I take the subway to work daily. While not the most prestigious means of transportation, it is definitely in my case the most practical, economical, and time saving. I happen to live three subway stops from the beginning of the line.

By the time I catch the subway, it is usually full with no seats available. Sometimes, I am in dire need for a seat to get a little nap, especially if I am caught trading overnight. An hour nap can do wonders in my case.

Out of this need I become more creative about finding this precious vacant seat. Knowing that the previous two subway stops to my own have only two sets of stairs closer to the front end of the train, I started walking all the way to the opposite end in hope that most people will go for the closer compartments. This is in fact the case except oddly enough that the farthest compartment is always packed.

My reasoning in this case is that most people play the same game I do hoping for the precious nap and seat. However, three cars away from the far end seems to be day after day the optimum solution to this game. Now that I choose the optimum car successfully, sometimes I still am not lucky enough to get a seat unless one of the passengers gets off the train.

I start analyzing the passengers’ profiles trying to figure out which ones are likely to get off the train first to sit in his or her place. This is not an easy task but some knowledge of the city and behavior can do the trick. For instance, I stay away from all people over 30 in business suits as chances are that they are headed to my same destination. Once this category is eliminated, I try to eliminate all university students by guesstimating their ages simply because four out of five universities are located downtown (at the end of the line) so the odds are clearly not in my favor there either. I try to spot two age groups. High school students and under since parents most likely prefer to send their kids to nearby schools so it is unlikely that this group will travel all the way downtown for schools. Also, the elderly group is most likely not traveling far either. This whole process usually takes few seconds since I usually get lucky enough to get a seat before we reach the next stop.

This process is very similar to gaming the mistress although I admit it's never this straight forward with her. Incentive, incentive and incentive. I play the market for monetary profits and only profits. I don't care what philosophical reasoning a speculator would give you a la George Soros; the bottom line is that it is all about the monetary reward. It is all about the nap in the case of my subway trip.

I always try to figure the line of least resistance in speculation, the car with the fewest passengers. This is usually the road least followed by the public. In search for prosperity, I have to copper the public play at all times (by going to the opposite end in the case of the subway), but sometimes the simple contrary play is not good enough to win the game. A little tweaking is often needed. In the subway example I had to go to the third car from the opposite end and not the last since some smart passengers figured out the "simple" contrary play by going straight to the last car.

Timing is also a very critical factor and can make all the difference between a win and a loss. In the case of the subway one has to process some information and position oneself accordingly in a few seconds before reaching the following stop. Flexibility is also a key to successful speculation as no fixed system will beat the market forever. In the subway example, my game plan is different on the way back home since a different crowd is taking the subway at that time.

Ever-changing cycles also plays a great role in this game. The last car was full as the public got wiser and I am sure the third will be one day and a new game plan and system will have to be developed.

Knowing who you are playing against is critical to any speculative game as is the case of the passengers' profiles of this subway. An extensive knowledge of the markets you participate in is essential to your success as is a knowledge of the different subway stops and what they represent to different passengers.

I will end this post here as I reached my subway stop and have to vacate my seat for the next player.

Sam Humbert comments:

In my Manhattan years, I'd often give up my seat to a person of gender or age. For me, the psychic pain of sitting whilst a pregnant woman or pensioner is standing outweighs the benefit of sitting down. Often I'd get the fish-eye from my fellow New Yorkers — they were silently thinking "he must be mentally ill." I'd sometimes make eye contact and explain "I'm not originally from New York," and this would calm them.

Craig Mee adds:

Watching commuters pile into the tubes in London, there is sheer brawn! Doors open at the station and boom, some people are fixed on the destination, i.e., empty seats and God help anyone getting in there road. Funnily enough this is usually concentrated to a certain gender. Some people like to try and muscle markets around too!

Chad Humbert adds:

 1. Watch for mothers with small children. Sometimes a child will scurry, and the mother will have to leave her seat to retrieve him. Voila! Open seat!

2. The elderly are often slow. I've found I can often simply beat them to the open seat by walking somewhat faster. If I'm careful, I can make it appear that I passed them inadvertently. "Oh, were you going to sit here? I'm sorry! Do I need to move?" Most of them want to be polite, and they insist that I keep the seat. Copper the elderly.

3. I've found that the handicapped seating rules are rarely enforced, and when they are, it's just a small fine. I pay that fine many times over with the extra trading profits I generate from feeling refreshed after a nice nap.

Yishen Kuik offers:

Mr Saad's comment on how the farthest caboose is not the optimal choice because of gamesmanship, but rather some not so inconvenient caboose reminds me of a well known behavioral finance game.

Ask 100 people in the audience to pick a number between zero and 100. The winner is the one whose number is closest to two thirds of the average.

Eggheads will zero in on zero, but that answer merely demonstrates deductive abilities without canniness.

People with a more limited appreciation of convergent series might pick 33 instead, based on the assumption that the average will be 50. People able to think one more step ahead might pick eleven. People able to think one more step in the convergence series might pick nine, and so on.

The real challenge of the game is to guess the distribution of this gradient of deductive powers among the audience and weight one's answer accordingly.

e.g. If you think half the people in the room will guess 33 and the other half are extremely bright but guileless and will guess zero, you should guess eleven.

So perhaps if the challenge is given in a lecture room at MIT, guess one (zero is pointless because of the likely pot split). If the challenge is given to the general public, guess between ten and fifteen.

Philip Tetlock, whom I'm reading currently, reports that the most common winning answer is thirteen.

Barry Gitarts contributes: 

 Here are a few of my subway gaming experiences as they relate to the market.

Gain an edge by counting - I use the grip mats markers to note where the train doors open when the train stops, so next time I will be standing there well in advance of the train arriving. This prevents others from being the first in the door. This takes several observations, because the train never stops in exactly the same spot, but it’s remarkable how close to the doors you can be. Standing on different parts of the platform to observe which cars are the emptiest helps in figuring out which car you would want to focus on.

Work harder then the next guy and be prepared in advance - Even if you are the first in at your door, there will be others coming into the same car through other doors, competing for the same seats as you, this is why you must start looking for empty seats through the windows as the train is still pulling in so you know exactly which seat you need to go for, instead of walking in, looking around and then going for a seat. Those two seconds are the difference between sitting and standing.

Know the relationships between markets - I find that sometimes, especially during rush hour, it makes sense to take a different train one stop away from your destination so one can catch the transfer one stop before the mob boards.

Capitalize on the public fears long after the threat is gone - Unlike Mr. Saad, in my case the last two cars are the emptiest, because the train I take starts in a more unfriendly part of the city where people wouldn't want to be caught sleeping in the last car, so when the train gets to midtown, every car is packed like sardines except the last two which are near empty.

George Zachar strategizes:  

As someone who sits most of the day in front of screens, my subway priority is not getting a seat but minimizing total transit time. I have a mental map of where the stairs are at my destination, and maneuver to get closest to the doors that will open nearest to my exit route.

Market lesson? Different players have different goals. Absolute or relative return? Style box restriction? etc. 

John Floyd adds: 

 I spent one of my school day summers as a messenger in Manhattan. To increase efficiency I learned the exact subways, waiting positions on platforms for door openings, and the correct cars to place me near an exit that would easiest to get me to my destination. I did this for as many of the routes I traveled as possible.

The numbers of possible routes in terms of subways, exits, etc. are myriad. The proper choice allowed me to be the first off the car and up the stairs, oftentimes placing me right inside the building I needed to reach. This was an added benefit as I avoided the often hot, humid, and crowded streets. I would estimate that this on average increased my efficiency by 20-30% at least. Conversely when I rode my motorcycle across the country I looked at the map once in the morning to get a general idea on the direction I wanted to head and roads I might want to take and then just drove. My efficiency of time probably dropped by 50% but my efficiency of pleasure went up by equal.

When traveling now I try to use the time to read, listen to books on tape, or use the time as a period of thoughtful reflection. I do this mostly because I find it most productive for me given I do not find the sleep comfortable or useful to me in modes of transport. I can understand others find it as a useful battery charger that allows them to be productive later.

So I would extend the logic and say that while the goals –profits, learning, etc., may be the same, the path and methods to getting there may be very different. I think another important point is that one needs to decide and focus on what works best for them, as it may not be the same as what works best for others. 

James Sogi comments:

 We don't have subways here in Hawaii, but I try to find the best time to find uncrowded waves for surfing. The best bet is to take my boat to spots such as the nearby national park that has nice waves, but only with a long walk and even longer paddle which weeds most out. The boat takes me to the front row spot and a short paddle, with refreshments waiting.

The other method is to go right after lunch, but before school is out and before workers get out. That seems to be the old guys’ slot, and usually only one or two old guys like me are left still surfing.

The other odd thing, is that even if its crowded, many in water can't see where and when the wave will form and break. If you calmly paddle to the spot where the wave will form as you see it coming over the horizon before anyone else realizes where or when it will come, you will be right at the right spot as it breaks without paddling and catch the perfect wave with a single stroke without effort at the perfect spot while all the crowd is scrambling around trying to catch the wave in the wrong spot.

This of course takes about 40 years water experience and have obvious market application as well. Study of the bottom, which many in water don't bother looking at, triangulation of shore navigation aids, like palm tree lined up with volcano peak and far point, and timing of the waves and sets all help find the ideal entry point. I guess it’s like standing at the right spot on the subway platform.

Another method if the waves are small, or really big, is to use a big board. All the kids ride short boards and only have one board, so if the waves are mushy they can't catch rides, or if the waves are big, they can't catch rides, and with 12 different boards for each micro category of waves it’s easier to catch the nice ones. So really good equipment helps.

Another method is to exercise and train even when the waves suck, so when the waves come, you are in great shape and can charge while the kooks are gasping for breath. Of course pros like Shane Dorian exercise all day long lifting weights, and after surfing five hours, swim around Tavarua Island twice. Geeze.

There are a million ways to beat the crowd. The last one is move a million miles away. The market still reaches here in about 89 milliseconds. 

Victor Niederhoffer extends:

These posts on how to get a good subway seat are a fine pyrotechnic display of native ingenuity. Presumably many of our readers, in their days as poor shavers, also had to apply these techniques to finding parking spaces, especially if they lived in urban areas and didn't want to pay $50 a day for a garage. What I'd like to ask, however, is how these ingenious delectations could be applied to getting a seat in the market. When someone is forced to get out at an unfavorable price, how do you know it's coming, like on the subway, and how can you take his place at a very favorable position to you? One hint is to study Michael Covel and his gurus.

Allen Gillespie replies:

In my experience, a sign of an open seat in the markets frequently presents itself when everyone sells a stock from news on a single company. A recent example is the retail selloff following SHLD's news — only to have WMT, HD, and retails sales numbers lead the market higher a few days later.

Questions I always try to ask myself in those situations:

1) Is the news company-specific or general?
2) Is the bad news the result of good play by a competitor?
3) Did the valuation make the news appear more important than it really is?
4) Which companies have future catalysts? 

Hany Saad contributes:

A fund manager using a trading system that has been losing for more than three consecutive reporting periods is usually a good bet, especially if the majority of fund managers trading the system fall into the switch trap by moving to a different system (usually a very thorough read of the fund prospectus is necessary in this case). They usually give up on the first system at the exact wrong time when it is on the verge of a big win, falling into what Rob Bacon warned against in his wise words "beware of the switches", leaving a seat wide open for the wise observant player.

The same reason I wager that trend following will make a killing next year with the only reservation being that it should be on the long side. 

Barry Gitarts adds:

I have tried to predict who would get up on the train, but such efforts have usually been futile. Instead I stand ready, knowing that anyone could be the next person to get up and I'll be ready to run for the seat. Of course this works better standing in the part of the car where there are fewer people, since there will be less competition for that seat when someone does get up.

In the market, this is like predicting the next big selloff. I can't predict when it will come, but I can be sure I have sufficient reserves for when the opportunity presents itself. As in the subway, this may work better where it is less crowded, and in stocks/markets with less media/analyst coverage. 



A few statistics and anecdotal evidence from the Aloha State. Tourism is down 15%. Japanese tourism is down significantly and mainland tourism down as well. Construction is down 46%. Appraisals on real estate are coming in lower; escrow closings are down; for sale signs are proliferating. Failed escrows are up. Prices are starting to approach mortgage balances requiring pay to close scenarios reminiscent of the last real estate cycle in the mid 90s.

At dinner last night at Jameson's, a nice restaurant by the sea serving plainly prepared, but cooked just-right fish and vegetables, the waiter must have overheard my trading musings and weekly stories and chimed in about how the market was up so big yesterday. I said to my wife, "Hmm, that's interesting." I remember early 2000 when I saw our waitress from dinner the next day at the broker buying all in on tech stocks. I don't know what the TV and all is saying about the recent highs in stocks, but it must be becoming a popular meme at recent all-time highs.



Symmetry is a basic characteristic of the universe and of the markets. Vic and Laurel have raised this concept in music, Lobogola, bridges. Weyl, in his book Symmetry, talks about symmetry in the history of human civilization, and how groups arise in the the study of symmetry. In Strange Curves, Counting Rabbits, and other Mathematical Explorations by Keith Ball, which Vic and Laurel recommended, is a discussion about the decimalization of fractions and how repetitive groups arise in the sequences. The combinations are endless as is the number of primes. There is a whole branch of math called Group Theory. The peculiarity is that a fraction is exactly stated, but most decimalization never are, and our digital computers never arrive at the proper result, only an approximation or rounding.

Such theory can be profitably applied to the markets, as we return to last week's S&P price after a Lobogola move of stampeding elephants charging down, and right back up over the same ground.

Dylan Distasio writes:

There is also a subset of evolutionary theory that points towards symmetry in nature as a sign of health, resulting in improved chances of mating for more symmetrical males across many species. The idea is that symmetry in living organisms requires a great deal of energy to be achieved, and hence the organism must be healthy if it has a pleasing symmetrical shape. And as an added bonus for symmetrical humans of the male (and by extension female) persuasion:

"Experiments have found that women are more attracted to men who have features that are more symmetrical than other men. One study even found that women have more orgasms during sex with men who were more symmetrical, regardless of their level of romantic attachment or the guys' sexual experience." 

As an aside, I would highly recommend "The Red Queen" as a fascinating primer on why sexual reproduction may have evolved as a means of reproducing.

Part of the theory is that plumage and symmetry in birds evolved as a sign of health, making them more attractive to females. It also deals with sexual reproduction as a panacea against the ebb and flow of parasites evolving in a constant battle across time with their host organisms.

I'm not sure what the equivalent of sexual reproduction would be in the markets, but I can see clear analogies between the parasites and market arbitrageurs (no offense intended) who are constantly in search of chinks in the armor of the market, looking for the fleeting free lunch before the opening is closed, and a new one has to be found.

In any case, the book is a great read with a lot of food for thought. 



Bear GryllsI much enjoy watching Man vs. Wild , aired on the Discovery Channel. The host Bear Grylls (former member of SAS, a career that ended when he broke his back in three places, after rehabilitation became the youngest Brit to climb Mt. Everest and return alive) places himself where tourists might get lost. He then with very little equipment shows the viewer how to survive and find the way back to civilization.

It usually involves staying calm and not wasting energy, finding your directions (construct a simple compass, observe the sun, or follow a river), finding water (look for plants in desert, don't eat snow as it is not energy efficient), and food (he shows how to catch fish, birds etc), protecting yourself against the elements (he shows how to block the sun, keep warm in the snow, etc). Maybe some of you can find parallels of how to survive in the markets?

Some survival techniques from the show below taken from Wikipedia:

  1. Glissading down a glacier using a broken ski pole
  2. Using trousers as a flotation device by tying off the leg holes to trap air
  3. Climbing up a tree to survey the land
  4. Hunting a rabbit with a throwing stick
  5. Soaking his shirt in urine and using it as a headdress to cool down in the desert
  6. Climbing up a knotted rope using Prusik loops
  7. Fashioning a raft from bamboo and palm fronds

Scott Brooks adds:

This is a great show and my kids love it! They DVR every episode and watch them over and over! Bear doesn't just talk the talk, he dives right in and walks the walk, actually eats the bugs, catches fish and eats them raw, purposely breaks the ice and then jumps and shows you how to get out, then takes off his clothes in snow and shows you how to dry off in freezing cold weather, or drinks his own urine to survive.

I'm sorry for being so graphic, but you have to admire someone that actually does whatever it takes survive another day. He really teaches the right message and it's a simple message, yet the most important message that any of us can learn. There is no higher value than life, and life requires an optimistic thinking mind to survive.

I find it ironic that his nickname is "Bear". He is the complete antithesis of market bears. Market bears talk their negative talk, but don't walk the walk. Heck if they did, they'd be completely broke! Market bears talk endlessly about gloom and doom and give advice that leads only to disaster. Whereas Bear Grylls gets in and shows you how to avoid the gloom and doom, but if you happen to find yourself in a gloom and doom situation, he actually gives advice that will get you out!

Market bears give lessons of pessimism. Market bears are constantly screaming the sky is falling so you'd better duck and cover. They are anti-life and their methods lead to sure destruction at any cost, and the cost is very high! 

James Sogi writes: 

Many needless deaths are caused by mistakes in a critical, and sometimes not so critical situation. Many times an everyday situation can become critical as a result of compounded series of small errors that snowball into a death threatening situation. A day at the beach, a ski trip, a hike, a trade in the market can all turn into a survival situation in a short period of time as a result of lack of proper preparation, and mistakes of judgment compounding, and or panic or inappropriate responses. 



We had eight new lows on the down swing in June and that marked a good bottom of that swing. Today marks the eighth new consecutive record session of new daily highs on the S&P Future Sept. And contrary to the bearish Candlestick analysis, the few times that this has occurred in this century have been in fact quite bullish.

Notably eight new consecutive highs was not seen in the last five years of the last century in the big run up. The paucity of data make conclusions difficult with any degree of confidence, but the tendency seems to be in line with the general upward trend and to extend upward runs. This also highlights the difference between longs and shorts. They are not symmetrical.



 In the animal world, ground hogs will make a certain noise to signal that a hawk is overhead. Other animals have similar patterns such as bees doing a dance to signal the source of food. It would thus reason that investments that share characteristics would behave in patterns familiar to people using a value or style method.

Animals left to themselves find a natural stable point between predator and prey but this becomes unstable with people as there is a need to get ahead in the short term at the expense of others. In business this issue is often resolved with methods of price-fixing.

Finally, groups may behave unlike the random investor who will attempt to profit from trial and error in this sector or another. It would appear that a stable group of (long term) investors has come to conclusions about the future of the sector and random (some such as small caps are larger) fluctuations just come with the investment.

Scott Brooks writes: 

Studies have shown that white-tailed deer that are left to themselves, or orphaned (assuming this is after they are weaned) actually do just as well as their counterparts with a mother.

Another interesting aspect to this phenomena is that if you want to keep the buck fawns on your property, it is best to shoot the momma deer and leave the fawns alone. Once the momma goes into estrus, she will run off the button buck (buck fawn). It is believed that this is an instinctual action to that lessens inbreeding. The buttons are left to fend for themselves and find a new home range. They usually travel for several miles, and are disproportionately killed in the hunts. If the mother dies or is killed, there is no one there to run off the button buck, and he will almost certainly stay in his familiar home range. This actually has been shown to increase his chances of survival.

There is a definite cyclical instability in wild in predator prey models. One of the easiest ways to observe this is by watching the rabbit population vs. the coyote population. They definitely ebb and flow opposite each other, never seeming to reach an equilibrium.

The problem is not so pronounced in a well managed whitetail herd. Man is the whitetails biggest predator and man does a pretty good job of keeping the whitetail in check. Due to our ability to use reason and logic, we do a pretty good job of holding the whitetail population in check and stable.

What I find interesting is that in the area's where the whitetail population is out of control, such as cities, it's usually because people are not using logic and reason to solve the problem they're using emotions. I'm reminded of when John Galt said to Dagny, that when you're confronted with a choice and your head and heart are conflicted, always go with your head. ) The point being that in cities, people let their emotions get in the way of doing what is best for maintaining the healthiest most well balanced deer herd possible.

I always find it interesting when city people complain about the deer, but then are all aghast at the idea of harvesting the renewal resource. They always seem to want to try the same tried and failed methods.

This is similar to investing. Most people that invest in the markets really don't have a fixed system that is researched and tested and proven to work. They invest in the emotion of the markets and end up buying the investment that they wish they'd bought last year. As a result, they never reach a consistent equilibrium in the markets and as a result, greatly under perform the 10% long-term positive drift.

The Market Mistress loves to swoop in and devour the portfolio of the unexpecting. But her older sister, Mother Nature, is a vicious task mistress and makes the Mistress look tame by comparison.

Yishen Kuik comments:

I think it has been mentioned here before that classic predator-prey models show cyclical instability instead of steady equilibrium. 

James Sogi writes:

Fish cluster in schools. The edges of the clusters are quite defined. None of the fish want to stray far beyond the pack. Same with traders. Look at how the closing price over the last six days, except Tuesday, clustered together despite wild swings.

Panicking is the worst thing to do around sharks. They don't bother humans or fish, only things that are injured or dead, easy prey. They never bother a strong confident swimmer or surfer, only things that look injured or panicked which is a good market lesson as well.



 Any father wants to spare his son the mistakes, the pain, the suffering he went through, especially learning to trade. But every generation discovers there is only one way to learn: the hard way. As my son leaves his teens behind and starts his own trading, I offer him some hard won humble advice about trading.

1. Watch your money management. Don't over extend. Start small. Learn well at the smaller sums. Be brave with the smaller amounts. It’s not the dollars that are at issue obviously with X shares, it is ego/emotion, etc.

2. Assume it will take at least three to five years to get professional. No one goes into the market and starts making big money right away. No way. Everyone has to pay their dues.

3. Fear and hope work against you. They are ingrained by 10,000 generations.

4. You are at the mercy of the broker. It is always a good practice to review your tickets each day like. The mistakes tend to be in their favor and not yours.

5. You will experience the real deal buying in on a real panic and experience the fear and uncertainty that will be a regular part of your trading life. Learn to embrace that feeling. It is not bad; it is good. It is what others feel and gives you the advantage to win.

6. You will learn the feeling of bailing too soon from the feeling of overexposure, and the great feeling of a winning trade and selling at the top. But it’s never satisfactory. Coulda, shoulda, woulda. Those there are in on every single trade. Ignore them. It’s not a precise science. For one used to winning, learning to lose is a big lesson. But by losing a bit less, and winning a bit more, the overall war is won bit by bit. That is the key. Avoiding a big loss. 15-20% a year turns into huge amounts over 50 years.

7. Don't grind. The fewer the pieces, the longer the hold, the lower the transaction cost, the lower the spread. It will eat you up over time.

8. Always haggle with the market. Put your orders in below to buy. Put orders to sell a bit above. Never give asking price. Never take the high bid. The extra cents add up over a lifetime. Better to pass a deal by than get taken by a fast-talking salesman like the market. See Practical Speculation on this subject.

9. Don't trade your profit and loss (P&L). You have to trade the market. The market doesn't care what your P&L is. It knows your break-even point and will come just short of it.

10. When things look the worst, that is the time to be optimistic and not fall into the herd mentality. That is the only way to make money. Look at it this way; it will never go to zero and you are not leveraged so you can never lose all of it. Even if it goes down 5 or 10%, it’s not the end of the world. You are 20 and have plenty of time to make money. Now is the time to take some risk and hopefully make some money. But if you keep your head and wits, it will turn out alright.

11. You can see how patience is important both for buying and waiting to sell.

12. The scariest points are the best times to buy. Everyone else is panicking. That's when you get some good deals. The herd is stampeding. That's when the predators pounce.

13. Sometimes walking away is best. If it goes down, you can buy more. Always good to have some cash.

14. It's very difficult, kind of like playing flinch with the hand slaps.

15. There are sharp operators out there that see you coming a mile away. When you look around at the poker table and don't know who the mark is, guess what? They know exactly what you are thinking.

Welcome to the wonderful world of markets and trading.



 Today will make eight new consecutive lows for S&P Sep. future contract. The last time was in May of this year with a happy outcome. The other rare occasions of eight new lows were mixed. Since none of this is very significant statistically and by reason of its rarity, a different approach, discussed by Nison in Japanese Candlesticks, about record sessions might provide an idea to consider. He says eight to ten record sessions is important and is called "bones of Sakata's body." Sakata was the city in Japan where rice futures were traded in the 1600s. He says buy after eight record session lows. So far today it would have been a good buy, but time will tell.

Another interesting technique is the use of three-line break charts. These are similar to point and figure, but rather than use fixed box sizes, the three-line reversal must exceed the low or high of the prior three bars for a reversal. This way the reversal adapts to the market rather than a fixed system and might capture the changing cycles. Vic and Laurel tested point-and-figure and found some value. Perhaps the three-line break approach could be tested as well. A suggestion might be to trade it non-traditionally, in new ways that might be more profitable as suggested by Vic and Laurel's work, using point and figure in buying the pullback rather than the breakout as is traditionally suggested.
New Lows:

1543.8 6/18/07
1540.7 6/19/07
1525.5 6/20/07
1518.0 6/21/07
1513.5 6/22/07
1505.5 6/25/07
1497.5 6/26/07
1494.8 6/27/07

Larry Williams remarks:

Not really eight new lows — the gap-up on 6/15 and inside bar (to the prior day's true range) and then 6/19, also inside the gap day, did not really create new lows. 



Roughly counting the day S&P September futures bars, it looks like it crossed 1400 about 20 times. We have 11 so far for 1500. This reminds me of the criminal defendant on the witness stand at his trial. His lawyer asks him, "How many times have you been convicted?" Defendant answers, "Six times, and this time will make seven."



 Kailua-Kona, Hawaii is the world's capital for big game fishing; 1000-pound fish are common. It's summer and the catch is on. On a typical gamefisher, a 35-64 foot luxury sport yacht, they will run four lures on four poles, one short corner three or four waves back, one a bit longer, one out deeper and one in the far corner about seven waves back. With the lures in we have a good depth for action and if they are hit the line won't get tangled and when the boat turns, the lines won't cross. When a lure gets hit, it's "fish on!" and time for a long fight.

When fishing for big game in the market, I sometimes run lures under at varying depths, say three to seven waves back, hoping to catch some big game. Sometimes only the short lure gets hit. Sometimes all the lures get hit at once and there is a lot of action with hands full and it’s time for a big fight.

Mark McNabb extends:

The boat industry is somewhat bifurcated, as the high end seems to hold while the blue-collar powerboat side is soft. Diesel in the south Chesapeake Bay is near $2.55, while in resort areas with good sport fishing in NC and VA Beach it can run $3.55 or more. After seeing Harborfest and several weekends of boating in the bay, I would say the shock of higher prices last year is wearing off for the fishing-oriented. As my friend who has run a 62' Buddy Davis off Delaware says, "Fuel is the cheapest part of owning a boat. If you cannot afford to fill it up, it is time to sell."

