Trader’s Narrative

Justin Mamis isn’t that well known but he is the author of several trading books, of which “When to Sell” is far and away the best. His book was published in the 1970’s when he was writing The Professional Tape Reader. Yes, the same one that later Stan Weinstein took over. As you’d expect, the two have very similar perspectives on the stock market.

I was just thinking about Mamis’ book these past few days and trying to remember where I’ve put my old copy when I stumbled on Tischendorf’s post about it. Talk about synchronicity!

When you think about it, the ultimate decision is when to sell. I recall reading in the Market Wizards book series an interview that Schwager did with a trader who said that he had tested completely random entries and with his proprietary stop loss and trade management process, it had been shown to be profitable. Not as profitable as when the signal was triggered by one of his trading rules but still, profitable. But when you think about it, when to sell is really furthest from our minds.

Instead, we usually, painstakingly analyze and ponder when and where to enter a trade. This is a case where intuition isn’t doing you any favors. Anyway, Tischendorf quotes from the book:

Rule One of the professional trader is: When a stock doesn’t do what you expect it to do, sell it. No hesitating, no questions or doubts raised no conjectures of the way it should have turned out, or might still turn out, no dreams of how it will do what it was supposed to do‚ tomorrow. The pro never says, “I’ll watch it one more day”. He doesn’t phone an analyst who’s been following the company and ask, “What’s happening? Is there any news?” All too often, the delay in searching for the‚ “why?” is costly. The desire to be perfect is one of the prime bugaboos of the stock market, but it’s a compulsion that belongs on the psychiatrist’s couch, not on the exchange floor.

The whole book is really about tape reading. While technological advancements have made the “tape” an anachronism, the idea of watching the ebb and flow of the market is still at the heart of speculation. And that is why it is the one skill all successful traders have. It is an edge without which you can’t really expect to bank serious coin. This is the skill that Steve Cohen developed as a teenager by hanging around a local brokerage office watching prices scroll across the wall.

If you don’t have Justin Mamis’ book, When to Sell buy it, it will help you become a better trader. There are few trading books that stand the test of time like it.

And check out Tischendorf’s blog. He’s a trader from Germany who has many insightful posts.

Persevering readers will know of my admiration for Stan Weinstein and his classic book: Secrets for Profiting in Bull and Bear Markets

If you haven’t yet discovered this gem, don’t let the silly title fool you. Pick up a copy at Amazon - although, I just noticed that it is temporarily out of stock!

So either order it new and wait until it is available again or order one of the used copies and get it fast. But don’t leave this book out of your trading library. Whether novice or experienced, you’ll learn something because the principles outlined in Weinstein’s book are timeless. For other books that I recommend, check out the About section.

One of the major themes in the book is that at any point in time, any market is in one of four stages: basing, breakout or advance, topping, and decline. Each of these “stages” have specific characteristics which are rather simple to recognize.

No two market periods are alike since history never repeats. But sometimes, if you look closely, it may rhyme. So here’s a comparison of the past bear market to the current one, through the perspective of Stan Weinstein’s Stage Analysis.

Something which immediately jumps out at you, even at a cursory comparison, is the lack of powerful bear market rallies. During this bear market we just rolled over each time with no real effort by the bulls to put up a real fight.

During the last bear market, the S&P 500 Index rallied about 6 times (depending on how much you want to squint) to either approach or hit its 200 day moving average. For a few brief days in early 2002 it even traded above the ever descending long term moving average. In contrast, the most recent market action has pushed price below its long term moving average to an extent not seen since the 1929 crash.

Apart from that difference, the two bear markets do have a lot in common. To start, at the beginning of “Stage Three” the 200 day moving average flattens and the shorter, 50 day moving average crosses, falling below it (marked by “1″ on the charts).

If you want to nitpick, the long term moving average started to flatten out in early 2002 due to the massive rally from the depths of the abyss of the September 11th tragedy (marked by “a” on the charts). But the 50 day moving average remained well below it - it did not cross above it.

Throughout, the long term moving average slopes downward and holds its decline (marked by “2″ on chart) until late April 2003 when, finally, the long term moving average flattens and the 50 day moving average rises above it (marked by “3″ on the chart):
Continue reading ‘Comparison Of Bear Markets: Weinstein Stage Analysis’

While the active vs. indexing argument rages on in the investing world, it is a moot point. Everything is actively managed. The only difference is that some funds are more actively managed than others. (Sorry Bogle.)

Every single index out there was created by someone or by some committee and it is regularly updated and managed to keep pace with the changes in the real world.

That goes for the Standard & Poor’s 500 Index, the behemoth out there that has more money following it than any other index out there. The composition of the list of 500 stocks is presided over by the S&P Index Committee, a group of employees of McGraw-Hill Companies.

