This Week’s Battle Plan
The only way
one can become proficient at anything is self discipline and
dedication. The people who succeed are the ones that really do not let
personal feelings get in their way from giving their all in whatever
they choose to do. The superstars are people who are willing to do and
give a little bit more than the others who do not succeed. When I was
growing up and learning to play golf and during my career, I wouldn’t
even drink a cup of coffee for fear it might affect my nerve control
to some degree.
   —Byron Nelson, Two Time Masters Champion and Hall
of Fame Golfer
Professionalism
There are different levels of
professionalism in in every industry. The difference between those who
are great and most others is vast. This past week I flew back east to
attend my college roommate’s father’s funeral. The mass was conducted
by this man’s other son, who is a priest in a local parish. I cannot
imagine too many things that are tougher in life than to bury a
father. And to conduct the mass for your father must be close to
unthinkable. But it was done. And done at the highest level of
professionalism. So professional, that the head Bishop of Rhode Island
went so far as to commend him in front of the entire congregation. I
witnessed what it is like to reach a level of professionalism in one’s
career that only comes from tremendous dedication and devotion.
The same holds true in every industry in the world. The difference
between the great is vast compared to those who simply are inferior.
And I’m going to show you an example on Wall Street.
The following is an excerpt this weekend from a journalist at CNN.com.
Read his analysis and read his conclusion. This is what you get when
someone really has no clue and makes himself/herself off as an expert
in an industry. And, when your done, I’ll steer you to excellence. Go
out and buy this weekend’s Barron’s. Read the interview with
Steve Leuthold, from the Leuthold Group. Steve is the ultimate
professional. He and his team have taken market timing and market
analysis to one of the highest levels on Wall Street. They are not
always right, that’s for sure. But, they’ve made some very good calls
over the past few decades. And they’ve done it with a massive amount
of historical data (180 different components) quantified into a model
that allows them to make solid investment decisions including turning
bullish near the lows two months ago.
Steve Leuthold is an example of someone
who brings professionalism to work. The following, however, is an
example of the work of an amateur attempting to mask himself as
someone who is knowledgeable:
Real Rally Or Just Traders Having Fun? CNN.com,
11/30/2002
Now, whether or not this rally is a true sign of an economic and
earnings turnaround or just a function of money managers trying to
boost lagging fund returns remains to be seen.
But there has been some concern that fundamentals haven’t improved
enough to justify such a gigantic swing in the market. Many tech
companies have maintained that big businesses have yet to renew
spending in a major way.
With this in mind, skeptics would argue that the main reason the
market is up is that traders are covering short positions and that
mutual fund managers are chasing momentum in order to try to boost
their fourth-quarter results.
So if the market bucks historical trends and takes a tumble in
December, then that could be a sign that institutional investors were
just looking to make a quick buck…and that this is not the start of
another bull market.
Re-read the last paragraph. Amazing.
Now go read Leuthold’s interview in Barron’s.
Indicators
This next part may stir some controversy. But, I feel it’s important
for us to look at which “main stream” Wall Street indicators
really don’t work when used alone. Much of the following is based on
two decades of personal experience and not the opinion of anyone else
who writes for the site. And, much is backed by statistical evidence.
Here goes:
Stand Alone Indicators I Won’t Trade
First, you need to understand what I’m writing here. I am not
saying that any of the following do not work. In conjunction
with other indicators, many do. In fact, many of these indicators
are successfully used in conjunction with other indicators by many
successful traders including other traders on this site. What I am
saying is that, “as stand alone indicators,” I see no
evidence that they work. Again, the key words are “stand
alone.” Yes, they are used successfully by others including many
traders I respect. But, if used alone, I will venture to say that you
will not make money from them. The lesson I want to get across is
that there are no shortcuts. If you take a successful methodology
(like Don Miller’s for example) and isolate just one indicator he uses
instead of trading the entire package, you will likely (very likely)
achieve inferior results compared to Don, who puts “all” the
pieces together.
Used Alone,
What Does Not Work
1. Put/Call Ratios. In 20 years of seeing this indicator, I
have yet to see one piece of statistical evidence that shows this
indicator works. I’ll go further. Joe Corona, who runs Tony Saliba’s
trading desk, has told me the same. So has Jon Najarian, who is one of
the largest options market makers in the world. And, I can name many
other successful traders who have told me the same thing. Too many
traders have spent too many hours chasing this indicator, trying to
make it work to predict short-term market direction. It’s all been in
failure. Does this mean it’s useless? Not completely. Mark Boucher,
who I have utmost respect for, uses this indicator. But, and here is
the big but, he does not use it alone. He
uses it as a confirming indicator with other indicators. Bottom line:
if you use this indicator by itself, you will likely not make money.