Tuna, mahi, and wahoo are running nicely off VA Beach and Hatteras this week. Grilled a friend's tuna catch last night with cilantro and lime over pecan wood. It's mahi or crab night at the Bay tomorrow. Our neighbors have so many blue crabs, we're getting dozens (not cheap this year either) just so they can clear the way for the ones in their pots.

Tim Melvin adds:

Around Kent Narrows, the Bay has been very busy. Mostly go-fasts and upper end cruisers. As Prof. McNabb noted the high end is fine. They have enough to afford what they want. Middle class, mid sized fishing boats, and center consoles are seen a lot less. Sailing is very active out of Annapolis but those cheapskates use the wind! It's not just a legend about the cheapness of sailors — having worked in, owned part of and spend a lot of time in waterfront bars, the difference between a tip from a sailor and a power boater is in the 100% range.

Large Vikings are selling very well, as are the Cigarette-style boats, especially Sonic and Formula. The after market in Intrepids right now is actually higher than original sale price.



There are many old daily articles from 2001 Chair and Laurel on Worldly Investor. I am having fun tracking the articles along with the daily chart and reading about their work on the markets.

It is a very educational supplement for those still hungry for more after Practical Speculation and Education of a Speculator and shows them at work in a tough market. The market calls are uncanny looking back with 20/20 hindsight.

Too bad we still don't get the great calls. Now we have to do the work ourselves. It’s probably better that way. It's funny but it doesn't work following someone else's calls. There is no confidence without doing the work yourself.



 Financial writers refer to liquidity. What is it? As of this writing on Friday afternoon at S&P September 1518, Globex cumulative depth shows around 3000 on each side with fewer than 1000 bids or offers at the various levels. Time and sales show orders of 1000 and more are fairly common and such an order might take out several levels.

Contrast this to 20,000 cumulative depth per side at market tops and trend days up. Right before the FOMC announcement liquidity dries up to lower amounts, which is followed on the announcement with large movements. The last few days have seen larger handles. Is it just the hot mid-summer and all the big traders are out in the Hamptons, or is something else at work?

Last night and tonight are midsummer nights following the solstice.

"More strange than true: I never may believe
These antique fables, nor these fairy toys.
Lovers and madmen have such seething brains,
Such shaping fantasies, that apprehend
More than cool reason ever comprehends."

From A Midsummer Night's Dream, William Shakespeare.



 At a time like this, one hesitates to do anything but say something descriptive.

The Dax broke below 8,000 today, but came back to 8,050, and bonds were down as low as 106.04 and have now recovered slightly, to 106.13. The Dow went below 13,400, to 13,398 for an intra-day negative sequence, and yesterday set a negative reversal of one, with its close below 13,500 at 13,489. The grains are down about three percent from their recent one year highs, with corn near $4, after being at $4.20 a week ago. The open in stocks was particularly confounding, just about unchanged at 1326.7 after closing at 1327.

Almost all big moves down in the last year have been greeted with big rises the next day, with Wednesday June 6th being the exception, when there was a decline of 17 followed by a decline of 28 on the Thursday.

There was a grave decline in the afternoon yesterday, which will have all weak hands very frightened, and there must have been considerable margin selling at 10a.m. today, as the S&P and Dow hit their lows, down about half a percent on the day.

Everything in this post is completely descriptive, and not at all helpful for trading, except maybe for those who like to take out the pencil and paper and turn descriptive thoughts into predictive studies. I can however, give some perspective from a specialist in panics, who was writing for The Ticker in August 1908. The panic specialist has decided to buy only on panics, and so found himself a buying opportunity after Steel broke, circa 1895:

A slaughter has taken place during the morning. Everything from St. Paul to Coxey had broken ten, twenty, thirty, or even forty points [those were the days: shades of 1987 — Vic]. The faces about me were those of lunatics, not sane men. Standing next to me was a man who ha seen the last of his fortune swept away, and another was pacing up and down the room muttering to himself: "My God, I've lost $30,000."

The panic had come and passed so quickly that if my orders had not been entered in advance I would have stood no change of getting Steel at my figures. I bought my Steel at $25 a share, and the lowest it had touched was $24. It currently stood above $33, so yes, I had a small profit. The tree had gradually lost its branches and fallen throughout the year from its highs, but I had not yet learned how to plant the acorn to my best advantage, and worried that the new tree might never have take root [He was a cane investor through and through — Vic].

The rest of the crowd were besieging the manager, the order clerk and the the office partner with such questions as "what have I got left?", "can't you give me a report on my sales?", and "can't you carry me overnight?"

The market was rallying by then, to be sure it was rallying, but the recovery came too late to save most of them. I heard the manager explain to one unfortunate: "I'm sorry. but there was nothing else for us to do, we put the stop orders in at about three points above where your margin was exhausted. It was impossible to know in advance that there would be breaks of twenty and thirty points between sales."

At such times, we brokers stand in the gap, and all for a commission of just one eighth [a beautiful touch — Vic]. We did our best.

The specialist in panics did become a millionaire, and perhaps this will provide some descriptive perspective from one hundred years ago or more.

James Sogi comments:

Counting the kind of action, it has been over 1000 days since there has been a 30-minute bar larger than today's 12-point handle at 10 am. 



 A few years ago we had a nice discussion about bridges, their engineering and structure, and how this might relate to market models. Looking at the recent market structure reminded my of the Brooklyn Bridge with a three-day suspension in the middle and two nice towers on either side, a common structure both in rhythm, elevation, and construction. A nice symmetry. The idea is that the market exerts similar forces and results in comparable structures.

Yesterday, Beethoven's Fifth Symphony was in the air. Da da da, dum. Seems like a fairly common market rhythm, and in fact it is.



I've been watching NYSE advancing issue volume minus declining issue volume, and it seems to lead the S&P futures by a few seconds and is a good barometer of the day. Yesterday it rolled into negative territory as the S&P fell off its midday highs before flip-flopping around and rebounding into positive on the up close. Last week saw some days over a million on either side on the runs. It seems more direct than TRIN, the predictive value of which Vic and Laurel have disproved in published studies.



 In his book, Beyond Candlesticks, Nison says, "The Japanese emphasize the number three. …[T]he Japanese view a market that has had three rising or falling windows in a row as a market that has reached maturity."

Nison refers to a book written in the mid-1700s entitled, The Fountain of Gold - The Three Monkey Record of Money. They refer to the yin and yang, yang being bullish, yin bearish. From the book, "When yang movement reaches an extreme, there is stillness. This stillness gives rise to yin." Nison recommends waiting for confirmation with a bearish movement.

The Sept S&P mini futures has had four gap ups in a row and two weeks ago three down gaps in a row. Today's low range market could easily be called stillness. The candlestick patterns have interesting names and history and are a fun source of ideas for testing. Time will soon tell whether these ideas have any merit or predictive properties.



Recent moves looked a bit like the year 2000 when there were bigger moves up and down. Looking at the average weekly average of the daily range of S&P futures as a measure, and using the median as a robust way to count varying periods, it looks like that measure of volatility is rising recently.

Days  Median average weekly range
200   10
100   11
20     12
10     15

During 2000, the median S&P median weekly range exceeded 15 also. This size of larger range was more common in 2000 and during the two years after.



 "Duuude, you really missed it!" said the surfer on the shore as I came up and asked him how the waves have been. "Ya should have been here yesterday. It was 6 feet, glassy and perfect." It's a classic scenario played over and over. You have to go in and surf the lousy, windy, junky days when the surf is bad in order to get the really good days. You can't just pick the good days or you won't be in good enough shape when the waves hit, and due to the random ever-changing cycles and sudden runs, unless you are there "on it" in the water, you're going to miss the epic sessions. How many days have I been out in lousy conditions by myself when the winds turn around, the swell hits, the tide turns and I am out in perfect conditions with no one out?

In Reminiscences of a Stock Operator, Lefevre recounted the story of Mr. Partidge, "The Old Turkey," an older operator who refused to sell out his position on rises.

Lefevre wrote, "Everybody knew that the way to do that was to take profits and buy back your stocks on reactions. And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came. And I saw my stock go kiting up ten points more and I sat there with my four-point profit safe in my conservative pocket. They say you never grow poor taking profits. No, you don't. But neither do you grow rich taking a four-point profit in a bull market. Where I should have made twenty thousand dollars I made two thousand."

Wise old Mr. Partridge said, "I couldn't think of selling that stock. Why this is a bull market!" And he said it as though he had given a long and detailed explanation. "My dear boy, if I sold that stock now I'd lose my position and then where would I be?"

Not much chance to get back in last week's rise except for the young and the brave.



 Say you are in a remote valley with a nice bottle of wine to go with the barbeque but darn, forgot the wine bottle opener, don't forget the Hawaiian wine bottle opening method. Take the wine bottle and wrap the bottom of it with a towel. Go the a tree and smack the bottom of the bottle while wrapped in a towel against the tree about 50 times really hard. (not so hard you break the bottle of course). The raps slowly move the cork out enough to grap it. Try it, it works. Enjoy your wine.



 Last night while swimming laps I was thinking about efficiency of movement through the water. Actually this started last Friday happy hour when I took a pile of people from here to the pub and they happened to have the America's cup on TV. Several of the folks here are part-time sailors and while watching the kiwis fend off Italy through tack after tack a seed of a thought started germinating in my mind.

Efficiency is a critical component of all kinds of systems involving movement. In fluids for example we know that flow can be steady or unsteady, laminar or turbulent, and uniform or non-uniform. The more the fluid flow is steady, laminar, and uniform, the less energy per unit mass it takes to move the fluid. Unlike solids, however, elements of a fluid mass may move at different velocities and be subject to different accelerations. Still, we have three fundamental anchors: the conservation of mass (continuity), the principle of kinetic energy (flow equations), and the principle of momentum (from which the forces exerted by fluids can be established). What I am most concerned with however in this gedanken is efficiency, therefore energy relations. The most basic energy equation for flow in a fluid mass with boundary constraints, say in a channel or a pipe is (Energy at point 1) + (energy added) - (energy lost) - (energy extracted) = (energy at point 2).

In swimming, energy is added via the muscles, energy is lost due to drag, and there can be a slight effect of energy being extracted depending on the movement of water in the pool. For example, in racing at elite levels measurements have shown that the racers who are lagging behind the others can get slowed ever so slightly as they approach the wall if the wave front generated by the lead swimmers hits the wall and is already bouncing back into them. But in any event the main concern here is with drag.

We know based on the Froude relations that drag of a body or vessel through water is a function of the ratio of the length of the body to its width and depth. In general experiments show that the higher the ratio of length to width, the less drag that is exerted, which is why racing hulls tend to be long and narrow.

In swimming the practical example of this is the use of the method of front quadrant swimming, which was popularized in the 1980s and has recently come back into vogue as people examine Ian Thorpe's technique. (At least as a term or methodology.) It's beyond the scope of this post to discuss all of the minor details of FQS (you can Google it) and there is always some controversy when it comes to swimming technique but the main gist is to maximize and maintain the ratio of your body's L/w in the water in order to lessen drag. This is accomplished by swimming mainly on the sides of your body, using rapid but fluid transitions from one hip to the other, with a long body position in the water that is created by keeping one hand out in front at all times (not straight out in front of the surface of the water but in the front quad in front of your head).

I can say from experience that working with FQS can drastically reduce the number of strokes required to cross the pool, in my case by about 15-20% (3,4).

This leads me to contemplate trading efficiency. To me trading efficiency is not the same as volatility of p/l that is really what is captured by Sharpe, but rather is using the least number of contracts to capture a given level of profit. We know that in trading, as in swimming there is considerable drag in commissions, account fees, and the bid/ask spread which has to be overcome.

Also, as with swimming, I have noticed as I get older that it is not so much the losses that annoy me (although they can definitely hurt at times) but rather the periods where I am churning and getting nowhere. As daytraders we have terms we use to describe this annoying feeling, like "not in gear," "last to get the joke," "the broker is my best friend this week," etc, all of which capture that feeling of trading inefficiency.

It also begs the question as to whether trading efficiency as a metric has any predictive value, at least for traders following a systematic approach to positions. Or, conversely, is there a metric that might be developed for the market movements as whole, say over the course of the week, to assess the degree of market efficiency or the degree of market efficiency as it moves between certain goal posts (1500-1520, 1520-1540, etc)?

We have discussed before how the market often has a tendency to turbulent behavior during the course of the week only to finish nearly unchanged on the week and Victor has proposed that this is one way the system maintains itself, by enticing people to do the wrong thing at the wrong time and thereby make a contribution to the upkeep.

Jim Sogi adds: 

Here are a few additional considerations: Swimming underwater creates less drag, so there are some rules limiting the time, say one stroke, underwater in swim racing. I have a lot of experience swimming underwater trading and in the ocean when I wipe out surfing, but it seems to be part of the game and is a necessary component that might be factored in to your equations.

I like spending only the optimum time underwater, ideally none, but only a breath or two. A two-wave hold down is serious and approaches drowning. Some time underwater is necessary to pop through waves, but also to build a position, as it's impossible to get a full boat on the bottom tick every time.

The second consideration in water is planning. At a certain speed and with certain hull designs the boat starts to plane up on the surface with a break out from the limitations of the hull length/width speed formula into a new equation. When surfing, the commencement of the plane from paddling through the water is the start of the 'ride'. The length of time in a trade getting to the profit ride part seems very important in efficiency terms.

The longer and faster profit/ride, the less time underwater slogging, the greater efficiency, especially tallied over a large number. Paddling a surfboard through the water, getting onto a plane, and jumping up, while at the same time not missing the wave, takes incredible timing and strength. This is a key to trading as well, to time the opportunity, to have the strength to plow through water, sometimes under water, and get to the plane, and ride the ride, maneuvering through the changing face of the wave. Maneuvering around the sections, under the curl, until the wave ends and before hitting the reef takes skill.

Just like every trade requires such strength and courage to enter with the risk of going underwater, skill to read the changing market turns and getting the maximum distance. These things could be quantified in performance stats, but lost opportunity must also be added in as a variable, and lost opportunity has been the key variable in the recent cycle.

From Vincent Andres: 

Here is a humble suggestion. Let each trade be evaluated automatically by your computer according to some criteria (many have been given here). There may well be around 10 criteria. Evaluation may be a note between [-100, +100].

After enough trades, have a look in the criteria space to see if there is some clustering or if the distribution is random or not. Also, this is nothing else than an alike computerized version of Chair's "keep in a notebook" recent advice. 



 This weekend we visited Waimanu, one of the most beautiful spots on earth, accessible only by ocean, or a daunting exhausting six-hour 11-mile hike up and down cliffs. The valley is deserted with a river running down the middle surrounded by 2,000-foot cliffs and a gorgeous 2,000-foot waterfall cascading into a clear pond.

We swam out with our gear through the surf at Waipio Valley and met my best friend and his boat outside the surf line and climbed aboard. We set out the fishing lines and trolled for ono. Outside the valley he hooked up a 25-pound ono that was to be the barbecue for the night. We swam in all the supplies to the camp site.

Meanwhile, while we were fishing, his boys ages 11 and 14 gathered coconut husks, ironwood needles for tinder, twigs and small sticks to get the fire started. After we let the wood burn down to a mass of red embers, that is the perfect time to start barbeque. Open flames are no good unless you like blackened fish, and you can't wait too long or the embers will die out.

We did not bring a saw to cut the branches so they stuck out of the fire. When we came back at dark they had a nice fire going. We filleted the fish into chunks and put on salt, pepper, some French herbs and some butter. We used plain soy sauce on the cooked fish. The smoky flavor from the fire was delicious with rice and salad. We even had rocky road ice cream for desert thanks to dry ice in one of the coolers.

It was much more deluxe traveling by powerboat than by Hawaiian canoe. That night the blue moon was bright and full. Sleeping in our Lawson Hammock tents kept us comfortable, dry, off the hard ground. During the May season the trade winds die off, so there were no waves and no wind making beaching through the surf less life threatening. During the perfect blue days we explored some of the other deserted oases like Lapahoehoe Nui, a small shelf below huge cliffs with waterfalls falling on it. We dove in the clear water among fish.

A few thoughts of statistics and the markets during the weekend concerned linearity and randomness. Our course, as typical of any endeavor on the ocean, and with my best friend, is never linear. We never go in a straight line from point A to B, always weaving, back and forth, in and out with the tides, up and down in the water to breath, dive, breath, but always making some progress, surviving and having a great time in the process.

In the Jonathan Raban book, Passage to Juneau, A Sea and its Meaning, he talked about how the European settlers could not understand the Indians on the water. They would never go in a straight line, but would wander about, loiter, talk, fish, go this way and that. They did not understand the under currents, the eddies, the unseen forces carrying the boats in and out, the tides, the surges, the forces of underwater rock formations. This is like the market. It never is linear and rarely takes a straight line. When it does, like the recent bull market, you don't expect it. Always up and down, back and forth, fits and starts, backing, surging, stopping for air.

Another thought came watching the wake of the boat and the surface of the ocean and the clouds in the sky. They constantly vary in random patterns, but taken as a whole system they are very organized with the smaller random variations taken as a coherent surface pattern. Above the small surface patterns are larger groundswells that travel through and then even larger tidal shifts. Beyond that there are larger evolutionary shifts slowly eroding the island away, the slow rise of the sea. These are a perfect metaphor for our markets, and if seen in the proper perspective may aid in the quest to see and make sense of the market.



Systems can be designed to trade end of day or once a day, the best of course being buy and hold, which was hard to beat last year.

There are many niches. The issue is whether it is possible to adapt to the appropriate niche given the trader's current state, and the state of the market, both of which vary from cycle to cycle.

The diversity of the markets is beautiful. It can accommodate many needs and does so from the bank to the hedge fund, the governmental retirement fund, the small saver, the retiree, the active trader, and the buy and holder.



 Remarkably, each of the four days this week the S&P Index has traded above its previous all time high close of 1527.9, but then failed to set a new closing record.

Day High Low Close
Mon 1534 1526.6 1527.9
Tues 1533 1525 1525
Wed 1535.7 1524.3 1525.5
Thur 1532.5 1507.8 1511.6

Note the artful way that the market was able to be down on the week by a hair, as of Wednesday, setting up the longs to increase their positions, only to decline 25 fast points the following day. It would take a Rommel or a Stonewall Jackson to duplicate such cunning.

Thursday had the highest single day range since March 21st; it was up seven by 10 a.m., but then down 18 by 3.40 p.m. (NY time). This is about two and a half times the average range of last year, and shows the usual ability of the market to do the unusual.

Finally, there have been four serious down afternoons, and these are presumably related to the fake Drs. feelings about China … let us hope he visits there for a second time soon, as the first time he was only there for a day (with Paulsen, just 1 year ago). 

From John Floyd:

I think other contributing factors to the market's retreat are also tied to the cycling of rate expectations, economic data, and "carry trades." The beginning of yesterday's sell-off started not soon after the stronger U.S. economic data and coincided with a sell-off in interest rates and carry.

In addition to the Dr.'s comments, who does seem to be losing some of his "mojo," the directive of the latest comments were towards China and the market has disregarded the comments and moved to new highs since them. The overnight price action in carry and Japanese inflation data continuing to border on deflation should make today interesting.

Also of note, combined with other indicators, is that gold last Memorial Day was at roughly the same level and subsequently fell sharply.

From James Sogi: 

Why three times? It's like the old knock, knock joke. Who's there? Always three times of course. Three is the minimum number to create a pattern. "Knock, knock. Who's there? Orange you glad I didn't say banana?" The three tops were also the three-mountaintop candlestick pattern. Seems like the market likes threes. "On your mark, get set, go!" Seems like something deeper, but what? But it's something to ponder over a three-day weekend.

Speaking of weekends, here's a favorite barbecue: Yakitori.

It's great for sitting on the deck because you can eat holding the little stick and still have a free hand for the beverage and you can gesticulate with the little stick to make your points more emphatic. Serve rice of course, or better yet Musubi. Here's how to make Musibi.

From Dylan Distasio:

If you're in the NYC area, check out Yakitori Totto on the West side for awesome organic yakitori and a great sake selection. They actually have an East side location also. My wife and I have eaten at both fairly often, and the food is delicious. They cook most of it over the long slim charcoal grill on skewers, and you can order any piece of a chicken you can imagine (and then some). It's fun to just order an assortment of small skewers and drink some sake. There's a great atmosphere also. I've never been to Japan but it seems pretty authentic. We're often one of the few Caucasians in there; the rest are usually all Japanese-speaking, including the entire staff. I'd highly recommend it. 

John Floyd adds:

Actually if you want sake and good food the other place to try is Sakagura on East 43rd street, in the basement of an office building. There are several hundred of types of sake to choose from, anywhere from a few dollars to a hundred dollars for a masu (traditional wooden box cup). 



C. Stuart HoustonIn Models of Adaptive Behavior, Houston and McNamara discuss the state of an organism and how that might affect its behavior. The state is characterized by a set of variables.

An overfed bird is less likely to engage in risk to feed. Its state is overfed and one can predict it will spend less time feeding when hawks are around. Companies like the Sage's are overfed, and by their own admission not feeding. It can't find food because it has no incentive to search when its state is overfed. It doesn't engage in research, as it has plenty of food. It's old, and doesn't seek partners, and won't reproduce. It relies on pecking order and crowing like an old rooster.

A company with no earnings is hungry, lean and will take risks, engage in research, and searches for new niches, new partners. A young company seeks partners and more capital.

Steve Ellison writes:

Geoffrey Moore wrote the book on this topic for the technology sector. It's called "Crossing the Chasm". There is a "chasm" between the needs of early adopters of a new technology product who love new technology for its own sake and the mainstream market of conservative information systems managers who want others to be the guinea pigs for a product before bringing it into their own organizations.

The companies that successfully make the transition from serving the relatively small number of early adopters to gaining significant market share in the mainstream market generally start by customizing their products for a specific niche market. Ideally, customers in the target niche should be currently served only by general-purpose offerings from large companies. By customizing its product, the upstart company can offer a product that is five to 10 times better for the target niche. Thus the company can dominate the niche, while staying under the radar of the large companies, who perceive only scattered customer defections. The niche gives the company a highly profitable customer base from which it can expand to a larger market.

Here is an example of how I might use Mr. Moore's ideas. Looking at this week's Value Line, I see five stocks with Timeliness ranks of one or two in a technology-related industry. I instantly recognize company A as the leading company in the industry with a larger market capitalization than all the others combined. I research the other four companies. I find that company E operates exclusively in a niche within the industry. In this niche, company E has the leading market share, 30%, well ahead of company A's 18% share in this niche. Thus company E appears to be a potential chasm-crosser, a potential high grower for years to come. Companies B, C, and D each operate in one or more niches, but none is a niche market leader, so I am not as interested in them.



Few college students pay full freight. Most get a package of grants, scholarships, loans, jobs, etc, designed to allow them to pay according to their ability to pay. It's an ingenious method to milk the most and get the highest price.

However, at under $20,000, it's still a great deal. Education in America is the dividing line between the classes, and the key to upward mobility for most.



 When water boils, it hits 100 C, but doesn't immediately turn to steam and change state to the higher energy level. Instead it requires additional energy at 100 C staying at the same temperature, until finally it breaks out into a boil. The various convective currents within the pot swirl around in interesting patterns during that time.

In the market system, how does heat in the form of capital get transferred? On the tick level of course there are individual transactions. The overall energy level of the system is the price. There are holders of capital at various prices. The inside price is like the convection as it comes down to various levels and stirs up the holders at the lower levels with energy to spur capital transfer.

On 5/17, the boundary layer at the top, above 1420, required more energy than was available to change phase. Perhaps more convective action is needed, and more stirring to transfer capital. The convective current swirled around the top but that did not seem to gather enough energy or tip the balance. Nuclear engineers study such currents when transferring energy to water to create steam for power.

Vincent Andres adds: 

Imagine a set of nodes. Each node may have some value. Those nodes are interconnected via constraints, e.g., node1+node5+node25 < 5, etc.

Let's call alpha the ratio: number of constraint per variable. When alpha varies, there is a phase transition phenomenon quite analogous to the water phase's transitions.

Alpha small = system with many solutions, may stabilize easily

Alpha too big = no solutions, erratic system

Alpha near the alpha limit = maybe/maybe no solutions, let's be : node1 = bonds, node2 = stocks, node3= real estate, etc., and we are not too far from "markets dynamically related".



 I have witnessed the Darwinian, dog-eat-dog world on numerous occasions. It is truly a world of fang, claw, might, and brawn. There is very little tenderness in the wild; there is mainly an indifferent or fearful view of other animals towards each other.

There might be some tenderness in higher mammals towards their young, but that doesn't last long. Adults will take care of themselves first and foremost and eventually try and dominate the young who will someday return the favor.

As a hunter I can appreciate the unpleasant side of the contract. But I'm not sure that is an apt description. For me it is not unpleasant. I actually enjoy the hunt, the whole hunt. I enjoy the process of getting ready, the exactness of detail to be truly prepared if the moment of truth were to arise, and the beauty and relaxation provided by Mother Nature.

There is one unpleasant side the hunt, though. Every so often, you're going to be involved in an ugly kill. I don't like it when these happen. I don't like it all. I figure that somewhere around 5 to 8% of kills are ugly kills. I define an ugly kill as one in which I don't make a clean killing shot.

But after years of hunting, hunts that have included ugly kills, I can tell you this with great certainty: I am the most humane killer in the woods. All deer/turkey will die. The best death they can have is at the point of my arrow or the point of my gun.

Jim Sogi writes:

Before we get too bleary-eyed, animals can be vicious in their quest to propagate. It's vicious out there in the wilds and the markets. Rarely is quarter offered in reality. 

Laurence Glazier writes:

HirogenThe comments about the turkey are not dissimilar to actions of humans to humans in distressed parts of the world, e.g., Sierra Leone. We are fortunate enough to be domesticated animals, but the wild human being is fearsome.

Now, the creatures sharing Scott's wonderful land are fortunate to have such a considerate steward, but though they are usually unaware of the moment of their transition, perhaps they live their lives in a more heightened sense of insecurity than otherwise, observing other members of their group being removed from their tribe, and being sorely missed if they too are taken. How is a balance kept between animal and human interests, both the good and the gory episodes?

The sound of a cow bellowing for days on end after its calves are taken is testament to the anguish of separation animals can feel.

So the question is, how do we act to animals? And that depends on our perception. In what way were aboriginals perceived to enable "wise and intelligent" people to hunt them?

I would also note that the tools and practice of hunting and warfare go hand in hand, and wonder if these histories will always be linked. Without wishing to sound like Kenny Schikler, of Goodnight Burbank, Star Trek dealt with this well in its allegory of the Hirogens.

