Rogers Interview

I'm heading home...but had to post the link to this great interview of market wizard, Jim Rogers. Thanks to the Commodity Trader for posting this interview.

Read article here.

I agree with Rogers on several points in the interview. Most importantly that oil will see much higher prices in the coming years. Although a pullback is needed from current levels.

Also pay note to what he says about utilities. And check out a few of the utility stocks and their corresponding stock charts...like TXU and Southern. I think an investment paradigm is in the making here. These stocks are moving into a different asset category. Moving from the old measure of dividend yields to the new one...the unthinkable for utilities...growth rates.

Dynegy's recent buying spree in this field is just a sign of things to come. Of course, these stocks are all due for a much needed pullback. But, pay attention to this sector. It could get interesting.

Random Links

"The public have an insatiable curiosity to know everything. Except what is worth knowing. Journalism, conscious of this, and having tradesman-like habits, supplies their demands." -- Oscar Wilde

Some Random Links to fill your trading day.

Excellent article by WallStreetWindow's Michael Swanson on the media's spin on investing and politics. I totally agree with the bullishness show producers force upon guests of the TV and Radio shows. I had the same thing happen to me when asked to be a guest for a popular investment radio show back in May of 2000. I wanted to talk about some of the stocks that were going to get cut in half...but the producers only wanted long picks. Really opened my eyes to what the media is about. Read on...

I'm not a fan of Robert Prechter. I view someone like him as a broken clock. Always telling the same time. The clock is worthless...yet everyday it reports the correct time...twice. But, this article has a few gems that Prechter doesn't even know he released. Read on...

Have a great election day!

The Market Sirens and Elections

I've sold my positions. Almost all of them. The only remaining position I have is McDonalds (MCD) with a 3.25% gain. I've sold the QQQ positions even though 4 of the systems currently have a .98% gain and one has a .35% gain. I even received a trading system trigger on CVT yesterday that I did not pull at the open today. That position would have been down -0.98% at the close.

I know I did a bad thing. In order to trade your systems you must remove all emotions. You must follow them rigidly. Most of my positions I've held for over 2 1/2 years. All of them were sold at the end of trading today. I've weathered many storms with those positions. But, I'm seeing things differently now. Maybe what I see is short-term in nature. I just don't think so.

It just feels like a strong top is or has taken place. The market sirens are singing their song...and I was almost lured to that island of Anthemoessa. I'm not sure what caused me to awake from their beautiful singing filled with GOOG like returns for many months to come. Where almost any breakout from congestion quickly garnishes several percentage points. Heck, some have even called those breakouts lottery tickets because of the huge moves accorded. Whatever shook me by my shoulders and melted wax into my ears...I'm grateful. At least for now.

Now that you know where I stand...let me show you some research you might find interesting. I researched the Dow Jones Industrials in respect to election years. Particulary, the time period from the end of October thru the end of December of the same year. I wanted to know what type of returns to expect from this very short period in time when the president is chosen thru the end of that election year. These results are based on election years 1916 - 2000.

The Dow Jones Industrials were up or breakeven 68% of the time and down 32% of the time. During those up or breakeven times...the DJ-30 eaked out an average gain of 5.63%. And during those down times the DJ-30 shed an average 5.44%.

Not bad, huh?

To go a step further, I reviewed the S&P 500. These results are based on the election years of 1964 - 2000.

S&P 500 was up or breakeven 70% of the time and of course down 30% of the time. The average move experienced during up or breakeven times was 3.85%. While the average loss during down times was -2.74%.

Very similar to the DJ-30 scenario.

I'm sure after seeing these numbers you're thinking I'm crazy for selling all my positions. You can't argue with the numbers. I mean we have at least a 68% chance of experiencing an average positive return of 5% or greater from now til' the end of December. And there's further research that agrees with this bullish scenario.

There's the Fed Model that suggests stocks are 37% cheaper than treasuries. Read on...

You also have the built in seasonality factor of November thru April where this period has outperformed the May thru October timeframe 70% of the time. Read on...

Despite all this great news, why am I bearish? And why if I'm a system trader would I give up all my hard-earned years of research for a hunch? I'll answer that in one word...EDGE.

I create systems to capture an edge in the market. The only way I make money is to find some edge or inefficiency to exploit. What happens when the edge I rely on is known by many participants? Does the edge vanish? I believe so. That's why I cashed out. I cashed out because the edge I was trading was gone. And there's another edge available to trade. I believe this new edge is rested on the fact that so many traders and hedge fund managers are leaning the same way. They are all using the same research and trading the same edge. They all know this bullish news. And they have been positioning themselves for this bullish news for the past few weeks.

What will happen when the market sirens stop singing? The answer to that question is the edge I'm looking to exploit.

Until then...

