Market Timing, Symmetry and Human Psychology...
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     holycow
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Username: holycow
Post Number: 1211
Registered: 08-2004Rating: N/A
Votes: 0
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| | Saturday, May 07, 2005 - 11:09 pm: |  
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First off, I HATE the subject title. I wish I can be less serious. But I am trying to gain respectability here, so I have to look and sound like some kind of (mad) Professor...
I guess everyone can see this is just my myopic view of the market? Good.
1) Market Timing
Personally I prefer not to predict, or rather, tell others when such and such an event will happen. This is because I know by doing so I am making myself an ass since it's something everyone can do very well and each stands as good a chance as anyone else to get it right. Luck seems to have more to do with that kind of "prediction" than anything else. So for those of you who are seeking for a definitive answer, I think you have come to the wrong guy. Sorry!
Let's talk TA instead, and the "frame work" of timing - my way.
The essence in TA is to study the market, find out what the market has just done, detect what is going on, and act accordingly. Regardless how we want to phrase our view, I don't believe we can avoid the "expectancy" issue - our human desire of wanting to find out what will happen next, driven by our own emotions of greed and fear will always be there. So we might as well ACCEPT this "flaw" of wanting to look into the future and move on with it.
To help with our prescience, we have developed implicit or explicit "ideas" and "models" which we believe will help us in looking forward. I guess the following is one of them/mine.
McL, the weasel who has suddenly decided not to share his view on the ASX ever since he realised he can make more money from his one day seminar than selling his newsletter - has mentioned a couple of ratios he considered as his life-long "trick" and I think I have to agree with him on this.
He divides his study in price and time into 3 or 8 parts, ie, he observes price movement and date movements some how fall nicely into multiples of these ratio. I don't know if this is Gann's method or not. But McL has made me realised something I have done unknowingly for a long time, ie, I have been observing 1/3 and 2/3 all the time.
In my simplistic view the bull market lasts twice as long as the bear market. A very old and not a ground breaking idea here but I do subscribe to it. So for those of you who are seeking for an answer to WHEN the bottom will happen you can quite easily work this out - the current bull market is about 24 months long, starting from March 2003, divide that by 3 will give you 8 months. The major (top) correction started on 22/3/05 where everyone can see, but I personally see the "cashing in" began way back at the beginning of December '04 - so I guess we have two different dates to use here. I prefer the December date and by adding 8 months to this date gives me a date somewhere in August (or November if you use 22/3).
I guess this is the problem of trying to play with time, the variations never end  If you take on McL's idea of ratio in eighth, then, when the time comes you can see the date and price will probably fall into these ratios he used. Sound a bit "zen" here but don't take my words for it. Monitor and then verify this for yourself.
Remember too, I am talking about a full fledge bear market as in NASDAQ back in 2000, so how much discount in terms of price and time for an intermediate correction for ASX at the moment is quite hazy for me. If you want an honest opinion - I don't know at the moment, but I believe (meaning I hope I can) I will know when it happens or within two or three days after it has happened.
Remember this is just my pet thesis I am talking about - If I am found wrong, the market will punish me. As for you, you will be very foolish if you listen to what I have just said and act accordingly. I expect you to consider this view and then try working out something that make sense to you. My philosophy is to play with all these "ideas", but rely on the market to "confirm" them. At all times, I won't be too hard-nosed in holding on to my own opinion if the market shows me I am wrong - I am wrong!
As a trader, there's no point arguing with the market. This is one advice no one should ignore.
You can try your luck with 1/3 and 2/3 and see where it will take you. A better option is not to try at all. Just watch the market and let it tell you when it happens. To me this is the surest and the best way. Between making a few quick bucks and getting it wrong and getting caught, you might as well contain your greed and let fear rule you for a while. Regardless of outcome, you know you are already better off than many others by staying aside with plenty of cash waiting for the return of the bull. By waiting patiently you have time on your side and if the trend is down, you have the market on your side because with each passing day your "favourite stocks" are becoming cheaper - by not committing and utilising your money, you are actually "accumulating" more shares in the stocks that you intend buying. The cheaper they are the more share you can buy. Make sense?
So instead of hoping the market to complete the bottom, you really should prefer the market to correct more because you are holding cash! Remember cash is king! Just take your time and ride the correction and make the market and your cash work harder for you.
The trick moving forward for me has always been and will be to wait and catch the MORE SURE FOOTED MAJOR TREND and ride it until it bends. The daily short term high volatility swings although look tempting, but if you are not good in the short trade, you just have to let others make the money while you wait for your turn. Sound familiar? You can't win it all. And you can't make it all. Every dog has to have its day. So let others have their days in the sun.
There's an age old stock market adage that goes like this - "bulls make money, bears make money but the pigs get slaughtered" - in this case it's the greedy pigs that get the chop. So don't be one.
Next... symmetry
ps: you can tell I am talking to those who only go long and not the "traders" that do both long and short, right?