Scott Brooks replies:

I'm not sure the cow is bellowing from anguish over the loss of its calf. Calves are frisky, much like small children, and want to run and play and explore. They have a tendency, like small children, to wander off. The mother calls them back with her bellowing. If a calf disappears the mother will keep looking and bellowing to call the calf back in. It may be instinctual or hormonal. She calls the calf because it's bred into her genes. Or maybe as her udder/teets burgeon with milk, she may be compelled to call the calf to come eat.

On my farm, calves are able to wander onto the grass between their fence and roads — "grass is always greener on the other side of the fence" situation. But they won't wander too terribly far from mom, who will eventually call them back. And every year there are a few calves that are rejected by their mothers and have to be hand-fed by the farmer/rancher.

I can't say for sure that cows don't feel anguish, but from what I've seen, I doubt they do. 

[Editor's comment: There is a fascinating discussion available online, on research in this field, which is called Cognitive Ethology.]



 The average child spends 34 hours watching television a week.

A recent poll indicated that over 90 percent of the population of the United States never reads a newspaper. Fewer read more than one book a year.

There are 1440 minutes in a day. If one spends 15 minutes reading, one can read a 300 page book in a month.

Question: What is the difference between someone who can't read and someone who won't?
Answer: Nothing!

Alan Millhone asks:

 I had not heard these terrible statistics before. The United Negro College Fund coined the slogan "a mind is a terrible thing to waste." Children today sit endlessly in front of the boob tube, which serves as a babysitter for many parents. Thirty-four hours per week is staggering.

Recently my daughter took her cable TV back to "basic" and has no Internet for her two young sons. Solomon makes all A's and Forest is a B student. She is conscious of the time they spend on video games and TV, and she makes sure they are involved in school and after-school sports (currently soccer). They also have to do their homework as soon as they are home from school.

Pizza Hut and Tim Hortons in our area have a book program once a month for students, where they read and have their reading certified by a parent. My daughter says Pizza Hut is under fire for this because they are, in a way, encouraging bad eating habits for children. I suppose Tim Hortons will come under the axe next for selling donuts!

I am lucky that my parents encouraged me to read and I enjoy learning new words to this day. I wonder what can be done to change the terrible trend amongst our nation's youth?

Tom Ryan replies:

I really hate to be the park ranger, but is there really a study that actually has data about kids and 34 hours of TV a week, and what poll was it that indicates less than 10% read one book a year? Can we get back to numbers on the table?

Conversations on how "things are going to heck these days" only bring us all down and serve no purpose, not to mention that I don't believe in the premise in the first place. I, for one, am very encouraged by what I see going on with young kids these days. 

George Zachar offers:

When technology permitted advertisers to study viewership with greater detail than the old Nielsen diaries, they discovered that having a TV on counted as watching, whether there was anyone in front of the box or not. Cooking, chatting, copulating, sleeping all counted as viewing, as long as the tube was clicked on. 

Stefan Jovanovich adds:

The periodic release of alarming statistics about the decline and fall of literacy in America is one of our country's most enduring traditions. It usually coincides with the discovery by publishers that they are losing market share to another medium. Forty-five years ago the new scandalous fact of America's illiteracy (prompted by the rise of color television) was that Americans were now spending more on pet food than on books. When I told my father the book publisher of this alarming fact, his comment was that it confirmed the obvious: dogs and cats eat more than they read. I think that (yet again) the apocalypse may be a bit farther off than the New York Times fears.

Jim Sogi writes: 

As our esteemed resident philosopher states, "happiness is the end that alone meets all the requirements for the ultimate end of human action." The distinction between wants and needs makes it harder to make a concrete rule for action. For example the desire for honor is not something that is needed, but is a worthy aspiration. The more concrete way to frame the dichotomy is to put it terms of "stuff". If the goal is to get a lot of stuff, the wants never end. If the goal is to get rid of stuff, and end up with a wooden bowl and a robe, there is a finite goal. Once the stuff is gone, only the needs are left and true happiness is possible.

Regarding television: it is evil and promotes the acquisition of stuff, thus fostering unhappiness. Those who seek happiness in stuff are never happy, for there is always more. Eliminating television will improve life. The least benefit is the added 14 hours per week available for self-improvement; the greatest is the freedom from incessant exhortations to feed a desire for more stuff. For children, it avoids the frenetic programming of the brain into 3-second sound bites, which can destroy the ability to concentrate and focus.



 One of the never-ending bearish ideas promulgated by the chronic pessimists is that the consumer was really punk in April 2007. The idea, according to a certain weekly financial columnist and his camp, is that whereas the 1990-1999 bull market (which he was consistently bearish during) just went up without raising warning flags, the rise in the markets in 2007 has raised a million warning flags. And that this is now bearish.

Some people have actually read the chronic bear columnist's columns in 1990-1999, and contrary to what is stated, there was nary a week during that period that warning signals of imminent decline were not hauled out by one or another of the curmudgeon's friends. Such bearish reasons are memorialized in Practical Speculation.

It seems petty on my part to constantly point out the fallacies in the chronic pessimists' (the Abelprecbuffgrosoros') arguments. Eventually they will be right, and I have no idea if the current market is more bullish or more bearish than at any other time, and I certainly don't find this a more than usually good time to establish positions — but the point is that there is no reason to think that the reasons for bearishness are greater today than at any other time in the last 100 years. Nor is a decline in previous or prospective consumer spending or real estate prices good or bad for the market — that would depend on the totality of market interrelations and forecasts of discounted earnings for the market for the indefinite future. All the chronic pessimists I know of who actually trade, (in contrast to the weekly financial columnist) and who must take responsibility for their calls, are scratching the backs of solvent members from their perches and living quarters in the vicinity of the Trinity Church graveyard. Such will continue into the indefinite future, because of the creative power of the individual when placed in a system with proper incentives and the protection of property rights, as memorialized in the work of Dimson, Marsh and Staunton.

Chronic pessimists often have surface reasons for being bearish. For example, several years ago they talked about how P/Es were too high. Of course this didn't take account of interest rates or growth or past prospective relations between P/Es and market moves. The bearish P/E relation is specious, based on retrospective, part/whole fallacious, out-of-date relations from the Shiller database. And these, by transference from the academic world, have so much more credibility (if you didn't know he's been saying the same thing since Dow 1000, like the weekly financial columnist).

The question is, whenever the ratio goes the other way, like P/Es, now the lowest in 20 years, or oil, down 5% over the past year, or now the dollar up against the yen over the past year, why do you never hear about the relation that was formerly bearish and is now bullish?

Another purported reason to be bearish is that the dollar is very low and when you look at things in terms of the Great Man sitting on a platform above the world with the lever, he's not really making money on his dollar holdings, and this is bearish. You could substitute any other market, like oil or food prices, that is going down or up when stocks are rising as a reason for bearishness. None of these putative reasons for bearishness is ever tested. Instead, vague qualitative statements are posited about the unwanted dollars piling up in foreign coffers that could create a landslide.

From Stefan Jovanovich:

There is at least one reason to think that the "record highs" in the stock market averages reflect faulty counting: those averages are being measured in U.S. dollars. Adjusted for the fluctuations in the Federal Reserve Bank's Broad and Major Currency Indices, the S&P 500 Index (excluding reinvestment of dividends) is still well below where it was in June 2000. Scaled to the Broad Index the S&P 500 is still 6.7% below where it was nearly 7 years ago.

The Major Currency Index is probably the more appropriate measure to use since it reflects the change in the value of the U.S. $ against the other currencies used in the world's capital markets. Scaled to the Major Currency Index the S&P 500 is right now at 72% of its June 2000 price.



 It is time we get our heads out of the sand and stop subtracting out food and energy and admit we have an inflation problem. Energy prices are up and are going to stay up. It has been going on for two years and we (the Fed) must stop fooling ourselves into thinking there is only transient inflation which will likely reverse itself and that there is no core inflation. The transient is now permanent, though volatile. We really have an inflation problem.

Michael Cook writes:

I disagree that we necessarily have an inflation problem just because energy prices are up and are going to stay up. The fact that they are up is sending a legitimate economic signal that supply and demand are not in balance, similar for food. Were the Fed to choke off this "inflation" by throwing us into a recession, these price signals would not be able to do their work of drawing out competitive supply in the form of nuclear, solar, biofuels, fuel cells, etc. - whatever the creativity of entrepreneurs comes up with.

Jim Sogi writes:

The other unidentified variables are the global currency/capital flows that render the "island model" obsolete. There are a number of well-tested empirical theories and studies. But early into the floating currency regime the dynamics are not well understood. There are various theories.

Productivity, things like hours per week are one measure. Other tested theories include comparisons of monetary conditions, fiscal policies, economic growth, central bank policies, portfolio balance, purchasing parity (McDonald's indicator) that seek to predict currency flows. The size of these capital flows are so significant as to render traditional measures of domestic economic conditions no longer reliable or as predictive as they were. Ignoring these variables is a mistake.

Charles Pennington adds:

This argument has been made repeatedly, but is there any empirical basis for it, or any rigorous theoretical basis?

Can it be stated in a falsifiable way, such as the following:

"If money supply measure X (M1? M2? M3? something else?) increases by Y percent, then price index Z (CPI? PPI? sum market caps of stocks, bonds, real estate?) will also change by Y percent."?

My understanding is that history shows that there are times when the value of "everything" drops or increases, without any change of comparable magnitude in the various measures of money supply.

The market cap of the U.S. stock and bond markets add up to about $30 trillion. For just residential real estate, I find numbers that are a few $10s of trillion. Meanwhile the most liberal definition of money supply has it on the order of $10 trillion.

From say 1995 to 2000 the stock market more than doubled, and real estate went up, too. Just the changes in value of stocks and real estate over that period clearly add up to more than the entire money supply. Prices of other things, in general (as measured for example by the CPI and PPI), certainly did not go down over the period. So it appears to me that there can be massive repricing of things in general, of magnitude that dwarfs not just the change in money supply (about $2 trillion over that period), but the money supply itself.

This tells me that pricing of things in general has pretty wide latitude to move around. The value of "everything" dwarfs all measures of money supply, and makes moves of magnitudes that dwarf changes in the money supply. One should never think of there being some kind of grand conservation law, though I'm sure there are useful correlations. 



 Hitchcock's SpellboundNeuroses are unconscious attempts to use what worked as a child in the changing adult landscape. This principle is at work in the markets as many lost opportunities result from attempting to use what was successful, even yesterday, in the current situation. Fixed systems are but one example.

Difficulties with overcoming personal issues are known to anyone who has overcome these things. The difficulty of adapting to the daily changing market cycles, the major difference between long and short, the difference in up days and down days, ranges and runs, are not like shifting gears in a car or wearing a different hat. The difficulty shifting to different analysis, different tools, different tactics, different markets, and the need to switch all these things on a dime cannot be overstated.

Some like to stick to just one mode, one system, and wait for the mountain to come to Mohammed, to avoid the switches. Just recognizing that the cycle has shifted is hard enough, but then to change course in the old battleship is even tougher.



The Low Bar Blues (Original by Jim Sogi)
B - E riff (With feeling) and repeat

Looking for the Low Bar blues
I'm searching for the low bar blues
Gonna turn my trade around
Lookin' for the those low bar blues
Those spus 'r taking me down.

Just sit and wait
Until you think its time
Press that button,
You spend a dime

Looking for the Low Bar blues
I'm searching for the low bar blues
Gonna turn my trade around
Lookin' for the those low bar blues
Oh spus,  don't  take me down.

Its gonna drop
You just bot the top
Gonna hurt
You just lost a lot

Looking for the Low Bar blues
I'm searching for the low bar blues
Gonna turn my trade around
Lookin' for the those low bar blues
Those spus are taking me down.

But wait, It'll turn around
Hang on, just stick around
forget the pain
Let me hear,  one more refrain

Looking, looking, looking for the Low Bar blues



 On days like today, when I have been proven wrong by the market and I am down a considerable amount of coin — when my nose is completely shot off — I close my book, take my losses, and start looking at the market all over again. I might re-enter, I might pass on the remainder of the day completely.

What I am seeing today: nothing has changed. I have not seen the market this fearful of an additional sell-off since May 1, or April 12, or March 30. Who cares if some imaginary geometry on the SPX has suddenly come into question?

I pay close attention to what the market has become: fantastically efficient. I see the market doing its dirty work in a much more efficient manner than even a few months ago.

Alan Millhone adds:

The market ebbs and flows like the tides, sometimes every 24 hours. I note today the Dow is down 120 points, however what about all the past days it went higher and higher? A short time ago it fell 400 points, but it all came back and then some. It stands to reason that at certain points traders are going to sell off certain holdings and thus take a profit. Then the market settles down and begins to climb once more to a certain level. Mr. Tar is in the market every day and gets in and out all the time. I stand back and watch oils, precious metals, lumber, etc. 

Jim Sogi extends:

Blaise Pascal wrote in "The Philosophers" in 1623:

Continuous eloquence wearies. Princes and Kings sometimes play. There are not always on their thrones. They weary there. Grandeur must be abandoned to be appreciated. Continuity in everything is unpleasant. Cold is agreeable, that we may get warm.

Nature acts by progress, itus et reditus, It goes and returns, then advances further, then twice as much backwards, then more forward than ever. The tide of the sea behaves in the same manner, and so apparently does the sun in its course.

And so does the market. Pascal's quote brings to mind yesterday's pyrotechnics on an otherwise unremarkable FOMC plain talk release. The broker's quotes disappeared for a number of minutes, but at least they were busy filling orders in a timely manner. Globex seemed overwhelmed. Why the market goes through these circumlocutions is not clear, but a few things stand out. First, there is some sort of clearing function. Second, the action seems to stretch the capacity of both the Globex system and the trading platforms, which are not good signs. The PPI announcement led to a similar reaction in bonds, which dropped a point in three minutes, then rallied. This has the smell of a mechanical issue rather than an economic reality. It is the thorny path the S&P futures must take to their inevitable new highs. The appearance of a madhouse, of panic, so different than the market's normal stately mien, reminds me of the little chickens in the yard scattering, the mother squawking, all running this way and that from their cover in a panic as the hawks pick them off. Then ending right back where they started.

Victor Niederhoffer remarks:

You can't expect any market, even one with a six percent-a-year upward drift, to go up every day, especially after a series of maxima. The problem is that if you wait for just the truly high-Sharpe days, you'll miss the 10,000-fold-per-century rise.



 Krakatoa, by Simon Winchester is a fascinating account of the social and scientific world in 1883 and the impact of the explosion of the volcano of Krakatoa. He is a geologist and explains the history of the idea of tectonic plate movements, which is standard knowledge now, but dismissed then as nonsense, like many new scientific theories.

One theory is that Krakatoa ushered in the global age that is now driving financial assets. The explosion sent shock waves through the air that traveled around the earth 7 times and registered on the many barometers in London! The tidal wave registered on tide meters 7,000 miles away. The particles created spectacular sunsets around the world for months and lowered temperatures. It was not Krakatoa that caused the many crop failures but another explosion that turned summer into winter.

The then recent telegraph and the new cables allowed the news to travel within days around the world leading to the realization of the importance of world events. A man named Reuter used pigeons to dispatch news from Europe to London to be the first to convey news of interest and financial importance. With that edge he was able to expand subscription to his services.

In the Heart of the Sea, The Tragedy of the Whale Ship Essex, by Nathaniel Philbrick, is a heartbreaking account of the attack by a sperm whale against the Essex, its sinking, and the devastating 87 days at sea in small whale boats and the suffering and struggle of the diminishing crew. As with many tragedies, though perhaps precipitated by some random event, a series of miscalculations, errors of judgment, both before and after led to creating a much worse situation.

In the case of the Essex, it was an older ship and the owners may have skimped on some repairs leaving it weakened structurally allowing the whale to stove its sides. The new young captain through bad sailing allowed a knockdown near the beginning of the voyage leaving them short of whaleboats. They were unprepared for a sinking.

After the sinking, rather than head for the Society Islands a few hundred miles away as the Captain first decided, he succumbed to the opinion of the mate and crew to go up wind, thousands of miles to South America. This example of poor leadership resulted in suffering and death. The horrific plight of the starving sailors on the small boats and who survived and who died and why in the social order gives much food for thought. It is notable that Captain Pollard eventually sunk a second ship by crashing it on a reef. Was it random? Bad luck? Or something else at work. The story reminds me of the feelings of a trader stuck in a bad trade or drawdown, starving for days and weeks and months on end but eventually making it back. Some even go on to live out their lives, but for some reason, the characters in this book seem to attract the plague of the fates. In this case, were correlation and causation related? That is an important question.

The Essex was the basis for Melville's, Moby Dick, which leaves off as the Essex horror continues. Interestingly, Melville was a commercial failure as a writer and had to work the docks during his life. As an aside, I have a fried here who taught us the hundreds of knots and lashing to lash a traditional sailing canoe who looks just like Quequaig with the tattoos and the top knot and is a seaman of the highest order and speaks of his death. He has tattoos on his back and head which mark where his life force will exit at his death.



 It's hard to test the overnight fat finger of fate bar on the jobs, but like the clearing fire, like the probing action, they seem to have a clearing function. Last year there were a few of the night spikes ups and the subsequent follow through. A lot of brush has grown between here and 1527 cash SPX in the last five years, but the function of the futures seems to be to probe, peek a light in the darkness ahead, clear away the brush for the main army which follows behind. I can't see how the army will not push through the short distance.

With only 500 stocks in the S&P to absorb a global glut of productivity, industriousness, striving, youth, inventiveness, and of the world, These are 500 of the best, systematically weeding out the losers, and it seems that there is much upward pressure and bias on those precious assets. Look around and see how crowded it is everywhere you go, and how prosperous and well fed everyone seems. Consider the linear rise in prices inexorably higher even to the point of exponential rise. Remember the 80's, the late 90's. Bears are trapped, break outs up, every dip bid back in a rush.

Consider the new highs in the Dow and the proximity of the S&P highs, current daily multiyear highs, the breakdown of many old systems and cycles. It's easy to say and see after it happens, but in practice its a very difficult environment when moving to and into new ground, and the old rules no longer seem to work so well.



 Mathematics does not correspond precisely with the real world. It gives an unnatural sense of precision that does not exist. The equals sign is a good example of a basic fault with math. Take 1=1 which seems simple, but in the real world nothing is equal to another thing, and nothing is the same as something else. Everything differs from everything else in some manner, in small details, in space, in time. Nowhere in nature or the real world will you find a line, a circle or a point. Zero is convenient for computations but zero does not and cannot by definition exist. This problematic from a philosophical standpoint.

Math may be useful as a model to help predict or understand but has basic flaws that are often overlooked at the users peril. The remarkable advances due to math cannot be denied, but from the realist's view, the discrepancies loom large. From this discrepancy creeps in random results present in the real world.The Mathmatician argues that calculus and limits, and statistical procedures account for this real world fuzziness, but the idea of limits and central limits can be ways of shortcutting by creating a simple model to represent a much more complex process and cramming it into a little figure which remains black, non transparaent and unexplained.

The mathmatician argues, "Who are you, untrained philosopher who never studied math, to say this." Point granted, but the analysis stands.

The bright side of statistics is that it attempts to measure the discrepancy between the line, the curve and the real world and in the process captures some information about the real world and its deformities exhibited as randomness.



 If there's one overriding principle of successful market navigation, it is that survival is the most important thing of all. The market will always be there, and if you have an edge, there will be a chance to rise to your rightful place in the firmament — if you survive.

Because survival is so important, I am always on the lookout for survival lessons from other fields. One of the reasons I always read Bo Keeley's writings is that he has had at least 81 near-death experiences, and by dint of proper planning and response, survived them all.

One of the best things about the Patrick O'Brian series is that in each of his critical battles, the hero, Jack Aubrey, goes through innumerable steps to survive and minimize the deaths of his crew, often changing tactics midstream, so that what would have led to certain death instead led to a long, beloved life.

I have 100 books on survival, at least one of which is on my desk at all times. I have books on survival at sea, survival in the mountains, survival on the battlefield. The problem is that others know infinitely more about the principles of survival in such fields than I do. However, I recently had some direct experiences related to survival that gave me confidence that I might have something to add in the continuing search for lessons.

For almost three months, I have been visited off and on by a racking cough and runny nose. The symptoms were the same as the flu. I have always been very resilient to colds and flu, and I expected each day that the symptoms would disappear and that I would go on my merry way. But on Sunday, April 22nd, after a game of tennis and family activities, I suddenly found that I could not walk without agonizing chest pain. I was about to have dinner at a restaurant with a trusted companion and before the first course arrived I asked her to pay the check so we could leave. She said she would call paramedics and I told her not to. I begged her to listen to me and do nothing. I stepped outside for some air, and within 30 seconds, two fire trucks and an ambulance had screeched to a stop on Park Avenue. Despite my efforts to elude them, they wrestled me in and administered tests. I rejected their advice to come with them to the nearest emergency room, and signed a release form stating that I knew I might lose my life in the next minute.

I went home and slept. In the morning, I could not muster the energy to walk 10 yards to my trading screens to see where things were opening. Those concerned called an assortment of relatives to persuade me of the error of my ways, and there was much talk about possible heart problems — which I refuted with elegant logical and philosophical proofs and reminders that I had played sport every day for the last 50 years. Furthermore, I refused to be transported by ambulance to the indignities and travails of an E.R.

But one thing led to another, and a triumvirate of magnificently determined women tricked and manipulated me into an E.R., where a battery of tests quickly revealed that I had pneumonia and that one of my lungs had stopped working. My brother who was working behind and in the trenches the whole time, subsequently sent an article indicating that my particular condition was associated with at least a 25% mortality risk within the next 30 days, and I submitted, albeit not without further complaints, to the ministrations of doctors.

Here is what I learned about survival from my experience:

1) The worst person to make a decision when survival is at issue is the person whose life is in danger. He may be concerned about discommoding others — or the Grim Reaper may have dulled his senses. If I had not been hurried into treatment against my wishes … I won't finish that sentence.

All market traders should have a designated person to take over decision-making in their positions when survival is in question.

2) For three months, I had been subjected to extremely non-random changes in my health. This had to be a 1-in-1,000 shot. When my symptoms didn't respond to the usual remedies, I should have seen a doctor.

When a market starts reacting in a completely non-random fashion, especially when it's against you, you should throw away the databases and get down to fundamental principles. Any persistent rise such as what we've been witnessing in the stock market for the past month, or the non-random episodes that happen so frequently in the commodities and foreign exchange markets — anything that refuses to give you even one chance of a dignified exit — should be treated with the most serious consideration, as survival may be involved.

3) I was admitted as a cardiac patient. If I had gone to a cardiologist's office or a dignified heart center, I am certain that I could have talked my way out. Instead, I was put into a hellacious, poorly ventilated, noisy, crowded emergency room where I received 20 tests in an hour or two and quickly learned that the problem was my lung, not my heart.

The lesson for market people is that during a survival episode, simple routine tests or systems of the kind that brought you into the trade are no longer sufficient. What is required is a wide-ranging approach that may have nothing to do with the original system.

4) A friend of mine told me 20 years ago that the only way to get good medical attention these days is to be on the board of directors of a hospital. I don't believe that the statistics on survival for poor and rich bear this humorous platitude out, but I do think that the only way to convalesce in quiet, or to die with dignity, is to be a friend of a key board member.

Because I have some important friends, I was whisked from the E.R. into a fancy section of the hospital where it was possible to breathe and to accommodate all my well-wishers and caregivers (although I was pegged mistakenly as a diabetic and the TV monitor was programmed to show me Diabetic Channel only). Somehow the name "Soros" kept being wafted about. The powers that be may have believed that my potential contributions to mankind would be of a Palindrome-like magnitude. It was rather amusing since Soros, I believe, would have been very pleased to have me shuffle off the mortal coil at any time during the last 10 years. But such is the power of reputation.

5) One of the items listed in the Patient's Bill of Rights posted in every hospital is that you won't be discharged from the hospital until an advocate for you has pleaded your case. Apparently, the tangled web of the third-party payment system so frequently impairs the profitability of some patients that these appeals have been made a basic right.

It would be great if they had a similar system in place in the market. Cases like Amaranth Advisers and Long-Term Capital Management make clear that it is not entirely likely that you will be accorded the dignity of such checks and balances before you are discharged from your positions. At least you should understand this in advance and try to set down the terms of timing, execution and procedures by which such discharge would be made.

Another key aspect of the Patient's Bill of Rights is the protection of privacy. Apparently somewhere along the way somebody in charge realized that patients are human beings and they like to be accorded the respect in their persons that they try to maintain in their homes.

Any market trades that are not kept private are an invitation to the ruination of your financial health. The levels of your stops are too tempting to those on the other side; the wolf point at which you must pull the cord, once disclosed, may almost certainly be expected to become a target.
6) Most deaths occur between 2 a.m. and 5 a.m. My nurses tell me that this time is known as "the wolf hours." While many people think night nursing is a breeze, somehow everything seems to happen in those three hours. I dreamed every night that the Grim Reaper was standing by my bedside trying to entice me down into Hades, and I woke with a start each time and asked my night nurse to minister to me.

The key times to worry about your demise in a market position are approximately those same hours - the closing hours in Asia and the opening hours in Europe, the time when the final tumultuous gyrations of the e-minis seek to send you and your positions to Davy Jones' locker.

A Friend continues:

How to steer between the Scylla of wreckage and the Charybdis of certain death:

For many years, I have harbored the goal of making a citizen's arrest. People do things wrong so often, especially violating rights to life liberty and property. I felt, as Jay Gaynor said, it was every citizen's duty to take the law into his own hand and act as a policeman would in arresting the malefactors. He won the mayorship of New York on this platform.

I made that citizen's arrest, ending up paying one-eighth the cost of the policeman's heart attack, lost every decision, paid the other side's legal fees, and was out a big ace before that one was over.

I've also wanted to experience the heroic feeling of liberty in Beethoven's Fidelio prisoner chorus upon seeing the first light of day after being in prison darkness for years. I wanted to combine this with the escape that Churchill made from the Boers by walking out of the Transvaal prison in top hat and coat in complete nonchalance and then descending into the rails.

I was more successful in this pursuit today as I dressed in my normal clothing, got out my tennis racket, and strolled out of the confined prison I was in, with windows that didn't open for seven days straight, and a feeling of fetidness waiting in the wings to engulf me at every stage. All the while the doctors tried to track down someone who would take responsibility for discharging me, even though I refused their last three X-rays and blood tests. I was much more successful in this second pursuit and I made my escape to the Central Park air at 1 pm yesterday.

At taking that first breath of fresh air, I felt utter happiness, the feeling of life's rekindling itself. It was exactly the counterpart of Beethoven's prisoner's song.

