Position Sizing Trials

I've been experimenting off and on with different position sizing methods for years now. One of those things that are always on the back burner, so to speak.

And since sizing techniques by and large are not giving away an edge...I figured I'd write a bit about techniques I use. Especially since John Tait over at Fickle Trader wrote a nice little post about small positions and their effect on trading. Read the post and comments here.

I use a baseline of 10% for my weekly system testing and sometimes will drop down to 5% if the number of trades generated become too large. That 10% is what I call my Equity Risk (ER). Now, that's just for a system testing baseline. What I typically use for my actual Equity Risk (ER) in live trading is much lower. Usually around 2% of equity risked.

I then apply a Stock Risk (SR) of some percentage point or range of price of the stock I'm trading. This Stock Risk can actually be quite high at times...up to 17% on some positions or systems in fact. Which is better here? Range or percentage? Ah, depends on the system traded. I'll sometimes even use a combination where the percentage acts as a maximum stock risk and then adjust downard for the volatility of the stock.

Now, from here I can go real simple and just use the standard formula most people use: trunc(ER / SR). For example, if my total equity is $50,000, I'm willing to risk 2% of equity, current stock price is $25.00/share, and I'm using a percentage stop of 10% then...
ER = $50,000 * 0.02 = $1,000
SR = $25.00 * 0.10 = $2.5
Number of shares = trunc($1000 / $2.5) = 400 shares
Dollar Amount = num shares * share price = 400 shares * $25 = $10,000
If cash on hand is less than this amount then I will just take the cash on hand and divide it by the price of stock. Let's say my cash on hand was only $5,000 then I would buy: $5,000 / $25 = 200 shares of stock. Simple enough.

Now, to get a little more complicated we can go with adjusting the size of the shares purchased by the volatility of the stock. Take the same logic above but now we calculate the current range of the stock and compare it against the historical range.

I use various methods to calculate the range of a stock. Sometimes just taking the high minus the low of the past x days and divide by the historical max. Another way is to use the average true range. Regardless of the method, the point is to reduce size when stock is volatile and increase size when quiet.

Here's one of the many formulas I use:
Current Range (CR) = 10 day high - 10 day low
Maximum Range (MR) = highest value of the (10 day high - 10 day low)
Shares = trunc((1 - (CR / MR)) * ER) / SR)

Example:
Equity Risk (ER) = $50,000 * 0.02 = $1,000
Stock Risk (SR) = $25.00 * 0.10 = $2.5
Current Range (CR) = $30.00 (10day high) - $20.00 (10day low) = $10.00
Maximum Range (MR) = $60 back a few years ago.
Shares = (1 - ($10 / $60)) * $1,000) / $2.5 = trunc(336) = 330 shares
Dollar Amount = 330 shares * $25 = $8,250

Now, what's the advantage of using volatility to adjust your positions? Well, for one, it does help in evaluating systems from one time period to another. But, that's a whole nother story. The key for me is it usually smooths out my equity curve. In other words, reduces drawdowns which can lead to an increase in totals profits for the system. Just depends on how the volatility is used and the nature of your system. And for how aggressive you want to get.

There are others ways to adjust your positions that involve the overall market volatility. And if you want to get real fancy you can play with your equity curve. But, it's late and I'm sure you're bored to tears already.

For those who are interested, Stephen Vita posted a few weeks ago the position sizing he uses. Check it out.

Good Night,

MT

One of the Greatest Threads in History

Just a quick post. Now, that I'm able to read a bit on the web I explored some threads on the EliteTrader forum. Came across possibly one of the greatest threads I've ever read. Anyone in the trading system development world should read this thread....each and every post. I'm just in awe that something like this has been posted and as you will soon see was closed forever due to the amazing amount of profitable information given by one acrary.

Maybe I have been too quick in my judgement on media/bloggers/etc being relevant. Or possibly in order to find great posts such as acrary's...you have to know what you're looking for. Hmmm....

Check it out: Here!

MT

Self-Exile is Over

Well, the self-exile is over. I can now read/watch media/bloggers/tv etc. in regard to the markets. And as I promised, I will now read/watch with an entirely different mindset.

Currently, my time has been spent testing new strategies and adjusting old ones. I'm also in need of some help. If anyone out there knows of a broker that offers trade triggers that are not tied to your cash balance...please let me know. Ameritrade Apex currently offers this and their max offered is 40 triggers. I don't believe this will be enough and plus their commissions have always been a bit high especially when you up your trading frequencies.

Interactive Brokers does not offer this and that really sucks. Cause that's the brokerage I was wanting to use. I have an email out to MB Trading but waiting to hear back. Also, looks like CyberTrader might offer such a service but not sure what their max is. Waiting on an email back from them as well.

Funny thing about the self-exile from financial media. It reminded me of my return to the Days of Our Lives soap opera. Back in college, one of my roommates was hooked on this soap opera. I mean so hooked that he would cut classes just to catch this show. I can still hear the immortal words of "STEPHANO!!!!!". Anyway, that was a long time ago and thank goodness I haven't watched that show since college. But, back a few years ago, I caught the show and watched a few mintues of it just for kicks. And you know what? It didn't even skip a beat. It was like I hadn't missed a thing. Everybody was still talking about the same old crap. And that's what I felt like on my return to the media. I guess the more things change the more they stay the same.

If you can do it and I mean really do it...you will be amazed at what avoiding the financial media will do for you. Cutting the financial soap opera ties could just change your life. :)

Later Trades,

MT

Be Water My Friend...

"If you want to understand the truth in martial arts, to see any opponent clearly, you must throw away the notion of styles or schools, prejudices, likes and dislikes, and so forth. Then, your mind will cease all conflict and come to rest. In this silence, you will see totally and freshly."

"If any style teaches you a method of fighting, then you might be able to fight according to the limit of that method, but that is not fighting."


Any idea as to the origin of these quotes? None other than the great Bruce Lee. I find these quotes most useful in my approach to understanding the markets. And I'm using these quotes to respond to a recent comment from my post that asks the question, "Are Bloggers Relevant?"

The readers responds, "As long as you can articulate any useful observation on the area of interest there is relevance. It may not be relevant to some -- only the ones who want to learn more."

I agree with the responders point but my true question lies in are we indeed sharing useful observations in regard to the market. More importantly are we enabling our readers with the insights needed to truly make money from the market? Or are we just frothing at the mouth espousing generalized concepts and ideas with no true tests or experiences backing them up?