Random Links

"You make money on wall street by being very selective and being patient, waiting for those opportunities that are irresistible, where the percentages are very heavily in your favor." -- Seth Glickenhaus

Random Links to keep you procrastinating about the work you really need to get done.

Jerry Grantham is on a tear. Believes we'll see a big drop immediately following the presidential election. Read on...

The top 100 TiVo Season Passes. Two of my favorites are on the top 10...The Apprentice and Survivor. I'm a little surprised by Joey coming in at number 6. I loved Joey in Friends...but just couldn't get into the Joey series. Am I wrong here? Read on...

Interesting story on Columbian coca farmers and how they outsmarted Clinton's Plan Columbia, an anti-narcotics package that supplements the Columbian government with crop dusters and the herbicide Roundup. The original intent was to spray drug crops and stop the cocaine export before it ever started. Now, it looks like the US government is spraying weedkillers on Columbian drug crops for free. Not a bad deal for Columbian farmers. Read on...

Interest chart and analysis of presidential elections from The Big Picture blog. Read on...

Enjoy!

Election and Market Sectors

Interesting study of sector movements and the Bush election contracts. To summarize, the author found:

Natural Resources and Utilities to do well when Bush's contract fell.

Healthcare performed well when Bush's contract rose.

Read on...

Second Guessing Your System

System trading can be difficult. I'm at all-time equity highs with my trading accounts. My systems have performed extremely well during the month of October. But, sometimes you get torn between your personal feelings about the market and your systems direction.

I've read many blogs expecting a post-election rally. Then on Bulls & Bears I noticed every person on the show from Gary B. Smith to Tobin Smith are expecting a post-election rally. This concerns me greatly. Because you know what? I'm expecting a post-election rally too. What happens when everyone leans to one-side? The other side is the place where money is made.

Normally the market is forward looking. But, every so often the market condenses the length of its viewpoint. Instead of looking 6 to 9 months ahead...a single event draws the market's attention...distracting everyone away from the big picture. I'm afraid that's what is happening now. All market participants are focusing on the Presidential Election...and that's it. Every since I noticed that everyone was leaning to one side...I've been asking myself, "What will market participants have to look forward to after the election?"

I've searched my brain all weekend for the answer to that question. And I keep coming back to oil prices. I'm afraid once the election is over...the fog will clear and everyone will then see the real effects of high oil prices. Earnings will be effected. Period. Consumer spending will be effected. Period. There's no denying this. Whoever is elected President cannot change what has already happened. High oil prices have effected our economy. In the next few days investors will again turn their attention to this matter.

Of course, this goes completely against what my systems are trading. Heck, I have 5 systems long the QQQ right now. All expect a minimum of a 5% up move in the QQQ. Only .60% move has occurred since the systems have been triggered. So, we still have a ways to go system wise.

Due to the confusion of my hunch and my systems I reviewed the Nasdaq, S&P 500, and DJ-30 charts. I wanted to see where they were trading in relation to their trendlines. You'll see in the following 3 charts that 2 of the 3 are hitting the top of their downtrend channels.





After reviewing these charts, the chances for a mid-term rally after this election look bleak. In fact, analyzing the charts did nothing but confirm my hunch that we're in a top in the market...loaded with many players on the wrong side.

I'll be the first to admit...my strength is my systems. I'm a good trading system developer. In fact, 98% of my equity performance over the past 3 years have come from my systems. My trading instincts do not perform as well. So, my initial impression is to keep my systems going and let them do their job. But, it sure smells like a nice little opportunity to cash out near the top of my equity curve, short the market, and buyback my systems at a much better price. Of course, many system traders have fallen prey to this exact syndrome of second guessing. Can I stay strong? Or do I know better than my systems? Looks like I'll find out in the next few days.

Until then...

Friday's Update

Today's a pretty tight range day. Market's afraid to move one way or the other for too long. I'm sure the upcoming election has something to do with it. So, be careful out there. Once this election pressure is removed...the market is sure to surge. Question is...which way?

Here's some random news links to keep you occupied and away from the market today:

A black swan event? Hobbits are real? Read on...

Canaries smarter than humans? Who woulda thunk it? Read on...

Investing in waves? Adam Hamilton from ZealLLC.com does a great job in showcasing how the market moves in waves.

Think how lucky the people were who entered their main investing years back in 1982 and basically just hung on for the ride. I'm afraid our generation will not be that fortunate. Read on... or click on the graph above.

Jim Rogers interview. Looks like he's a strong believer in the future of China and that we're in a secular bull market for commodities. And he's writing a new book to prove it, Hot Commodities.

And finally, Happy Birthday Dad. You were born just two years before Black Tuesday, the day the Dow Jones shed 11.73% and the mark of the Great Depression. What an interesting and hard time you grew up in. Amazing the changes that have transpired. To think you grew up in a time before television and are now reading this on the Internet via DSL. Boggles the mind.

