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Trend Following
Amos Hostetter, the wise sage of the infamous Commodities Corporation, offered wisdom, well worth sharing:
Trading Dont's
Don't sacrifice your position for fluctuations.
Don't expect the market to end in a blaze of glory. Look out for warnings.
Don't expect the tape to be a lecturer. It's enough to see that something is wrong.
Never try to sell at the top. It isn't wise. Sell after a reaction if there is no rally.
Don't imagine that a market that has once sold at 150 must be cheap at 130.
Don't buck the market trend.
Don't look for the breaks. Look out for warnings.
Don't try to make an average from a losing game.
Never keep goods that show a loss, and sell those that show a profit. Get out with the least loss, and sit tight for greater profits.
Dangers in Trading caused by Human Nature
Fear: fearful of profit and one acts too soon.
Hope: hope for a change in the forces against one.
Methodology: Lack of confidence in ones own judgment.
Independence: Never cease to do your own thinking.
Objectivity: A trader must not swear eternal allegiance to either the bear or bull side.
The individual fails to stick to facts!
People believe what it pleases them to believe.
Think about how simple Hostetter's wisdom appears on the surface. But how many people could actually adhere to his strict rules? Its been said that rules to making money in the markets could be in the front page of the daily papers, and people would still ignore them . . .
See also Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael Covel. More about the book at trendfollowing.com
Friday, April 30, 2004 | 08:50 PM | Permalink
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Advance Decline Line Brings Good News and Bad
There have been a few reports recently suggesting that the Bull move is over. Based upon deteriorating market breadth, these authors are predicting the end of the rally. Under specific circumstances, we’d be inclined to agree with that perspective. Typically speaking, a narrowing advance-declines line that diverges from a rallying market is cause for grave concern. Under those conditions, the A/D line would be an early signal of an imminent collapse.
That rule doesn’t apply to periods like now.
Why? We are in a rising rate environment. One should expect to see the NYSE experience a marked weakening in the number of advancing versus declining issues. The NYSE is home to a broad variety of interest rate sensitive issues. As the weakening NYSE A/D reveals, these are selling off in response to rising rates. Many of these issues have taken tumbles of 15% or greater. REITs, closed end bond funds, and other similar non-operating companies are doing exactly what they are supposed to do in this environment.
But that doesn’t mean the present A/D decline weakness is anything more than a concurrent - and not a leading - indicator. It is merely tracking a softening market, which is distracted by geopolitics, a rallying dollar, and valuation concerns. That situation is a far cry from times when the A/D line diverges from a strongly rallying market. Recall that divergence occurred in late 1999 and early 2000.
So the A/D line is falling with the market: That’s the good news. The bad news is that none of our favorite indicators have reached the point where we feel we must start getting long again. The one notable exception: The NYSE McClennan Oscillator has reached moderately oversold levels. Some practitioners use this Oscillator to provide a short term snapshot of when the market is getting oversold. But since it is essentially a breadth derived signal, I prefer to see it much more oversold, in light of the previously mentioned trading in interest rate sensitive REITs and Funds, before getting too excited.
Investors still remain quite optimistic, by most recent sentiment measures. Measures such as the AAII Bull Bear Ratio, the Volatility Index (VIX), and the Put/Call Ratio are still relatively strong (see nearby chart). On Wall Street, Pessimists are your potential buyers, while Optimists are potential sellers.
We continue to suggest trading smaller and less frequently until we see contrary extremes in these measures.
Friday, April 30, 2004 | 09:33 AM | Permalink
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Barrons picks up The Future of Music
The increasingly hip Barron's picks up the "Future of Music: Monetize Your IP" piece here.
Way cool!
Source:
The Future of Music?
Barron's
MARKET WATCH TODAY 2:05 p.m.
http://online.wsj.com/barrons/article/0,,SB108317569959996157,00.html
Thursday, April 29, 2004 | 06:00 PM | Permalink
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Chart of the Week: S&P500 versus Sentiment (1988 to present)
Investment advisors have remained extremely optimistic, despite the less than stellar market conditions since the market peaked late January. This works as a contrary indicator, because people become more bullish after buying stock - call it the pride of ownership).