Again I will say, it's a great question. And I'm afraid of the answer. You see, people get blinded by rules, methodologies, and logic. There are many things in this world that make perfect sense. But, when tested against real data are found wanting. Why is this so? I believe its due to the ever changing nature of the markets. It's a game. And being a game...the players are constantly evolving their strategies. Much like the differences you see in the first episode of Survivor versus the Survivor All-Stars.

They played the game for the first time with one set of rules (to be honest they had no rules)...and then learned and revised and when the time came around to play again...the game was different. Reminds me of the Ultimate Fighting Championship. A real walk-forward test if you will.

I can still remember watching the first UFC. I was so excited because I would finally get to see all these different martial arts forms compete against each other in a real fight. Nothing scripted...nothing expected...and the outcome completely unexpected. It must have been humbling to so many practicioners of the traditional arts. I watched as Karate-Do, Tae Kwon Do, and yes even Jeet Kun Do fighters get taken down hard and fast. In the end it was an opponent so small and seemingly harmless that put the fear of God into his opponents and won the championship hands-down. This fighter, Royce Gracie, excelled in ground fighting...something almost all of the traditional martial arts avoid in their practice. And soon ground fighting took the world by storm and everyone was doing it. Several of the great fighters incorporated ground fighting into their practice. The UFC evolved and the game changed because the fighters changed.

That's what happens with the market. Investing styles are much like those traditional martial arts. They look good and sound good on paper and in a controlled setting. But, out in the real world...they just don't cut it. Because somebody always has some edge to exploit the weakness of the players. Once this weakness is shown for the world to see much like Gracie showing the world the arts of ground fighting...the fight changes.

I think this ever evolving nature of the fight is what Bruce Lee was after in his quest to develop the ultimate fighting art. All the traditional disciplines failed him when tested in actual fighting conditions against worthy opponents. So, he developed Jeet Kun Do...one of the first modern form of mixed martial arts. The basic JKD theory is to do whatever is necessary to defend yourself. Break down the limiting factors in the traditional styles and use only those elements that could be found in a fight. Hence the quote by Lee, "The fancy mess solidifies and conditions that which was once fluid, and when you look at it realistically, it is nothing but blind devotion to the systematic uselessness of practicing routines or stunts that lead nowhere."

But, back to offering value. If we do indeed offer value to our readers...does that value instantly become worthless as the opportunity is showcased and known by the public to exploit? Much like Gary B. Smith has found in his original GBS Breakout Method? Or do we hold back some of the vital pieces to the puzzle from our readers much like the following story illustrates...

Bruce did not even show all of his students every way that he himself trained, or present all skills that he himself developed or advocated. Besides the reason of every person having their own "way", there is the following:

This is an excerpt from a letter from James W. DeMile to the editor and staff of Inside Kung Fu, and Hawkins Cheung. The latter who had a series of articles published on Bruce and JKD, to which resulted in the following reply.

"What Sifu Cheung did not feel when he touched hands with Bruce's second- and third-generation students is some key elements that Bruce left out in his later teaching. Bruce made a statement to me that made everything clear as to why he changed certain aspects of his teaching. Jessie Glover, Bruce's first student and probably the best fighter in our group, and I were visiting Bruce when he was teaching a Jun Fan class in a Chinatown basement (Oakland). We noted that Bruce was teaching some things that seemed incomplete. We asked Bruce about this and he said, "Why should I teach someone to beat me?" It was true. Why should he spend all his time developing his personal style and then give it away to someone else who might one day challenge him."

Another example of this phenom is Warren Buffett. So, many investors have tried to emulate his investing style...when in actuality...his investment style is a farce to the general public. How he really generates his billions does not resemble anything close to what he espouses to the investing public.

So, what do we do? Continue to listen and follow the traditional investing arts? Or forge ahead and create our own JKD? Discard anything that does not work in the real world of the market and keep only those things that do. Follow the philosophy of Lee's in response to a question of "What would you do if a skillful wrestler pinned you to the floor? Lee replied, "I'd bite you, of course." May not be pretty...might not fit all the teachings the great masters have given you...but works nonetheless.

Creating our own JKD would mean giving up many of the lessons and teachings that we investors have spent many years learning. Throwing away that 200 day moving average, breakout to new highs, low PE's, overbought, oversold, cut losses short and let your profits run. And only add to your style what works after they are thoroughly tested in the only arena that matters...the true fight...the market.

This would also involve reading media differently. Instead of reading bloggers and the financial media to learn principles and rules to follow...we'd cast a skeptical eye...always looking for the latest weakness to test. Watching and waiting for popular techniques to catch on and giving us opportunities to take the other side. Observing, Testing, and Revising all in the hopes of adding another piece to our arsenal of fighting styles.

That is my quest anyway.

"Empty your mind, be formless. Shapeless, like water. If you put water into a cup, it becomes the cup. You put water into a bottle and it becomes the bottle. You put it in a teapot it becomes the teapot. Now, water can flow or it can crash. Be water my friend." -- Bruce Lee

Later Trades,

MT

A Great Dog and Price Slopes

My dad called tonight with some sad news. Seems our family dog, Roxie, has developed a very serious tumor in her stomach area and it's preventing her from eating, moving, living to tell the truth. Not sure how many readers out there have had to deal with aging pets and the toughest of decisions when it comes to their life and health. But, I'm afraid that's what my dad will have to debate over the next few days.

Roxie is a Chesepeake Bay Retriever and her temperament and character are Chesepeake to the core. Extremely hard-headed, loyal, smart, and most of all loving. I can still remember when we picked Roxie up from her litter for the first time. It was my first year of marriage and my wife and I were still living in College Station and I was hacking away at my final year at A&M. She was a fun pup and gave my mom and dad quite a delight over the years. My family has had many dogs including labs, goldens, boxers, heelers, etc. But, for some reason Chesepeakes just take the cake. Having a Chesepeake is like owning a dog for the first time all over again. Because they do some many things just bassakwards. And they're BIG. Big enough to truly help when you're clearing timber. Picking up big logs and carrying them around like little sticks to the far woods. Funny.

Anyway, back to the market. While on the phone my dad mentioned I haven't written much in the blog. He's right. I haven't had a whole lot to say. Most of my energy has been focused on studying the market and I haven't lifted my head up to do much else. Sorry about that.

