@VicNiederhoffer Tweets

April 13, 2020 |

 April 9th:

The best advice on the stock market during a "bear market" is contained in a book by Frank Kelly Why You Win or Lose: The Psychology of Speculation written in 1930 by a man who played the market during the 1929 crash and after and profited.

The advice is "the wrong behavior is almost sure to be seemingly logical behavior". Indeed one of the most charming things about the stock market is that one may prospect there by being illogical. The few who contrive to take more out of the market than they put into take more out by by going contrary to what would generally be accepted as logic. They do the opposite of what seemingly intelligent speculators are doing. Kelly gives many examples of this for the 1929 crash. Stocks go down on good news and up on bad news. A stock announces a dividend (earnings beat) and goes down but it rises when the dividend decreases (earnings masses) and goes up. Many other examples are given as to why the public buys stocks when the prices are near the top and sells them when prices are near the bottom.

No better example of the value of the illogical is given by the price behavior this week. For example, today. Friday March 7th, unemployment was at 8.5 million and 8 million more claims came in. What a time to take advantage of the coming carnage than that

At the beginning of the week the surgeon general reported that this would be a disastrous week or the hell of a week. Dr. Fauci in an interview give his usual prolonging the likely course of the recovery and downplaying the host of a cure within 4 months (why don't they confine him to jogging around a forlorn and distant track while others try to salvage any hopes of recovery). The drum beater of bad news continued during the week with headlines about retailers coming failure to meet debt payments and even online marketers were hurting because although views were up, advertising revenues were way down. Hardly a nook was spared. Typical was the highlight that airline leasing companies were in jeopardy to say nothing of the layoffs in Boeing and all travel companies.

No wonder the market has its best week in 48 years and that it is now 30% above its previous low. A content analysis of the negativity of news or headlines in the media this week would show this was the most negative on record. The WSJ was almost as negative as the NYT if that possible.

Is there any solution for succumbing to this all to human proclivity? Yes. A study of numbers will help. One example, it was 40 or so days without the stock market hitting a 20 day high. Such extended durations without a drink (or romance) are rare.

They have an expectation and Sharpe quite in line with what transpired. I could give many other examples. For example the big Friday decline that preceded the biggest rally ever. You have to be illogical and you can't assume that what happened in vivid memory continues.

Typical of all the bad news on the virus front was the number of new deaths and new reported incidents in NY reaching a maximum. (When will the common man understand that the more they test the greater than number of new virus will be found.

And the news that the after effect of ventilator cures are likely to be worse than shuffling off itself. As a benchmark the number tested is less than 10% of the population in almost all areas. The constant increase in the areas under lockdown and the extension everywhere. How illogical can you be?

T SUBSCRIBER 1 minute ago: "What we are doing is working," Dr. Fauci told reporters Thursday." Um, excuse me Dr. Fauci, you and your sidekick are strangling the economy of the US based on your euphoria over of this "pandemic". Mr. President, do what we elected you to do.

For all those against reopening the country until things are perfectly safe please educate yourself: (cont)

One more thing. Companies like Fedex and businesses like the professional sports have say 600,000 workers and the death rate is less than 10 deaths. How have they done it. They take care and use their common sense to distance.

Take manufacturing jobs 19 million or so. They are all used to tight work rules and restrictions on distancing. They would use choice and common sense to resume their jobs and pursuit of happiness. How did Mencken, Nock and Rand predict that we would give up all our liberties with a whimper.

What's amazing is that Kelly was able to profit by swing when commissions were so high unlike Livermore he was not born to commit himself in the Netherlands (never go near 62nd street). His swinging at least was with a several month holding period usually without margin.

Kelly didn't use margin and his average swing was 3 months hold so he didn't vig himself to death.

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Speak your mind

3 Comments so far

  1. stone.cao on April 14, 2020 12:15 pm

    Hello, under the current market conditions, the vix index will soon return to around 10. So can we think that appropriately shorting the vix is a great opportunity?
    I am a student in a university in China.

  2. none on April 14, 2020 2:22 pm

    “The advice is “the wrong behavior is almost sure to be seemingly logical behavior”. Indeed one of the most charming things about the stock market is that one may prospect there by being illogical.”

    This is an excellent read, and the notes here towards the subject are also excellent.

    ‘Excellent’ sound like a Tradestation guy after writing some code! LOL

    To add:

    “What is obvious is obviously wrong.”

    Lately I see this quote more than ever, as towards market history and a ‘1 second’ historical event.

    ‘1 second’ historical events contain several geo social/political and economic happenings; they must ‘dislocate’ a thinking of the pass on the subject or area where it is taking place. Those nation states surrounding are now subject to act or react in thinking towards real time solutions because new and larger head winds have been created, the need to resolve by observing changes the issues at hand and moves towards action.

    The changes forth coming may be quite larger in time then most can see at this point. Price or the moving of recent price ‘value’ is at rocket speed, this is not a positive as it is moving or had been moving downward at the point of take off.

    2020 = 1982.

    Its seems not very logical to suggest, as to why it has great possibilities of the reality.

    Great read and thanks! have a great day.

  3. Stone Cao on April 21, 2020 11:08 am

    I have been predicting that the vix will fall to its normal range of 10 to 20. But if a big drop in the index causes the vix to rebound, even if I’m right, the vix rebound will kill my trading account.
    It sounds like, “I’m sure if the dow goes down 20% in one day, I’m going to blow up, but I don’t think that’s going to happen in my lifetime.” I’m sure the vix will return to low levels, but the volatility in the middle may not be manageable. If you care too much about risk, the return is too low. If you go for it, the risk is unbearable. If you continue to assume that the vix is now bouncing as high as 80(which could also be 60,70), you will return to normal, and then rely on this expectation of a maximum rally to plan for the risk and margin of shorting the vix. This is virtually indistinguishable from the belief that it cannot fall more than 20% in a single day.
    May I ask you in those days when you encountered such risks and benefits are very big, is what kind of mentality to face? Or tell me about your own experience.
    I started my stock trading simulation in early march. The simulated account starts with $100,000. At its best, it hit $170, 000 by going long on the vix, then fell to $50, 000, then recovered to $91, 000 by frequent day trading, again with a vix-related etn.
    This process only takes about two weeks.
    I then dropped the first simulated U.S. stock account and started a second simulated U.S. stock account.
    By shorting luckin coffee and shorting the vix related etn, from an initial $100,000 to a peak of $140,000, the vix rebounded in the last two days and has fallen to $110,000. Due to insufficient margin, I had just liquidated my short position in the vix and was looking for a suitable opportunity to continue shorting the vix. If things go as I expected (luckin coffee dies like enron, vix eventually returns to normal range), I believe my simulated account could reach $200,000 or more, but time will tell if my expectations are normal. I don’t know the future.
    Even though it was a mock account, I sometimes felt anxious, almost identical to the real one.
    I have read your work and kenner’s, and I hope to learn from your experience.


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