I feel the same exhilaration after exiting a losing position that I feel after coming into the fresh air. I believe they are both life-enhancing acts, and should be taken much more often and earlier. However, this must be contrasted with the terrible wrongness of the morphine drip, the one thing they were sure was working,

After making my escape, I voluntarily came back to the prison, feeling like Willie Sutton, who found it so difficult on the outside because of the kinds of people he met inside and knowing that a posse of concerned parties who had done much good would be discommoded by his absence. I didn't want the extra X-rays and blood tests for a simple reason. The change in my health that might have come from any intervention resulting from the tests had an expected value of zero, whereas the costs of the pain and discomfort of the tests was quite tangible. It was impossible for me to explain the concept of the value of information to the doctors who so earnestly wanted more and more facts to base their further treatments on. Ultimately, there was an impasse and I was discharged properly and walked out a free man.

Dean Parisian writes:

Sometimes women just know best. Don't fight the tape and don't' fight the E.R. help. Fighting can seriously affect one's livelihood. Ah, hope and wishful thinking can be a wonderful thing. They can make things happen! 

Vincent Andres adds:

Yes, survival is the first point. The rest will always be there.

Resting is very important for a durable recovery. Time to fully recuperate is not lost time. I hope you'll find the time for that. Hear the wise women!

A prescription suggestion: Two weeks of cool trout or salmon fly-fishing in Ireland. Remember The Quiet Man. The place where they made the movie is really lovely. 

Jim Sogi extends:

It is good to consider one's death every day. Nothing else is more certain statistically. Would you be happy with your life if you died today? It is not morbidity; it is a celebration of what is important in life. Were you 10 times happier when your bank account grew to 10 times what it was? Were you happier to be hugged by a child? Hearing recently of a close friend's near death from appendicitis, skiing the life and death gnarly in Alaska, feeling my own mortality face to face, seeing my aging parents, makes the important choices in life loom large. Health has to be the first priority, then family. That is where the greatest wealth is, not in the bank.

David Humbert remarks:

You have learned the awful truth that hospitals are dangerous places, and to be avoided unless absolutely necessary. As a general rule, your constitutional well-being is a reasonable proxy for how you are recovering from a medical event. In other words, if you are feeling well, you are probably improving internally. Expect weariness, remember that your body's immediate response to injury of any type (surgery, infection, etc.) is to cannibalize skeletal muscle in order to obtain the protein building blocks necessary to repair tissue. This leads to an obligatory weakness that can only be overcome when the body shifts from its catabolic (breakdown) stage to its anabolic (building) stage. That occurs at a variable time but probably sometime 10-14 days after the original insult. 

Kevin Humbert adds:

“All market traders should have a designated person to take over decision-making in their positions when survival is in question.”

There is a designated person who often takes over when survival is in question, the Margin Clerk. Heed the warning! 

George Zachar comments:

In New York State, you cannot be discharged over your own objection, without the hospital jumping through onerous legal hoops.

After my father had his gall bladder removed, NYU tried to discharge him 48 hours later. He was in his late 70s, weak, and obviously needed longer to recoup. Nonetheless, the staff hectored him to sign the release, and it wasn't until I said "you will literally have to carry him out over my body, and I'm not bluffing" that they relented.

Once they saw he was going into a different insurance category as a result of my statement, the staff demeanor flipped from bean counting to healing, and all went well.



The idea of recovery is linked to the subject of clearing. After a clearing, how long does recovery take? The measure of your fitness is the recovery rate to normal heart rate after reaching your maximum heart rate. You should be able to return to your normal rate quickly. The longer it takes, the worse shape you are.

It might be asked of your emotional health: after an argument how long does it take to regain your composure and to forgive? After illness, how long does it take to regain your normal strength? What is the best path to recovery? Rest of course, but the struggle back up the hill is always twice as hard.

This might be asked of the market, what shape is it in? How long does recovery to old highs take? It might be asked of a trader: after a drawdown, how long does recovery to new highs take? After a fire, our colleague showed recovery is especially rapid. We will see what kind of shape our market is in here soon. So far it seems pretty healty with a start at recovery.



You never hear much about the real facts when people are trying to waft a detrimental meme past you. Now that inflation is all the rage again and people are fearful that there is going to be a terrible thing happening — not sub-prime, not China, not earnings slowdown, but inflation — don't expect anyone to point out that bonds closed the month at 111.24, a 35 calendar high, and up a bit on the year.

Perhaps the adjusted deflator index for March or April of this or that seasonally adjusted economic series would be more meaningful, as well as a parsing of the forces that will beset Bernanke. It is such a pleasure to have at the Fed a real economic man, who seems truly interested in providing the backdrop for a proper growth and inflation, rather than his predecessor who was always posing and always had a hidden agenda. The fake doctor reminded me of one of the old men who sat at the club windows on fifth avenue and commented on the mini skirts and diversity walking by these days.

Note the freqeunt high fives the fed boys gave each other under Dr. Greenspan when he used to tell them that by fooling the market one way or another he was able to avert upward movement.

There are many circuits in electricity and biology where the energy and health of a system is not complete until a clearing event has occurred, (I would very much like some good examples from the specs). It is interesting to speculate if such a clearing event can be described and used predictively for market movements. I would think it worth much study.

Hint … One such clearing event occured today.

Jim Sogi writes:

On the inflation meme, I was astounded at how cheap a car went for. It seems less than they cost years ago. Cars now are bigger, better, more engine, last longer for less money. Go figure.

On clearing, forest fires are a great example. There has been a debate for years in the US Forest Service on fighting fires. The policy before was to fight all the fires. The policy cost lives and in fact made the fires later worse because the underbrush grew creating tinder. The natural fires clear out the underbrush and give way to new growth and healthier forests. The policy now is to allow more natural fires to run their course to have a healthier forest. This is true with markets. A few little fires here and there help to clear out the dead wood, leaving the healthier more vibrant life. Some forests need fires to regenerate.

On that subject of running their courses, these long bars are always of interest. My favorite biochemist studies how to attach new molecules to the molecules that they want to track and follow in the body. The ones they want to track try to hide and avoid detection. The only was to find them is to cut and that is no good. The scientists attach a "handle" or a long bar molecule sticking out of the diseased molecule. To that handle they attach something like a glowing chemical or tracking device so they can see the disease in the body without cutting. This is my layperson's simplification of a complex process, but in my mind at least describes the process. Molecules operate on a very physical level, like a key in a lock. The long bars are a kind of handles that help track the market and are good handles to tag to follow the market.

David Lamb adds: 

To add to (and hope not diminish from) Mr. Sogi's comments, I quote from a Botany textbook I received from Arizona State University.

Many viable seeds do not germinate right after they are shed from the parent plant, nor do they germinate during the following growing season. Seeds can lie dormant for many years before conditions are suitable for their germination. Everywhere that seed plants grow, the soil contains viable, ungerminated seeds in natural storage-that is, a seed bank.

Seeds in a seed bank may be dormant because of their own inhibitors, as in many desert plants. Ecologists can sometimes determine what kinds of seeds are in the seed bank of a particular habitat by removing the shrubs from a small area. When a new growing season begins, the seeds of many annual plants germinate. Such experiments simulate what happens, in part, when fire sweeps through an area. In addition to eliminating the source of potential germination inhibitors, fire also releases the nutrients contained in plants. Thus, annual plants grow abundantly in burned areas during the first growing season after a fire. As perennial plants become reestablished, the newly replenished seed bank of annual plants once again goes into natural storage until the next fire."

Seed banks that require favorable environmental conditions to germinate can be compared to the famous caneology. Some of the lesser plants that do not have strong enough roots to withstand the "heat" can be cleared out in order for those other plants, the plants that have been leaning on their canes for quite some time, to show up on the stage.

Vincent Andres writes: 

There are many circuits in electricity and biology where the energy and health of the system is not complete until a clearing event has occurred.

Some rough thoughts. I would distinguish at least 2 kinds of clearing events, based on the event's duration.

1. Long clearing events:

Biology: at the end of the day we sometimes get tired, e.g., quite unable to solve a problem. A good night sleep and the problem gets solved. I think most of the night "clearing" we use our energy for our brain/body reparation/maintenance/etc.

Mechanics: I ask a bit too much to my motorized cultivator or my chain saw. So it becomes dangerously hot and I have to give it "clearing" time in order to cool a bit.

In both above cases, the clearing event is quite long. At least it has some proportionality with the working time.

Maybe markets also need to rest or to cool.

2. Short/instantaneous clearing events:

Electrical: e.g., the soft reset or hard reset on some computers. Necessary to bring a computer out of a endless loop etc. The clearing event is very short, but this effect may be very beneficial. The computer system is rebooted to an initial state.

Biology: Sometimes our mind gets confused. A problem seems very difficult. We try many issues and none work. And suddenly in the middle of the confusion a little detail, a little connection occurs, and we understand. I believe that in fact, the understanding was already here, already present, but hidden in the confusion/drafts of the work. The clearing event is maybe the moment where we decide to wipe out the useless stuff. A clearing event may also be the recognition/awareness, of denial. It's a short instant, but it may have great consequences. But, I think it would be erroneous to believe that all occurs just during the short instant. All is already prepared. The question is "when will we look at it?"

The straw that breaks the camel's back catches our attention, but the responsibility is not the straw's. And detecting the straw is probably much more difficult than noticing that the camel is overloaded.

Maybe markets have also some trigger or revelation.

I think markets are concerned by both kind of clearing events but I'm respectfully curious about precisely which kind of clearing event you were thinking of?

"For fifteen days I struggled to prove that no functions analogous to those I have since called Fuchsian functions could exist; I was then very ignorant. Every day I sat down at my work table where I spent an hour or two; I tried a great number of combinations and arrived at no result. One evening, contrary to my custom, I took black coffee; I could not go to sleep; ideas swarmed up in clouds; I sensed them clashing until, to put it so, a pair would hook together to form a stable combination. By morning I had established the existence of a class of Fuchsian functions, those derived from the hypergeometric series. I had only to write up the results which took me a few hours."

Henri Poincare

Victor Niederhoffer adds: 

It is interesting to speculate if such a clearing event can be described and used predictively for market movements. I would think it worth much study. Hint: One such clearing event occurred today. 

David Wren-Hardin writes: 

There are many circuits in electricity and biology where the energy and health of the system is not complete until a clearing event has occurred.

The first that comes to my mind is both electrical and biological. When our nerves send a signal, it's sent by an action potential. A neuron maintains a potential difference across its membrane through the use of a Na/K pump; it pumps Na out of the cell, and K into the cell. The action potential is kicked off by a signaling event, and the gates in the cell membrane open, and Na floods into the neuron, causing a rise in voltage. The Na gates are sensitive to depolarizing events, and a positive feedback circuit ensues, where more and more Na channels open, causing a spike in voltage — the action potential.

The Na channels don't just stay open, however. After depolarization and opening, they are inactivated in a voltage-dependent manner; the very process of opening and depolarizing the cell leads to their own inactivation. Another action-potential is only possible after the Na/K gradient is re-established, and the refractory period ends. In other words, more activity is only possible after a clearing out of the activity of the previous event.

One could also see the action-potential itself as the clearing event. A large potential is built up over time, and with a seemingly small synaptic event, a cascade begins that triggers a large event.



SPY        Up Months in Year
2007       3

2006      10
2005       5
2004       9
2003       8
2002       4
2001       6
2000       3
1999       7
1998       9
1997       9
Average    7

High SPY 3/00  155.75
High SPY 4/07  149.80

SPY high is not too far off. What path to get there?



 I just bought a new car. Cars.com gives good referrals to the Internet sales departments of two or more competing local dealers and gives the dealer invoice price and cost of options. The referrals result in what seem to be the best deals. Having the info about manufacturers' rebates that might be in effect is also very helpful. The sales process was no-nonsense. After choosing the car, the salesman knew I had checked with other dealers and had a prior quote, which he beat. I walked out with a price below what I had expected to pay. In all, it was the least painful way to buy a car. I recommend this to new car buyers.



 What is it about square roots that they are so prevalent in natural phenomena? Gravity diminishes as the square root of distance. Tsunamis travel at the square root of the depth of the water. Energy is mass time speed of light squared. Why is this? Is it just a mathematical convention for ease of computation, and if so, why do natural phenomena follow this relationship?

Henrik Andersson suggests:

Sound, gravity and waves are propagating like surface of an expanding sphere. The surface of a sphere is 4*pi*r^2 (squared distance from the center). Thus the square is a result of the two-dimensional property of a surface.



 Many thanks to Chris Cooper for hosting a wonderful Korean barbecue dinner in Oakland, CA. Attending were Easan Katir, Tom Larsen, Henry Carstens, Chris Cooper, and the Sogi family. After the initial toast to Victor and Laurel for bringing us all together, we heard tales of adventure in the options pits, debated systems and discretionary systems, heard insights from decades in the institutional brokerage business, discussed lookback periods and changing cycles, practical hedgefund back-office tips, programming, mathematical algorithms, trade execution, and pros and cons of having a separate office outside the home for trading.

To add excitement to the evening we even heard trading signals and alarms at work in the background from Chris's trading room. To my delight, my daughter, a PhD candidate at Berkeley, held forth at length from her perspective as a scientist studying molecular biochemistry and application of the scientific method. Each of us had a completely different approach to quantitative analysis, making for interesting debate. It was a pleasure to meet many in person whom I hold in high regard. It was a fun and educational dinner.



I have been considering the many confidence games that players in the market are exposed to with particular reference to the many false signals of imminent decline, programs of fixed quasi arithmetic bent, and expert con men who claim to have an easy way of making money. I used to use myself as an example of playing an unwitting role, i.e., being a key middle brow naive person who blindly goes his happy way allowing experts to take his money.

Indeed, I've written on the subject. And when I asked the collab the best way to research this subject she said, "go to our past writings on it." But I'm a little rusty on it and I think there have been so many new cons in the market lately that are so extensive that any previous typology has to be augmented. Any help or ideas that you all could give on this subject, particularly those related to some of our discussions on funds, that might be not as good as they seem, would be appreciated. I found the following article very helpful as a jumping off point for eliciting some market cons. 

From Jim Sogi:

It is something about the mark that allows the conman to 'turn' the victim. As with the baseball maven, the appeal to the esoteric investor who has the depth of capital to withstand drawdowns must appeal to some 'streak' in investors. In confidence games it is the greed, or dishonesty of the mark that is the key to the game. Each person, no matter how optimistic and bright, has a dark side.

Often the most apparently cheery have the darkest side. It is the job of the conman to find that side that can be used to turn the mark to his advantage. Or he finds his specialty niche. This is how elderly are preyed on with winning drawings, or the Nigerian scam. It is the combination of need with greed and a dose of dishonesty in the mark. The typical description of a con focuses on the perp, but the study of the victim yields more lessons. Most do are not aware of these seeds of darkness within, and there lies the danger.

This is the same technique used in sales, cross-examination, and religious proselytizing. Leading the victim down the primrose path feeding the victim's inner need and darker impulse. It is what happens in the market so often. Look to the victim. Look to yourself for the secrets of the con.

Eason Katir writes: 

If ya gotta lotta nerve
And ya gotta lotta plenty
Five'll get ya ten
And ten'll get ya twenty

— Singsong of the 3 card monte grifters, as they throw the

It has been written that, "In religious confidence games, this means that the religious leaders must convince the prospects that they (leaders and present members) have a special relationship to a personal God."

Market equivalent: the supplicant must prove he is worthy (accredited) and have a pious bankroll (high minimums) to have a special personal relationship with the elite hedge fund.

"The doctrine of a personal God supports: (a) perfect (infallible) leaders, (b) perfect (inerrant) sacred books, (c) perfect (marvelous) miracles, and (d) perfect (eternal happiness) posthumous rewards."

Market equivalent: the hedge fund prospectus supports (a) managers who have had a good run at some period, supported by much media hype, (b) infallible trading edge supported by scholarly white papers, (c) backtesting, hearsay, testimonials (d) eternal retirement happiness: the TV commercial or glossy magazine ad depicting the WASPy looking character in his argyle sweater sailing his wooden boat through retirement with his loving wife by his side.

"Incorrect details can expose a con game. Accordingly, details such as the location of Heaven and means of transportation thereto are not mentioned. The posthumous rewards are claimed to be wonderful, but no details are given which can be checked in the present. "

Market: black box systems. Opaqueness of current hedge fund positions.

"The advantage of the confidence games with posthumous promises, of course, is that no deceased person is going to return and ask why he did not receive his reward."

The market hasn't worked this one out as well as the article's example yet. Best it can do is provide tables and charts showing hypothetical increase in value over some long period of time, and a posteriori rationalizations about why a system stopped working.

"The religious leaders have another advantage. They carry little inventory and have small expenses."

Financial salesmen have this same advantage. They don't have to finance an inventory of expensive cars or other widgets. The mark puts up his money, and sees only flickering pixels in his browser representing his bet. Another confidence game: Feng Shui is popular. The delusion that one can fix one's problems by rearranging the furniture.

Market analogy: Beat the market by rebalancing sectors.

Michael Cook writes: 

On of the most interesting insights in "The Big Con", for me, was that it represented a new insight into human nature, namely, the depths of delusion and self-deception a mark can be led into. The very fact that the "big con" is possible was an important discovery.

And if you look at the world through the eyes of a con, it seems that everybody is conning everybody all the time, and everyone is conning himself most of all. The con, in his sociopathic cynicism, thinks that everyone is being conned except himself, but there's some saying to the effect that it's always easiest to con a con man. Why should this be true? I think it is because the most effective way to con someone is to believe the con yourself. As George Costanza said: "It's not a lie if you believe it." And once you get in the habit of believing your own lies you lose the distinction between what you know and what you don't know, the "taste" of knowledge. So the most dangerous cons suck you in by virtue of people who believe in them, and who you trust.

Hypnosis has always fascinated me as a phenomenon, and as a description of the state of mind we inhabit so often, a sort of "waking sleep", in which we are driven by suggestions, associations, and habitual patterns and reactions. Con men harness this power of the mind, as do advertisers. Are not advertisers con people? And salespeople? And don't we all sell ourselves and promote ourselves, and in so doing, engage in cons? Creating a resume is a good example - the goal is to gain the confidence, or at least the interest, of the person (or machine, these days) that is reading it. And it is shaped, edited, selectively biased - from one point of view, a "pack of lies".

The con man uses a person's propensity to con himself against him, like the way a judo master uses the momentum of his opponent against him.

If I try to convince you of anything, i.e., persuade you that it is true, am I "conning" you?

It is a compelling metaphor for all human interaction, which is a little depressing. I don't really like looking at the world through a con man's eyes, and yet I have been conned, and didn't like it, and am therefore skeptical of people's hidden motives at times.

But someone said "you must be as wise as serpents and as innocent as doves" - alert to the confidence games all around you, and even in yourself, but somehow not going through life assuming the worst about people.

One of the most visible "behavioural biases" is overconfidence, and it always amazes me when people make claims to know something that they can't possibly know. Which happens every single day. And that's their job - there is a demand for that. Portfolio managers want analysts to "pound the table" on their ideas, to have confidence, and some don't care to hear what that confidence is based on.

So overconfident salespeople marketing products they believe in - Caveat Emptor!

Russ Sears adds:

I have been attending dog-training classes on Saturdays, which is really a class on "trainer training." One thing the instructor said that struck me was that most of your dog's behavior problems can be corrected, if you can get the dog to believe you have a omniscience about everything important to them.

To paraphrase, the dog won't go nuts over that leaf that flies by the window. He will say 'my master must know it, it must be ok.' And eventually you can take him for a walk and that squirrel running by your path, will not cause him to bolt if you say 'no.' He will say, 'its ok, my master saw him and knows what he is doing.'

Dogs want you to correct them before they do it, while they are thinking about it. Still, there certainly is some element of physical force to establishing dominance. This is downplayed as many owners overestimate the need to be "omnipotent." It's more about consistency. Always show them you know what they are thinking.

It seems many of the con's tricks are similar. People have a need to believe that someone knows everything, and therefore the assumption is they are in control. One does not imply the other, however, as the media and dooms-dayists would have you to believe.

For the pacifist owner, dominance need not be harsh, but rather omniscient and omnipresent. Always have a plan. Rattle the keys annoyingly, throw rocks over their heads when they bolt etc. The preparedness causes the dog to think they knew that would happen so he knew what I was thinking. Rather con thinking is, you knew it "could" happen and were ready to imply that it "would" happen.

Perhaps this is the "set-up." Where the journalist digs out the "dirt," the reader never suspects that the story was planned, even written long ago. The subprime is a good example…



 Hidden Sword is a chick flick masquerading as a samurai movie. There was one good scene where the samurai went to his teacher Toda before the big showdown to the death with his friend who was ordered to kill him.

The teacher told him, "Whenever a man draws his sword, he becomes emotional and tempers go up." The teacher taught the samurai to duck and dodge, and draw the attacker. "Withdraw in body, but the spirit still advances." In that way the opponent is drawn in to attack. As the fighter withdraws, the opponent attacks and his temper goes up as there is no engagement. However the samurai waits for the opponent to have a moment of emotion or temper and rushes in reaching. At that moment, the samurai turns quickly and attacks under the opponent's sword and kills him.

In our market operations, despite quantitative signals, strategy is useful. When the opponent in the market is engaged, tempers go up. When looking for an entry, it is sometimes good to withdraw orders, but not the spirit. The opponent's temper is aroused and when there is a rushing in, that is a good time for an attack. By the same token it is good to recognize this as the market retreats from the order. Care must be used when tempers are aroused and there is danger from rushing in. There are many variations of this move in judo and aikido.

Today's market was notable for the linearity of the move after the early reversal. There have been hints in posts about automated systems. Globex is a backdrop to any system and the linearity of its function seems unnatural and nonrandom and a buffer or framework to the participants.



 The weather is important for surfing, sailing, skiing and markets. The weather in Alaska comes in large systems that move across the Pacific, lasting two weeks or more as they spin across the Gulf of Alaska.

These large weather systems have many random eddies. From day to day or hour to hour the sun or rain and snow may vary, but in a weather system more then 80% of the days are rainy, windy or snowy. In good weather, there was a stretch of nine days of sunny calm days up in Valdez. The big satellite pictures give a good sense of the scale of the systems and storms, more than just looking out the window from day to day. Seeing the spin of these large systems allows better prediction over days. A harbinger of a storm is sometimes very calm conditions with little variance in the wind speeds. After a very turbulent storm, there is a period of calm as the pressure and temperature gradients stabilize.

The markets have large systems that spin across the globe, visible as price history structures. Market systems are similar to large weather systems or structures that span the oceans or continents and last a similar period of one or two weeks before spinning out. This last big market storm in March lasted a few weeks, then we had nice sunny weather for a few weeks after. It takes a few days or more for the systems to change, and then they pick up speed, with good or bad days predominating for a week or two.

A period of flat calm may signify the winds of change are coming. About 15 years ago we went camping on Superbowl weekend. That night, the ocean was smoother than a bathtub with nary a ripple, and dead calm. We commented. "How odd!" Then at 3 am the wind started to pick up, and by dawn it was blowing over 60 mph. Eleven boats were blown on to the rocks that night. It was called the Superbowl Storm.

We have had two days of below six point ranges in the S&P500. A period of unusual calm. I wonder if it might portend turbulence.



 The book Denali chronicles the history of climbing Denali, tallest mountain in North America. Severe storms can set in with little warning and can trap climbers for days with winds of up to two hundred miles per hour or blow them right off the mountain. The deaths occur when unprepared climbers are caught near the peaks in a storm in temperatures down to 100 below zero with wind chill, and high altitude dehydration, and the accompanying errors in judgment that start to pile up. Small slips can lead to a fall and death.

A classic error is waiting too long when the opportunity presents itself. When near the top or the bottom when good weather presents itself, it is imperative to make progress immediately. Waiting, wasting good weather can result in getting caught later in a bad storm. By waiting, the odds of getting caught in storm increase. When caught, the climbers get stuck in a position where they can neither go up nor down. Bad situation.

In markets it is easy to let opportunity on high peaks slip by for one reason or another, be it bad judgment, bodysnatcheritis, fear, busy with something, lack of attention, a million reasons or faulty reasoning. Once the good weather slips by one is running behind. The odds of getting stuck in a bad place increase. Getting stuck, too late to enter, too late to reverse, can't go forward, can't go backwards. Stuck. Not a good situation, and all arising from the initial failure to take advantage of the good conditions.

From John Floyd: 

On a related note I remember a quote that Ed Viesturs once told me. "Getting to the top is optional, getting down is not." Ed has the ability not only to summit numerous peaks but to do so while treading the fine line of pushing limits while always remembering survival is the paramount goal.

Likewise, I have found in trading it is important to know when to push the limits of risk. In fact, without pushing the limits it will be impossible to earn high rates of return over time. On the other hand, those limits need to be put to the test in conjunction with a full focus on survival. If we lose our bankroll getting back into the game will be that much more difficult.

Alan Milhone writes:

 Aside from scaling the heights of mountains there are those who scale financial heights and lose their head when at the pinnacle.

I think about the tirade that ensued between Donald Trump and Rosie O'Donnell. Mr. Trump is at the top of his mountain (though he constantly looks for higher peaks to conquer in the financial world). However I feel he should not lower himself to trade barbs with Ms. O'Donnell and a man of his caliber should keep himself well above the fray. Did he verbally attack her for ratings? I am sure the 'haircut' bet with Vince McMahon was 100% over ratings and money.

As a billionaire I am sure Mr. Trump has a gigantic ego to feed. I like what the Chair says about being humble in what we say and do. I admire Mr. Trump for his successes and am sure he does a lot of behind the scenes donations for various charities. So when climbing the financial mountains one should maintain humility and civility in what is said and done; many are watching every move.



 Errors are rewarded in strange fashions, ways which are abnormal and thus unperceived by individuals with normal perceptions; meaning a right-minded person does not expect strange types of reinforcements to be in the mix of rewards.

One instance of strange reward I know of is referred to in some circles as a drive for self-destruction. Normal individuals perceiving an individual persisting in error that is harmful will not catch on that the error is accomplishing a reward, that reward being harm, and harm not generally acknowledged as a reward.

The hawkers of doom who get paid for their opinion to be persistently gloomy are being rewarded by an audience who appreciate the darkness. These readers return again and again to renew subscriptions with enthusiasm and this rewards the hawkers. In brief, doom hawkers speak to an audience of believers.

Stefan Jovanovich writes: 

Marshall McLuhan's theory was that the advertisements in the newspaper were the "good" news; the "doom" was the necessary bad news that allowed the ads to stand out. I suspect that, if McLuhan were alive today, he would stand by his theory but point to Google instead. The news is usually gloomy but the paid search ads promise wealth, happiness and good looks all for the low, low price of $xx.99. McLuhan would probably also suggest that the relative decline of newspapers' ad revenues compared to their Internet competitors was an indication of the fact that "good" news these days was more about price and less about image -just as it had been in newspapers' heyday (1870-1925).

Victor Niederhoffer adds: 

A correspondent from Canada writes to me that the move today in oil up and down in the five minutes after the Ahmadinejad awarding of the medal, lead him to query ways of generally profiting from such false and ephemeral signals.