I've been bound and determined to come up with a general market trend detector. Basically, an indicator that would answer the following questions: 1) Are we in an uptrend? 2) If so, are we in the beginning stage, middle, or topping? 3) Are we instead in a downtrend? 4) If so, are we in the beginning stage, middle, or bottomming? 5) Or are we stuck in congestion?

I agree it's complicated. But I'm breaking the development into little steps and attempting them one by one. As Charles Atlas says, "Step by step and the thing is done."

The first step I'm tackling is answering the question "#1 - Are we in an uptrend?" I've been working on this step for about 2 weeks now and tonight I believe I'm close to the answer. Surprisingly, there was a fairly simple solution. It involves the slope of the price average. It seems the slope of the average works much like price volatility in that it being a leading indicator.

If the current slope is positive then the future slope is likely positive. Sounds simple doesn't it? Anyway, by just testing this indicator alone it turns out to be a pretty good system. But, more development to come. My next step will be tackling question #2 - Are we in the beginning, middle, or topping process of the uptrend.

Later Trades,

MT

Bloggers Relevant?

Finished my computer project. The computer build went smooth as glass. Had a slight conflict problem after the first set of tests. But, the problem was quickly solved. Overall, I'm extremely pleased with the new computer. And the first test of my weekly system simulations were amazing. Took a job that ran over 6 hours down to 1 hour. Not too shabby. If I had to do it over again...I would probably go with a stronger AMD cpu. That's just because the rest of the system is so high-performance. And I didn't take that into consideration with my cpu considerations. But, hopefully due to purchasing the 939 board...I can pick up a dual-core sometime in 2006 after prices drop somewhat.

Portfolio updates...

My Dow trade is still under water. No fun there. But, my Nasdaq system trade is doing wonderfully. I knew the trading system would kick my tail. :-)

As far as the oil service stocks...I'm taking it on the chin. And almost sold them all on Monday. But, if you take a look at the price declines from their recent highs...you can see their recent downward move is extreme and we should get some upturn soon. But, if not...asta la vista to those babies! And if we do get an upturn, I'll look to liquidate close to break-even on those trades.

What's next? Well, the media-avoidance experiment is still on-going. Has it been hard to avoid all financial media? You bet. What has my performance been like since the experiment? I hate to say it...but much better than when I followed everything. Will I make this experiment a habit? I find the following quote most appropriate...

"My views on markets always seem to be completely against the weight of the best academic research and the most astute political commentators. Invariably, I find these learned commentators know infinitely more about the subject at hand than I do. I find their views compelling but, invariably, a ticket to the poor-house. That's why I tuned out of all media except the National Enquirer..." -- Victor Niederhoffer in The Education of A Speculator

I think not only do we typically fall prey to someone else's argument...but find ourselves lodging a stand against the person stating the argument as well. Or we take the other side and move like sheep in our desire to belong with others of our own viewpoint. All this clouds the mind and takes our eyes off the ball.

I have found from this experiment that my time is now focused on studying the market and its behavior versus listening and reading to what others pontificate. And really, isn't that the most important job of all...studying the market? Rolling up our sleeves and getting our hands dirty by using our own brain to decide what the market is doing versus synthesizing gobs of information thrown at us from pundits and prognosticators alike?

What does that say about us bloggers? Are we relevant? Are we truly helping investors out there? Or are we just giving our readers something to do? Or more importantly...giving ourselves something to do? Great question.

Later Trades,

MT

The Perfect Computer

Here's some more info on the computer I'm building. Please note, the computer parts have just been ordered. I have not received all the parts and thus will not begin building the computer until all components are received. I expect to start in the next week or so. Now here are the parts I selected and the reasons why...

AMD Athlon 64 3000+ 512K 90nm (939) CPU

I decided to go with the AMD chipset mainly due to the upgrade path the 939 chipset provides. Most of the applications I currently use will not take advantage of the 64-bit performance. But, when spending the kind of money I'm spending on this computer I do want the widest upgrade path available. Plus, my Wealth-lab software does not take advantage of Intel's Hyperthreading but does take advantage of AMD's memory controller being built-on to the board. Also, if you're going to choose AMD...might as well go with the hottest chipset which is the 939. That's where everything is going.

MSI K8N Neo4 Platinum SLI Motherboard

It really was a toss up between this board and an ASUS A8N-SLI Deluxe nForce4. And to be honest, I went with the MSI because it was available. Currently, most of the online stores were out of the ASUS boards. No doubt, there seemed to be a feeling out there in the building community that MSI is the better board. And the more reliable. But, from what I could tell...you really couldn't go wrong with either. Like I said in the previous post...I don't give a rat's a*s about SLI...but if you want the latest and greatest bells & whistles you've got to go with the SLI boards. Especially since I will utilize the built-in RAID controllers.

2 GB (2pcs 1GB) DDR (400) PC-3200 Corsair (TWINX2048-3200PT)

There's no doubt that the most important purchase for my system was memory. Because my applications use lots of it. I spend more time waiting for simulations to run mainly due to memory and hard-drive bottlenecks in the current system. So, I decided to go with 2 GB's and chose memory designed for large memory arrays. Hoping this will improve the speed and more importantly allow me to work with larger data sets in my trading simulations.

Western Digital Caviar RE WD 1600SD 160GB 7200 RPM Serial ATA150 Hard Drive

I chose this hard-drive mainly because of Western Digital's reputation and also because the RE version of this drive means it's built for high duty cycle environments. I almost chose the 10,000 RPM drive but decided against mainly due to some reliability issues I have read about. I'll probably purchase another one of these RE drives and RAID 0 them. And then I hope by that time the reliability issues of the 10,000 RPM drives will be worked out and I'll purchase one of those for my system drive. Then I'll have my applications running on the 10,000 RPM drive and store my data on the RAID 0. That should be FAST!!!!! Could it be overkill for what I'm doing? Maybe...but who cares.

XFX GeForce 6600 GT 128 MB DDR3/PCI-E/TV-OUT/DVI

Okay, okay, this graphics card is way to much muscle for my needs. But, since I spend large quantities of time sitting in front of the computer I wanted dual-DVI hookups for two LCD monitors. And truth be told, this was the cheapest dual-DVI graphics card I could find.

