mkt

Of all the talk here about buying the S&P at various levels I have to make this comment.... It's a load of crap if you think you can trade a large index future and make a profit. I mean come on - you think you get "feelings" and can technically trade??


That guy who is posting here talks about learning how not to loose his money. This is correct - he is up against professionals who have boat loads of money, tricks, and better information than him and have a great number of "set ups".


Guess why day traders did well for 97 to 99 cause they were usualy long and the mkt rallied. guess why they are almost all gone now - cause they were usually long and the mkt sold off. Next victim please...


Even for individual stocks - do you think you can know more about a stock then the investment bankers who do business for the company?


No where on this board do people talk about the economy, global trends or changing demographics - the real drivers of the markets.


So I chuckle to myself every time I see a "buy S&P right now" line. If you really could do it you'ld be quietly doing it and not here wasting your time.

This idea of professionals having better information is pretty thin anymore. And besides, your point only holds if they have 100% of information. If they have a more realistic 3% of information, and they price it in, then of course you cannot use that same information to make a profit yourself, and any movements based on that information will appear random to you.


Why would I be quietly doing it? I certainly don't post every trade I ever make, I am pretty quiet in that respect for the simple fact that it would be so easy to lie on the Internet, as so many people do. If my expectation is 1 point a trade, I could certainly fudge a half point each on entry and exit. So even if I did post every trade, and I gave the exact reasons, the chances that anyone would believe me, much less give me any more credibility than you do, are slim to none.


As it is, I rarely post trades, and when I do I only post counter-trend trades where I can use stated limit-order prices which the market trades through after the post, and prices available market-on-close. Meaning, I only post trades where I can't cheat. If I ever miss an entry or exit "timestamp" in the forum, I expect to hear about it. I never just say "Yeah, I bought that."


There are published returns to investors generated by individual systems traders all over the place. But like Richard Dennis said when he made $200 million, you could publish the exact buy and sell times in the newspaper each morning and nobody would pay any attention. That's half the fun!


Besides, do I sound like a guy who wants to stare at a screen in some little room all day, and make $20 million dollars a year, like other people do who can do what I can do? (I had written a bit longer paragraph here about my personal motivations, but I edited it out:)


And of course, you can't help but make money in a bull market, I learned that a long time ago. But the growth and decay of populations of day traders responds to a great many more market-microstructure changes than just whether the market is rising or falling.


And people talk quite a bit here about global economics and such. I'd name names, but there are enough people enough more on top of it than me, that I'm afraid I'd be rude and leave someone out. But, for example, here's a post on demographics that got me in trouble:


http://www.twoplustwo.com/cgi-bin/newforums/stocks.pl?read=1555


Of course in my opinion, when you start trying to talk about global economics, is when you really do choose to butt heads with the smartest, best capitalized people on Earth. The number of people in this world whom I believe can make "supernormal" returns timing major economic shifts using popular theories can be counted on the fingers of one hand. So, you see, we all have our own silly little prejudices, in our own little worlds.


And we all have our own motivations. I admit I am probably wrong in my assessment - since my strengths are fairly narrow - but I don't think that posting on this forum is a waste of my time. Not that I don't waste a lot of time, mind you, this is probably just less of a waste, relatively speaking:)


eLROY

This is just getting ridiculous, where your post has 5 views and my post has 10 views, meaning you are probably reading my post over and over.


So tell us about your economic take on the current global situation, and what it portends for stocks, already!


After all, I gave you a good chuckle, now you owe me one. Let's hear it. Where are stocks going and why??


eLROY

yes elroy i read your post 10 times. (-:


Q4 rally for stocks preceded all of the positive economic news we have been seeing.


This month sell off in bonds is saying the bond market is a believer as well.


The yield curve is pricing in 250 bps of tightening in the next year. (similar to 94ish)


Enron stays with us as balance sheet fraud still has to play out (note qwest story about the swap it did with enron)


Telecom will continue to melt down


All thats left are profits to be realized.


With the S&P trading over 20 times earnings that is a tall order for companies.


