case you missed my original review, you can read it here: Hedge Fund Operational Due Diligence: Book Review & Giveaway

If you’re interested in Jason Scharfman’s book it is available at online and retail bookstores. It is not a general interest book, even within the area of investment and trading. But it is clearly top notch. So far there have been 6 Amazon reviews and they all give it 5 stars. The other online reviews, similar to mine, are also all positive. If you’re a hedge fund, thinking of starting one, or if you’re on the other side of the table, thinking of investing in one, you will save yourself countless hours of headache by picking up a copy and letting it guide you through the due diligence process.

In any case, I’ve contacted the lucky winner (you know who you are!) of the random draw and will be sending them their prize as soon as I hear back from them.

But I’m also going to giveaway a second copy to another reader. I know, I know, originally I said I was only giving away just one book… but why not? So I’ll be contacting the second winner (you know who you are!) and sending them their prize as well.

With that out of the way, I’m casting about for the next book. So if you’ve written a book and you’d like it to be reviewed and raffled off, drop me a line. Or if you have wanted to read a book on trading or investing and you think would be a good candidate, let me know in the comments.

Congratulations to Norman, the winner of my latest trading book giveaway!

Thank you to all who entered. I wish I could give each of you a prize as well. Since I can’t do that, with the permission of the publisher, I’m going to do an extra bonus draw for a second winner as well.

That way, two of my readers can enjoy Hedge Fund Trading Secrets Revealed” by Robert Dorfman.

One of the reasons that I enjoy writing this blog is the ability to be able to help others out there who are interested to learn more about trading and investing. These book reviews and giveaways are a great way to do that so look forward to more of them.

Keep watching because I already have two other books on deck and once I am finished reading and putting up a review for them, I’ll be doing a draw for them as well.

To keep the karma leveling up, all of the winners of the book giveaways will write their own reviews once they are done so you can get their perspectives as well.

If you have any suggestions for a book that you’d like to nominate as a candidate, by all means, drop me a comment below. I try to keep up to date on high quality books but with the amount that keeps getting written every year, it is difficult to not miss a few gems.

My last book giveaway was Tim Sykes book “An American Hedge Fund” so with this new book it seems we are continuing a “hedge fund” theme …

“Hedge Fund Trading Secrets Revealed” by Robert ‘the Hawk’ Dorfman.

Dorfman runs the SilverHawk Fund out of Costa Rica and before that used to work for Jim Mellancamp of Genie One Capital Management. I couldn’t find much on Mellancamp or Genie One but I suppose most hedge funds are fairly secretive.

The first few chapters of the book tell the story of how Dorfman came from humble roots in Cranston, Rhode Island, thanks to a fight in a restaurant was able to attend Brown University and from there, discovered Wall Street.

If you are new to trading or investing, the book contains a lot of basic to intermediate information that you’ll find useful. I don’t think there are many “secrets” revealed about hedge funds, other than they know more and have more resources than the average retail trader.

Still even someone who is experienced and relatively knowledgeable will be able to pick up a few things here and there. For example, Dorfman talks about Thompson Financial’s AutEx, an institutional liquidity pool I wasn’t familiar with.

As well, he outlines his basic strategy:

“…we enter trades based on these institutional trading firms’ actions as reported by Thomson Financial’s incredible global, pre-trade execution and communications network called AutEx, which provides us with an in-depth view of the moves being made by over 800 institutional traders…”

His basic thesis is that “the price simply will not make a sustained move without the power of institutional buying or selling”. Which is hard to argue with. He describes in some detail how a hypthetical order from an institutional trader will be pounced on by others and result in the price being pushed against the order.

Unfortunately, there is a chapter devoted to the “Universal Law of Attraction“. I’m more than skeptical about this New Age phenomena. I don’t think it has any validity but the good news is that in this book it is only a small part and can be easily ignored.

Most importantly, there is significant portions of the book devoted to capital allocation and risk management. He talks about maximum position allocation (MPA) and describes how to calculate it. As well he discusses scaled entry for an order (that is increasing size as the trade goes your way). On the whole, while important, it is fairly basic stuff. If you are curious about similar topics of risk management and capital allocation, check out the “Way of the Turtle” by Curtis Faith.

Dorfman’s book will be a disappointment if you naively believe its title. But if you dedicated to learning more about trading and especially about how large institutional traders operate, you’ll pick up some good information.

If you would like the chance to receive a copy of Robert Dorfman’s book for free, drop me a comment below. Make sure you write your email correctly (so I can contact you in case you win the random draw!).

If you would like to receive a free copy of Tim Syke’s book, An American Hedge Fund, leave a brief comment below (making sure you leave your correct email). I have TWO copies to send to two of my randomly chosen readers as a Christmas [slash] Hannukah [slash] New Year’s gift.

Timothy Sykes’ book An American Hedge Fund takes you through a conversational, breezy account of how he took $12,000 of Bar Mitzva money and traded it to $1 million. Although Tim peppers his book with specific trades, the book doesn’t have any charts. This is disappointing because it would have been so enriching. Maybe for the second printing

While I respect and admire Tim’s drive as a trader, I can’t help but think it was sheer luck that he didn’t completely blow up before he made serious money. Although the story takes place during the tech bubble of the late 1990’s, when turkeys flew like hawks, his complete disregard for risk is breathtaking.

The string of luck catches up to him when he sinks 33% of the capital under his management into Cygnus (now Accesso) a private company that later in the story goes public on the pink sheets. This is not only a continuation of his disregard for risk management, it is a colossal style drift, taking him from trading short term price patterns to long term investment into an illiquid holding.

I don’t recall every reading about any thought of capital allocation or money management. That is, measuring trades using R to standardize the risk that was taken to provide the resulting return.

To Prop or Not to Prop
After his initial success, while considering the options available to move him away from casual trading to a more serious undertaking, Tim decides against joining a proprietary trading firm because it “would only serve to increase [his] risk, not reduce it.”
Continue reading ‘An American Hedge Fund: Book Review & Giveaway’