How can I be Anti Fragile? 11/25/12

Nassim Taleb’s new book “Antifragile: Things that gain from disorder” is likely to be another hit as he uses a catchy title, excellent reputation and his academic standing to promote his extreme but correct theories. I have to admit I was one of the readers of the “The Black Swan” and wondered how I could make money from a market crash. Options came to mind certainly. But I felt I would have to take a thousand cuts of the sword before the black swan event unfolded, whenever it did. I am not too good at taking a thousand cuts. After a few cuts, I am out of there. I think I am still fragile; but I do have plans for risk management of my portfolio. the few people who did massive bets against the sub-prime also had to take a thousand cuts as the markets kept climbing against their positions and they were paying out money against their credit default swap positions. The investors in those pools riled against their money managers and one famous investor and his company sued their momeny manager but the money manager held firm, held the money and remained antifragile and came out with a huge win.

The notion that we are fragile, robust or antifragile is interesting to me. Someone who can handle volatility and actually gain strength from it is antifragile. Taleb talks about his drinking a drop of local water in India to make him stronger. David Cameron supposedly considers Taleb his “Guru”.

I remember thinking about the housing markets in its prime and wondering how I can shelter myself from a possible market drop. The idea of buying put options against a major ETF like IYR or against the housing stocks like HOV occurred to me. But no one else was talking about it and soon my own ideas withered away. I would have bought put options worth my mortgage when the housing market was indicating a fall. Would that have worked? Yes. But I did not act on it.

So what is the next Black Swan event and how do I make myself antifragile? I like to use put options as a hedge and it feels like a thousand cuts when the market climbs like it did last week. But does that make me more robust? Yes. But antifragile? Hmmmm not sure that I have reached that far. Governments and States are extremely fragile and it will take a huge change in the Government to think of them getting antifragile. Taleb talks about allowing institutions to fail so that there is learning memory from the events. But Paulson, Bush, Bernanke and Obama all backed away after Lehman Bros and Bear Stearns… and other like AIG, Bank of America and Merrill Lynch who made very bad bets survived in one form or another. And what about Goldman – well they pulled off the two sided bets that kept them antifragile I suppose.

The next black swan event we will see will be Governments unwilling to take a tough course and instead continuing to print money. I need to map out a plan that Taleb refers to as being more heuristic in nature and not too complicated. The damage in those fat tails can be a lot more than investors like me can withstand.  I will always want to protect myself against them fat tails. But what can I do to truly make lots of money from those events without facing a thousand cuts? I think I have to learn to take those cuts in order to be stronger.
How about protecting my portfolio with alternate currency and gold trading positions? Yes – I need to take some time out during Christmas and finalize those plans and put them into action by 2013 January…I also need to learn to be more contrarian and keep positions in those tails, regardless of the direction.

Ford (F) Changes Direction 11/18/12

I was pretty upbeat on Ford (F) a couple of posts back. I feel obliged to post this and note the change in direction for F and the down arrow that has come up. I still see that the blue trend line I have drawn touching the past lows has not been violated, and the up trend could still survive. Yes – I went long and took half my position out when it started pulling back and closed out the entire position when the down arrow came along. I have pointed out before that I will theorize as to what is happening and sometimes hope; but will not permit such thoughts to cloud my judgment regarding whether to be in a stock or not when my system drops a down arrow on me!

A Down arrow or an exit signal is like Pavlov’s bell ringing to me, and I am the dog. No way that I will sit on a stock and hope it will go up with a down arrow saying it is now tilted towards the downward direction. Staying past your welcome is how people get burned in the stock trading business. Just take a look at the chart on AMD. It is now at a sorry $1.86 after being as high as $7.00 a few months back. There were plenty of down arrows indicating get out.

Gold (GLD) has been down as well and I am currently not in GLD. I will be the first to jump back in when the signal changes to an up signal however! I have also exited major portions of my long position in my 401K and in the last couple of weeks, made a little money on my SPY put positions on the down side. But the charts are pretty oversold and I am expecting a bounce on some good news. Better to close out some of my puts at a profit. I am using the down signals on SPY as my master switch to bias me up or down. Right now the bias is definitely down. The fiscal cliff is the key excuse, along with EU Union going back into a second recession. I certainly would be very surprised if those politicians agreed and compromised on anything! But surprises do happen and that would make the markets joyous for the moment in that the uncertainty would be removed. More likely is a long drawn out protracted process while the market sheds some more value. The drop so far has been  quite orderly. No signs of panic yet.

Pls note that the AMD system chart above shows large and small arrows. Large arrows are overall trend direction. The small arrows are meant to provide guidance within the large arrows - trade only in the direction of the larger arrows.