I see stocks in a holding pattern for several months. If last Q4 rally really saw "6 months ahead" then we are getting really close to that and we have not seen the profits yet. SHOW ME THE MONEY


This month high yield indices are up 2.3%


I still like high yield for the next quarter.


Just my thoughts -

How can you say that all of Wall Street has 3% of known information out there and thus what they've priced in is irrelevant?


If Wall Street only has 3%...then how much realistically can someone like you have?


I'd really like to hear your spin on how Wall Street is only pricing in 3% of known information? How did you arrive at this number? What is the 97% they aren't pricing in?


What I'd also like to know is how long you've been trading and how your techniques have varied over the years.

I can tell you, from experience, that when we get into this area of defining "all" information, which begins to involve asymmetric information, and geographically scattered information - and the question of "known by whom" that follows naturally from our definition of the term "known" - that some people's propellers are going to be spinning in a vacuum.


The simplest example I can give of information which is not known on Wall Street is if I decide, for the stubborn sake of making a point in this post, to actually sell short 500 shares of Amazon.com stock on Monday at the open, buy it back 15 minutes later, and close out the account. It is true that people on Wall Street can make assumptions about the general ability of people to buy stock, by having cash, and that they can assume that rather than being on Mars, I share some of the conditions affecting, and am therefore correlated to other people. And they can also assume that people going outside of their normal pattern of investing, as with a 401k, might create some cost to them, and my quick trade would be out-of-pattern for me.


But what is more signifcant, and has a greater impact than any of that, are their assumptions about other people making such assumptions. Meaning, most of the missing information is not so much in the physical world, involving the quanitities of known petroleum reserves, and the cost to find more for instance, but rather exists in the form of the contents of people's minds. Nobody knows how much new stock investors will demand next year. But how much they demand, and how much is supplied, are both contingent on the volatile contents of the minds of decision makers right now, and almost any amount can come into existence.


I called 3% "realistic" to make a point, and to contrast with 100%. The amount of information that Wall Street is not pricing in is 99.99% with about a billion 9's, if you assume the entire data reflected in the universe, which will all be brought to bear at a single point by the end of time (or at least some subset). I don't know how else I can put it, except to say that people on Wall Street just don't know jack any more than I do. I guess a better way to say it would be that no matter how much information you price in, the amount not priced in is still infinite.


My trading has changed in that in that it has gotten worse, as I have lost interest. I have found easier ways to do more reliable things, which have less of a chance of an enormous profit or loss. I don't try to do remarkable things any more because I don't have to, and some days I am sad about it. This has been about 10 years total, about half of it spent focused on trading. I have never really enjoyed the act of trading, it feels weird in my brain. In short, when I first started trading I was just latching onto a way to make some money that was open to an oddball like me. I guess my skills and ambitions have moved in two totally unrelated directions.


My first trading was as a SOES bandit, which was as easy as using cake mix to bake a cake. SOES banditing was just the world's fastest, easiest form of trend trading. In the sub-period of my life when I have focused on S&P futures, I have gone from being an utterly clueless idiot saved by randomness, to being a freak counter-trend trader, to being a bored and disillusioned trend-trading adherent. What I am much more fascinated with than trading are 1) the processes by which scattered bits of information are brought to bear in the ticker, the quantity obtained, and physical factors which could increase or decrease this quantity and rate, and 2) how people evolve strategies and habits, and how they inter-operate.


If you had spent your life studying a player piano, would you want just to sing along, or would you want to start monkeying around with the apparatus at some point? I would like to teach it to output less random songs that are easier to sing along with. Really, the condition of that piano is totally volatile and fascinating and in flux, but I don't think anybody else on Earth is even watching.


eLROY

You have to ask yourself whether all the information that Wall Street doesn't know (your what are people thinking and expecting) really affects the market. I think you overestimate the effect individuals have on the market.

In any case, if you are bored with trading I hope you made boatloads of money with it before it got boring.

You said I overestimated the effect individuals have on the market. But at no point did I make any statements as to the relative magnitude of the impact of individuals on the market!?