S&P500 versus Sentiment (1988 to present)
Source: Chart of the Day
One can disregard overly optimistic sentiment indicators if the tape and internals are strong. They have been choppy lately, and not providing very much guidance.
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Smart Fraction Theory of IQ and the Wealth of Nations
Poll: Growing Doubts On Iraq
Quote of the Day:
"Regret for the things we did can be tempered by time; it is regret for the things we did not do that is inconsolable." ~ Sydney J. Harris (1917-1986)
Thursday, April 29, 2004 | 04:22 PM | Permalink
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GDP soft, Inflation rises
The WSJ Econ Roundup:
"The U.S. economy strengthened during the first three months of the year, but at a weaker-than-expected pace, the government said Thursday in a report that also suggested inflation rose at a faster rate.Here's the key stat to me:The reading on gross domestic product for the January-to-March quarter, reported by the Commerce Department, marks a slight pickup from the 4.1% rate registered in the final quarter of 2003. While the first-quarter figure suggests that the recovery is in good shape, it fell short of the strong 5% pace that economists were forecasting. . .
The report also showed that gauges of inflation rose at a higher rate. The price index for gross domestic purchases climbed at a 3.2% rate in the first quarter; it advanced 1.3% in the fourth quarter. The government's price index for personal consumption rose at a 3.2% rate January through March. It had risen just 1% in the fourth quarter."
Federal government spending went up 10.1% in the first quarter, compared with a 0.7% climb in the fourth. State and local government spending fell 2.6%.That suggest that government and military spending are still a key driver of the recovery -- not typically an encouraging sign.
Source:
GDP Rose 4.2% in Quarter; Key Inflation Gauge Climbs
Consumer Spending Increases 3.8%; Initial Jobless Claims Drop by 18,000
April 29, 2004 9:10 a.m.
http://online.wsj.com/article/0,,SB108323883685597205,00.html
Thursday, April 29, 2004 | 10:11 AM | Permalink
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Harnessing Nanotechnology
Interesting article in Chemical & Engineering News on Harnessing Nanotechnology. Very often, the best sources for early stage R&D are specialty publications. By the time it hits the WSJ or NYT, its already in late stage development. If you do any early stage or venture investing, learn to love these sources!
You may not be aware that there is a National Nanotechnology Initiative being run by Uncle Sam, funded to the tune of nearly a billion dollars in research grants in 2005. Here are the focus areas:
NNI HAS NINE SPECIFIC R&D FOCUS AREASIts no exaggeration to say that this is potentially the next industrial revolution . . .
1. Nanostructured materials by design, led by NSF
2. Manufacturing at the nanoscale, led by NIST and NSF
3. Chemical - biological - radiological - explosive detection and protection, led by DOD
4. Nanoscale instrumentation and metrology, led by NIST and NSF
5. Nanoelectronics, -photonics, and ?magnetics, led by DOD and NSF
6. Health care, therapeutics, and diagnostics, led by NIH
7. Efficient energy conversion and storage, led by DOE
8. Microcraft and robotics, led by NASA
9. Nanoscale processes for environmental improvement, led by EPA and NSF.
Source:
Harnessing Nanotechnology
Susan R. Morrissey
Chemical & Engineering News (ISSN 0009-2347): April, 19 2004
http://pubs.acs.org/cen/nanofocus/top/8216/8216nni.html
National Nanotechnology Initiative
http://www.nano.gov/
Thursday, April 29, 2004 | 06:16 AM | Permalink
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Apple to Music Industry: Monetize Your IP
"Put your full damned catalogues on-line already."
In not quite those words, Apple CEO Steve Jobs pressed the music industry to fully monetize their intellectual property. In a conference call today on the one year anniversary of Apple's popular iTunes Music Store, Jobs was was far subtler and more diplomatic than my own take on it. He correctly noted that most of the music industry's IP lay fallow.
If only the industry would digitize the 2/3rds of their catalogue currently out of print, the big labels might find a potentially high margin revenue source.