Happy Halloween everyone. And to my cousin Mysti and her new husband Chip...I wish ya'll all the best!

Another QQQ Trigger

A new QQQ system trigger was issued for Friday's market open. A little disconcerting because this has not happened to my systems before. Very odd to receive 5 seperate system triggers for the same security within two days.

I think it's safe to say these 5 systems are now up for review. Need to identify the differences between systems and verify whether they are still valid. I'll let you know the outcome.

Now, on to the good news. The QQQ is up .76% from today's open. So, those 4 systems are currently profitable and still long the QQQ. The new system will enter at tomorrow's open and has a backtested win percentage of 83%.

So, here's to a good trading day for Friday. It has to be good...because Friday is my Dad's birthday. Happy Birthday Dad!!!

Playing Moneyball?

Usually when making investments, it is implicit that investors believe they have some degree of knowledge about the future. So Wall Street has more fortune tellers than any other industry. I feel I've had an advantage over the years because I am clear about a couple of things: 1) it is part of the nature of life itself (and markets are simply manifestations of people's expectations) to trend, and 2) I will never have a complete or full understanding of anything. Therefore, all investment decisions should be based on what can be measured rather than what might be predicted or felt. -- John Henry, famous commodities trader and Boston Red Sox owner

One of the difficulties in trading system development is idea generation. I have several notebooks around the house, the car, and the office so when an idea for a new system hits...I'm ready. And then you have the problem that when the ideas start coming...you can't write them down fast enough. This can go on for weeks. And then you crash. You hit a dead end.

I guess, it's a lot like writer's block. You're completely out of ideas and you don't think you'll ever have another good idea again. But, then get recharged from the strangest things.

After the movie last night I stopped by the local bookstore and picked up Moneyball by Michael Lewis. I read just a few chapters and I can already tell it's a classic. A book that every system trader should have in their investment library.

The story of Billy Beane and the Oakland A's is amazing. And the field of Sabermetrics is pretty cool. The story is a great idea generator for system traders. It makes you feel great about what you do. And gets you excited about finding more systems out there in the market.

On a special note: Bill James is the founder of Sabermetrics. For years he received little or no respect in the field of baseball. With the record of Billy Beane's Oakland A's and the Moneyball book...that respect slowly came. In 2003, Bill James was hired by the great commodity trend follower and Boston Red Sox owner, John Henry. The rest as they say is History.

Congrats Red Sox on your historical World Series win!!!

The Scary Grudge

I saw one scary a*s movie last night. The Grudge. Man, that was scary. It's a bit different because it was filmed in Japan. A Japanese story. Japanese director. I belive Spiderman's Sam Raimi was the producer.

Scary? You bet. I have several images just burned into my brain. And that dang, "Uuuuhhhhhhhhh"...is enough to drive you crazy. And the eye! That dang eye just gives me the creeps. Take a look and check out the site...it's just as scary even more so after seeing the movie:



So, if you're into scary movies...it's a must. If not, run...stay away...cause those who encounter it will be consumed by its fury. Uuuuuhhhhhhhhhhhhh....

QQQ System Triggers

I received QQQ triggers from four of my trading systems to go long at Thursday's open. All four systems are based on the following technicals that occurred today:

Truerange greater than 1.5 times the average true range.

and

Volume larger than 1.5 times the average volume.

Then all three diverge in the hopes of finding a small edge in trading the QQQ.

All four are short-term daily systems. Backtested win percentages of 78%, 83%, 87%, and 94%. Should be an interesting next few days.

The Buffett System

Great interview of Moneyball author Michael Lewis. Moneyball continues to receive high praise. I guess, it's time I get my act together and read it. :)

Michael Lewis asserts being a contrarian isn't always about going against the grain. Being contrarian is about asking why something is done and finding out if there is a better way. Sometimes there is...and sometimes there isn't. He gives a great example on how Bill James discovered the error in errors and how conventional wisdom was right in ERA's. Read more...

The best part of the interview is where Michael Lewis shows his contrarian side in questioning the role Warren Buffett plays in the investing world and whether there is a way to profit from it. Here's the excerpt:

Michael Lewis: I hate to use this example because he is so successful, but Berkshire Hathaway's (NYSE: BRK.a, BRK.b) Warren Buffett. My God. Warren Buffett has been a wonderful investor. He has been a wonderful influence on American life. But I can't believe Warren Buffett is always right.

And that means that if you can find a position that you can take with some conviction and certainty and it is the opposite of something that Warren Buffett is doing or saying, there is probably a huge opportunity in it. You may have to weather a little storm along the way. But with the markets following whatever he says and does almost instantly in a way that may be unprecedented in financial history, there are definitely inefficiencies being created.