All I did was illustrate where a decision made by an "individual" (whether that "individual" is Peter Lynch or a gas pumper who decides whether or not to turn his savings over to Peter Lynch) cannot be known or predicted by Wall Street. And the total supply and demand for stock at various prices is the aggregate of the individual demands by individuals.


Now if all individuals were non-correlated, there wouldn't be a problem. But given that there are only two sides of the market to be on, it is very easy for everyone to be on the same side.


In any case, your whole "the-effect-individuals-have-on-the-market" idea is hokey. I don't know what exactly it is you assume I picture, but I can guarantee you it is neither some sort of conspiracy theory where the big players fix the prices in boardrooms, nor is it something I came up with the other day sitting at the McDonalds drive-thru.


So what I am wondering is what, exactly, you would say does "effect" the market, John?


eLROY


P.S. If people on Wall Street know jack, then why didn't all the individual junior investment bankers short Nasdaq 100 futures at 5,000, and hedge their own anticipated job loss???

sure maybe, but what about those that dont want to adjust every quarter so so. and want to hold until they see a reason to move. arent bonds looking poorly for out a year or two as interest rates will certainly take its toll on them.

Believe me Wall Street doesn't know as much as some people think. For my company we get to deal with 13 different investment banks and guess what, about half of them are flat out idiots! They only know what is going to happen with us when we tell them and at that time any investor can be listening in as well. We have one guy calling us up all the time and all I hear from him are four letter words, questions about how easy is it to get a girl in a Vegas casino, when he is coming out here so he can buy us dinner (and hope we spill the beans accidently), and finally he gets around to the fact that he doesn't quite understand how to model one of our businesses anymore since its "sort of changed in the last quarter" and if we can help him out with that. With Reg FD our answer is quite simply "NO". And this is the main helper of one of the more followed analysts on Wall Street. So you are going to tell me this guy and his firm have a big edge? Yeah right, hardly. I have been saying for awhile there are two edges. One to the guys that trade well, who read the market well from a supply/demand standpoint (people like Leroy and Dr. Bill). I am not one of them but I know they exist. The other is the one who looks big picture as I do and understands just about everything is driven by economics sooner or later. Why else would I harp on the things I do, even though they really aren't about revealing where the best trade for tomorrow is? Simple answer to this all is to understand the rules of big picture thinking and then either apply it for longer-term investments or use it to narrow down your potential shorter-term investments and stick to ideas that don't go against wiser long-term thinking. At least the way I see it.

"arent bonds looking poorly for out a year or two as interest rates will certainly take its toll on them. "


everybody and their mothers know interest rates are likely to go up. that's priced in.

Wall Street isn't the analyst that you talk to.

Wall Street isn't the broker that cold calls Grandma.

Wall Street isn't the administrator at Charlie Schwab giving you advice about which box to check on your form.


Wall Street is the general knowledge of human beings on the current situation in the markets. Some people (not many) can beat these markets. Most can not.

Our analyst hero has an MBA from the London School, an undergrad from the University of Michigan. Another "genius" I deal with regularly got his MBA from the Univ of Chicago. You would think best and brightest, the types most would guess would be able to beat the street. I don't even have an MBA yet no doubt in my mind and that of my bosses that I could do much better in those jobs. These are the people that are driving decisions of millions and millions of dollars. These guys and their bosses are getting quoted by source after source. One of their bosses is a so-called expert often featured on CNBC and other investment shows. This boss I have from time to time at these face to face get togethers they have forgot that New York New York was an MGM property, didn't know that Rhode Island's gaming machines were run by the state lottery (which means big gaming companies can't make much money off them), and to top it off he completely missed the boat talking about one gaming company having "almost no debt" when the fact is they have about $1.5 billion of it. I know these things as a simple matter of fact and I don't have any responsiblity to anyone's investment decisions but my own. This guy is telling wealthy clients and in-house traders what to invest in much of the time. Its silly, but these things alone should tell everyone Wall Street ain't quite what its cracked up to be.

"You would think best and brightest, the types most would guess would be able to beat the street."