Steve noted why most of the large music labels have only one third or less of their music catalogues available for purchase: It is simply not cost effective to physically press, distribute, warehouse and inventory the vast majority of the labels' intellectual property. This makes a good deal of sense, especially for specialty and niche genres which may have small but dedicated fans.
However, those prohibitive costs do not apply to digitized music.
As the chief of both Apple and Pixar, Steve Jobs is a man who knows his technology, as well as his digital content. If the music industry is smart -- and there is little to suggest that they are -- they will sit up and pay attention to what he is suggesting.
If Jobs manages to convince the major studios to release their back catalogues to Apple initially, and ideally to Apple exclusively, then they become the defacto standard for "Digital Music Distribution."
Perhaps Apple could even become to music what the the Library of Congress is to the printed book.
UPDATE: April 29, 2004, 3:18pm
Here's the excerpt from the conference call:
Steve Jobs: Oh, there's, you know, there's a lot of challenges that we all face together. Let me give you one that's really exciting to us, which is that if you look at a typical music company, less than a third of their music that they have in their vault is actually available for sale. And the reason for that is, is because with traditional CD distribution channels where you have to make a physical object, somebody has to carry the inventory, somebody has to make, you know, rent space to put it on a shelf, they can't get distribution for a lot of their catalogues that's sitting on their vault because it wouldn't sell enough to justify, you know, the record company...the record stores carrying it. And it's getting even worse with the demise of the small individual record store and the tendency of, you know, of Wal-Mart and Best Buy, et cetera, the selection is even narrowing further.Transcript courtesy of MacObserverAnd one of the most exciting things for us is to get the rest of that catalogue, which has not been purchasable, in some cases, for decades, digitally encoded and online on the iTunes Music Store where there is no inventory, where there are no returns, where there is no rent for the shelf space, and make that music available to everybody.
http://www.macobserver.com/article/2004/04/29.9.shtml
Wednesday, April 28, 2004 | 02:18 PM | Permalink
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Apple iTunes Music Store 1 year anniversary
I listened in on the Apple / Steve Jobs conference call today. (The potentially blockbuster news will get posted later today).
A few interesting tidbits from the conference call:
-Apple iTunes Music Store downloading 2.7 million songs a week; That's a run rate of 140 million annually;-ITMS now has 700,000+ songs, expects to have over 1 million songs by year's end;
-Music Videos as well as film previews now playable thru the ITMS;
-HP is (or will be soon) shipping 8 million copies of iTunes pre-installed on Windows PCs;
-iTunes users now have access to a free single, every Tuesday;
-CD Insert Printing allows users to print a jewel case insert right from iTunes -- Includes mixed CDs with multiple album covers;
-iTunes Music store was profitible this Quarter.
Here's some more details from the official press release, :
-- "iMix," a new way for users to publish playlists of their favorite
songs on the iTunes Music Store for other users to preview, rate and
purchase. iMix creates a virtual iTunes community, enabling users to
discover new music recommended by fellow music fans and rate the iMixes
published by other iTunes users;-- "Party Shuffle," a new playlist that automatically chooses songs from a
user's music library, displays just-played and upcoming songs, and
allows users to easily add, delete and rearrange the upcoming songs on
the fly. Party Shuffle is the ultimate DJ at any gathering, and a great
way for users to get reacquainted with their personal music library;-- Radio Charts from more than 1,000 radio stations, enabling users to
easily find and buy the top songs played on local radio stations in
major US markets and buy directly from the charts with just one click;-- A new Music Video section featuring more music videos than ever, and a
new Movie Trailer section with the most popular movie trailers on the
Internet and links to buy songs from the soundtrack or audiobooks
related to the movie;-- The rights to play songs purchased from the iTunes Music Store,
including songs previously purchased, on up to five personal computers,
two more than before;
Fascinating stuff.
Wednesday, April 28, 2004 | 01:37 PM | Permalink
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Are Deficits Caused by Tax Cuts?