Antec Performance TX1088AMG SOHO File Server 480W Power Supply

I went with this case for two reasons. 1) The power supply was included and its one heck of a power supply. The True Power II that is built to handle SATA and PCI-E. 2) The case has capacity for expansion and fans galore. From the reviews the case has good airflow to keep things cool during those high power all-night simulation runs.

Dell UltraSharp 1905FP 19-inch Flat Panel Monitor

I went with this monitor mainly because its the one everyone has at my dayjob. So, I knew it performed well. Plus, Dell was having a 40% off sale and so I couldn't refuse. If I wouldn't have chosen this bad boy I probably would have gone with the Acer AL1912B 19" 16ms LCD Monitor. Don't have any experience with this monitor but the reviews were pretty good.

Lite-On SOHW-1673 16X8X16-DVD-RW/48X24X48-CD-RW Black
Didn't want to spend too much on the CD/DVD burner...and this received some great reviews from the builder community. Nuff said.

NEC FD1231H-302 Black 1.44MB

Floppy drive mainly to install SATA RAID.

Best Data 56FW-92 56kbps Modem
Well, gotta have a phone modem for backup purposes on your Internet Connection and this modem by Best Data fits the bill. If your Internet provider supports v.92 standards you should connect and download faster. Whether this is the case...I cannot comment...since I haven't tested it out yet.

That's pretty much my purchases. I did pick up a few more fans for my case but overall that was it. I'll use my current keyboard and mouse and install Windows XP Pro. Just a few more words about computer parts shopping. If you're really interested in going this route check out the product reviews over at NewEgg.com. Then after you decide on your components...search for the best price between MonarchComputers.com, ChiefValue.com, and of course NewEgg.com. And don't forget to include shipping costs in your comparison.

I'll post a follow-up on this project once I get the system built, tested, and run a few simulations. Wish me luck!

Later Trades,

MT

Market Experiment

In the process of building a new computer for my trading platform. And let me tell ya, it will be sweet. It has taken me about a week to figure out all the components I wanted. Decided to go with an AMD 64 platform using the 939 socket infrastructure. Chose the new SLI type boards. Not so much for the SLI but for all the built-in RAID features that I will soon take advantage of. Also loading 2 GB of dual-channel memory from Corsair. Chose memory designed for large memory array applications such as my Wealth-Lab software simulations.

My next post will be a breakdown of all the hardware purchased for the system and I'll share with ya'll the places I purchased the components. And give reasons for choosing what I did.

And for those interested...I'm still long the market. I did take advantage of the new price highs in land drillers early last week and sold. Mostly just because I figured earnings would be about as good as they could get for the next few quarters. The subsequent quarters most likely will begin seeing capital expenditures eating into some of their recent blow-out profits.

I'm still long a few oil service plays. Mostly because they haven't done anything and are typically late to the stock market party. Also, their strong season is the summer. So, I'll hold until I see new highs or until I get stopped out. Or if they don't respond well to the summer season like I expect.

The rest of my money is in the S&P 500, Nasdaq, and the Dow. And lots of it. I just hope this bucking bronco keeps bucking and doesn't turn up dead on me. Ha!

And lastly, I'll share with you a recent experiment I've been carrying out. I have cut-off all market related news and commentary. The Fox morning Stock Market shows are gone. My daily blog readings...gone. Investors Business Daily, Wall Street Journal, newspapers from around the world? Gone. Yahoo Finance? Gone. The only thing I'm allowed to see are my stock charts. I cannot even follow world events such as economic and political news. Since these can and will affect my trading perspective.

I bet you're asking, how does it feel? Oh man, it's rough. Finally in the second week of the experiment and I'm beginning to see the power behind being cut off from the rest of the world. I guess Darvis was on to something. Anyway, I expect to carry out the experiment til at least the end of May. Based on the results I may continue this path. To be honest, it does focus you. Forces you to see the market for what it is instead of what everyone else is saying it is. For a contrarian like me who is always ready to take the other side of someone's opinion...this might actually be the way to go.

I'll keep you posted.

Later Trades,

MT

Keep It Simple Stupid!

Listen to the what the market is saying about others, not what others are saying about the market. - Richard Wyckoff

Sorry everyone for the lateness in posting. Some big things have been going on here at the TaylorTree. One, my 34th birthday was this weekend and my wife and daughter gave me a wonderful birthday. Just wonderful.

Secondly, some real interesting and a bit troubling news came this weekend. I have briefly mentioned my recent evolution in systems trading and promised I would share. So, here's the deal...

After you develop and trade a few systems, pop your cherry so to speak, you then begin to experience the battle to keep up with the market. You think developing more systems will do the trick but in some ways only worsens the problem. Why? Because many of the systems you trade share similar characteristics and begin to overlap with each other. That leaves a whole world out there in the market that you can't trade or have yet to capture in system logic.

For some system traders that is okay. They did not come from trading backgrounds. Their love is in finding logic to the market and exploiting it via their systems. Then you have rascals like myself that evolved from daytrading into system trading. It's very very hard to turn off the trader in me and sit back and let my systems do the work. Luckily, I have fought the battle and won for the past 4 years. But, these past few months have been extremely hard.

My systems continue to do well (some have had their problems like the Penny Weekly system) but for the most part they have performed very well. In fact, I've even had a revelation or two with the Penny Weekly system and some of my older private systems that have made them even better than ever. But, as I mentioned above, the trader in me yearns to trade.

So, I've embarked on a journey recently in my trading. Instead of using the sheer audacity of intuition/gut to trade the market like my President Election fiasco...I have decided to combine my intution/gut, analysis, and programming experience together and you have followed the transformation in the recent blog postings. I have to admit, it sounded great! Heck, I go back and read the posts and I'm like, man...that's good. You're a smart cookie. And you do not even know the half of it. The amount of data crunching, chart analysis, correllation analysis, historical studies, etc. performed was mind boggling. All to hit the big trade. And when it all fell into place in my Moment of Clarity...I felt good. Relieved! I knew I hit the mark and just had to take action and I did. After that...wait.

Waiting is what I've been doing. No doubt the market has been like a bucking bronco ever since I initiated my position. Well, let's be honest...a dying horse is more like it. But, I've been holding strong...proud of the fact I'm trading a portion of the market that I have yet to capture in 100% system logic. A bit of my gut...a bit of my mind...is in this trade. Something to be really proud of. And then low and behold what happens this past weekend?