401K Analysis – SPY Points a Change 11/11/12

The S&P500 (SPY) points down. Attached below is a chart of SPY showing the down signal. Note the blue bubble which was an exit long signal a while back that I posted when it occurred. This sets the stage for the market going deeper downwards. This is the proverbial master switch that says it is not a good time to be long. My slower monthly 401K system is merrily suggesting staying in equity funds however. What do I do? I have decided that from now on, I will follow my overall master switch and use that to override any 401K picks in the equity arena. That means exit my equity funds.

Going into my current company’s 401K the top funds selected by my monthly analysis are Fidelity Div Intl, WFA SPL Midcap VL and Fidelity Disciplined Equity fund.  However, they are all starting to turn downwards and I will exit them based on my first rule outline above. I will place some money into bond funds like the PIMCO funds

As far as the 401K analysis on my previous employer’s funds, I see that top of the picks is Fidelity Invst Div Int, Lazard Emerging Market, and T Rowe Price Intl Disc. I will move money away from all these and place some into bond funds.

Also below is a chart on IIF, India Fund. It had a buy signal back in June and if one followed it, the return would have been a nice 17% with an exit signal marked today for market open tomorrow. Interesting that SPY, IIF are both facing downwards? Why fight them with long positions in my 401K? Worst case is the market goes up and I miss some gains. It is much better to stay long in my 401K when the overall market is long as well.

What is the most difficult thing to do in Trading? 11/11/12

I was thinking this morning about what is the most difficult thing I find doing in stock trading?

For many people it is exiting a bad trade. They get stuck in a trade and hope that it will turn around for them. This is the worst situation to deal with. Add to that most people do not know technical analysis and have no exit plans. I have suffered through that during the 2002 time frame before I got into technical analysis and it wiped me clean in my technology funds. I remember all my Strong funds that were the opposite of strong. I was frozen and could not get out. And when I finally did, that must have been when the market capitulated along with me. I almost promised never to trade again. But I picked myself up and told myself I will learn to master this. This is a non-issue for me now! When I see an exit signal, I head for the doors. No problem with that anymore.

For me, the hardest thing is buying into dips as a stock is moving up. When I see an up signal and the stock is going up, and it pauses for breath, starts pulling back; that is an excellent time to buy. Pristine preaches that methodology well. I have put together trading systems that is a combination of trend following and contrarian, that provide entry signals on dips. Still, it is easier for me to sit there and watch it pull back and then rip upwards without my participating in the trade! I knew it would happen, saw the signal, but did not jump in. Coulda-shoulda-woulda! Why? I suppose I am afraid to lose money. This game involves risk, and without risk, there is no reward.

Learning to trade stocks is a very hard thing to master. Not only are their technical things to learn, there is the difficult part of knowing yourself and managing your own emotions as it relates to money. I think that is why so many people hand over their money to others to manage. Unfortunately there are many shysters and very ignorant people out there under the guise of money managers. Their goals may be quite different from yours, particularly as far as risk tolerance is concerned. Their knowledge level could be poor. For many, it is diversify and rebalance once per year. That works well in a growing economy; but not so well for a stagnating economy. In the end, we need to learn when we want to enter a trade, when we should take profits and when we want to exit because the trade did not go our way. In addition, we need to master what % of our money we should put in a trade, recognizing that it is easy to have 5 losses in a row and we don’t want to blow our account on a string of bad trades. I never put on too large a trade – at least not consciously. And if I even did, I would balance it with put options to cover my tail.

  

<a href=”http://www.guerillastocktrading.com”>Cartoon courtesy of GuerillaStockTrading.com</a>
Read More http://www.guerillastocktrading.com/stock-market-cartoons/

Rising Star? 11/03/12

Years back I had made a great trade based on a couple of indicators. It was a trade I listed in my first blog titled "Beginnings" on Visteon stock. It looks like we may have a similar situation developing on Ford (ticker symbol: F). Can the same logic work again? Truth is no one knows and I would not risk life and limb on such a relationship but invest modestly with an exit criteria in mind that would limit my losses should it prove to be wrong. Other news could drown out the relationship and people can change their minds in this fickle market.

So what is this relationship? It is a combination of technical and fundamental indicators – the best way to go. From the attached daily chart on Ford the technicals show a spike in volume as the stock moves up strongly. It has already based and has been showing higher highs during the last 3 months. My trading system kicked in and gave a buy signal with an arrow up. I am adding some Ford stock to my long portfolio. Fundamentally, Ford had a record Quarter despite a soft Europe market. Among the auto stocks, Ford looks promising but above all, rise in volume as the stock moves up on good news should sustain an up move for the next month. Or so I think and will put my money behind it.

Everyone has to judge an entry and exit. The stock is over extended up and the support is quite far down at about $9.90. One could argue that the Risk: Reward is not so hot and wait for a pullback. But sometimes pullbacks do not occur and the stock can run away from you. My logic is to add some now and add more if it pulls back. Ford did reasonably well on a down day – Friday, and I am going long.