Now you can trade like a hedge fund

April 24, 2006
Brett Steenbarger

When therapists first meet with their clients, they do a lot of
listening. What they’re listening for are themes–patterns that run
through people’s lives. Sometimes these themes are ones of emotion: people
feel certain ways in particular situations. Other times, the themes
involve patterns of action. On still other occasions, we find thought
patterns. Whenever someone seeks help, it is because a pattern is
interfering with their lives, and they want to change that situation. The
role of the therapist is to figure out what that pattern is and then introduce a
set of measures for changing it. As a result, a great deal of a
therapist’s time is spent deciphering the thematic patterns that run through a
person’s life, just as a reader will discern themes in a well-crafted novel or
symphony.

Markets possess their themes as well, and deciphering them can prove quite
profitable. Consider the past 25 trading days in the stock market.
Seemingly, not much has occurred. The S&P 500 Index
(
SPY |
Quote |
Chart |
News |
PowerRating) is up less
than a tenth of a percent in that time. On a closing basis, we’ve stayed
within a 2.5% range over that span. The average trader would discern no
theme, no trend, and leave it at that.

But let’s be psychotherapists and look beneath the surface.

The U.S. consumer has long been an engine of
growth. How have consumer staples stocks
(
XLP |
Quote |
Chart |
News |
PowerRating) fared over the last 25
trading sessions? They are down 2.8%. The consumer has been using appreciation
of housing values to help finance purchases (and economic growth). How have real
estate stocks
(
IYR |
Quote |
Chart |
News |
PowerRating) done in the past 25 sessions? They’re down 3.72%. And
retail? Surely that ‘s a barometer of the consumer’s willingness to spend.
Retail stocks
(
RTH |
Quote |
Chart |
News |
PowerRating) are down 2.8% in 25 trading
days.

So we have a potential theme: What’s bad for bonds, bad for the dollar,
good for energy prices, and good for gold is also bad for economic growth and
the consumer. The S&P 500 Index is going nowhere because some of its
components (energy stocks) are benefiting from the current theme and others are
suffering.

So, at face value, it looks as though nothing is happening in the S&P 500
Index. Smart stock pickers, however, who read the themes like therapists
might just develop some trade ideas out of what’s happening beneath the
surface. And if you’re reading *my* theme correctly, you’ll see that a
greatly expanded exchange traded fund (ETF) world now allows you to play these
global/macro themes like any hedge fund. There’s pretty much a stock for
every theme, which keeps us market shrinks working overtime.

Brett N. Steenbarger, Ph.D. is Associate Clinical
Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical
University in Syracuse, NY and author of The
Psychology of Trading (Wiley, 2003). As Director of Trader Development
for Kingstree Trading, LLC in Chicago, he has mentored numerous professional
traders and coordinated a training program for traders. An active trader of the
stock indexes, Brett utilizes statistically-based pattern recognition for
intraday trading. Brett does not offer commercial services to traders, but
maintains an archive of articles and a trading blog at www.brettsteenbarger.com
and a blog of market analytics at www.traderfeed.blogspot.com.
His book, Enhancing Trader Development, is due for publication this fall
(Wiley).

Now you can trade like a hedge fund

BUY THE FEAR, SELL THE GREED

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