A system trigger to go long the Nasdaq! Can you believe it? All that work, struggle, keeping up with everything and anything. Using every last ounce of myself and one of my systems not only picks up the trade but actually enters at a much much better price. And you wanna know the most frustrating part? This system truly follows the KISS dogma...

Keep It Simple Stupid. Let me say that again so I won't forget. Keep It Simple Stupid!

Yes, it's true. I'm not afraid to admit it. A very simple system that I created almost 3 years ago most likely in a few days time has beat me. So, after a defeat of this magnitude, what did I do?

I quietly took the Nasdaq trade with my tail between my legs. Yes, I'm massively long the market. Both in the Dow and now the Nasdaq. And I have no doubt the Nasdaq system trade will indeed perform better than my Dow trade. Heck, it already has.

Just wanted to give you the spill. Let you know what's going on. And let you know that even more changes are brewing down at the TaylorTree. I'll share more with you in coming posts.

Later Trades,

MT

If it feels good, don't do it.

"Dennis used to say, somewhat fecetiously, "If it feels good, don't do it." In fact, one rule we taught the Turtles was: When all the criteria are in balance, do the thing you least want to do. You have to decide early on whether you're playing for the fun or for the success." -- William Eckhardt

Maybe I was right after all about the oil plays hitting a soft spot. This is good. Means we still have more room to go with these guys. Unless of course our economy falls off a cliff. In the mean time, I'm feeling the pain, baby.

The Dow call? Oh, yes, I'm feeling the pain with that one as well. Hurting bad. So, with that hurt I'm going to go out on a limb even more. Tomorrow we rally. The Dow will experience a move up of 1% or more. Next week? A +2% up move.

What crystal ball am I looking at? The 70's correllation. And according to my studies the Dow rallies from here. If I'm wrong...then I'm afraid I'll have to look into liquidating my positions. I still have a little leg room on the downside...but not much. If the Dow moves down more than 2% from here...I'm out. Then papa will have to find a brand new bag. Ha!

Everyone have a great weekend!

MT

Dow Teaser

Wanted to post a link to a chart I've created comparing the 1970's on the Dow versus our current timeframe. So, please check it out here. I'll post my explanations later this week in another post.

Please note, the chart is a very rough comparison. Let me say that again...a very rough comparison. :-)

Oh, and pay special attention to how the Dow flirted with the 1,000 level back in the late 60's and 70's and how we are flirting with the 11,000 level now.

Later Trades,

MT

Echo Bubbles?

I have a great little treat for everyone coming this week. I have been performing further studies on the 1969 - 1975 market versus the current market we are in. I'll post a great chart possibly Monday of my research.

To give you a brief hint of what my study is pointing to...I'll leave you with this: We should see an explosive move occurring within the next few weeks. In fact, my bet is on this week or the very next week of this move occurring.

Also, someone posted an anonymous comment on the A Moment of Clarity post. I wanted to thank that person for pointing out the errors in my article. I was blending the business cycle dates and stock market cycle dates together. The person also made a great comment in regard to echo bubbles. And provided some great examples. So, thank you for your comments!

The first time I ever heard the echo bubble term was back in the early 90's. The news was all a buzz in regard to Japan and how several economists believed Japan was experiencing an echo bubble. I was just a young pup back then so girls were my focus instead of the market ..thus I have no idea why I remember that discussion...but I did. In fact, I haven't heard that term written or spoken since...until the anonymous poster brought the term back to my attention.

So, are we in an echo bubble? I believe so. Stay tuned for the chart I'll post this week to explain why I believe we're in an echo bubble.

Later Trades,

MT

Brief Update

Between a sick daughter, taxes, and daylight savings time...I haven't had time to write a post this week.

Just wanted to share a few thoughts on the markets. In my previous post, I discussed my bet on oil/gas stocks being soft and going long the Dow. Funny how oil/gas stocks surged and the Dow dropped even further. But, that's what the market does...makes it tough on ya.

This week will prove to be a key week in my Dow trade. I have placed a line in the sand and if the market doesn't live up to my plan...I'll have to adjust the plan. Meaning, by my plan the Dow should begin a turn and reverse very soon. In fact, if I do not see the Dow begin an advance this week...I'll get worried. Not until then.

In fact, based on the data I'm seeing...oil/gas stocks are where my worries are. I wanted...no I needed to see a continued soft spot for these stocks. The Goldman Sachs call....all that changed. I'm seeing new equity highs due to that call. Something I didn't think would come until the first quarter numbers begin to come out. If we continue to see strength in these stocks heading into earnings...the earnings announcements may prove to be an intermediate top in this sector. And I really hate to say that considering the long-term fundamentals of the sector. So, watch out...if you're not in this sector...it may pay to wait several months before stepping a toe in.

Pay attention out there. Things could get interesting.

Later Trades,

MT

A Moment of Clarity

Just a brief update on what's been going on in my trading mind. I've been spending lots of time digging through websites, newspapers, old magazines, data tables from obscure economic sites, and books...books....books. Trying to wrap my mind around just where we are in the market cycle. But, I've only shared with you, my reader, the information I have found. Information that I believe is important in meandering through this confusing market. I have failed to share with you my true insights as to what this information means to me as a trader. What I'm going to do with this information. Truth be told, I couldn't share my insights because I was still processing the information through this slow brain of mine.

But, today, all that changed. Someone asked me after reviewing the business cycle chart posted on Sunday and Monday what I thought this meant for the market going forward. That was a great question and maybe because someone else asked me instead of myself...I was actually able to answer. Something I have not been able to do for about a month of processing. After answering the question...I received a moment of clarity. You know, when everything you have been trying to put together just clicks. So, I wanted to share my answer with you.

Part 1 of the reply to the question:

Thanks for the reply. Take a peek at another article I wrote, Canary in a Coal Mine. In the article, I'm attempting to paint the picture that we're in a boat similar to the 1970's. In particular I feel we're very similar to the 1973 - 1974 time frame. If you notice on the business cycle chart the contraction that followed the 1973 expansion lost approximately -9.33% in the Dow. I could see us losing about that much this time.