2. Oscillators and Oscillator
Divergences. OK, here’s where it gets good. Here’s the beachfront
that’s definitely going to be attacked. Yes, you read it correctly.
I’m saying oscillators and oscillator divergences don’t work. But,
before you blow up my house, I will state again, they likely work
as a confirming indicator, but they don’t work alone. Kevin
Haggerty uses the divergences to confirm his set-ups; Don Miller does
the same. Both are terrifically successful traders. But, neither
uses them in a stand-alone fashion. They have other things going
on at the same time to give them their signals. I too have a few
trading strategies that use oscillators as confirmation to the other
signals. But, trade them alone? Never! And I’ll leave you with
this last point: read or re-read the three Market
Wizards books. Count the number of traders who solely rely on
oscillators or oscillator divergences. When your count gets to one,
let me know.
3. Short Ratio levels, both exchange levels and individual
stock levels. Ah, the infamous contrarian indicator. If everyone is
short (bearish) this must mean the market or stock is due for a short
squeeze and heading higher. I think not! Record short levels were hit
throughout 2000, 2001 and 2002. Some of the most-shorted stocks
went to zero. Contrarian indicator? Not from what I have seen. The
next time you read that a short squeeze is imminent, just buy some
puts. It will likely pay better in the long run.
4. Moving Averages. By themselves, they are useless.
With other indicators, they sometime prove essential. What does this
mean? This means if you buy/sell a stock/market that crosses a
moving average, you will lose money in the long run. Merrill Lynch
proved this in the 1950’s. They spent millions on research looking for
moving average combinations that made money. Their findings? None
do. And, nearly 50 years later, this study has yet to be unproven.
Moving averages are wonderful when combined with other appropriate
indicators. But as a straight crossover method…forget about it!
There you have it. I am not saying you cannot make from using P/C
ratios, oscillators, oscillator divergences, short ratios or moving
averages. I know many traders who do make money from them (in
fact my Windows strategy applies a moving average component to it!) What
I am saying is that these indicators, as stand-alone signals,
do not carry enough weight for you to use. If you use them, as
I do, and as Kevin, Don and Mark do, you must apply them with other
signals and other confirming indicators. Those who are lazy, and
try to simplify trading methodologies by just isolating one piece of
the pie, are ultimately doomed to fail (but they do qualify to
write financial articles for CNN.com).
What’s New
We have a number of things going on:
1. This weekend is our annual Thanksgiving weekend sale.
Many books and videos are on sale until Monday at 20-30% off. You can click
here for details of the sale.
2. My Windows training module went live two days
ago. If you are interested in learning more about it, click
here.
3. As I mentioned a few weeks ago, we have a number of new
columns and pieces coming to the site over the next few weeks. This
includes our “Big Saturday Interview” with top professional
traders and money managers (some you know of and many who will be new
to you). We also are bringing out a morning piece called “The
Morning Short List” which will combine stocks with news along
with the price levels of these stocks you should focus on, a
“Mid-Day Opportunities” column, a weekend piece that will
prepare you for Monday morning, plus much more. You can find
information as these pieces are released on the What’s
New at TradingMarkets link found in the upper right-hand
corner of the home page. Plus, I’ll announce the launch of these new
features in this column each Sunday.
Finale
I’m not here to tell you that nothing works except my
strategies or strategies found on TradingMarkets. Far from it. You
have heard me say over and over again that there are many many ways to
make money in the markets. There are probably hundreds of strategies
that work, if not more. And more will be discovered in the future.
What I am trying to show you is that there is a lot of information
that is passed along in books and on web sites that don’t work, at
least in my opinion. And this information is passed along (in most
cases) with honest intentions. But, the bottom line, and this week’s
lesson, is that I strongly urge you not to use these indicators
alone. If you do, you will have little chance of making money. No
matter how great your trade management is.
Have a great week trading (and a special thanks to everyone whose
ideas and suggestions helped us recently be selected by Forbes.com as
among the Best of The Web)!