That's where we differ. I don't think getting an MBA, PHd or any other academic standing has anything to do with being able to trade markets. It takes a different skill.


I know what you mean, I've met the same type of people that you mention. I am simply saying that it is the cumulative human population in them markets that really define the market and Wall Street...not each individual idiot that we all know of. So when we are trading, we are not beating that individual idiot that we know of, but all of humankind. That probably sounds more grand than I mean, but I hope you get my drift.

Key thing for you to understand Ray is that bets or investment considerations as far as interest rates go is making a prediction against current expectations. Its obviously too easy to just say rates will be higher than they are today. Its more important to say if the market is predicting rates over a certain period of time that are too high or too low. Besides most of the bond investing done by the big money isn't actually buying or selling particular bonds but its attempting to outperform expectations based on yields. What a typical investor of this type does is something like buy XXX 2010 bonds and sell XXX 2015 bonds. In this case he has fairly low company risk because if XXX goes under he makes money on one and loses on the other, give or take a bit because of the number of years left on each bond. What he is doing is saying the market is underestimating the returns for the '10 bond and overestimating the return for the '15 bond. About 90% of all futures contracts based on sovereign (country issued) bonds involves hedges just like this one. Bonds in and of themselves are not very good speculative assets because they are subject to marketplace issues such as lack of supply, lack of competitive pricing, lack of investment coverage, etc. Hedges and futures bets are where the action is because as long as there are some trades in these bonds, then you can make these derivative type bets.

if that were true everyone and their mother would buy bonds and take advantage of the higher interest rate being offered.

Education has little bearing on a persons ability

to trade.I have been a member of 3 different exchanges and I assure you there are many people who have a talent for trading.One of the most successful traders I have ever known and still know to this day got in and out of markets

depending on whether her shoes hurt or not.I am talking a huge futures trader.Many,many years of success trading 1000 lot and larger positions.

You cannot be schooled to be an effective trader,

or every analyst would be able to buy and sell Bill Gates.

My point wasn't that these people are smart because of their education, its just the point that there are many people that trust their millions to such numbskulls. I agree with both of you, the good trader doesn't really learn his craft in any MBA program, but the general public thinks he does! Trading is much like sports betting, which I put a lot more effort and time into. The public thinks they are trying to beat an enemy that doesn't really exist. When the average Joe bets he thinks he is betting against his bookie. Really he is betting against every other bettor out there. Same for investing, the average Joe thinks he is investing with Wall Street as his "enemy" when he is actually just matching opinions against every other investor. Some sporting events are "public" events, such as yesterday's basketball game. These are games where everyone with an a****le has their opinion as the saying goes and many more are inclined to wager on the game, if not over their head because its a big game. There are stocks like that, the Amazons, the Yahoos, the Ciscos, the Microsofts...the stocks that are followed and traded a lot more than average by the typical amateur investor. When the amateur money gets huge, as it does with these stocks, then professional opinions mean less and you can't read as much into what the prices say and what the smart thinking is. You just have to accept their public status and that their prices will be driven by different factors than some unglamorous mid or small caps that don't have a tech angle to them. I think this whole factor is overlooked quite a bit by most people, but not necessarily the people that post in here.

"Education has little bearing on a persons ability

to trade...You cannot be schooled to be an effective trader..."


I beg to differ. I would love nothing more than to be able to trade along side of a professional with a proven track record. That's the kind of schooling I would give my eye teeth for.

Good point...I don't think that Wall Street knows "everything." Meaning very few of them went short at Nasdaq 5000. However, their attitudes are a correct proxy for what is priced into the market and also a correct proxy for what the market (ie all the individuals) is thinking. Therefore, you could generate excess return when you realize that reality is different from what is being priced in.


What I totally disagree with is this statement from you:

"I don't know how else I can put it, except to say that people on Wall Street just don't know jack any more than I do. I guess a better way to say it would be that no matter how much information you price in, the amount not priced in is still infinite."


I think there's very little relevant information on stocks that is not priced in. You could have insider information on stocks which gives you a huge leg up...but that's illegal and you need it from lots of companies.