I immediately thought of the many times that it looked like a vivid event that had been associated with the tremendous market decline might be occurring again, and the many opportunities that provided. Indeed, I have a confession. During the summer there was a time that I was short a line of stocks. And a former Yankee pitcher played too near an apartment building. The rest of the story is too sad to tell. However, all parents should play "a boy stood near a railroad track" for their kids.

But this method must be generalized. It only happens about five times a year, and the 50 or so points you'll make from it each year must be counterbalanced against the expert sage Mohammed's view that big risks are not properly priced so that the one time you lose, let's say in 10 years, it will be more than 500 points.

Here's one attempt. I wonder if there is a very big list out there in cyberspace of people who like to read about scandals and failings among liberals, and negativity. Much of the economic news on such a list I would presume is planted. I would assume that the source might not be an overly reliable in informant or forecaster for various reasons. These include the lack of evidence of forecasting ability of the planters, their temptation to feather their own nest (except for their high moral turpitude and altruism and the checks and balances that the receivers and transmitters of such info must have), the anonymity of the source, and their insulation from the consequences of good or bad calls.

I would speculate that such economic news would tend to lead to ephemeral moves that are copperful to the caned when directed south. Such would happen, I would speculate, much more often than 10 times a year.

However, one seeks to generalize on this subject. We all know such people. Why can some people be wrong so often and yet maintain a following? We all know such people, the financial weekly news columnist for example is one icon in this regard. The economist who is always bearish in public but even more bearish in his private briefings is another. The technician who always sells the lows and buys the highs is another. The person who writes a book that's very persuasive and then starts a fund and loses hundreds for his clients but then rises up again and again like the Phoenix in another context. A consultant is another (doubtless many of my enemies will use this opportunity to say this about me). The self-indulgent authoritarian chief executive with a terrible management philosophy who hangs on and on is another.

Still another is the old eminence Arcadian who hasn't changed his views about anything and wants to do things the same way as the past and who eschews modernity like Chair Volcker (who, when I saw him in 2004, told me he sees no need for modern things like tape recorders).

I have written on Delphic forecasts. A condition for these people to hang on is often the couching of their statements in fuzzy irrefutable terms. That would apply to most of the ones I know.

But also, the ability to retaliate with force when their views are found to be falsified. This would apply to the Jonestown type error person as well as to the adviser who will sue you if you say anything about their record.

I would add that in the cases where the errorful have good motives their inabilities seem to be inordinately associated with a lack of education. They tend to be unaware of current scholarly work in their field, but hide behind a veneer of pseudo scientific talk as described by Marin Gardner and exemplified by Velikofsky, et al.

I'd be interested in augmentations, even example of why errors persist so that we can try to reduce the hard and persistence of same.

Jim Sogi adds: 

It is gratifying to disparage our opponents, however, even as we dismiss the turtles or news oriented lists, breakouts/breakdowns which have not worked for years seem to be occurring more and more as ranges widen again. The market seems "newsie" moving on Fed news, oil news, war news, and economic announcements. Contempt can breed complacency. 

From J.T. Holley:

Two things stick out for me: the lack of recognition of change, and laziness. The pack, herd, society, for the most part, don't like change. They would rather hang themselves and repeatedly take the easy way out than utilize anything remotely scientific that requires blood, sweat, and toil.

Miller's Willy Loman is a wonderful example of this. He would rather stick to his old sales ways than change like the young guns. Get rich quick schemes involving his son show this as well by Miller. Even in the end, Willy tries to leave more for his family by suicide but fails. This was laziness and lack of effort involving changing his ways.

I don't know. My PaPa told me on his deathbed to embrace change. It was like they were the most important words to me than anything else he had taught me up to that point. From that moment on I have always seen that as a sign of success in others, their willingness to be flexible and bend.

The persistence of errors-types would rather die in all forms than change! They'll take their hardheaded ways to the grave. This is laziness. Why else would someone be willing to succumb to such? How could you face the truth dead in the eye and not change? Denial must have its talons deep within people of this nature.

Once a charismatic type possesses both persistence of error disease and gathers a congregation it becomes lethal and the flock thrives.

Guys like us who are individuals, hardworking, non-altruistic, and embrace change, don't have big congregations! We just have empathy to fire us up occasionally.

Abe Dunkelheit writes: 

The errors persist because, psychologically, there is no alternative. One could go on and on, but everything would come back to the same basic thing: the impossibility of living without repression.

"[M]an is the more normal, healthy and happy the more he can … successfully … repress, displace, deny, rationalize, dramatize himself and deceive others." [Otto Rank]

The whole dilemma is perfectly elucidated in the Pulitzer Price winning book The Denial of Death, by Ernest Becker. But I am not sure if one should want to know too much about it.

When we say neurosis represents the truth of life we mean that life is an overwhelming problem for an animal free of instincts. The individual has to protect himself against the world, and he can do this only as any other animal would: by narrowing down the world, shutting off experience, developing an obliviousness [to facts] to the terrors of the world and to his own anxieties. Otherwise he would be crippled for action. (p. 178) 



 The best coffee is Arabica. You guys drink the worst coffee. I'll bring some good Kona stuff out when I come next.

I got a sampler of eight different international coffees with the new iRoast 2, in green bean from Mexico, Peru, Timor, Sumatra, Congo, Panama, Nicaragua, Guatemala, and a few others. I'm not sure if it's what they're trying to sell or just trying to get rid of, but none held a candle to fresh roasted homegrown hand-picked sun dried Kona Coffee. Most were bland. Peruvian was about the best of the bunch, but still rather bland. Some were close to undrinkable. Sumatra tasted like dirt, Panama very bland, Nicaragua very bitter, and Peru mellow, good to mix 10% with 90% Kona.

Sam Humbert asks:

Why does anyone voluntarily drink "flavored" coffee? I'm having a cup just now, because "hazelnut flavored" beans were all we had on hand in the office today. But I feel like the high-school stoner who's so desperate he'll smoke roaches. The stuff tastes like something the EPA would send HazMat-suited guys out to Jersey to detoxify.

Who buys it? Is it a ladies' drink? Would appreciate insight.

Yishen Kuik adds:

A coffee importer once told me that the flavoured coffee industry grew out of a desire to use cheaper robusta beans and yet avoid the inferior aftertaste that caused manufacturers to prefer arabica. But then flavoured coffee took off. 

J T Holley writes: 

Having earned and financed my college education working at various coffee shops such as Mill Mountain Coffee and Tea in the Roanoke Valley, and Food For Thought in Missoula, MT, I can tell you very few [buy flavored coffee]! Most coffeehouses have pots of coffee lined up on the counter of some sort for self pouring. The ratio to the best of my knowledge on refilling those was around 5 to 1 compared to regular coffees of many varieties.

Not that what you drank was good but there are two ways to flavor coffee. I have utilized both ways. One is with a horrible flavored oil and the other is via bottled syrup. The oiled way is to roast a rather cheap Columbian bean and then mix the oil and coat the beans (like applying chemicals to kill weeds). The other is much better and that is having an individual cup of coffee and adding a shot of flavored syrup. This seemed less toxic to me even though both are probably the same.

I witnessed very few people other than women that would order flavored coffee. Espresso drinks would be the exception to that. I would classify flavored coffee along the lines of 100 cigarettes. We used to joke that those extra long 100's were for people that like to ash not smoke. They don't smoke the cigarette they simply puff to be able to "ask" so they look sleek and sexy or something. Same with flavored coffee drinkers I've witnessed. They don't drink coffee like you and me, they sip and end up throwing half of it away in those plastic lined trash cans that weren't made to hold liquids!

My experience in the Navy taught me something about coffee as well. Cream and sugar were rarely added to a cup on my ship. Your sexual orientation back in the early 90s when I served was questioned if you had a stir stick in the cup. It was taunting or hazing thing on my ship. Words were slung at you in humiliating ways and made a man either quit drinking coffee altogether or go with the straight black cup of coffee to avoid the hassle.

It's amazing how psychological warfare works. I drank my coffee straight anyways so it wasn't a bother to me, but literally saw fights break out. Can't even imagine what would've come about if someone would have brought their own International Flavored Coffee onboard.

On a lighter note, I spent 6 to 8 years of my life roasting and serving coffee in all of its varieties. I have to confess that it is amazing how much caffeine is abused and that literal addicts consume the beverage. The mark-up on a cup of coffee from raw bean, to roasting, to brewing and serving is utterly amazing to me as well. The shops that I worked in did absolutely zero advertising as well, another fascinating fact of the coffee business.

Pitt Maner adds: 

I hate to think of the abuse one might get for using the following, but based on a crude experiment it does seem that cold brewing makes for a smoother (some say lack of) taste.

With respect to Nicaragua there seems to be a fair amount of variability in the taste of the coffee. The best coffee growing region is up around Matagalpa and Jinotega in northern Nicaragua.

The Nicas seem to like to drink it black with a fair amount of sugar.

Problem with all coffee though seems to be how long it has been sitting on the shelf. You don't always get a "born on date" on the package. Of course you can pay $9 a pound for some of the brands that are sealed with nitrogen gas.

I know of someone who actually was marketing small discs that you put in your coffee maker to flavor the coffee of your choice. Better living through chemistry indeed. 

Pamela Van Giessen writes: 

The Irish coffee flavored stuff is the worst. My mother served it to me once when I was visiting. Being sleepy I didn't focus on the malodorous nature but the second it hit my taste buds I literally spit it out. Thankfully we were outside. I think that stuff was made for older ladies. 

Scott Brooks writes: 

Chicory is a plant that I use in my food plots to feed and attract deer and turkey. It is highly desirable, palatable, and nutritious to deer and turkey as well as many species of birds, and other assorted animals.

Gordon Haave adds:

I am a big chicory fan. The only kind to get is Cafe Du Monde. Every other kind I have tried is terrible. That being said, I don't know that it mellows the flavor, unless the underlying coffee is much more harsh than regular. I drink it with sugar and cream. 



 Each day seems to have its theme. The stories connect from day to day, as chapters in a longer booklet continuing a theme for a few days, or maybe a week or more, referencing back elements from the prior days. The same characters are involved from day to day. Sometimes, as when watching a movie, it is apparent what the theme will be and you can figure the outcome. Other day, it is hard to figure out and often the ending is a surprise with unexpected plot twists. Looking back, the plot and the surprise always seem obvious, just as looking back at Friday's doji reversal bar, in retrospect, seems so obvious. It is easy to lose track in the middle of the week. It is good to remember when watching how the theme started, how it is likely to resolve. Where you are in the story? What are the clues to the plot? Who are characters? The timing is designed to deceive. There are periods of suspense and denouement. As in fiction and drama, there are several broad themes around which many sub-plots are woven. The main stock market theme is one we discuss often, the upward march to new highs and redemption and the battle between the Force and the Dark Side.



 This has been used of late in a political context, but the Costanza Doctrine (taken from a Seinfeld episode in which George Constanza temporarily improved his fortunes by doing the opposite of what his instincts told him) would seem to offer hope to thousands of losing traders. The trick would seem to be to buy when you feel that knot of fear in the pit of your stomach, or sell when you feel the joy and excitement of a trade going your way.


"Why did it all turn out like this for me? I had so much promise. I was personable. I was bright. Oh, maybe not academically speaking, but I was perceptive. I always know when someone's uncomfortable at a party. It all became very clear to me sitting out there today, that every decision I've ever made in my entire life has been wrong. My life is the complete opposite of everything I want it to be. Every instinct I have in every aspect of life, be it something to wear, something to eat… It's always wrong."


"If every instinct you have is wrong, then the opposite would have to be right."

Jim Sogi adds:

There is a twist to this. In the markets, and in life, there is an asymmetry of some sort that throws this equation off. How it works in life will take some thought. But in markets, long is not the exact opposite of short.

From Kevin Depew:

A funny application of the Costanza Doctrine (pre-Seinfeld) appeared in the movie "Let It Ride," which may be the closest the movies have come to real-life racetrack bettors in action. The main character, played by Richard Dreyfuss, is a degenerate gambler/loser who one afternoon mysteriously begins winning. (That the notion of winning at the track would be considered a) mysterious, and/or b) noteworthy enough for a film or book, is itself a pretty hilarious inside joke.) Anyway, in the middle of his winning streak he decides he's not even going to handicap the next race and instead walks around the track asking various degenerate gambler acquaintances of his who they like. Whichever horse they name, he scratches off the program and eliminates from contention.

When he gets to the one horse that hasn't been named, he lets his winnings ride on the unwanted horse with predictable winning results. As an aside, Robbie Coltrane has a nice turn as a dour teller. Also worth noting, the hatred emanating from his fellow degenerate gambler "friends" as his winning streak grows; everyone hates a winner; everyone loves a loser.

Interestingly, last night on the Black Donnellys (clearly, I'm watching way too much television these days), two of the Donnelly brothers are at the OTB to place a bet and hopefully recapture some money they owe to a crime boss. The "expert," Kevin, (a fictional character who nevertheless I am convinced is a direct blood relative of mine) can't decide between two horses. After much prodding from his brother, Tommy, he chooses one rather indecisively. Naturally, Tommy bets the one Kevin didn't choose, with predictable winning results.

By the way, the Black Donnellys is not a good show. The main character, Tommy, seems to have modeled his mannerisms on Tony Soprano, and the Irish stereotypes run for a full 47 minutes, laddie; may misfortune follow you the rest of your life, and never catch up. This may sounds strange, but I think I watch the show because Eisenberg's Sandwich Shop is one of the locations for filming.

Art Cooper adds: 

One of the first things taught in a first-semester computer class is that the opposite of > is not < , but rather < or = . This applies to markets as well. The opposite of "long" is not "short," but rather "short" or "flat." 



 On a sailboat there are dozens of lines, but not a single rope. You've got your mainsheet, anchor rode, jib halyard, downhauls, uphauls, outhauls, and reef lines. They are all attached by simple knots. In fact the simplest knots are the best. They hold best and they are undone quickly and easily, which is very important to be able to release a line at the appropriate moment. Some knots are so simple, it is a matter of merely crossing two lines over each other and applying the appropriate pressure to be able to hold upwards of a five ton vessel with one hand.

I had a few landlubbers on my boat the other day. They tied a line to a fitting and it looked like a rat's nest, a tangle jumble of lines, impossible to undo, with questionable holding power. Their model, more is better, is flawed. A simple square knot or bowline cannot be beat for simplicity, ease of release, and reliable holding. Trading has the same needs: simple models and a simple position that can easily be unwound in a jam but that will hold well in a storm.

The problem of pattern recognition is quite fascinating and similar to the problems of knot classification and application. A jumble of indicators all crisscrossing this way and that is often not the best. In creating predictive models, statistically speaking, simplicity is best to avoid the problem of curve fitting the past, and reducing predictive power.

Humans are quite good at recognizing patterns, even ones that don't exist. Humans can recognize faces, even in disguise, remember a loved one's perfume, the smell of a certain flower, read hand written scribbles, spot fake antiques, recognize dangerous driving conditions, and spot good opportunities in financial markets. Now, machines can do almost none. Why? There is obviously a learning process, and a judging process. B.D. Ripley, in Pattern Recognition and Neural Networks, discusses these problems. He is careful to distinguish that the term neural networks is not an attempt to recreate a human brain in the box. Rather it is the process of creating statistical models to recognize and rate pattern recognition algorithms in terms of the their predictive power outside the learning set.

On a sailboat there are dozens of lines, but not a single rope. You've got your mainsheet, anchor rode, jib halyard, downhauls, uphauls, outhauls, and reef lines. They are all attached by simple knots. In fact the simplest knots are the best. They hold best and they are undone quickly and easily, which is very important to be able to release a line at the appropriate moment. Some knots are so simple, it is a matter of merely crossing two lines over each other and applying the appropriate pressure to be able to hold upwards of a five ton vessel with one hand.

I had a few landlubbers on my boat the other day. They tied a line to a fitting and it looked like a rat's nest, a tangle jumble of lines, impossible to undo, with questionable holding power. Their model, more is better, is flawed. A simple square knot or bowline cannot be beat for simplicity, ease of release, and reliable holding. Trading has the same needs: simple models and a simple position that can easily be unwound in a jam but that will hold well in a storm.

The problem of pattern recognition is quite fascinating and similar to the problems of knot classification and application. A jumble of indicators all crisscrossing this way and that is often not the best. In creating predictive models, statistically speaking, simplicity is best to avoid the problem of curve fitting the past, and reducing predictive power.

Humans are quite good at recognizing patterns, even ones that don't exist. Humans can recognize faces, even in disguise, remember a loved one's perfume, the smell of a certain flower, read hand written scribbles, spot fake antiques, recognize dangerous driving conditions, and spot good opportunities in financial markets. Now, machines can do almost none. Why? There is obviously a learning process, and a judging process. B.D. Ripley, in Pattern Recognition and Neural Networks, discusses these problems. He is careful to distinguish that the term neural networks is not an attempt to recreate a human brain in the box. Rather it is the process of creating statistical models to recognize and rate pattern recognition algorithms in terms of the their predictive power outside the learning set.

The Bayesian models figure prominently in many pattern recognition texts such as Ripley's, but also in Bishop's, Pattern Recognition and Machine Learning.

One of the issues is the use of parametric and non-parametric models. Often it seems that the data do not fit a normal model easily, and a non-parametric model may give better prediction. Ripley states the following,

"The normal distribution is a convenient abstraction, but all careful studies show that real distributions do not quite follow a normal distribution but have slightly heavier tails. In addition we should consider the possibility of outliers, that is examples which do not belong to the class under consideration….If the distributions are non-normal, then we need to take into consideration that the tails will be longer, and assuming a t distribution will be more appropriate."

A continuing issue is how to combine normal densities with outliers, like 2/27, to arrive at robust estimators. The traditional statistical approach to model selection includes the iterative process of backward selection by eliminating features until the best remains, or forward selection by starting with none and adding one at a time.

One method of arriving at a non-parametric model is through the use of Monte Carlo with replacement to ascertain the parameters of the learning set. Ripley finds that it may give superior predictions over a parametric model. Before computers, the difficulty of computing non-parametric models must have been insurmountable. But with fast computers why is greater use not made of non-parametric models?

We recently had some discussion on creating some rule of thumb benchmarks for easy computation based on non-parametric models created through Monte Carlo methods. This is an example of how recent market activity might be modeled simply.

A way to incorporate cycles might be with a rolling testing learning period to give estimators and in a Bayesian framework use those estimators going forward. That way the distribution parameters will morph to reflect the current regimes rather than be stuck with a fixed system. The Bayesian Information Criteria, which penalize size severely, might be used to determine a good leaning set/lookback size.

From Pitt T. Maner III:

With respect to pattern recognition, this reminds me of the thief knot used by sailors in days past.

Isn't it amazing, too, how easy it is for random lines to get tangled or knotted up and not break and yet how compounded simple knots done with willful intent can come unraveled in the blink of an eye and fail their purpose. It's one topological mystery.



The bears who project great declines and market breakdown on fears of Iran, the nervous longs with the same fears of subprime mortgages and recession, buyers at market at today's gap up open today, those that recalled with trepidation last month's breakdowns, all had their stops at June ES 1424, the prior day low. As GM says, it was too obvious.



When no friends were around to play, I would spin nickels like little tops. Dimes were harder since they were smaller, and there were fewer of them. Pennies were plentiful. I would try to see how many I could get spinning like a top at one time.

Watching the market paths recently, in line with Chair's study on dimes and nickels, June ES seems roughly like a coin spinning around the dimes and bouncing off the nickels.

From Steve Ellison:

I have been thinking in terms of quarters since the frightening intraday drop of March 14 that left a low-water mark at 1375.9 and the rally later the same day that breached 1400. The post-Fed exuberance was turned back just above 1450, and today the market rallied from just under 1425.



 This weekend my daughter taught me how to do the Sudoku puzzles that I have seen others doing. They say it is good to keep the brain in good working order and to prevent brain atrophy, and it's fun. It involves a process of elimination, narrowing down the possibilities across different variables in order to have a better chance of recognizing the patterns. It is similar to the SAT aptitude test technique of narrowing choices to one or two, to increase your chances of arriving at the correct answer.

Perhaps such a process of elimination might be fruitful in market analysis, where one does not need to be exactly right all the time, but in order to achieve some level of success one needs to avoid being totally wrong all the time. Eliminate the possibilities that have a poor chance of occurring and it reduces being totally wrong.

The tendency for the news and the public seems to be to assume that whatever trajectory the market is on it will continue on in that direction. After a big bounce and big up, is it likely for the market to continue up forever? After a big drop, like earlier in March, will the market, as the news seems to assume, continue down forever? What scenarios might we want to eliminate from consideration?

Let's say the market is caught in a tight range for days on end after a move. The process of elimination might make pattern selection a bit less error prone. And though it might not make you right all the time, at least you might not be wrong all the time, which is a start. If you are at least not going in the completely wrong direction, that is about 68 percent of the battle.



 The market's repertoire of rhythms extends past human grasp. Sometimes it seems to make no sense at all, at least to me.

Sometimes, things seem to become clear. Just as in Afro-Cuban music, a strong voice - the "mother drum" in bata - dominates the counter rhythms of the smaller drums, sometimes the Fed's announcements dominate the backdrop of lesser voices — Chinese monetary authorities, fixed-systems followers, and what have you.

Earnings season has a peculiar rhythm. But it's ever-changing, based on which companies are strongest at the time.

One quality the market shares with music, good music, anyway, is "always the surprise." Bach, Mozart, Beethoven were all masters of deception and expert at weaving rhythms across bars. Beethoven's sforzandi, unexpected sharp accents, and sudden pianissimos, will be appreciated by all traders.

Back in the '90s, when I was the editor for the stock coverage, a humorous bond reporter at Bloomberg had a saying when stocks had yet another amazing jump: "Stocks ONLY GO UP," he would say, rolling his eyes knowingly, meaning just the opposite. No good musician plays loud all the time.

Victor writes: 

I am thinking of ways to quantify the rhythms of markets. Instead of looking at what others do, critiquing it, and then augmenting, I thought I'd just take a crack at thinking of it my own way.

Music rhythms would seem to be a good starting point. The rhythms that kids are taught are those they can step or clap or slap to. They can be fast or slow to start with. And I would look to see if the number of moves in a minute is fast or slow and how this changes. The slapping would involve moves from separate markets occurring in the same time period. When we step, the first step is the accented one and that's a good way to look at moves within a period. Is it the first step that's always the biggest, and what happens when the second or third step in a period is the biggest?

I would look next at the rhythms of big moves. They obviously are reversing now, with some big Tuesdays: February 27, -58; March 8, +22; March 13, -28; and March 20, +8. Naturally this kind of stuff isn't predictive in general or else it would come out in the standard time series programs. But on occasion, it comes back and forth to an inordinate degree and the question becomes how to find it.

Animals often migrate at the same time of year to the same places even when transported geographically. One wonders if the migrations of markets after big moves have a fixed place in the price firmament that they go back to. Or is it just in time, like the conventional seasonal stuff that one can expect from the migration? Last year, prices went way down in May and migrated back the last part of the year. This year the migration started in February. The month ended with the three old bags ("a woman her age would never show her posterior to a camera") acting in concert with the rhythmic release of the perennially bearish message from the Sage.

The rhythms of political announcements always seem to follow a circular path. They start with a loose cannon doing something that hits into something else. Then others join the act. One typical sequence involves worry about inflation, based of course on a preview of an upcoming release, then the release of the number, then the big bond fund guy saying he's bearish, then the perma-bears finding other inflationary things, then the opportunistic movement in certain nations that benefit from this or that energy price, and finally the rhythm ending with the release of the next number, or the quieting influence of an open market meeting.

has some great diagrams of rhythms in the body. And the body has different rhythms that it responds to as molecules bounce into each other and create disturbances throughout other more complex molecules, thus upsetting the usual homeostatic methods. One market makes a big move, perhaps silver, and it spills over into others in a rhythmic sequence, perhaps an up in energy, and then a decline in stocks. It's not over until the initiating market has its move back down as was the actual case with the recent bloodbath and recovery, which seemed to have the elements of rhythm of all the ones I mentioned.

Of course, the rhythms have to be combined with the melodies. The speed of the moves has to be counted with the steps between those moves, sometimes big and sometimes small. And I like the way they quantify melodies in the Joy of Music and in the statistical studies of music intervals that have so much resonance with markets.

A more humdrum approach to rhythms, which I take, is to look at the rhythms of patterns. How often do the 3-day moves with their eight possible directions: —, –+, -+-, -++, +++, ++-, +-+, + — repeat? Is it a first order Markov process vis-a-vis these eight patterns, and what is the correlation between the closeness of each of the last three moves to these three patterns, and future moves? I recently ran some rhythm stuff with open, open to close, and open, and found some ministerial randomness with t's all below one, but enough evidence of non-randomness to get me thinking about rhythms on the whole.

I know enough about rhythms to know that they feel like the basic rhythms come from within the body, like the beating of the heart, and they can model it with rhythms based on the mathematics of African rhythms. Whatever quantifications they are making in bringing African rhymes and Latin rhythms into the heart beat problem would seem to be a natural for extension into the market.

I am fortunate to know someone with perfect rhythm and she is the coeditor of this column and I am going to ask her how she would try to trade in the market if she knew nothing else but markets. Perhaps other musicians with perfect rhythm might have similar expert opinions as to where market moves would be going based on their knowledge and oneness with rhythms in markets. Certainly these experts would be more prone to give good calls than the eminent people who have passed the tests of the mystical societies of America that are licensed to forecast the market.

The market's open now, and I haven't read any of the dozens of books I have on rhythms lately, but after I do and study it on the Net, perhaps I'll have some other ideas. For sure, my colleagues will be able to augment my preliminary fast ideas on this and guide others and me in proper directions.

George Zachar comments:

Perhaps other musicians with perfect rhythm might have similar expert opinions as to where market moves would be going based on their knowledge and oneness with rhythms in markets. Certainly these experts would be more prone to give good calls…

An interesting way to test this would be to submit representations of various tradeables in various time increments to musical prodigies who are naive about markets. I am thinking particularly of junior and senior high school students, who could have sufficient musical training and experience, without having been exposed to what passes for financial and economic wisdom in the popular press. 

Ken Smith writes:

In harmony with Victor's piece on music, rhythm, I attempted to write a melody with three notes. I am having difficulty conveying this little ditty because the note symbols for music are not available in email text messages.

I've tried before to get symbols to end up as they were written when they appear after I've sent them. Somewhere in the Internet circle symbols sent in email get warped, become hijra. Meanings are thus distorted.

So maybe someone can help here. The musical symbols for this simple melody would be symbols for the Dollar, Mark, and Yen, just three notes.

Create a melody using these notes - they are real notes, after all. Then choreograph a dance for the melody. Add lyrics. Create permutations and program computers to trade dollar, mark, yen - according to the melody.