Since the Internet bubble burst, he was right about that in a way. His reputation was already huge, but since what was it, January 2000 or thereabouts, his influence in the market has been out of all proportion to any wisdom that a human being could have. What he says is taken as pure gospel so there is an opportunity in that for someone.

Great stuff!

Trading Personalities

The Innerworth newsletter focuses on the psychological aspects of trading. While I think too much emphasis is placed in this area...every so often these guys write something that hits home. Today is such a day.

Today's newsletter states there are 3 types of traders: data-oriented, intuitive, and impulsive.

The data-oriented trader focuses on concrete evidence and is extremely risk averse. He or she tries to seek out as much supporting data for a trading decision as possible.

The intuitive trader is the opposite of the data-oriented trader. He or she bases trading decisions on hunches and impressions rather than on clearly defined data.

The impulsive trader allows his or her decisions to adversely influence trading decisions. Rather than looking at information logically and analytically, information is discounted completely.

The article then breaks down each category. Read on...

While my trading instincts have improved over the years...I still consider myself a data-oriented trader. Don't know what I would do without the ability to backtest my ideas and strategies.

Robotics and Assisted Living

The buzz is getting louder for Robots. Cnet's article provides some background to my post last week that Robots are being hailed as the answer to our nation's rising senior population.

One of the key issues for robotic senior assisted living will be funding. President Andrew Silverthorne of PALS Robotics believes "Every month you delay an older American's entry into a nursing home, you save the system thousands of dollars." Thus, Silverthorne, believes Medicare will soon provide support to this burgeoning field.

You make the call. But, whatever your decision...the buzz for robotics is growing. Read on...

Check out RoboticTrends.com for further information on this exciting new field.

Boone Pickens Interview

Short but sweet interview with BP Capital's Boone Pickens. Mr. Pickens believes we've seen $40 oil for the last time. And makes a very interesting case for the Canada's Tar Sands. Read on...

State of the Oil Industry

Wonderful article on the state of the oil industry. Key points in the article:

• Mark Pease, senior vice-president of exploration and production for Anadarko Petroleum Corp., believes "There really is a lot of potential and reserves to be found in North America. There's going to be a lot of increase in activity."

• "I've been in the industry for 23 years now, and I certainly believe that the industry fundamentals are the strongest I've seen in my career." mentioned Mark Urness, Merrill Lynch director of oil services and drilling research.

• "Our forecast shows drilling activity reaching the highest level in 20 years. And we expect sustained growth in 2005-06 as long as [global] economic growth remains strong." again noted by Urness.

• In the Gulf of Mexico, said Danny McNease, chairman and CEO of Rowan Cos. Inc., drilling rigs are in short supply, and a spate of lease expirations looms.

Please read on...

Robots

Investors looking for the next big wave should pay attention to the growing utilization of robots. As this article states...falling component prices are increasing demand for automation. The use of robots is predicted to rise sevenfold over the next few years.

The leader in automation is Japan with approximately 400,000 industrial robots currently in use. Japan is leading this movement partly due to their aging population.

Many believe robots will become the caretakers of our aging seniors in the years to come.

Oil Spending Growth

Oil equipment stocks fully priced? The first of many articles forecasting increased spending in the oil patch. Read on...

Oil Prices and Rig Counts

The charts from yesterday's post inspired me to map oil prices onto the US Rig Count Chart. Keep in mind the chart below reflects inflation adjusted oil prices.


Data provided by Baker Hughes, Inc. and inflationdata.com

Record highs in oil prices and rig counts occurred the same year...1981. While the record low in oil prices struck in 1972...one year after the record low in rig counts.

Oil prices have risen 130% since their 1998 bottom. While rig counts have only risen 28% since their 1999 bottom. Compare this to 1978 when oil prices rose 70% from their 1972 bottom and rig counts rose 140% from their 1971 bottom.

My father worked as a field engineer for Schlumberger back in the 60's, 70's, & 80's. He remembers quite fondly the various mom and pop oil companies that popped up in those days. Very similar to the dot com's of the 90's.

Most of the mom and pop drillers are long gone. The remaining companies are hesitant to increase drilling dollars for what they believe is a temporary situation in oil prices. The longer oil prices remain over $40/barrel...the less hesitant these companies become. Until then be prepared for higher oil prices.

Oil Rig Counts

I decided to chart the World and United States Oil Rig Counts...due to the recent spike in oil prices.

Yearly Worldwide Oil Rig Count Averages...

data provided by Baker Hughes, Inc.

Yearly United States Baker Hughes Oil Rig Count Averages...

data provided by Baker Hughes, Inc.

United States oil rig counts began trending upward in 1973. Their 1981 peak occured just one year prior to the start of the 18 year US equities bull market. US Oil rig counts hit their record low in 1999...one year prior to the conclusion of the 18 year equities bull market.