The way I see it...the only way to generate excess return is to interpret known data differently and better than others.


I think this is what you do if you have trading success rather than knowing something the market hasn't priced in. It's all about interpretation.

I don't think Wall Street has a big advantage at all. That would be impossible...since they are the market it would not be possible for them to beat the market.


What I'm saying is to beat market returns you must either have information they don't or interpret it differently. I question how much information anyone has that hasn't been priced somehow into the market in an obvious way. To beat this you need to interpret this information better.

I agree that there is not that much difference in the perception of what is being traded, meaning in the guesses as to how many cases of soda sold a share of Coke (KO) represents, and in the data used to get to the guesses. Put differently, Cisco doesn't know jack about router demand up the pipe, and if they are too dumb too collect their own future demand data (an infinite missing quantity of it) from right in the middle of the supply chain, you can hardly expect investors to have much luck from their livingrooms.


But the main information I'm talking about is information about the supply of stock tied up in people's accounts, relative to demand over some timeframe. How many people are counting on selling stock under what conditions? How many people will be forced to sell stock under what conditions? It would be easier if the stock was a series of government bond coupons, so we didn't get sidetracked about information involving what is being traded, meaning earnings. But buyers of bonds aren't nearly as far-flung and hybrid, and don't gamble as much, as buyers of stock. And then the supply of stock per share being unknown just further compounds the complications.


When I first started trading S&P's, I came up with some odd chart-reading concepts, including "information delta" and "perception(?) delta." The first one was how much money would I make or lose in the size chart move it would require for me to get $1.00 worth of information. Obviously, this is normally 1, and your objective is to find situations where you can know to get out either after you have made a dollar, or lost 50 cents.


The second concept - and I called it "perception delta" here for lack of remembering exactly what my term was - was how much people's perceptions would change for each dollar move in the index price. The trading idea was to stay away from the volatile side of self-perpetuating ideas. The point being, when you say


"their attitudes are a correct proxy for what is priced into the market and also a correct proxy for what the market (ie all the individuals) is thinking"


that that is just my point. If everybody is thinking the same thing about the demand for stock one year out, and what everybody is thinking is wrong, and they don't themselves demand it one year out, the market will collapse. The main missing data is not what the demand for stock will be one year out, or even what the earnings will be of individual companies, but rather how many people are holding how much stock to meet that demand, and are they too many or too few?


Earnings don't matter one iota if 90% of people holding stock are expecting to sell it (or margin it) 100% higher a year out. There could be 10 billion companies, all expected to earn 10% of their stock price in profits next year (P/E 10). But there are not 10 trillion people to absorb all that stock. Moreover, trying to guage true supply, demand, and inventories of stock by doing arbitrage against government bonds is pretty thin.


eLROY

i didn't get my point across.


"if that were true everyone and their mother would buy bonds and take advantage of the higher interest rate being offered. "


1st, if everyone knows interest rates are going up, they wouldn't buy bonds, they'd get the hell out of them and try to short them if possible.


2nd, my point is simply that the market has priced in rates will go up...they have priced in that they think the Fed will bump up rates, and the bonds they trade, whether it be 5 year, 10 year, 30 year, etc., have that priced in. you may think you can beat it, but it is simply your opinion, there is no certainty that rates will go higher than what all the other people think.


i hope that is clear. sorry for being sarcastic before

You are a trader Leroy, not an investor. Your view of the world is far removed from that of most investors and indeed most Wall Street analysts. From your point of view, you could know from insider information that X corp is going to blow away estimates NEXT year, but right now there are a bunch of people looking to sell so you would say sell the stock. Two different perspectives. Yours works for people that trade, that take advantage of supply/demand issues and psychology to make consistent short term gains. Nothing wrong with that. However, most people aren't traders, they are investors. For them, the issues you bring are mostly confined to short term issues. Whether there are more potential sellers than buyers this week, this month, this quarter...that all isn't what guides a long-term price perspective. That all evens out over the long run. What matters in the end is what the company will produce over the next few years in terms of cash flow and earnings, that EVENTUALLY supersedes all the issues you cover plus things such as sentiment, expected growth rates, etc. Its hard though for most people to reconcile the short-term and long-term aspects. They are investing for retirement and find a company they feel will do better than expected so they buy the stock saying they are willing to hold it for many years because they like their business model and management. Then a week later they fret because they could have bought the stock for a buck less a share. Further out three months they think of selling because it is already up $5 as others (namely analysts) have caught onto their theory. So they had long-term intentions but short-term interests get in their way. Most people would be best served by investing purely one way or the other and remembering that concept.