"A salient feature of markets is temptation." (Syncreticus)

Todd Tracy writes:

Everyday I am inspired by the list and become more humble. In the business of music I had done well being rather sure of myself. That confidence came about from having practiced hours daily for 20 years. And even then I had much to learn. Afro-Cuban percussion was one of those things I knew nothing about until the day that my roommate brought home four percussionists. I didn't know at the time that they would be living and practicing in my living room for two years. And yes, they had many percussionist friends. The neighbors didn't seem to mind. They played all day, ten drummers strong, and then went on to their gigs at night.

One guy, Jacques, studied African rhythms. His guru was Babinga. Another guy, Blake, studied Cuban fusion. His guru was Giovanni Hidalgo. Davey was into Indian drums, Egyptian bells, and all sorts of experimental world music. Josh was a well-rounded guy who did it all. Their friends were mostly jazz funk kit players.

At any rate, I was doing 80 hours a week at the record company but on occasion they would let me sit in with them during rehearsals. When it came to the Congolese and Senegalese rhythms I had to learn to play the pattern given to me and not concentrate on the patterns the other guys were playing. The African stuff doesn't resolve like western music. Each part is simple; the complexity comes from the layering. Euro rhythms resolve every measure. Four beats to a measure at tempos ranging from 60-130 beats per minute. The African stuff would resolve many measures out, like ten equivalent western measures. It felt as though it was random until, with incredible anticipation, the resolution was at hand.

The Latin stuff was different in that the Cubans, Haitians, and Puerto Ricans had fused the African rhythms with western melodies. The most important part to the rhythm was the clave (wooden sticks that ring out when struck). The clave would be a simplified version of the rhythm. Then came the congas. They would play a rhythm called a Tumbao. Again, you had to concentrate on your part but synchronicity was achieved and resolved after just a couple of measures.

I was completely humbled by all that I did not know. But soon, through repetition, I found I had a whole new arsenal. These guys would play until their hands bled every day as they developed the incredible muscle memory needed to counter western rhythmic intuition.

Now the straight up rap beats are simple in that they are looped (kind of like rock music). But it is the anticipation of that resolution that concerns us with the market rhythms. In hip-hop the kick is on the one and the three; the snare is on the Two and the Four. The snares are played late to increase the anticipation. This lateness is the most important part, in fact, so important that rap artists actually consider the two and the four as the one and the three.

All of the rhythms resolve. There are problems in programming the beats in that there is a finite number of places to put each beat within a measure (460 ticks per beat) and the velocity of each beat is set at a value 1-127. We can, however, increase the resolution by doubling the BPM and by fine-tuning these anticipations and resolutions. I am studying the Quantlet Booklets so that I could one day break down the market rhythms as is being shown to me by the list members through the graciousness of Victor and Laurel's benevolence.

As far as what I think the S&P index will do from a musician's perspective is resolving to 1450 after channeling a bit more.

Laurence Glazier writes:

It is very tempting to apply my knowledge of music in selecting trades, though I like to follow grounded mathematical principles at this stage. I would note that much of what we consider the theory of music was derived by the posthumous analysis of the works of the one and only JS Bach (the Moses of music?), which like much technical analysis is seductive but not necessarily predictive. I work on the principle that part of this analysis represents laws of musical reality empirically testable, but not in the normal way. As Leschetitsky said, "Where words end, music begins."

Of the technical analysts of music, Schenker is particularly interesting, while those who have enjoyed "The Glen Miller Story" may have observed the appearance of another significant analyst, Schillinger.

Having said that, I believe the analogies with market rhythms, while not necessarily predictive, would be very valuable as part of a real-time virtual reality program reflecting the current state of play in the markets, and pose the question whether users of such a system would do better if they were more musical.

Victor Niederhoffer adds:

There is something rhythmic in the moves of bonds and stocks together, over and above the comparative rates of return that the Duo and Dodger have quantified. And it's like the monkey rope that Melville describes, where when one goes down and the other has to follow. But there is much thrashing around as the turbulence from the whales temporarily overrides the inextricable bond.

And in that context the bonds, after setting a 19-day low at 11,202, are still up 2/3 of a point or about 1/2% on the year. And the stocks, after setting a 19-day high at 1445, are up about 1/2% on the year. Regardless of that it's what I used to call an ugly day and the rhythm is very bad for both when a big decline in one occurs in conjunction with a big rise in the other. Something has to give, and as Berlioz would say in reviewing Beethoven, you know it's going to return.

George Criparocos writes:

The two days preceding the big note (02.27, the resonant, memorable one) had the bonds making a rhythmic intro analogous to what is expected when the largest instrument of all, the bass, announces a change in melody.

Since then, the contrabass, cellos, and violas (10s, 5s, 2s) are keeping the resonance, while the bass returns. The clarinet (Yen) is hanging around its 200MA set like a rope, refusing to let go of the anticipation and the piano (stocks) are all over the pentagram, in 1/16th intervals: four days low, four days high, four days flat, four days high.

The rhythm seems to be analogous to a symphony, lets say in F major. The allegro is in progress and I anticipate that the andante should follow in a molto mosso way.

James Sogi adds:

Todd's analysis of African rhythms resolving over eight or 12 bars or multiples rather than the simplistic four beat 16 bar square "rock" structure is right on the beat.

One of the most basic rhythms popular in the blues is called the shuffle. It is a short-long, short-long, short-long, similar to the heartbeat or train on the track, da-dum, da-dum, da-dum. This basic rhythm underlies many more complex patterns.

Applied to the market after a small beat, there the long bar, the "shuffle." The count often does not capture the rhythm, just as European musical notation does not carry information relative to rhythm. That is an odd omission. A shuffle might be notated as straight quarter notes, but played as doted quarter and eighth note sequence and designated as a shuffle, all the musicians know right away what it means.

The rhythm can get behind the pocket, giving a laid back feeling, like the end of last week. Or the rhythm can get ahead of the beat, like disco, like last month's drop.

The middle of the pocket of the beat is the march's oom-pah, oom-pah, even beats. The rhythms will swing from behind the "pocket" and give the music different feels. This is very difficult to quantify because the interaction of the multiple players is complex and the "feel" is a subtle thing to capture. Musicians know this.

To capture this in the market is a difficult matter. The main difficulty is the time structure. A structure stretched out over weeks is difficult to feel for human rhythmic sense as our rhythm is based on the heart and walking, and resides in the feet and heart and head motions. So it's hard to feel the market rhythm without condensing the time and looking at the numbers or speeding it up on a replay as an interesting exercise.

Russ Sears writes:

To Be With Me
by Russ Sears

Chic chic ca dee!
The Bluebird on our clothes line sings to me.
Come home, come home,
To be, to be,
 to be with me.

Kar Reeee! Kar Reeee!
The Bluejay mocks the hawk in perfect key
Go! Clear! Go! Clear!
Not free, not free,
No meal is free!

Tit tit ra lee!
The glorious Lark boost for all to see
Stay back, Stay back,
Match me, match me
You cant match me.

From Vincent Andres:

I am thinking of ways to "quantify" the rhythms of markets.

I didn't test it yet (will probably do so sooner or later) but the already known track of Hurst/Hölder/ exponents seem to me to be a possibly good piece of measurement.

Another possible tool could be wavelets.

Also, I recently came across a paper melting wavelets + Hölder curves : L'analyse par ondelettes, in Science, Vol.119 Sept. 1987. Yves Meyer, S. Jaffard, Olivier Rioul. The paper is in French. Very certainly progress have been made since this paper was published.




 It is spring in Hawaii and the hens are laying eggs and chicks are hatching. We hunt for eggs and when we find a nest we take the eggs. The hens can't count. If at least one or two eggs get left, they hen keeps laying. If you get greedy and take them all, the hen will give up and move. The hens don't know exactly how many eggs they have. When eight are gone, they only have a vague feeling that something is not quite right, but they can't quite pinpoint it. So they keep laying eggs, and we keep having omelets. They can't get very precise about what is the most efficient way to propagate. Of course some chickens are not too smart, like the ones that try to lay their eggs in a tree on branch.

There are vague feelings of unease when a trillion market dollars disappears. But, the eggs must keep getting laid. Sometimes it's good to be able to count the eggs so that so many don't disappear and to keep the right place in the ecology.



Ever notice whenever The Chair takes a vacation, the market makes a big time crash? One of the silly jokes around our house is that I need to watch the markets to keep it from crashing, and that if I look away it will crash. I was wrong. It's The Chair who needs to do it.

Thanks, Dr. Niederhoffer for your hard work. Keep watching for me next week while I'm on vacation.



What are your thoughts or solutions for any or all of these Time Traps?

From Jim Sogi:

It's not necessarily time, it's really a question of categorizing priorities. Take all the things that have to be done and put them into 3 categories:

  1. Must do to survive. Do those.
  2. Next are important but not absolutely necessary. Get as many of these done as possible.
  3. The rest, get to it if it does not interfere with first two. If not, forget it and give it up.

How does one categorize? In this order: Each lower item must give way to the higher in priority.

  1. Health
  2. Family
  3. Other

Seems to work well but its not going to be what the "Man" tells you or wants you to do. Another good trick is to turn off the TV and radio for good. Disconnect them and throw them in the rubbish. They are evil.



Interesting to note Asia seemed to lead or presage the decline last week, and led the bounce last night. Also interesting dollar/yen negative correlation and lead during same period.

  3/6/2007   16925
  3/5/2007   16510
  3/2/2007   16865
  3/1/2007   17300
 2/28/2007  17495
 2/27/2007  17460
 2/26/2007  18235

Nikkei  225                               16,844.50     202.25    1.22%
Hang Seng                               19,058.56     393.68     2.11%
Singapore Straits Times             3,036.52        54.23    1.82%
S&P/ASX 200                             5,808.90        37.10    0.64%



Many lessons of the list are coming in handy these past few days such as lessons on canes, leverage, liquidity, and survival. More heed might have been taken though to the bear's argument during the past few months, as they were not entirely wrong or foolish. Never underestimate the opposition. It is easy to delude one's self as we and the market were.

Since this panic was the biggest drop since 9/11, it is odd, since there is nothing really wrong like there was on 9/11. It was just one of those seasonal panics that come with the regularity of the seasons or the years as the case has been. The news is good, the economy is good, the market is good, and even the price is good. Anyway, a good time to get long, as it has been difficult to do so for months now.



 A few years back I read Wolfram's A New Kind of Science. I have been thinking about snow and looking forward to some heli-skiing in Alaska next week while spending long hours watching the market day and night. Wolfram's thesis is that simple binary rules for cellular automata in computer-generated binary or trinary functions develop into patterns as they branch out in an iterative fashion, often random in appearance, but with astonishing regularity. Quite amazing regular patterns, symmetrical patterns, emerge.

One of his theories is that natural cellular development is often binary and such a basic mechanism leads to gross formations with bilateral symmetry such as a hand with five fingers, a leaf, shells on the beach, starfish and a host of others. Applying the ideas to crystal formation, such as snow crystals, a simple branching mechanism tends to create symmetry in its patterns, though varied to infinity within its randomness, but more than random nonetheless, due to the basic binary rule at the heart of the creation of the crystals.

The market bid-ask is a simple binary function which, when iterated, develops the many price patterns in the historical record. The interesting application is the appearance of more than random occurrences of regular and symmetrical patterns. TA practitioners have proclaimed this for years. But might there be a quantitative manner of deconstructing and predicting the formation of a pattern before it completes, in a rigorous predictive manner?

Though he could develop the patterns from a basic beginning formula, Wolfram's greatest question and unsolved problem was that he was unable to deconstruct the basic formula from the developed pattern. But his main query for further study was, if these patterns could be developed from simple basic iterations of a simple rule, then why can't they be backwardly deconstructed?

In the market we know the rules; we see the patterns. Why can't they be deconstructed, categorized, and thus be predicted in a more rigorous manner than the TA practitioners use? There is no question in my mind that some TA rules have grounding and can be used rigorously for prediction. The Popperian problem is to state it in a falsifiable form, in a manner that can be quantified for testing.



I heard today that a very large barge of sand from China, so big it fills the harbor, arrived at our local port here in Hawaii. It is for use in construction. It must be cheaper than grinding solid volcanic rock. All the dump trucks are busy ferrying it to a big project here. 

Normal meme is raw materials going to China. 



 Tsunamis occur for which the orgin is unknown in that no source has been discovered. They are called orphans. This week a shock, like a tsunami, hit China and the shock wave extended around the globe. It could be called an orphan. Not accompanied an origin.

Orphans appear out of nowhere, are not predictable, and leave damage that takes time to repair. Lives are lost.

In Japan, officials recorded an orphan tsunami — unconnected with any felt earthquake — with waves up to ten feet high along six hundred miles of the Honshu coast at midnight, January 27, 1700.

So far I've not heard of lives lost this week, no accounts of stockholders jumping from high windows above streets teeming with anguished investors and traders.

Only accounts that were weak suffered losses. However, shock waves reverberate and second waves are common. Today is all we have for knowledge; what happens at the open tomorrow is unknown.

Jim Sogi adds:

Interesting how the wave traveled and continues to travel around the world, and how Japan follows US action later in the evening. The flu pandemic, which there will be at some point, will follow a similar path, and change many things, such as travel and free trade, more so than terrorism did.

Many lessons from DailySpec are coming in handy these past few days, on such topics as canes, leverage, liquidity, and survival. More heed might have been taken though to the bears' arguments the past few months, as they were not entirely wrong or foolish. Never underestimate the opposition. It is easy to be self-deluded as we, the market, were.

The biggest drop since 9/11, oddly, since there is nothing really wrong, as there was on 9/11. Just one of those panics that come with the regularity of the seasons, or the years, as the case has been. The news is good, the economy is good, the market is good, and even the price is good. Anyway, seems like a good time to get long, as it has been difficult to do so for months now.




 It's spring in Hawaii. The free-range chickens in the yard are having little chicks. They are really cute. The clutches vary from three to 10 chicks. They all follow their mother hens around and peck at little worms. They struggle to keep up with mom, across the grass, up the rocks. Sometimes when the mother is spooked, she reverses direction really fast. Some of the chicks are not paying attention, or are not as fast, and are left behind. The Hawaiian Hawk, or Io, is cruising right above in the trees and swoops down and grabs a chick. Out of ten chicks, maybe two or three survive to maturity. Execution is swift.

That reminds me that when he market changes direction, not everyone is paying attention, or can't move as fast, and some few are left straggling in the wrong direction. A good spec is on the alert and can swoop down for a meal. That brings up the subject of execution. It can account for several percentage points of return, no matter what the system. There is always the tradeoff in fills, between size and accuracy. One can't have both. That brings up alpha. How much alpha is execution? A part of any system is its executability and accounts for a chunk of alpha. Many systems look great, but will they execute? A poor system can turn out great with great execution.



 I'm only 34 but I have been involved in sales for 16 years, when I started selling ads in a magazine. At some point I managed a sales force of fifty and I found the most successful salespeople to be hard working single mothers who needed to work hard to raise their kids. The best salespeople I know come from the lower classes, driven by the desire to have a better life. I can't recall a single good salesman coming from the upper levels of society.

Mark Goulston adds:

People who play in competitive team sports are sought-after for sales positions because of their ability to "take the hit," face, and deal with a reality in their face that produces an unambiguous score.

James Sogi extends:

 The benefit of sports to a child, which leads to success in life, is the ability to face, accept, and overcome loss. A sporting loss is not life-threatening or career-ending, and the sportsman learns to overcome adversity in a controlled setting. Furthermore, he learns the rewards of effort, ultimate effort, training, discipline and competition. He learns, perhaps the hard way, that he cannot succeed without extra effort, hard work. These are over and above the benefits of health and fun and camaraderie from sports. These are lifelong lessons. 

David Lamb writes:

Many Wall Street firms hire ex-athletes, who are sought-after due to their competitive nature, their ability to take a "hit", and their desire to excel.

Steve Ellison replies:

It is not a Wall Street firm, but tech giant EMC that has built an outstanding sales force by seeking out athletes. I know a manager there who was a college hockey player. He says that he would give preference in hiring to anybody who was a student-athlete because it takes excellent time management and organization to be able to compete at the collegiate level while completing a college education.

Russ Sears adds:

Quote of the day from the sports page describing the Duke lacrosse team's motto for this season: "Succisa Virescit," Latin for "Cut it down, and it will grow back stronger."

To compete, in sports, in sales, in business, even in life and perhaps eternity, it is not enough to learn to "take a hit." Even the losers who barely survive will learn to take a hit.

To thrive you must learn to embrace the pain, to accept that success has a price. This will take you beyond the masses. The runt playing football or basketball for the love of the game will learn this.

To be a champion, you must find your niche; find that pain that makes you stronger. You must learn what exists inside you that, when it is cut down, makes you grow back stronger. You must learn to reinvent yourself until your dreams run parallel to your ability. You must learn to evolve.

Many great successes do make great salesmen. They don't make great salesmen, however, by just selling anything. They must sell something they believe in, on their own terms, not somebody else's.



The current popular explanation for the market's persistent strength is "worldwide excess liquidity" (a la Sam Zell's singing Christmas card).

Under this view,

1) Where is all the excess liquidity coming from?

2) And why is there more liquidity being created now than in normal other good economic times?

Dan Grossman writes:

Maybe the world is awash in liquidity and maybe it isn't. But the central banks of the number 1 and number 2 economies are restrictive and have been that way for some time:


Jim Sogi writes:

 I am sure everyone has noticed that the market refuses to go down. Every time the bid pauses, after a small airdrop, buyers come back to bid it back in force. The liquidity is a tectonic event, like the movement of plates. Once put into motion by years of pump priming in the US, in Japan, in China, it is hard to hold back.

While the monetary authority is restrictive in its pronouncements, it is not necessarily so in practice, with low rates below short-term rates, which would cause liquidity to flow to equities under the Fed model. Typically, as with any political movement or group situation, once a consensus is created it is hard to change the direction and the momentum tends to overshoot the changing circumstances. It is a typical group dynamic caused by the difficulty of getting people to agree. And as with the gambler's being more certain once the bet is made, decisions become etched in stone and are hard to change. When currencies move, they tend to overshoot their mark. When risk is deemed to be low, the consensus continues even beyond the time and circumstances justify. Remember 1995? It seemed the market was really high then. But it shot up like crazy over the next five years.

Old metrics of liquidity such as M3 don't work. George and Phil mentioned the role of derivatives. Is there a way to measure the derivative market? What are the indicators? Currencies measure the relative strength of flows of capital, goods, and fiscal and monetary balances between nations, and are important measure to consider in a multivariate way similar to gold and commodities that reflect and predict equities.

Japan's new equity highs and yen lows reflect a political and economic dynamic of a growing economy with its monetary gear in reverse. Very odd. Both the US and Japan benefit from weak currencies against the Euroland, and despite the jawboning and posturing, the currencies stay low. The fiscal power is exercised by the Executive but the power, in theory, is in Congress. This is separate from the monetary power of the central banks. The two are related, but are not formally coordinated. The size of the currency markets surpasses equity and debt and is subject to intervention in scope beyond both.

As the floating fiat currencies mature, the competition between nations may become more intense. While liquidity is good, now, there is not much of a squeeze. Reading some of the old books, there were some tense moments when bars of gold had to be shipped from England to New York to keep things afloat. Benjamin Franklin argued for printing money to stimulate commerce. All nations have incentive to inflate their currencies to keep growth from falling back into recession. What happens when the confidence, rather than gold, that keeps the currencies afloat turns dark?

It's a very difficult issue to understand. Thanks all for your help.

Bud Conrad writes:

Nice charts. I appreciated your sharing them. I agree with your base point, and want to see if I understand the importance of this analysis.

A little more explanation would help me apply the observations. The red curve fit looks like it is at a higher rate for the Japanese. Can you give me your fit percentage annual growth for each? The size is hard to read on my small screen.

Do you have an explanation of the big drop in Japanese monetary base? I think there were shifts in the policy of the BOJ in May 2006, around going off the Zero Interest rate policy but I can't recall the actions taken. Would they fit though the Japanese end point were higher or lower than the US? Is the monetary base an important measure now that there is so much credit created outside the banking system that is not regulated, and for which there is no reserve requirement, and now people prefer paper money to credit cards?

From Bill Rafter:

U. S. Monetary Base is the combination of currency in circulation and deposits in Federal Reserve Banks. It is released bi-weekly in seasonally adjusted form by the St. Louis Fed. It is also released weekly in non-seasonally adjusted form. I can seasonally adjust the weekly data myself, but then I would be the only one with that data. Since much of market action is sentiment-based, it's best to see what everyone else is watching, so I use the default.


The Base must grow at the rate of the population growth and economic growth or risk causing deflation. Thus in the long run the Base growth will be exponential with some positive and negative feedback influences. The best way to fit it would be with a parabola. That's what the red line represents. The software that I use (our own*) does that easily and produces the formula giving the growth rate. Off list, I will send you a text file with the base and parabolic fit numbers. What is absolutely amazing is that the fit is so perfect from inception. To me this means that there is a "natural" target for the Base. Whether the Fed admits to a target or not is inconsequential. One exists. Once you have acknowledged that, then it is a small step to say that growth in excess of the target is accommodative, and less than it is restrictive. The two spikes (Y2K and 9-11) prove that the Fed has control.

The Japanese Monetary Base numbers are available monthly. They consist of currency and deposits and are available raw and ARIMA adjusted. I used the latter in my chart. The Bank of Japan did have an inflation epiphany last May, when the numbers showed a huge contraction. Some have attributed the sell-off in our equities markets at that time to the BOJ action. Yes, the growth rate in the Japanese Base is considerably greater than that of the US. Please don't flame me for saying so, but I attribute that to (a) inexperience and (b) BOJ having less independence from the government than our own Fed does.


Credit is created outside the central bank infrastructure, but sooner or later, that money hits the banking system where it is recorded in the Base.

Note to members: I would be happy to produce additional information based on monetary numbers from other countries. Send me links. Europe would be particularly useful. Australia and Russia are probably just warts on the elephant's butt. China is a question mark. I assume that even the rural areas are somewhat dollar-influenced. I don't know how China's banking system works, but assume it is run by benign neglect. Therefore, a lot of what goes on there shows up in the U.S. numbers.

* To all: I have previously offered the software free to list users. That offer still holds. Just send me an email if you want a serial number.




 The market has days when it consolidates, then breaks out of the range to a new level, like the discussion of bird nests. Counting the last three months by hand shows a count of the number of days to build a bird's nest. 7+5+5+5+3+6+6=37 /7 ~ 5.

The average is around 5 days, after which time the chicks fly off. Today is the fourth bird nest building day. The boughs seem to have bent but not broken. Three times have been breakdowns, 4 times have been up. It's the same idea as the room cleaners in the big hotel. Clean rooms, move to the next floor.



 Investors are often perplexed by the lack of warning of market tops and bottoms, until after the fact. There is no alarm bell tolling. However, there are warning signs at the tops usually based upon enthusiasm, and at the bottom signs based on despair. Didn't Mutual Fund Magazine close its shutters at the end of the last bear market, ringing the bell near the bottom? So now we have a new FOX Business Channel to start broadcasting this year.

Is this a warning bell that the market is flirting with the top?

Victor Niederhoffer writes:

This is all very well and good except that there are approximately 1 billion qualitative events like starting a new business channel that come within a month of all market tops, bottoms, and continuations. It is impossible to differentiate the cause, effect, or any other factor related to the seemingly and for the large part random movements from drift.

From Jason Goepfert:

My local Barnes & Noble is relatively small and its business magazine section is sparse, Forbes, Fortune, BusinessWeek and not much else.

Last year, they started carrying Active Trader, which I found at the back of the top rack. If I weren't 6'6", I never would have seen it.

This weekend, on the second shelf, I was taken aback when I saw the following magazines all prominently displayed: Active Trader; Equities Magazine; Technical Analysis of Stocks & Commodities; Traders Press; Trader Monthly; and Bloomberg Magazine 

Jim Sogi writes:

My daughter called last week and said, "Dad, I want to buy some stocks, now." I said, " Wait till they go down a bit." She said, "You always say that." I told her that, as with the rest of the public, with recent all time highs, the urge to buy stocks at high levels is typical but often wrong. It is better to buy stocks when they are down so you aren't down a couple percent as soon as you buy. She looks at her stocks about once a quarter.

From Stefan Jovanovich:

 The actual use of canaries in coalmines fails to provide the historical lesson that the metaphor promises. Mining for "sea" coal (named because the earliest pits were at the coastal towns like Newcastle in what is now the United Kingdom) began in the 1400s. Canaries were first used in British coal mines in 1911. As part of the political alliance between the Liberals and the new Labor Party, parliament adopted regulations requiring that two canaries be placed in every mine. That, of course, required that someone be assigned the job of canary keeper.

The requirement for canaries was finally abolished in 1986. There is no evidence that the canaries served any useful purpose; the scientific justification was so weak that they were first described as being uniquely qualified to detect carbon monoxide. When that proved not to be the case, they were rationalized as being peculiarly sensitive to methane. The canary in the coalmine is probably better compared to the caboose on the rail train, a "safety" requirement that provided a comparatively soft berth for the man assigned to the useless activity.



He hovered nightly like a dove around its pillaged nest.

 Bird nests provide an environment of shelter and protection for eggs to develop. The exquisite variety of the construction techniques, building materials, and camouflage used in these nests, and also their importance to the ecology of birds is described here. Numerous articles cite the importance of nest building in birds as an essential aspect of their evolution, and such articles include Dawkins The Extended Phenotype For Behaviors. With something as important as this, one would expect that markets would have borrowed from nature and that there would be numerous areas where the mistress and the invisible hand would have developed comparable features in market behavior for the development of the young. Yet a search shows that the main references to bird nests in markets are to the habits of very successful Asian traders in eating gourmet delicacies such as birds' nests rather than using them for profit in their strategies. As a start, this must be remedied by me and the colleagues here.

Undoubtedly, the main application of nests to markets is the protective function that companies in one index play with respect to their graduation to the next stage of life. The mid market S&P 500 is always the best bet for young companies to develop into the big 500. The Nasdaq is a nest for the NYSE, and the S&P small cap is a nest for the midcap. The IPO's are a stage in the life for future NAS 100. What strategies do such companies play? Do the parents of the index themselves play to separate the survivors from those who decay? Are there comparable forms of altruism that some companies play as they do in birds' nests where the young devote their life to feeding their kin knowing that it will lead to a much greater overall transmission of the essence of their being?

Another area where nests are found is at levels of price that bring one into a new class. One level would be the movement from below five where stocks are usually not eligible for margin to above five where companies are eligible for inclusion in most portfolios. The same would happen for a company that starts paying dividends for the first time since certain funds and institutions are restricted to dividend payers only. At a more general level, big orders often rest to provide nourishment for a company. It could be from a buy back program or perhaps an insider who is accumulating Insiders often accumulate stock in their companies. This is sometimes a signal that a change in state, like an acquisition, is in the offing or perhaps a buyout in a going private transaction.