In fact, take a strong look at the business cycle chart. Take notice of just the 1969 peak through the 1973 peak. The 2001 peak through the current 2005 expansion is almost mirror image. What also has struck me lately is the similarity in the way stocks performed during those time frames. If you remember the late 1960's was the time of growth stocks. I believe small caps did very well (although I have yet to find performance statistics to support this). Then tough times and all that was left was the Nifty Fifties in the early 70's that then proceeded to finally kowtow to the bear in the 73 - 74 bear market.

Check out the Nasdaq composite and S&P 500 monthly charts and notice the strong sell-offs from the 2000 high. The Dow's plunge was relatively mild during the bear . In fact, during this recent expansion we almost hit new all-time highs in the Dow. The only difference between the 73 market and now is the 73 market did indeed hit all-time highs in the Dow before plunging into the bear.

Based on just this information...looks like tough times ahead.

Part 2 of the reply:

Another point I'd like to make in regard to the 1973 - 1975 contraction that
took the Dow down almost 10%. The Dow actually went lower than the 9.33%
figure. That's just where the Dow stood at the 1975 trough in relation to the
1973 peak. I figure we'll see something similar...in fact we've already
dropped almost 5% from the March closing high of 10,940.55 in the Dow.

What I'm trying to wrap my mind around is just exactly where we are in the
comparison. Is the March closing high the climax of this recent expansion?
Was the record company earnings in the last quarter of 2004 the peak? If so, I
believe the NBER will mark December 2004 as the peak for this current business
cycle expansion.

But, it does concern me that we haven't hit a new all-time high in the Dow. And
also concerting is the noticeable strength in the WLI from the ECRI. Along with
the somewhat flattening of the FIG. It could just mean the current expansion
has another year to go especially if inflation begins to stall here.

After writing those two replies my moment of clarity has come to this:

• I believe we will see a new all-time high in the Dow this year. In fact, it could even be as early as May. This new all-time high will mark the peak of this current expansion and the bear will take us down much like the bear took down the 1973 all-time high and corresponding business cycle peak. 2006 could prove to be a great year to begin shorting the market.


• I believe oil/gas stocks will continue the soft patch they are currently in. But, this will be short-lived. Oil/gas stocks are now in the sweet spot for investing. Almost a win-win situation. If oil comes down as it has been doing this week...the oil/gas stocks will surge due to their earnings potential in the coming quarter. If oil stays down...the market and this economy (our expansion) will continue to do well...thus setting us up for another run-up in oil prices down the road. Thus, benefitting the oil/gas stocks and their earnings potential even more in the coming quarters.


• When I refer to oil/gas stocks, please note I'm referring to the US land drillers and some oil service stocks. Despite the positive press on the oil tankers...please be careful there. The tankers are facing a new ship supply wave coming in the next 3 to 4 years. In fact, 10,000 ocean-going tankers are due, more than 8,000 new containerships and at least as many standard bulk carriers. Plus, remember, in 1974 despite high and rising oil prices...oil tankers were taking a beating due to fuel costs and oversupply. And yes, I'm talking my book...I am long US Land drillers and a few oil service companies.


• And yes, I'm long the Dow as of 2:00pm Central time today, Wednesday March 30th.

How's that for putting it out there? Could I be wrong? Yes! Any number of things could derail this plan of mine. The number one thing being Greenspan and a 50 basis point rate hike. But, trading is about putting a plan together and taking action. Then adjust as the action unfolds.

One last item. If there are any long-time readers of my blog...you're probably asking why I'm trading out of my systems so blatantly. I promised not to do that after the President Election fiasco. And you're right, I am breaking my promise. But, not how you think. My system trading has evolved and will continue to evolve. This is part of it. I will share more with you in coming posts.

Later Trades,

MT

* Note: the Dow lost over 40% in the 1974 - 1975 Bear Market from the 1973 all-time high.

* Note: the WLI is the Weekly Leading Index and the FIG is the Future Inflation Gauge. For an explanation of these indexes please check out ECRI's website and even read the great book, Beating the Business Cycle.

Please read the disclaimer on the website. This is not a recommendation to buy, sell, or trade securities. Just a journal of my travels through Wall Street. I can buy, sell, or hold any positions mentioned on this website at anytime. So, be warned.

Cumulative Knowledge (03/28/2005)

I'm a recent fan of Stephen Vita's Alchemy of Trading blog. What I most admire about the blog is Stephen's ability to write several posts daily, encompassing what all of us traders are feeling, while keeping it fresh and new. The conversations with hedge fund friend, Anthony from Brooklyn, are priceless.

On to the notes...

Inflation effects farmers too. Read here. Despite a banner 2004, farmers are being squeezed due to higher steel, energy, and fertilizer costs. Plus, banks are tightening the reins on lending money to farmers. With irrigation equipment costs rising 20%...farmers are opting out until prices hopefully decline. This hurts LNN and VMI. Despite the rising inflation, farmers still can't resist new tractor purchases.

China has doubled steelmaking capacity since 2000 and now accounts for about 30% of the world's total. In fact, China has become a net exporter of steel for the past few months.

The FAA is expecting the US to exceed 1 billion airline passengers by 2015 from a current 688 million in 2004. Most of the growth will come from regional/commuter airlines and international flights to Latin America. In fact, Latin America travel is slated to grow at a 5.5% annual rate. Read here.

US Drilling hit a 19-year high. Read here. Note most of the growth came from land drillers in North America. The Texas PetroIndex rose to 167.4 in January. Note the 43% increase from the 2002 low versus the 70% increase from the June 1999 low to the August 2001 high. Still more to go? Perhaps that's why Karr Ingham is forecasting the index will reach 182 by December 2005. Nothing like an economist laying it on the line.

For the last time...there is INFLATION! For the past few months I have come across more people than I care to count that do not believe we're in an inflationary environment. BALDERDASH, BALDERDASH, BALDERDASH! Possibly Greenspan's recent federal bank brick has hit most of these people in the heads to realize what's going on. If not, maybe this article on tuition cost increases will help. Reason for the tuition hike? Rising employee benefit costs, utilities, software, and hardware. Yes, software and hardware costs are rising. Have been for the past year. Wage inflation? Yes, via employee benefit costs. Do you realize it costs some teachers in Texas $1200/month to insure their family for healthcare alone? And if it doesn't cost the teachers...its costing the district and/or the state.

Rents low and House payments high? Read here. The differential is at its biggest since 1994 and by some accounts the biggest since the 70's.