They follow a few guidelines:

• U.S. Company
• Market Capitalization: min. $4 billion
• Public Float at least 50%
• Adequate Liquidity and Reasonable Price.
• Sector Representation
• Company Type: operating, not CEF, REIT or BDC

But, in the end, these are just guidelines and the committee has full discretion to include any company and to exclude another, even if it technically meets all the criteria.

Every once in a while the committee faces a rare situation where a large portion of the S&P 500 Index does not meet one or more requirement they have outlined. Usually the simply ignore it and hope that it just goes away on its own.

In October 1987 there were 35 S&P 500 Index stocks that traded for less than $10 a share. In the aftermath of the September 11th terrorist attack, 59 S&P 500 Index companies traded for less than $10 a share. Right now we are going through a similar situation.

Currently there are about 101 S&P 500 Index stocks trading at sub $10 a share. Unbelievably, one S&P 500 component, E*Trade (ETFC), closed below $1 a share. And there are 36 stocks trading below $5 a share. These are levels at which stocks are called “penny stocks”. You can find a table of the constituents, ordered by share price here:
Continue reading ‘S&P 500 Index: Now More Poor, Less Standard’

Yes, today’s decline was yet again another Lowry’s 90-90 day and it took us perilously closer to the ledge. Or over the ledge, depending on which index you’re looking at and how thick you draw your support lines. Weinstein’s support level is still not breached, for whatever that’s worth. Is everything lost? I turned to an ancient way of looking at the health of a market.

You already know how to use bullish percent indices to time the stock market. Although they are usually shown in point and figure charts (those X’s and O’s), I prefer to look at a line chart because it moves in tandem with time and the market proxies like the NYSE index, Dow Jones and S&P 500.

But the original way that bullish percent charts were interpreted was to gauge where we were along a continuum of bull or bear market. The short version is that when the NYSE bullish percent index moves up above the 70% line and closed below it, the market is on notice. Similarly, when the NYSE bullish percent index moves lower than 30% and then breaks above it, there is an indication of underlying health, and a portent of a nascent bullish rally.

Looking at a very long term chart of the NYSE bullish percent index, it is easy to see the efficacy of this measure of market internal health:

Recently though, the NYSE bullish percent index has been breaking down through the 30% level not only often but to such a degree that it has fallen lower than it did after the Black Monday crash of 1987.

Here’s a chart zooming into the past two years to show more detail:

Each successive piercing of the 30% “maginot line” brings about a weaker and weaker counter rally from the market. Until in July, the market barely manages to plateau before falling again. So what’s up? Why is this once solid indicator start to sputter and fail so badly?

My hunch is that what changed over time was the inclusion of non-equity securities on the big board. Right now half of the securities traded on the NYSE are closed-end funds, ETFs, ADRs, municipal bond funds and other funny pieces of paper that do not represent fractional ownership of a public company as it used to when traders started pushing paper under the Buttonwood tree.

This is why Lowry Research service started to keep “operating company only” NYSE data. Speaking of Lowry’s, I went to a presentation by one of their analysts last night and will share the details with you tomorrow.

Stan Weinstein was the guest for Market Monitor on Friday’s Nightly Business Report. In his previous interview back in September 2007, Weinstein warned of a potential bear market if we penetrated 12,800 on the Dow. If you follow the link, you can see a long term chart showing the significance of that level.

Of course, we did break through that level and we are in a bear market. So what about now?

Weinstein thinks that we are going through a bottoming process but it isn’t finished yet. He is still bearish, long term, but thinks that we may have hit a low short term. If the market can close above 9,800 he expects a rally. If it closes below 7,800 he expects it go even lower:

Moving Averages
A few readers asked me about the difference between 150 and 200 day moving averages. Weinstein mentions in the interview that he uses the 50 and 200 day moving averages, with the first for short term trading. There really isn’t a magical number. A long term moving average should represent the long term trend. Since there are approximately 200 trading days in a year, it makes sense to follow the 200 day moving average. But anything close to that level is fine as long as you stick to it.

Basing Sectors
If you are familiar with the stage analysis that Weinstein applies, he thinks that “select regional banks”, airlines and a few healthcare stocks are in stage 1 or basing. That doesn’t make them automatic buys, yet. They have to finish basing and break above with a volume burst. The financial sector has gotten clobered but the regional banks are different than the investment banks like Goldman Sachs (GS) and JP Morgan (JPM).

Worldwide Bear Market
Stan also mentions that this is a global bear market with stock markets across the world being mauled. I would go beyond that and say this is beyond a bear market like the one we saw in 1970 because everything is under forced liquidation, gold, oil, commodities, bonds, REITs, etc.

Watch the whole video for more details. And for up to the minute links to videos and articles like this, watch news.tradersnarrative.com