Option strike levels provide barriers and nesting sites for traders to nourish themselves until the price is ready to come out of the nest into an area where real buying, selling, exercises and conversion of the stock are possible. Considering the strategies of nest building, in particular the effort that is put into its construction with reference to the probability of survival for the egg to maturity, one should consider the many fledgling companies that are incubated in research laboratories, entrepreneurial efforts within companies, and previous acquisitions that are being nourished for a proper time in the market.

May I suggest that we expand the subject to the many fruitful areas that could be considered and fomented by a general study of bird behavior. Such questions as the following would only be a beginning. How do the feathers of birds enable them to fly? What are the special functions of display behavior in birds that are so successful in the sexual selection of their partners, in particular, the back and forth strutting that stocks often do to attract the interest of the public and the dealers? What are the migration patterns and timing of stocks that follow in the footsteps of our feathered friends? Most important of all, what are the functions of birds, the stocks and companies that fly about in the general structure, growth, and stability of markets? What songs do markets sing to attract, warn, and establish territory?

From Alan Milhone:

"Birds of a feather flock together." Is this the same with investors and brokers in that they all want to stay with the winners (performers)? I liked the way you described the construction of a bird's nest, guess that is where the term 'nest egg' developed? Or 'putting all your eggs into one basket' meaning one should stay diversified? The strong and secure nest is analogous to a strong and protected portfolio.

I enjoyed the Chair's article and it gave me a different perspective on nesting & ways of attracting investing. Not sure about songs used for attraction. My guess is how online or televised marketers vie to attract a potential investor's attention in hopes of getting them to buy into their program, much like a male bird hoping to attract a female's attention. The male bird's 'chirping' is music to the females' ears (hopefully) and the online/televised promoter of various stocks and investment programs is hoping to lure our attention in similar ways.

Jim Sogi writes:

Another bird nesting behavior in the market is the bunching of the price range within a certain area. For example over the last few days we see the bunching nesting behavior in the 1256 area, and before a nest was built in the lower branches at lower levels. When the little birds are strong enough, they venture out and start to fly from the nest, taking forays flying to higher levels.

There is busy back and forth activity as the nest is build. The nest normally must have a structure and normal time to build before the birds either venture out or, for some reason, the whole nest falls out of the tree an on to the floor, as in rare occasions it does, killing all the little chicks. Bigger birds like eagles that build bigger nests at higher altitudes soar higher. Perhaps that is why Dow big birds are hitting all time highs and SPs are still moving up to their all time highs, in sight a couple bird nest levels away.

J. T. Holley writes:

On a similar note [to previous post] you can look down the option chains intra-day and see birds perched either on nests or on wires and see them "spooked" as higher and higher numbers are reached historically. It's almost like opening up a dark room and seeing the cockroaches scatter when the light of day hits them.



 I am glad to consider Larry Williams as a friend, so it is was with great enjoyment that I read his recent book. One of the great pleasures and benefits of knowing the Specs is being able to meet and discuss market ideas with the best.

The commitments of traders report provides good additional information to speculators in the futures markets. Larry presents many good ideas for quantitative specs to test, and even hints at some of the many tricks he has up his sleeve, without giving away the family jewels. The book's use of charts is aimed at the less quantitatively inclined beginner, and while some of the chart-based reasoning suffers from chartism's typical retrospective bias, Larry does have a chapter on quantitative tests, although limited to win/loss ratios and amount of wins, and briefly discusses down days in S&P. However, any astute spec can test the many good ideas rigorously and develop his own more precise methods.

Ideas for new trades can come from any source, as the Specs have shown us, and new ideas are necessary to keep an edge in a competitive market. Rather than try to find entries base on comparing chartpoints and indicators which is non predictive, better to use the ideas and data to refine the entries. It is in this spirit that the book is helpful to a speculator. It's a fun an quick read, in Larry's breezy and folksy style.

In many ways the most basic and important call in the market is if it is going up or down. Seems so deceptively simple, but the paths it takes throw one off the track. Good information, just a bit more than the next guy, is what it takes to head in the right direction, and the COT report may give an edge.



Sometimes it costs some money to make money. You have your advertising. You have your expenses and normal overhead. Sometimes you have to fix up the merchandise to make it look good. You have to pay off your shills. You have to paint up them horses so they look nice to the buyers. Sometimes you have to give a bit on some inventory to get the action going, get the customers interested.

 Hopefully the costs won't exceed the ultimate rake in, but you've got to spend a little hopefully to make a little. I'm not a gambler, but I guess you have to get the mark interested in the game by giving him a few pots before the rake. The problem is, I can never tell who the sucker is at the table when I play. Hmmm.



 Just discovering Google's book project. They're scanning in books from various libraries and have an ambitious plan to scan every book ever published (New Yorker article by Toobin).

A search for "speculator" brings up these full, searchable texts (among many others):

Arthur Crump: The Theory of Stock Exchange Speculation; London, 1874, John Hill, Jr. (of the Chicago Board of Trade).

Gold Bricks of Speculation; Chicago, 1904, A Study of Speculation and Its Counterfeits, and an exposé of the methods of bucketshop, and "get-rich-quick" swindles.

Harrison H. Brace: The Value of Organized Speculation; New York, 1913. A prize-winning essay from a contest run by Chicago, Columbia, Michigan, NYU, and Harvard, and sponsored by, "…Hart, Schaffner & Marx, of Chicago, who have shown a special interest in trying to draw the attention of American youth to the study of economic and commercial subjects."

Jim Sogi writes:

 Thanks to Alston Mabry for pulling this one up. It will surely be a favorite of the Chair.

Arthur Crump appears to talk about the English markets, but the lessons are the same. Crump charges out of the gate with some great formulas for risk, such as, "…the sum risked must be only such proportion of the possible gain as the mathematical probability of gaining it is of unity." This is brilliant. "A man should not hazard his all on any terms."

Imagine this quantitative risk measurement in the 19th century. Closer to current one-day drops he speaks of typical drops of 2-3% a day with very gradual gains, familiar scenario indeed.

Crump identifies the pitfalls that await the unwary.

A typical reason many beginners convince themselves speculation is simple is they say to themselves the market can only go up or down and his chances are at least 50-50. Their mistake is overlooking path dependency in calculating the odds, thinking reversing position might have avoided losses.

"The outsider's stakes are too large a proportion of their means."

"Multiply each gain or loss by the probability of the event on which it depends; compare the total result of the gains with that of the losses. The balance is the average required and is known by the name of mathematical expectation."

It follows from this that the player must be able to stand a number of plays to realize the expectation. Furthermore, the gains must be greater than the expenses.

"Those whose only business it is to be in the stock markets must of course know that the outside public are always dropping their money."

"If a speculator has not learnt the alphabet of recurring intervals, he has not learned the alphabet of his business."

More later, but this is fun and good book in nice quaint old print.

More Crump Quotes from Jim Sogi:

"Any jackass can take a profit, but it requires a devilish clever fellow to cut a loss. After he has once realized the importance of having his accounts open and ready for the periodic haves to carry him in and land his profit, the difficulty is to get him to realize the importance of keeping out while the water weeps back, carrying with it the gray speculators who were not content to take their profits"

Good advise these last few days.

"It is as necessary to the success of his operation that he posses no more regard for the feelings or pockets of other people than a hungry tiger would for him, if he were airing himself unconcernedly in a Bengal jungle. He has a purpose in view, just as a surgeon has when the amputation of a leg has been decided upon." 

"Deception in all its form will be found in the armory
of the professional speculator, and the weapons, two-edged, are employed."

"Then there is the fatal blunder made by almost every inexperienced speculator, of never being satisfied with a moderate profit. If he buys, and the price rises 1/2, he cannot make up his mind to take it, but must wait for 3/4th. When it has reached that he must have 1 per cent and when that rise has been attained too, he wants another 1/8th to cover the commission. Like a dog in attempting to grasp the shadow of his bone, he loses all." 



 There has been entirely too little thought given to the mechanism, pathways and reasons that negative feedback works in markets. Perhaps the main reason is that the feeding web is based on a reasonable stability in what and how much is being eaten and recycled.

The people who consume and redistribute must maintain a ready and stable supply of those who produce. They develop mechanisms to keep everything going. One of them is the specialization and great efficiency in their activities. If markets deviate too much from the areas and levels within which the specialization has developed, then much waste and new effort and mechanisms will be necessary.

Aside from the grind that trend following causes (i.e. the losses in execution), and the negative feedback system of movements in the supply and demand schedules that equilibrate, which Marshall pioneered and are now standard in economics, and the numerous other reasons I've set forth (e.g. the fixed nature of the system and the flexibility to profit from it), this appears to me to be the main reason that trend following doesn't work.

Here are a few interesting articles on the subject:

How Great Traders Make Millions in Up or Down Markets 

Does Trend Following Work On Stocks?

Interviews At RealWorld Trading

Why I Don't Believe in Trends

Briefly Speaking . . . 

Bill Rafter writes: 

Dr. Bruno had posed the idea of beating an index by deleting the worst performers. This is an area in which we have done considerable work. Please note that we do not consider this trend-following. The assets are not charted, just ranked.

Let us imagine an investor who is savvy enough to identify what is strong about an economy and invest in sectors representative of those areas, while avoiding sectors representing the weaker areas of the economy. Note that we are not requiring our investor to be prescient. He does not need to see what will be strong tomorrow, just what is strong and weak now, measured by performance over a recent period.

What is a market sector? The S&P does that work for us, and breaks down the overall market (that is, the S&P 500) into 10 Sectors. They further break it down into 24 Industry Groups, and further still into 60-plus Industries and 140-plus Sub-Industries. The number of the various groups and their constituents changes from time to time as the economy evolves, but essentially the 500 stocks can be grouped in a variety of ways, depending on the degree of focus desired. Some of the groupings are so narrow that only one company represents that group.

Our investor starts out looking at the 10 Sectors and ranks them according to their performance (such as their quarterly rate of change). He then invests in those ranked first through fourth (25 percent in each), and maintains those holdings until the rankings change. How does he do? Not bad, it turns out.


From 1990 through 2006, which encompasses several types of market conditions, the overall market managed an 8 percent compound annual rate of return. Our savvy investor achieved 10.77%. A less savvy investor who had the bad fortune to pick the worst six groups would have earned 7.23%. Those results are below. (Note, for comparison purposes, all results excluded dividends.)


How can our savvy investor do better? By simply sharpening one's focus, major improvements can be achieved. If instead of ranking the top 4 of10 Sectors, our savvy investor invests in a similar number (say the top 4, 5 or 6) of the 24 Industry Groups, he achieves a 13.12% compoundedannual rate of return over the same period. Note that the same stocks are represented in the 10 Sectors and the 24 Industry Groups. At no time did he have to be prescient.


One thing you will notice from the graphs above is that the equity curves of our savvy and unlucky investors mimic the rises and declines of the market index itself. Being savvy makes money but it does not insulate one from overall bad markets because the Sectors and even the Industry Groups are not significantly diversified from the overall market.

Why not keep going further out and rank all stocks individually? That clearly results in superior returns, but the volume of trading is such that it can only be accomplished effectively in a fund structure - not by the individual. And even ranking thousands of stocks will not insulate an investor from an overall market decline, if he is only invested in equities. The answer of course is diversification.

It is possible to rank debt and alternative investment sectors alongside equities, in the hope of letting their performances dictate what the investor should own. However the debt and commodities markets have different volatilities than the equities markets. Anyone ranking them must make adjustments for their inherent differences. That is, when ranking really diverse assets, one must rank them on a risk-adjusted basis for it to be a true comparison. However if we make those adjustments and rank treasury bonds (debt) against our 24 Industry Groups (equity) we can avoid some of the overall equity declines. We refer to this as a Strategic Overlay:


Adding this Strategic Overlay increases the returns slightly, but more important, diversifies the investor away from some periods of total equity market decline. We are not talking of a policy of running for cover every time the equities markets stall. In the long run, the investor must be in equities.

Invariably in ranking diverse assets such as equities, debt and commodities, our investor will be faced with a decision that he should be completely out of equities. It is likely that will occur during a period of high volatility for equities, but one that has also experienced great returns. Thus, our investor would be abandoning equities when his recent experience would suggest otherwise. And since timing can never be perfect, it is further likely that the equities he abandons will continue to outperform for some period. On an absolute basis, equities may rank best, but on a risk-adjusted basis, they may not. It is not uncommon for investors to ignore risk in such a situation, to their subsequent regret.

Ranking is not without its problems. For example, if you are selecting the top 4 groups of whatever category, there is a fair chance that at some time the assets ranked 4 and 5 will change places back and forth on a daily basis. This "flutter" can be easily solved by providing those who make the cut with a subsequent incumbency advantage. For a newcomer to replace a list member, it then must outrank the current assets on the selected list by the incumbency advantage. This is very similar to the manner in which thermostats work. We have found adding an incumbency advantage to be a profitable improvement without considering transactions costs. When one also considers the reduced transaction costs, the benefits increase even more.

Another important consideration is the "lookback" period. Above we used the example of our savvy investor ranking assets on the basis of their quarterly growth. Not surprisingly, the choice of a lookback period can have an effect on profitability. Since markets tend to fall more abruptly than they rise, lookback periods that perform best during rising markets are markedly different from those that perform best during falling markets. Determining whether a market is rising or falling can be problematic, as it can only be done with certainty in retrospect. However, another key factor influencing the choice of a lookback period is volatility, which can be determined concurrently. Thus an optimal lookback period can be automatically determined based on volatility.

There is certainly no question that a diligent investor can outperform the market. By outperforming the market we mean that he will achieve a greater average rate of return than the market, while limiting the maximum drawdown (or percentage equity decline) to less than that experienced by the market. But the average investor is generally not up to the diligence or persistence required.

In the research work illustrated above, all transactions were executed on the close of the day following a decision being made. Thus the strategy illustrated is certainly executable. Nothing required a forecast; all that was required was for the investor to recognize concurrently which assets have performed well over a recent period. It is not difficult, but requires daily monitoring.


Charles Pennington writes:

Referring to the MathInvestor's plot:

www.mathinvestdecisions.com/Worst_6_of_10.gif :

At first glance it appears that the "Best" have been beating the "Worst" consistently.

In fact, however, all of the outperformance was from 1990 through 1995. From 1996 to present, it was approximately a tie.

Reading from the plot, I see that the "Best" portfolio was at about 2.1 at the start of 1996. It grew to about 5.5 at the end of the chart for a gain of about 160%. Over the same period, the "Worst" grew from 1.3 to 3.2, a gain of about 150%, essentially the same.

So for the past 11 years, this system had negligible outperformance.

One should also consider that the "Best" portfolio benefits in the study from stale pricing, which one could not capture in real trading. Furthermore, dividends were not included in the study. My guess is that the "Worst" portfolio would have had a higher dividend yield.

In order to improve this kind of study, I would recommend:

1.) Use instruments that can actually be traded, rather than S&P sectors, in order to eliminate the stale pricing concern.

2.) Plot the results on a semilog graph. That would have made it clear that all the outperformance happened before 1996.

3.) Finally, include dividends. The reported difference in compound annual returns (10.8% vs 8.0%) would be completely negated if the "Worst" portfolio had a yield 2.8% higher than the "Best".

Bill Rafter replies:

Gentlemen, please! The previously sent illustration of asset ranking is not a proposed "system," but simply an illustration that tilting one's portfolio away from dogs and toward previous performers can have a beneficial effect on the portfolio. The comparison between the 10 Sectors and the 24 Industry Groups illustrates the benefits of focus. That is, (1) don't buy previous dogs, and (2) sharpen your investment focus. Ignore these points and you will be leaving money on the table.

We have done this work with many different assets such as ETFs and even Fidelity funds (which require a 30-day holding period), both of which can be realistically traded. They are successful, but not overwhelmingly so. Strangely, one of the best asset groups to trade in this manner would be proprietarily-traded small-cap funds.

Unfortunately if you try trading those, your broker will disown you. I mention that example only to suggest that some assets truly do have "legs," or "tails" if you prefer. I think their success is attributed to the fact that some prop traders are better than others, and ranking them works. An asset group with which we have had no success is high-yield debt funds. I have no idea why.

A comment from Jerry Parker:

 I wrote an initial comment to you via your website [can be found under the comments link by the title of this post], disputing your point of view, which a friend of mine read, and sent me the following:

I read your comment on Niederhoffer's Daily Spec in response to his arguments against trend following. Personally, I don't think it boils down to intelligence, but rather to ego. Giving up control to an ego-less computer is not an easy task for someone who believes so strongly in the ability of the human mind. I have great respect for his work and his passion for self study, but of course disagree with his thoughts on trend following. On each trade, he is only able to profit if it "trends" in a favorable direction, whether the holding period is 1 minute or 1 year. Call it what you will, but he trades trends all day.

He's right. I was wrong. Trend following is THE enemy of the 'genius'. You and your friends can't even see how stupid your website is. You are blinded by your superior intelligence and arrogance.

Victor Niederhoffer responds:

Thanks much for your contributions to the debate. I will try to improve my understanding of this subject and my performance in the future so as not to be such an easy target for your critiques.

Ronald Weber writes: 

 When you think about it, most players in the financial industry are nothing but trend followers (or momentum-players). This includes analysts, advisors, relationship managers, and most fund or money managers. If there is any doubt, check the EE I function on Bloomberg, or the money flow/price functions of mutual funds.

The main reason may have more to do with career risk and the clients themselves. If you're on the right side while everyone is wrong, you will be rewarded; if you're on the wrong side like most of your peers you will be ok; and if you're wrong while everyone is right then you're in trouble!

In addition, most normal human beings (daily specs not included!) don't like ideas that deviate too much from the consensus. You are considered a total heretic if you try to explain why, for example, there is no link between the weak USD and the twin deficits. This is true, too, if you would have told anyone in 2002 that the Japanese banks will experience a dramatic rebound like the Scandinavian banks in the early '90s, and so on, or if you currently express any doubt on any commodity.

So go with the flow, and give them what they want! It makes life easier for everyone! If you can deal with your conscience of course!

The worse is that you tend to get marginalized when you express doubt on contagious thoughts. You force most people to think. You're the boring party spoiler! It's probably one reason why the most successful money managers or most creative research houses happen to be small organizations.

Jeremy Smith offers:

 Not arguing one way or the other here, but for any market or any stock that is making all time highs (measured for sake of argument in years) do we properly say about such markets and stocks that there is no trend?

Vincent Andres contributes: 

I would distinguish/disambiguate drift and trend.

"Drift": Plentifully discussed here. "Trend": See arcsine, law of series, etc.

In 2D, the French author Jean-Paul Delahaye speaks about "effet rateau" (rake effect), here and here .

Basically, our tendency is to believe that random equals equiprobability everywhere (2D) or random equals equiprobability everytime (1D), and thus that nonequiprobability everywhere/everytime equals non random

In 1D, non equiprobability everytime means that the sequence -1 +1 -1 +1 -1 +1 -1 +1 is in fact the rare and a very non random sequence, while the sequences -1 +1 +1 +1 +1 +1 -1 +1 with a "trend" are in fact the truly random ones. By the way, this arcsine effect does certainly not explain 100% of all the observed trends. There may also be true ones. Mistress would be too simple. True drift may certainly produce some true trends, but certainly far less than believed by many.

Dylan Distasio adds:

 For those who don't believe trend following can be a successful strategy, how would you explain the long-term performance of the No Load Fund X newsletter? Their system consists of a fairly simple relative strength mutual fund (and increasingly ETF) model where funds are held until they weaken enough in relative strength to swap out with new ones.

The results have been audited by Hulbert and consistently outperform the S&P 500 over a relatively long time frame (1980 onwards). I think their results make a trend following approach worth investigating…

Jerry Parker comments again: 

All you are saying is that you're not smart enough to develop a trend following system that works. What do you say about the billions of dollars traded by trend following CTAs and their long term track records?

Steve Leslie writes:

 If the Chair is not smart enough to figure out trend following, what does that bode for the rest of us?

There is a very old yet wise statement: Do not confuse brains with a bull market.

Case in point: prior to 2000 the great tech market run was being fueled by the hysteria surrounding Y2K. Remember that term? It is not around today but it was the cause for the greatest bull market seen in stocks ever. Dot.com stocks and new issues were being bought with reckless abandon.

New issues were priced overnight and would open 40-50 points higher the next trading day. Money managers had standing orders to buy any new issues. There was no need for dog-and-pony or road shows. It was an absolute classic and chaotic case of extraordinary delusion and crowd madness.
Due diligence was put on hold, or perhaps abandoned. A colleague of mine once owned enough stock in a dot.com that had he sold it at a propitious time, he would have had enough money to purchase a small Hatteras yacht. Today, like many contemporary dot.coms, that stock is essentially worthless. It would not buy a Mad magazine.

Corporations once had a virtual open-ended budget to upgrade their hardware and software to prepare for the upcoming potential disaster. This liquidity allowed service companies to cash in by charging exorbitant fees. Quarter to quarter earnings comparisons were beyond belief and companies did not just meet the numbers, they blew by them like rocket ships. What made it so easy to make money was that when one sold a stock, all they had to do was purchase another similar stock that also was accelerating. The thought processes where so limited. Forget value investing; nobody on the planet wanted to talk to those guys. The value managers had to scrape by for years while they saw their redemptions flow into tech, momentum, and micro cap funds. It became a Ponzi scheme, a game of musical chairs. The problem was timing.

The music stopped in March of 2000 when CIO's need for new technology dried up coincident with the free money, and the stock market went into the greatest decline since the great depression. The NASDAQ peaked around 5000. Today it hovers around 2500, roughly half what it was 7 years ago.

It was not as if there were no warning signs. Beginning in late 1999, the tech market began to thin out and leadership became concentrated in a few issues. Chief among the group were Cisco, Oracle, Qwest, and a handful of others. Every tech, momentum, and growth fund had those stocks in their portfolio. This was coincident with the smart money selling into the sectors. The money managers were showing their hands if only one could read between the lines. Their remarks were "these stocks are being priced to perfection." They could not find compelling reasons not to own any of these stocks. And so on and on it went.

After 9/11 markets and industries began to collapse. The travel industry became almost nonexistent. Even Las Vegas went on life support. People absolutely refused to fly. Furthermore, business in and around New York City was in deep peril. This forced the Fed to begin dramatically reducing interest rates to reignite the economy. It worked, as corporations began to refinance their debt and restructure loans, etc.

The coincident effect began to show up in the housing industry. Homeowners refinanced their mortgages (yours truly included) and took equity out of their homes. Home-buyers were thirsty for real estate and bought homes as if they would disappear off the earth. For $2000 one could buy an option on a new construction home that would not be finished for a year. "Flipping" became the term du jour. Buy a home in a hot market such as Florida for nothing down and sell it six months later at a much higher price. Real estate was white hot. Closing on real estate was set back weeks and weeks. Sellers had multiple offers on their homes many times in the same day. This came to a screeching halt recently with the gradual rise in interest rates and the mass overbuilding of homes, and the housing industry has slowed dramatically.

Houses for sale now sit on the blocks for nine months or more. Builders such as Toll, KB, and Centex have commented that this is the worst real estate market they have seen in decades. Expansion plans have all but stopped and individuals are walking away from their deposits rather than be upside down in their new home.

Now we have an ebullient stock market that has gone nearly 1000 days without so much as a 2% correction in a day. The longest such stretch in history. What does this portend? Time will tell. Margin debt is now at near all-time highs and confidence indicators are skewed. Yet we hear about trend followers and momentum traders and their success. I find this more than curious. One thing that they ever fail to mention is that momentum trading and trend following does not work very well in a trendless market. I never heard much about trend followers from June 2000 to October 2002. I am certain that this game of musical chairs will end, or at least be temporarily interrupted.

As always, it is the diligent speculator who will be prepared for the inevitable and capitalize upon this event. Santayana once said, "Those who cannot remember the past are condemned to repeat it."

From "A Student:"

 Capitalism is the most successful economic system in the history of the world. Too often we put technology up as the main driving force behind capitalism. Although it is true that it has much to offer, there is another overlooked hero of capitalism. The cornerstone of capitalism is good marketing.

The trend following (TF) group of fund managers is a perfect example of good marketing. As most know, the group as a whole has managed to amass billions of investor money. The fund operators have managed to become wealthy through high fees. The key to this success is good marketing not performance. It is a tribute to capitalism.

The sports loving fund manger is a perfect example. All of his funds were negative for 2006 and all but one was negative over the last 3 years! So whether one looks at it from a short-term one year stand point or a three year perspective his investors have not made money. Despite this the manager still made money by the truckload during this period. Chalk it up to good marketing, it certainly was not performance.

The secret to this marketing success is intriguing. Normally hedge funds and CTAs cannot solicit investors nor even publicly tout their wares on an Internet site. The TF funds have found a way around this. There may be a web site which openly markets the 'concept' of TF but ostensibly not the funds. On this site the names of the high priests of TF are repeatedly uttered with near religious reverence. Thus this concept site surreptitiously drives the investors to the TF funds.

One of the brilliant marketing tactics used on the site is the continuous repetition of the open question, "Why are they (TF managers) so rich?" The question is offered as a sophist's response to the real world question as to whether TF makes money. The marketing brilliance lies in the fact that there is never a need to provide factual support or performance records. Thus the inconvenient poor performance of the TF funds over the last few years is swept under the carpet.

Also swept under the rug are the performance figures for once-great trend followers who no longer are among the great, i.e., those who didn't survive. Ditto for the non-surviving funds in this or that market from the surviving trend followers.

Another smart technique is how the group drives investor traffic to its concept site. Every few years a hagiographic book is written which idolizes the TF high priests. It ostensibly offers to reveal the hidden secrets of TF.

Yet after reading the book the investor is left with no usable information, merely a constant repetition of the marketing slogan: How come these guys are so rich? Obviously the answer is good marketing but the the book is moot on the subject. Presumably, the books are meant to be helpful and the authors are true believers without a tie-in in mind. But the invisible hand of self-interest often works in mysterious ways.

In the latest incarnation of the TF book the author is presented as an independent researcher and observer. Yet a few days after publication he assumes the role of Director of Marketing for the concept site. Even the least savvy observer must admit that it is extraordinary marketing when one can persuade the prospect to pay $30 to buy a copy of the marketing literature.

Jason Ruspini adds:

 "I attribute much of the success of the selected bigs to being net long leveraged in fixed income and stocks during the relevant periods."

I humbly corroborate this point. If one eliminates long equity, long fixed income (and fx carry) positions, most trend-following returns evaporate.

Metals and energies have helped recently, after years of paying floor traders.