Two-thirds of US adults are overweight or obese. Up to 30% of US children are overweight. Childhood obesity has more than doubled in the past 25 years. Childhood diabetes has increased 10-fold in the past 20 years. In other words, life expectency gains could fall dramatically. Read more here.

Speciality hospitals have nearly tripled in number since 1997 according to the Texas Hospital Association. Of the 100+ speciality hospitals...nearly half are in Texas. This article must scare the bonkers out of physicians.

Arizona has won approval from the EPA for a proposed $2.5 billion oil refinery. This would be the first oil refinery built in the America in almost three decades.

Finally a word about the recent American Business Cycle chart I posted on Sunday. You should seriously check out the chart. Notice the most recent expansion/contractions. Definitely it seems the cycles are getting longer. I wonder if that has to do with the greater experience the Fed has with playing with rates in order to govern the business cycle? Anyway, here's a few tidbits from the chart...

• Average expansion is 4.06 years.


• Average contraction is 1.08 years


• Average gain in an expansion is 64.39%.


• Average loss in a contraction is -3.51%


• The current expansion is working on 3.42 years...just shy of the average.


• And the current gain under this expansion is a paltry 7.53%. In fact, the last time we had an expansion 3 years or greater and below an 8% gain was back in 1973. In 1973 we had a 3 year expansion coupled with a 5.57% gain.

And that's it from the TaylorTree where I wonder just what these financial shows are doing to my state of mind. Did I just use the word BALDERDASH?!? Thank you Jim Rogers. :-)

Later Trades,

MT

Quick Post - Business Cycles

This chart reflects the peaks and troughs of the American Economic Business Cycle from 1919 - Present. Along with the performance of the DJ-30 during those times. But, please note that the 2001 - present is estimated since the NBER hasn't released data since the 2001 trough.

I wanted to get this out to you before I head out for the day. My daughter woke up this morning ready to hunt eggs and hasn't stopped yet. We're heading over to my aunt's house for a great Easter lunch and even more egg hunting for the little ones. I'll post commentary to follow the Business Cycle Chart later tonight or tomorrow. Interesting stuff!

Enjoy!

MT

Cumulative Knowledge (03/20/2005)

I'll admit...I've been lazy this weekend. After figuring out some pretty complicated programming stuff late Friday night at my day job...I decided to relax and kick back over the weekend. So, I watched TV, read some books, put off doing my taxes, and took my daughter to see the Robots movie. The movie was pretty good. Would have been really cool if we could have seen the Imax DMR version of the film. Still good nonetheless.

One thing I caught up on this weekend was Cramer's Mad Money show on CNBC. Were you like me and caught yourself rubbernecking to the show? It felt like I was watching a traffic accident in progress. But, in the end...the show works. Why, I have no idea. But, there is some value. If you can get past the corny highjinks, preachy tone, and bald headed crystal ball...the show comes alive when the viewer interaction begins. Granted it's a somewhat one-sided interaction...but interaction nonetheless. In fact, I believe the show's approach shares more in common with us bloggers than we care to admit.

Now on to the notes...

• Almost 47% of U.S. food dollars will be spent in restaurants in 2005. In fact, the U.S. restaurant industry is projected to set a sales record of $476 billion in 2005. Could this be a boon for greasetrap cleaner DAR?



• Need a job? Looks like a nationwide shortage in ultrasound field technicians. And a growing demand for Veterinarians.



• Increased crop production raises land values, which pushes out livestock. So, if farmers are doing well with crops then they'll turn more land over to farming and less to cattle thus boosting crop production and limiting meat production.



• Annual farmland price survey data from Iowa State University shows the average price for Iowa farmland surged 15.6% to $2,629/acre in 2004.



• Top Oil producers in Texas here.



• Texas ranks first in the U.S. for new corporate offices and expansions in 2004. Second on the list is Michigan. Last time Texas was first was back in 1992 when tied with North Carolina. Read here.



• According to the Mortgage Bankers Association, more than 32% of mortgages are now adjustable.



• Prisons are normally big landowners in the state they reside. Why couldn't they sell some of that land to satisfy the large state government budget crunches? Looks like Texas is already doing just that. Read here.



• Did you know there's a 20% drop in household spending in apparel, decline of 18% in spending of food away from the home, a decrease of 10% on food at home, and 16% drop in owned housing for the ages of 49 - 59 years old? If spending drops for pretty much everything for these 49 - 59 year olds...what spending categories see increases? Healthcare is up 23%, reading material up 32%, and a small increase in entertainment spending. This research was performed by the BLS and obtained from the Economic Beat Column by Peter Francese at Barron's. What age bracket does the current glut of Baby Boomers reside? Ages 47 - 54 years of age.



• An aging population means sluggish growth in output per person. Business profits will be pressured as profit growth is weighed downward and pension obligations rise. Plus, an influx of new workers, a.k.a...the Echo Boomers, and you've got a decrease in the average productivity of the employed labor force as happened in the 60's and 70's when the Baby Boomers entered the labor pool. A decrease in average productivity means higher unit labor costs and thus higher prices.



• The fall of GM? Is GM a great buying opportunity? Or time to get out while the Titanic is sinking and the band plays on? Me? I'm avoiding GM altogether and watching the auto parts group. It's way too early to buy them right now...but another bad year like 2004 and things might get interesting. Already Japan and China are courting Delphi due to their low cost high quality manufacturing process. Could it be out of line that one of these countries buy a company like Delphi? I'm not smart enough to know. But, will continue to watch the group.



• I've studied many trading styles. But, I'll be the first to admit...Elliot Wave has always been placed on the back burner for me. The reason? I don't like anything that changes the past. In essence, subjective viewpoints are tough for me to trade. I come from a programmer's background...junk in = junk out. If your input data can change on you then what is the validity of your output data? I fight this all the time in system development. So, to choose Elliot Wave techniques where counts can change based on something new happening...well...I didn't need something else to aggravate my system mind. This interview with Glenn Neely from Real World Trading changed all that. In fact, I have added this guy's book to my reading list. I'll be honest, I learned a lot from this interview. I like the guy's use of "violent" price action to end the old trend and start the new. I have used "violent" price actions in my trading systems to identify new long term trends so it's nice to see another viewpoint on this pattern. The guy forecasts a bottom in 2015 and then we'll see the most spectacular stock market advance in the history of mankind. In fact, the Glen goes on to predict all sorts of things from a reduction in government overhead, huge efficiencies in our medical systems, third world industrializations, gold still in a secular bear market that will potentially bottom in 2010, a period of deflation, and the 2002 lows in the SP500 & DJ30 will not be broken for the next 50 - 100 years. Please read more here.