The NYTimes discussed the CBO's Analysis of the President's 2005 Budget, and Deficit Analysis. I've been meaning to get to it, as its a somewhat overlooked issue. Now that the Greenspan testimony is behind us, let's take a gander at the Budget, and see what causes deficits:
"When President Bush and his advisers talk about the widening federal budget deficit, they usually place part of the blame on economic shocks ranging from the recession of 2001 to the terrorist attacks that year. But a report released on Monday by the nonpartisan Congressional Budget Office estimated that economic weakness would account for only 6 percent of a budget shortfall that could reach a record $500 billion this year. . .There are 2 issues here which seem to get confused into one: 1) What causes the present deficit? and 2) What will determine the size of future deficits/surpluses.
The new numbers confirm what many analysts have predicted for some time: that budget deficits in the decade ahead will stem less from the lingering effects of the downturn and much more from rising government spending and progressively deeper tax cuts.Administration officials do not dispute the basic thrust of the agency's estimate, but they still say that faster growth and spending restraints can reduce the deficit in five years."
The source of the present deficit is the easier question: Its simply a matter of revenues versus expenditures. Whenever Uncle Sam spends more than he takes in, deficits result.
There are two sides to the equation: Spending and Revenue. The present administration has increased spending at the same time it decreased revenues. The math on this is simple enough so that even Supply Siders can understand it. Things get more complicated when we look out a few years. Estimates for the growth rate of the country vary dramatically, so revenue projections will similarly vary.
What makes the Congressional report so damning however, is their conclusion "that the 'cyclical' problems of slower growth are a tiny part of the overall budget problem. The Congressional agency estimated that slower growth reduced tax revenues by $53 billion in 2002, accounting for a third of the budget deficit that year. In 2003, the agency estimated that subpar growth cut tax revenues by $68 billion. The overall budget deficit in 2002 swelled to $375 billion as a result of spending on the Iraq war and Mr. Bush's tax cuts."
That means that the structural changes introduced into the budget are not only the underlying cause of the deficit, but will also generate deficits going forward -- even if we meet the most aggressive target's for economic growth.
Higher military spending and homeland security spending is a significant issue. But the CBO is telling us that deeper revenue losses, and not temporary economic distress, is the primary source of tyhe deficit.
Source:
Deficit Study Disputes Role of Economy
By EDMUND L. ANDREWS
NYTimes, March 16, 2004
http://www.nytimes.com/2004/03/16/politics/16BUDG.html
Wednesday, April 28, 2004 | 05:30 AM | Permalink
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NYSE Short Interest Rising
Something definitely worth tracking -- along with outstanding Margin -- is Short Interest. The WSJ reported that Nasdaq Short Interest rose this month, as "sellers began to anticipate an interest-rate increase by the Federal Reserve.
For the month through April 15, the number of short-selling positions not yet closed out rose 2.8% to 4,993,345,137 shares, up from 4,855,579,913 in mid-March. The short ratio, or number of days' average volume represented by the outstanding short positions, rose to 2.9 from 2.6 a month earlier."
Makes sense -- After licking their wounds, the Perma Bears have taken the markets listlessness as a negative. The reality is that after making a low on March 22, the market went too far too fast (The Dow shot up 500 points on 8 days). That made it vulnerable to a pullback:
"Over the period covered by the latest short-interest report, the Nasdaq Composite Index rose 3% -- a trend that would have hurt the value of many short positions.Nevertheless, short sellers are becoming emboldened, after taking a prolonged beating, said Harry Strunk, managing director of Aspen Grove Capital Management, which tracks short sales.
He said the average short portfolio is down about 2.5% for the year, including a 0.5% decline in March. While that performance isn't great, short sellers are at least happy to see their losses are slowing, compared with a 28.2% drop in the average portfolio in 2003, the worst annual performance in 12 years."
I need to start charting this regularly . . .
Source:
Short Interest Grows as Market Bets on Rate Rise
Portfolio Losses Slow, Down 2.5% This Year; Sellers Pin Hopes on Fed
PETER A. MCKAY
WALL STREET JOURNAL, April 27, 2004; Page C14
http://online.wsj.com/article/0,,SB108301216713693809,00.html
Tuesday, April 27, 2004 | 01:30 PM | Permalink
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