Victor replies:

 I don't agree with all the points above. For example, the beauty of capitalism is not its puffery, but the efficiency of its marketing and distribution system as well as the information and incentives that the prices provide so as to fulfill the pitiless desires of the consumers. Also beautiful is in the mechanism that it provides for those with savings making low returns to invest in the projects of entrepreneurs with much higher returns in fields that are urgently desired by customers.

I have been the butt of abuse and scorn from the trend followers for many years. One such abusive letter apparently sparked the writer's note. Aside from my other limitations, the trend following followers apparently find my refusal to believe in the value of any fixed systems a negative. They also apparently don't like the serial correlation coefficients I periodically report that test the basic tenets of the trend following canon.

I believe that if there are trends, then the standard statistical methods for detecting same, i.e., correlograms, regressions, runs and turning point tests, arima estimates, variance ratio tests, and non-linear extensions of same will show them.

Such tests as I have run do not reveal any systematic departures from randomness. Nor if they did would I believe they were predictive, especially in the light of the principle of ever changing cycles about which I have written extensively.

Doubtless there is a drift in the overall level of stock prices. And certain fund managers who are biased in that direction should certainly be able to capture some of that drift to the extent that the times they are short or out of the market don't override it. However, this is not supportive of trend following in my book.

Similarly, there certainly has been over the last 30 years a strong upward movement in fixed income prices. To the extent that a person was long during this period, especially if on leverage, there is very good reason to believe that they would have made money, especially if they limited their shorts to a moiete.

Many of the criticisms of my views on trend following point to the great big boys who say they follow trends. To the extent that those big boys are not counterbalanced by others bigs who have lost, I attribute much of the success of the selected bigs to being net long leveraged in fixed income and stocks during the relevant periods.

I have no firm belief as to whether such things as trends in individual stocks exist. The statistical problem is too complex for me because of a paucity of independent data points, and the difficulties of maintaining an operational prospective file.

Neither do I have much conviction as to whether trends exist in commodities or foreign exchange. The overall negative returns to the public in such fields seem to be of so vast a magnitude that it would not be a fruitful line of inquiry.

If I found such trends through the normal statistical methods, I would suspect them as a lure of the invisible evil hand to bring in big money to follow trends after a little money has been made by following them, the same way human imposters work in other fields. I believe that such a tendency for trend followers to lose with relatively big money after making with smaller amounts is a feature of all fixed systems. And it's guaranteed to happen by the law of ever-changing cycles.

The main substantive objection to my views that I have found in the past, other than that trend followers know many people who make money following trends (a view which is self-reported and selective and non-systematic, and thus open to some of the objections of those of the letter-writer), is that they themselves follow trends and charts and make much money doing it. What is not seen by these in my views is what they would have made with their natural instincts if they did not use trend following as one of their planks. This is a difficult argument for them to understand or to confirm or deny.

My views on trend following are always open to new evidence, and new ways of looking at the subject. I solicit and will publish all views on this subject in the spirit of free inquiry and mutual education.

 Jeff Sasmor writes:

 Would you really call what FUNDX does trend following? Well, whatever they do works.

I used their system successfully in my retirement accounts and my kids' college UTMA's and am happy enough with it that I dumped about 25% of that money in their company's Mutual Funds which do the same process as the newsletter. The MFs are like an FOF approach. The added expense charges are worth it. IMO, anyway. Their fund universe is quite small compared to the totality of funds that exist, and they create classes of funds based on their measure of risk.

This is what they say is their process. When friends ask me what to buy I tell them to buy the FUNDX mutual fund if their time scale is long. No one has complained yet!

It ain't perfect (And what is? unless your aim is to prove that you're right) but it's better than me fumfering around trying to pick MFs from recommendations in Money Magazine, Forbes, or Morningstar.

I'm really not convinced that what they do is trend following though.

Dylan Distasio Adds:

 For those who don't believe trend following can be a successful strategy, how would you explain the long-term performance of the No Load Fund X newsletter?

Michael Marchese writes: 

In a recent post, Mr. Leslie finished his essay with, "I never heard much about trend followers from June 2000 to October 2002." This link shows the month-to-month performance of 13 trend followers during that period of time. It seems they did OK.

Hanny Saad writes:

 Not only is trend following invalid statistically but, looking at the bigger picture, it has to be invalid logically without even running your unusual tests.

If wealth distribution is to remain in the range of 20 to 80, trend following cannot exist. In other words, if the majority followed the trend (hence the concept of trends), and if trend following is in fact profitable, the majority will become rich and the 20-80 distribution will collapse. This defeats logic and history. That said, there is the well-covered (by the Chair) general market upward drift that should also come as no surprise to the macro thinkers. The increase in the general population, wealth, and the entrepreneurial spirit over the long term will inevitably contribute to the upward drift of the general market indices as is very well demonstrated by the triumphal trio.

While all world markets did well over the last 100 yrs, you notice upon closer examination that the markets that outperformed were the US, Canada, Australia, and New Zealand. The one common denominator that these countries have is that they are all immigration countries. They attract people.

Contrary to what one hears about the negative effects of immigration, and how immigrants cause recessions, the people who leave their homelands looking for a better life generally have quite developed entrepreneurial spirits. As a result, they contribute to the steeper upward curve of the markets of these countries. When immigrants are allowed into these countries, with their life savings, home purchases, land development, saving and borrowing, immigration becomes a rudder against recession, or at least helps with soft landings. Immigration countries have that extra weapon called LAND.

So in brief, no - trends do not exists and can not exist either statistically or logically, with the exception of the forever upward drift of population and general markets with some curves steeper than others, those of the countries with the extra weapon called land and immigration.

A rereading of The Wealth And Poverty Of Nations, by Landes, and the triumph of the optimist may be in order.

Steve Ellison adds:

 So Mr. Parker's real objective was simply to insult the Chair, not to provide any evidence of the merits of trend following that would enlighten us (anecdotes and tautologies that all traders can only profit from favorable trends prove nothing). I too lack the intelligence to develop a trend following system that works. When I test conditions that I naively believe to be indicative of trends, such as crossovers of moving averages, X-day highs and lows, and the direction of the most recent Y percent move, I usually find negative returns going forward.

Bacon summarized his entire book in a single sentence: "Always copper the public play!" My more detailed summary was, "When the public embraces a particular betting strategy, payoffs fall, and incentives (for favored horsemen) to win are diminished."

Trend Following — Cause, from James Sogi: 

Generate a Brownian motion time series with drift in R

WN <-rnorm(1024);RW<-cumsum(WN);DELTAT<-1/252;

MU<-.15*DELTAT;SIG<-.2*sqrt(DELTAT);TIME<-(1:1024)/252 stock<-exp(SIG*RW+MU*TIME) ts.plot(stock)

Run it a few times. Shows lots of trends. Pick one. You might get lucky.

Trend Following v. Buy and Hold, from Yishen Kuik 

The real price of pork bellies and wheat should fall over time as innovation drives down costs of production. Theoretically, however, the nominal price might still show drift if the inflation is high enough to overcome the falling real costs of production.

I've looked at the number of oranges, bacon, and tea a blue collar worker's weekly wages could have purchased in New York in 2000 versus London in the 1700s. All quantities showed a significant increase (i.e., become relatively cheaper), lending support to the idea that real costs of production for most basic foodstuffs fall over time.

Then again, according to Keynes, one should be able to earn a risk premium from speculating in commodity futures by normal backwardation, since one is providing an insurance service to commercial hedgers. So one doesn't necessarily need rising spot prices to earn this premium, according to Keynes.

Not All Deer are Five-Pointers, from Larry Williams

 What's frustrating to me about trading is having a view, as I sometimes do, that a market should be close to a short term sell, yet I have no entry. This betwixt and between is frustrating, wanting to sell but not seeing the precise entry point, and knowing I may miss the entry and then see the market decline.

So I wait. It's hard to learn not to pull the trigger at every deer you see. Not all are five-pointers… and some will be bagged by better hunters than I.

From Gregory van Kipnis:

 Back in the 70s a long-term study was done by the economic consulting firm of Townsend Greenspan (yes, Alan's firm) on a variety of raw material price indexes. It included the Journal of Commerce index, a government index of the geometric mean of raw materials and a few others. The study concluded that despite population growth and rapid industrialization since the Revolutionary War era, that supply, with a lag, kept up with demand, or substitutions (kerosene for whale blubber) would emerge, which net-net led to raw material prices being a zero sum game. Periods of specific commodity price rises were followed by periods of offsetting declining prices. That is, raw materials were not a systematic source of inflation independent of monetary phenomena.

It was important to the study to construct the indexes correctly and broadly, because there were always some commodities that had longer-term rising trends and would bias an index that gave them too much weight. Other commodities went into long-term decline and would get dropped by the commodity exchanges or the popular press. Just as in indexes of fund performance there can be survivor bias, so too with government measures of economic activity and inflation.

However, this is not to say there are no trends at the individual commodity level of detail. Trends are set up by changes in the supply/demand balance. If the supply/demand balance changes for a stock or a commodity, its price will break out. If it is a highly efficient market, the breakout will be swift and leave little opportunity for mechanical methods of exploitation. If it is not an efficient market (for example, you have a lock on information, the new reality is not fully understood, the spread of awareness is slow, or there is heavy disagreement, someone big has to protect a position against an adverse move) the adjustment may be slower to unfold and look like a classic trend. This more often is the case in commodities.

Conversely, if you find a breakout, look for supporting reasons in the supply/demand data before jumping in. But, you need to be fast. In today's more highly efficient markets the problem is best summarized by the paradox: "look before you leap; but he who hesitates is lost!"

Larry Williams adds:

I would posit there is no long-term drift to commodities and thus we have a huge difference in these vehicles.

The commodity index basket guys have a mantra that commodities will go higher - drift - but I can find no evidence that this is anything but a dream, piquant words of promotion that ring true but are not.

I anxiously stand to be corrected.

Marlowe Cassetti writes:

 "Along a similar vein, why would anybody pay Powershares to do this kind of work when the tools to do it yourself are so readily available?"

The simple answer is if someone wishes to prescribe to P&F methodology investing, then an ETF is a convenient investment vehicle.

With that said, this would be an interesting experiment. Will the DWA ETF be another Value Line Mutual Fund that routinely fails to beat the market while their newsletter routinely scores high marks? There are other such examples, such as IBD's William O'Neal's aborted mutual fund that was suppose to beat the market with the fabulous CANSLIM system. We have talked about the great track record of No-Load Fund-X newsletter, and their mutual fund, FUNDX, has done quite well in both up and down markets (an exception to the above mentioned cases).

For full disclosure I have recently added three of their mutual funds to my portfolio FUNDX, HOTFX, and RELAX. Hey, I'm retired and have better things to do than do-it-yourself mutual fund building. With 35 acres, I have a lot of dead wood to convert into firewood. Did you know that on old, dead juniper tree turns into cast iron that dulls a chain saw in minutes? But it will splinter like glass when whacked with a sledgehammer.

Kim Zussman writes:

…about the great track record of No-Load Fund-X newsletter and their mutual fund FUNDX has done quite well in both up and down markets… (MC)

Curious about FUNDX, checked its daily returns against ETF SPY (essentially large stock benchmark).

Regression Analysis of FUNDX versus SPY since inception, 6/02 (the regression equation is FUNDX = 0.00039 + 0.158 SPY):

Predictor    Coef         SE Coef           T             P
Constant    0.00039    0.000264        1.48        0.14
SPY            0.15780    0.026720        5.91        0.00

S = 0.00901468    R-Sq = 2.9%   R-Sq (adj) = 2.8%

The constant (alpha) is not quite significant, but it is positive, so FUNDX did out-perform SPY. Slope is significant and the coefficient is about 0.16, which means FUNDX was less volatile than SPY.

This is also shown by F-test for variance:

Test for Equal Variances: SPY, FUNDX

F-Test (normal distribution) Test statistic = 1.17, p-value = 0.009 (FUNDX<SPY)

But t-test for difference between daily returns shows no difference:

Two-sample T for SPY vs FUNDX

            N          Mean      St Dev       SE Mean
SPY      1169     0.00041  0.0099       0.00029
FUNDX 1169     0.00045  0.0091       0.00027   T=0.12        

So it looks like FUNDX has been giving slight/insignificant out-performance with significantly less volatility; which makes sense since it is a fund of mutual funds and ETFs.

Even better is Dr Bruno's idea of beating the index by deleting the worst (or few worst) stocks (new additions?).

How about an equal-weighted SP500 (which out-performs when small stocks do), without the worst 50 and double-weighting the best 50.

Call it FUN-EX, in honor of the fun you had with your X that was all mooted in the end.

Alex Castaldo writes:

The results provided by Dr. Zussman are fascinating:

The fund has a Beta of only 0.157, incredibly low for a stock fund (unless they hold a lot of cash). Yet the standard deviation of 0.91468% per day is broadly consistent with stock investing (S&P has a standard deviation of 1%). How can we reconcile this? What would Scholes-Williams, Dimson, and Andy Lo think when they see such a low beta? Must be some kind of bias.

I regressed the FUNDX returns on current and lagged S&P returns a la Dimson (1979) with the following results:

Regression Statistics
Multiple R                0.6816
R Square                 0.4646
Adjusted R Square   0.4627
Standard Error        0.0066
Observations           0.1166

                    df         SS          MS         F            Significance F
Regression       4      0.0444    0.0111   251.89    8.2E-156
Residual      1161      0.0511    4.4E-05
Total           1165      0.0955

                Coefficients  Standard Error  t-Stat        P-value
Intercept  8.17E-05     0.000194           0.4194        0.6749
SPX          0.18122      0.019696           9.2007        1.6E-19
SPX[-1]    0.60257      0.019719         30.5566        6E-151 SPX[-2]    0.08519      0.019692           4.3260        1.648E-05 SPX[-3]    0.04524      0.019656           2.3017        0.0215

Note the following:

(1) All four S&P coefficients are highly significant.

(2) The Dimson Beta is 0.914 (the sum of the 4 SPX coefficients). The mystery of the low beta has been solved.

(3) The evidence of price staleness, price smoothing, non-trading, whatever you want to call it is clear. Prof. Pennington touched on this the other day; an "efficiently priced" asset should not respond to past S&P price moves. Apparently though, FUNDX holds plenty of such assets (or else the prices of FUNDX itself, which I got from Yahoo, are stale).

S. Les writes:

Have to investigate the Fund X phenomenon. And look to see how it has done in last several years since it was post selected as good. Someone has to win a contest, but the beaten favorites are always my a priori choice except when so many others use that as a system the way they do in sports eye at the harness races, in which case waiting for two races or two days seems more apt a priori. VN 

 I went to the Fund X website to read up, and the information is quite sparse. It is a very attenuated website. I called the toll free number and chatted with the person on the other line. Information was OK, but, in my view, I had to ask the proper questions. One has several options here. One is to purchase the service and do the fund switching themselves based on the advice of their experts. The advisory service tracks funds that have the best relative strength performance and makes their recommendations from there, www.fundx.com.

Another is to purchase one of four funds available. They have varying levels of aggressiveness. Fund 3 appears to be the recommended one.

If one purchases the style 3 one will get a very broad based fund of funds. I went to yahoo to look up the holdings at www.finance.yahoo.com/q/hl?s=FUNDX.

Top ten holdings are 47.5% of the portfolio, apparently concentrated in emerging markets and international funds at this time.

In summary, if money were to be placed into the Fund X 3 portfolio, I believe it would be so broad based and diversified that returns would be very watered down. Along with risk you would certainly be getting a lot of funds. You won't set the world on fire with this concept, but you won't get blown up, either.

Larry Williams adds:

My 2002 book, Right Stock at the Right Time, explains such an approach in the Dow 30. The losers were the overvalued stocks in the Dow.It is a simple and elegant idea…forget looking for winners…just don't buy overvalued stocks and you beat the idex.

This notion was developed in 1997, when i began actually doing it, and written about in the book. This approach has continued to outperform the Dow, it is fully revealed.

Craig Cuyler writes:

Larry's comment on right stock right time is correct and can be used to shed a little bit of light on trend following. This argument is at the heart of fundamental indexation, which amongst other points argues that cap weighting systematically over-weights overvalued stocks and under-weights undervalued stocks in a portfolio.

Only 29% of the top 10 stocks outperformed the market average over a 10yr period (1964-2004) according to Research Affiliates (this is another subject). The concept of "right stock right time" might be expressed another way, as "right market right time." The point is that constant analysis needs to take place for insuring investment in the products that are most likely to give one a return.

The big error that the trend followers make, in my mind, is they apply a homogeneous methodology to a number of markets and these are usually the ones that are "hot" at the time that the funds are applied. The system is then left to its own devices and inevitably breaks down. Most funds will be invested at exactly the time when the commodity, currencies, etc., are at their most overvalued.

Some worthwhile questions are: How does one identify a trend? Why is it important that one identifies a trend? How is it that security trends allow me to make money? In what time frame must the trend take place and why? What exactly is a trend and how long must it last to be so labeled?

I think it is important to differentiate between speculation using leverage and investing in equities because, as Vic (and most specs on the list) point out, there is a drift factor in equities which, when using sound valuation principles, can make it easier to identify equities that have a high probability of trending. Trend followers don't wait for a security to be overvalued before taking profits. They wait for the trend to change before then trying to profit from the reversal.

Jeff Sasmor adds:

As a user of both the newsletter and the FUNDX mutual fund I'd like to comment that using the mutual fund removes the emotional component of me reading the newsletter and having to make the buys and sells. Perhaps not an issue for others, but I found myself not really able to follow the recommendations exactly - I tend to have an itchy trigger finger to sell things. This is not surprising since I do mostly short-term and day trades. That's my bias; I'm risk averse. So the mutual fund puts that all on autopilot. It more closely matches the performance of their model portfolio.

I don't know how to comment on the comparisons to Value Line Arithmetic Index (VAY). Does anyone follow that exactly as a portfolio?

My aim is to achieve reasonable returns and not perfection. I assume I don't know what's going to happen and that most likely any market opinion that I have is going to be wrong. Like Mentor of Arisia, I know that complete knowledge requires infinite time. That and beta blockers helps to remove the shame aspect of being wrong. But there's always an emotional component.

As someone who is not a financial professional, but who is asked what to buy by friends and acquaintances who know I trade daily (in my small and parasitical fashion), I have found that this whole subject of investing is opaque to most people. Sort of like how in the early days of computing almost no one knew anything about computers. Those who did were the gatekeepers, the high priests of the temple in a way. Most people nowadays still don't know what goes on inside the computer that they use every day. It's a black box - opaque. They rely on the Geek Squad and other professionals to help them out. It makes sense. Can't really expect most people to take the time to learn the subject or even want to. Should they care whether their SW runs on C++ or Python, or what the internal object-oriented class structure of Microsoft Excel is, or whether the website they are looking at is XHTML compliant? Heck no!

Similarly, most people don't know anything about markets; don't want to learn, don't want to take the time, don't have the interest. And maybe they shouldn't. But they are told they need to invest for retirement. As so-called retail investors they depend on financial consultants, fee-based planners, and such to tell them what to do. Often they get self-serving or become too loaded with fees (spec-listers who provide these services excepted).

So I think that the simple advice that I give, of buying broad-based index ETFs like SPY and IWM and something like FUNDX, while certainly less than perfect, and certainly less profitable than managing your own investments full-time, is really suitable for many people who don't really have the inclination, time, or ability to investigate the significant issues for themselves or sort out the multitudes of conflicting opinions put forth by the financial media.

You may not achieve the theoretical maximum returns (no one does), but you will benefit from the upward drift in prices and your blended costs will be reasonable. And it's better than the cash and CDs that a lot of people still have in their retirement accounts.

BTW: FOMA = Foma are harmless untruths, intended to comfort simple souls.
An example : "Prosperity is just around the corner."

I'm not out to defend FUNDX, I have nothing to do with them. I'm just happy with it. 

Steve Ellison writes: 

One might ask what the purpose of trends is in the market ecosystem. In the old days, trends occurred because information disseminated slowly from insiders to Wall Streeters to the general public, thus ensuring that the public lost more than it had a right to. Memes that capture the public imagination, such as Nasdaq in the 1990s, take years to work through the population, and introduce many opportunities for selling new investment products to the public.

Perhaps some amount of trending is needed from time to time in every market to keep the public interested and tossing chips into the market. I saw this statement at the FX Money Trends website on September 21, 2005: "[T]he head of institutional sales at one of the largest FX dealing rooms in the US … lamented that for the past 2 months trading volume had dried up for his firm dramatically because of the 'lack of trend' and that many 'system traders' had simply shut down to preserve capital."

I saw a similar dynamic recently at a craps table when shooters lost four or five consecutive points, triggering my stop loss so that I quit playing. About half the other players left the table at the same time. "The table's cold," said one.

To test whether a market might trend out of necessity to attract money, I used point and figure methodology with 1% boxes and one-box reversals on the S&P 500 futures. I found five instances in the past 18 months in which four consecutive reversals had occurred and tabulated the next four points after each of these instances (the last of which has only had three subsequent points so far). The results were highly non-predictive.

Starting        Next 4 points
Date      Continuations  Reversals
01/03/06        3            1
05/23/06        1            3
06/29/06        2            2
08/15/06        2            2
01/12/07        1            2
             —–        —–
               9           10

Anthony Tadlock writes:

I had intended to write a post or two on my recent two week trip to Cairo, Aswan, and Alexandria. There is nothing salient to trading but Egypt seems to have more Tourist Police and other guards armed with machine guns than tourists. It is a service economy with very few tourists or middle/upper classes to service. Virtually no westerners walk on the streets of Cairo or Alexandria. I did my best to ignore my investments and had closed all my highly speculative short-term trades before leaving for the trip.

While preparing for taxes I was looking over some of my trades for last year. Absolute worst trade was going long CVS and WAG too soon after WalMart announced $2 generic pricing. I had friends in town and wasn't able to spend my usual time watching and studying the market. I just watched them fall for two days and without looking at a chart, studying historical prices and determining how far they might fall, decided the market was being stupid and went long. Couldn't wait to tell my visitors how "smart" a trader I was and my expected profit. It was fun, until announcement after announcement by WalMart kept causing the stocks to keep falling. The result was panic selling near the bottom, even though I had told myself before the trade that I could happily buy and hold both. Basically, I followed all of Vic's rules on "How to Lose."

Trends: If only following a trend meant being able to draw a straight line or buy a system and buy green and sell red. The trend I wrote about several months ago about more babies being born of affluent parents still seems to be intact. I have recently seen pregnant moms pushing strollers again. Planes to Europe have been at capacity my last two trips and on both trips several crying toddlers made sleep difficult, in both directions. Are people with young children using their home as an ATM to fund a European trip? Are they racking up credit card debt that they can't afford? Depleting their savings? (Oh wait - Americans don't save anything.) If they are, then something fundamental has changed about how humans behave.

From James Sogi:

My daughter the PhD candidate at Berkeley in bio-chem is involved in some mind-boggling work. It's all very confidential, but she tried to explain to me some of her undergrad research in words less than 29 letters long. Molecules have shapes and fit together like keys. The right shape needs to fit in for a lock. Double helices of the DNA strand are a popular example, but it works with different shapes. There is competition to fit the missing piece. They talk to each other somehow. One of her favorite stories as a child was Shel Silverstein's Missing Piece. Maybe that's where her chemical background arose. Silverstein's imagery is how I picture it at my low level. 

Looking at this past few months chart patterns it is impossible not to see the similarity in how the strands might try fit together missing pieces in Wykoffian functionality. The math and methods must be complicated, but might supply some ideas for how the ranges and strands in the market might fit together, and provide some predictive methods along the lines of biochemical probability theory. I'll need some assistance from the bio-chem section of the Spec-list to articulate this better.

From Kim Zussman: 

Doing same as Alex Castaldo, using SPY daily change (cl-cl) as independent and FUNDX as dependent gave different resluts:

Regression Analysis: FUNDX versus SPY ret, SPY-1, SPY-2

The regression equation is FUNDX = 0.000383 + 0.188 SPY ret - 0.0502 SPY-1 - 0.0313 SPY-2

Predictor     Coef           SE Coef       T        P
Constant     0.000383    0.00029      1.35    0.179
SPY ret       0.187620    0.03120      6.01    0.000*            SPY-1        -0.050180    0.03136     -1.60   0.110           SPY-2        -0.031250    0.03121     -1.00   0.317 *(contemporaneous)

S = 0.00970927   R-Sq = 3.2%   R-Sq (adj) = 3.0%

Perhaps FUNDX vs a tradeable index is the explanation.




With this last year's crop of parchment back from the millers in the form of fresh green beans, the old Zach and Danni (now known as Nesco) coffee roaster bit the dust, and in shopping for a new one, discovered a good review of roasters here. I decided on a programmable I Roast 2. The review says that Nesco did not do a good dark roast as well and was a bit slow making a 'dead' cup, which I did experience with the Nesco. In the meantime, roasting is done on the Wok on the stove. Cast Iron fry pan is what the old time farmers used and it gives a very complex flavor but kicks off some smoke. The fry pan allows graduated programmable roast also, but requires standing there stirring the beans. Hopefully I will have heavenly coffee, better than a millionaire's money can buy. Fresh roast is the best way to go.

Alan Millhone writes:

Interesting article. My Daughter likes to grind her own fresh coffee and likes Caribou for grinding. My Wife and I are lazy and have been members of Gevalia for a number of years. Each month we get our standard shipment of 4 to 8 oz. boxes.

Every so often we get an additional special of some coffee. In front of me I have Maragogype from Mexico, Papua New Guinea, and Antigua that have come as additional shipments. Recently from Gevalia we got a nice coffeemaker and two boxes of coffee for $10.00. Another time or two I notified them that our pot went on the blink and we were shipped a new pot for no charge. They also sell teas, but to date have not tried them. In Belpre this morning the wind chill was three below zero, and I am currently having a cup of Bigelow brand Constant Comment tea :-) . It's an old favorite of my grandfather's and mine. He started me drinking it many years ago. I readily admit there is nothing like the aroma of fresh ground beans being brewed. My best friends are Greek and they like Bravo brand of coffee from Greece. 

Tom Larsen adds:

On vacation in Florida this week, I was driving on I-75, yawning like crazy. I knew I needed coffee and MCD saved me. I didn't even have to get out of the car to buy it and I thought about the Chair's earlier post about McDonald's coffee. I would have had some food too, if my wife weren't with me!

James Sogi reports:

Reporting back on the new coffee roaster, I-Roast-2, which produced a beautiful cup, roasted to perfection medium dark with a hint of sheen. Highly recommended over Nesco. What is interesting is that it has different programmable temperatures for first crack and second crack and finish so the oils don't come out too soon. It came with a nice variety of exotic green beans from Sumatra, Peru, Guatemala, Mexico, East Africa, Timor, so it will be fun to try the different varieties. The roast finished in less than 15 minutes, as coffee should not roast longer at the risk of getting flat. 

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