• Another great interview by Real World Trading...this time with Aaron Schindler. Aaron worked with Monroe Trout (one of the Market Wizards). I like his use of inter-market relationships in his trading systems. He gives a brief example of China and oil. The interview also covers some great backtesting topics similar to what GalaTime is currently doing with his covered call system. His comments on trying to be as quantitative as possible in your trades is great advice.



• And finally, a good laugh. This article, though a bit out there, probably does shed some truth on the recent housing boom. The Testosterone versus Estrogen magazine covers highlighting the different manias (tech vs credit) had me laughing out loud.

And Jaloti, I'll work on getting my weekly posts out there a bit earlier than my always erratic late Sunday/Monday night postings. :-)

Have a great week!

Later Trades,

MT

Canary in a Coal Mine

Sudden changes in population have historically contributed to inflation. For example, the Black Death in England was a leading factor in the wage inflation of those times. In 16th century England, a population expansion fueled inflation due to the increased demand for goods and services. Thus, anytime a segment of the population expands significantly from a prior generation...be on the lookout for inflationary pressures.

The Baby Boomers were born between 1946 - 1964. They started college from 1964 - 1982. And assuming a five year average to complete their scholastic studies...they graduated in 1969 - 1987. While these figures provide insight...what we really need is to capture the center of the bell-shaped curve in this demographic segment.

Let's take the median of when the Boomers were born and that would be the 10th position in the yearly series which is 1955. These Boomers started college in 1973 and finished in 1978. Okay, we have a pretty good start here. But we still need to capture more of the meat in that bell curve. Try to find the heart of the demographic surge we really need to capture the standard deviation. But, that's too hard for this old country boy. I'm going to keep it simple and assume 1/3 from the median value both ways would give us what we need. With that in mind, we would obtain the following information:
Baby Boomers born: 1951 - 1958.
Baby Boomers Start College: 1969 - 1976.
Baby Boomers Finished College: 1974 - 1981.

Wow! Do these numbers freak you about just a bit? Back in 1969 thru 1981, the United States experienced a significant rise in young adults. I don't have the numbers on hand but I'm guessing probably a 20 million plus increase compared to levels from the prior generation. Granted all boomers did not attend college. But, from the years 1969 thru 1981, Boomers were flooding the US economy in more ways than one. Amazing that 1969 was the beginning year of when the glut of Baby Boomers turned 18 as well as the beginning tough times for the US Equities market. Equally amazing is that 1981 was when the majority of Boomers had finished college and flowed into the system. By that time the US had absorbed this new generation and the worst in numbers was behind them. In fact, the rapid expansion in commodities during the 70's due to these boomers coupled with a large, energetic, and young workforce....is it any wonder that 1982 was the start of the 18 year long bull market?

On to the Echo Boomers. You know, the kids of the Baby Boomers. I've written about them in past articles. These little darlings make up 1/3 of the US population just like their parents make up the other third. They already spend $170 billion per year. First to grow up with computers at home, cellphones, and the Internet. They also drink less, smoke less, and break the law less than prior generations. Teen pregnancy is also way down. These Echo Boomers were born from 1976 - 1995. Will attend college from 1994 - 2013. And will finish college in 1999 - 2018. The median year an Echo Boomer was born is 1985.5 and 1/3 both ways provides the following breakdown:
Echo Boomers born: 1982 - 1989.
Echo Boomers Start College: 2000 - 2007.
Echo Boomers Finished College: 2005 - 2012.

If the Baby Boomer numbers were amazing...these numbers should make the hair on the back of your neck stand up. Interesting bit of data in that the year 2000 marked the beginning of the glut of Echo Boomers into adulthood and at the same time the end of the 18 year bull market. Are we destined to follow the same fate from 2000 - 2012, when the Echo Boomers flood into adulthood as the 1969 - 1981 timeframe when their parents did the same? To answer that I performed some research at the local library.

I found several Business Weeks from the 1970's time period. The conditions described in those magazines mirror our current conditions. I figured 1974 was a great time period to study because we are 5 years past the beginning of the Echo Boom flood into adulthood. And 5 years past the same period in Baby Boomer history would put us in 1974. Here's what I found in the 1974 issues:

• Several articles discussing rising oil prices and the talks of a bubble in those prices.


• Rising commodity prices. In fact sugar, orange juice, silver, oil, cotton, and gold were the best performing assets in one issue.


• Another article discussed rising oil prices and the fact that solar, wind, and more importantly the Canadian Tar Sands would kick in to fulfill the demand. Especially because the oil's recent price now made mining the Tar Sands a viable option.


• Escalating higher education costs. Enrollment levels were increasing to levels never seen while state budgets were being cut. A situation that is happening now with our colleges.


• A real insightful article on oil tankers and the surprise that everyone is having in their declining market conditions. With oil prices at all-time highs...why would their market be so bad the article asks. The article goes on to say several company CEO's placed orders for new tankers several months ago and now wish they could cancel those orders. Rising fuel costs and oversupply were the factors blamed in the tankers poor market conditions.

Keep in mind this was a 1974 Business Week. Kinda scary, huh?

Are we at the start of the next Bull market? Or will we be forced to spend until 2012 to absorb these young rascals into our US economy? Time will tell...but keep an eye on your faithful canary in the mine shaft. :-)

Later Trades,

MT

System Test Questions

Kaushik from the GalaTime blog asked for my thoughts on his recent Covered Call system tests. First, I'd like to say I'm honored by Kaushik's request. GalaTime is part of my daily reads. Kaushik covers the options trading arena and uncovers some interesting information in the options data he mines. And being a fellow Texan doesn't hurt. :-)

So, check out his site and in particular his recent Covered Calls articles...part I, part II, part III, and part IV. You'll find my comments in part IV of the series.

One last thing, sorry again for failed postings this week. This has been a very busy week at my other job. Hopefully after tonight, things will slow down a bit and I can get back to market research and blogging.

Until then...

MT

Very Sorry

Planned to write a nice little post on market history and boomers but encountered several problems at work that had to taken care of. Sorry about this. I hope to resolve everything in time tomorrow to write the post.

Thanks for your patience.

MT