I know you are saying economics overrides people's decisions, people without jobs and money can't buy stock no matter how neat it sounds. People who have extra earnings to save are not going to by fruit and burn it. Companies cannot imagine greater earnings out of thin air.


But the future leads us into an unknown land. There is no hard-and-fast rule that says a glut of oil today will lead either to a glut of computer chips tomorrow, or to a glut of apartment buildings tomorrow. Which one it leads us to depends on whether people today think we will have a shortage of computers tomorrow, or a shortage of housing tomorrow.


So, rather than proceeding through a tragic progression of stages, where A leads to B leads to C, the economy is choosing an infinite sequence of forks in the road, and which forks it chooses depend on people's perceptions on the day the choice is made.


Today, whether the world wants cruise ships or oil is a perception on my part. Two years from now, when I have invested my money to build either a cruise ship or an oil tanker, whether the world has a cruise ship or an oil tanker is a cold, hard fact. Perceptions lead to facts.


Perceptions may be fluid. Cold hard economics is just perceptions once they have frozen into immutable facts. To determine the supply of oil next year, you need not look at weather nor politics nor drilling technology, but only at perceptions right now about the demand for oil next year.


People who buy stocks based on perceptions of corporate earnings cause resources to be reallocated towards chasing those earnings. If, at a later date, their perceptions change, it may be too late to change the resources back.


eLROY

So if that is the case then, why has the market paid off positively for just about any investor that took a 5-year approach? Yeah a few short periods would have been bad and right now might be one of them, but in the end I am making the statement that most people should focus on long term investing. Not because of perceptions, but out of need. Most people don't have your knowledge or time, not to mention experience to trade as you do. Feel fortunate about that. Bottom line is that most people are best served investing in equity markets and sticking with it. We can all be stock pickers and have a hundred theories on what works here, thats fine, but most people are best off just making their regular bi-weekly payment/deduction and investing in S&P 500 or Russell 2000 indexes and ignoring the gyrations of the market. You can't refute that logic, as long as a person doesn't need that money within a 5 year time frame, that is the best way for 98% of all people to be invested.

What people "should" do, if everyone had perfect knowledge, and if every rule laid out in Deuteronomy could guide you through every decision in life in the year 2002, is irrelevant.


The numbers of people who realize they "should" invest long-term rises and falls with the success of the strategy. And the stock market, and therefore the popularity of the decision (or at least the amount of money held by people who make it) rises as the popularity rises, so that it self-perpetuates in both directions.


Meaning, the behavior of the stock market feeds back into what people have learned they "should" do, regardless of your advice. Perhaps the best advice would not be "invest X% of your paycheck," but rather "do exactly the same thing you did last year next year."


That would at least stabilize the religion for five seconds, so that the demand we were trying to meet would not be a moving target. But when you throw demographics, and ages and incomes into flux, the whole dynamic that feeds experience back into behavior and outcome, and re-programs religion, is thrown into oscillation.


So the problem is not what people "should" do but, rather, how people are to learn what they should do, and from whom, or by what mechanism.


Meaning, you say 98% of people "should" be invested. But given that the number who actually are will not be static, the more interesting dynamic to examine is how the deviation from 98% rises and falls, and why.


Or, going back to your example where I secretly "know" earnings are going to be great, but at the moment everyone else is selling. The more interesting dynamic to examine is what irreversible resource-allocation errors will be made in the meantime, what will be the permanent outcome of those temporary errors, and what randomness will people learn they "should" do as a result of the outcome?


eLROY