HC
"... if you've got a chart, I have an opinion!"
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holycow
Member
Username: holycow
Post Number: 1212
Registered: 08-2004Rating: N/A
Votes: 0
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| | Saturday, May 07, 2005 - 11:30 pm: |
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2) Symmetry and Market Psychology
When I mention symmetry I don't mean precision as in maths, I am referring to symmetry in time - the time requires for human beings, and for the average market bulls and bears, needed to switch their views around. They usually swing from one end to the other end - from extreme bullishness (driven by greed) to extreme bearishness (driven by fear) over a long period of time.
You can argue this with exception, and I will agree because there are always exceptions (the winners); but the majority of the people (80/20 rule) will not fall into this group. 80% of the market participants WILL need substantial time to change their view or opinion they have acquired over a period of time. In this case - 24 months+ of bullish view!
So, ask yourself this question - after 24 months of "conditioning", how long would it take you to adapt to the new idea that the bull market might have ended? Or due for a substantial correction? How easily could/would you realise and accept that the "tricks" and methods that use to work in the last 24 months have now turned unworkable?
Not likely nor easily. Hence you should expect the bulls will not just take it sitting down or lie down to die so easily because people need time to change their view. This is just human nature. Agree?
And now here is the tough part - the market has corrected "somewhat", but is it over? My opinion is "NO!", but if I can't convince Peter Loh, and to a degree, Mark, and other "mainstream" investors/fund managers/big players who "play" the market with a long to very long term investing view, I can never come to this conclusion because this is how the market works - they call the shot and they are the "market".
And I don't want to go against the market.
The only way is to WAIT! We have no choice but wait for them to change their mind. And the only way they will change their mind is for the market to be sold down continuously. They need evidence. They need proof. The to'ing and fro'ing between the bulls and the bears will go on for a while until one side capitulates. Right now, the correction has only gone on for less than two months, the good fond bullish memory is still fresh in many bulls' mind, so you should expect the fight to go on.
The "final" resolution will only happen when one side gives up completely and there's no two way about it. When it happens, I have a feeling some will know it but majority of the people won't have a clue. (you reckon the average market participant will know without the constant reminders in backpage?)
The most stubborn bulls will need some kind of extreme market behaviour to instil fear into their heart before they will capitulate. On the other hand, you probably won't see the same behaviour when the bears capitulate. You probably will not even realise there's a sea change until you are into it deeply. The bulls capitulate enmass while the bears capitulate individually.
This can be explained quite "simply" if you were to consider how we react to FEAR and GREED. We react with extreme prejudice/reaction to FEAR due to our survival instinct. But we don't become extremely greedy people over night due to our "modesty" and our "moral training" - we turn greedier and greedier with successive gains and over a longer time frame because greed and fortune are not life threatening. But greed does grow on us and make us "drunk" in our own fortune.
So with the above market psychological make up as a guide, this is what to watch for in the index - any "V" shape rebound will not last - people are still jittery. They won't bet their life on the market so easily. A prolonged "U" or a "W" shape is a possibility and a potential because people can only build up their confidence and bullishness through repeated trial and error resulting in success. So if you were to see an extended “U” or a “W” (successful test) pattern in your chart now, you might have just seen a “temporary bottom”. For a more affirmative intermediate bottom, we need more time. Also, we need more alternate confirmation/indicators.
For this purpose I suggest we watch the bulls here, say Peter – when he reveals to us that he has turned bearish and is reconsidering his position, we know the bottom is very near. When a bull like Peter capitulates, we know there has to be some kind of extreme market action to make him come to that conclusion. (...now that he knows he is being watched, I doubt he will ever show us his fear or doubt. So we have to look for some others )
But frankly, without any disrespect, Peter is our first choice contrarian bear indicator here. (my apology, Peter)
As for your contrarian bull indicator – I guess I may fit the bill quite well. But you know I am a cunning fella right? I will never reveal my “greed” to anyone…
So here's your homework, find the next best bull and bear contrarian and watch them. When the time comes, report your finding to all of us... and then we will all jump in for another round of bottom fishing....yea...!
END of story... and World Peace.
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HC
"... if you've got a chart, I have an opinion!"
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oldwombat
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Username: oldwombat
Post Number: 626
Registered: 04-2004Rating: N/A
Votes: 0
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| | Sunday, May 08, 2005 - 01:50 am: |
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Why do you think it is the end of World Peace HC?
Do you have some inside info about war as well as GM?!!!
Cheers
OW
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holycow
Member
Username: holycow
Post Number: 1214
Registered: 08-2004Rating: N/A
Votes: 0
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| | Sunday, May 08, 2005 - 11:10 am: |
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Here is an article seems to have certain echo to what I have said above... read about it.
Let's take on his points and ponder why good fundamental stocks are also getting d'dump. To name a few - WES, ORI, RIO, BHP, etc.
Alternatively, if BIG bluechips are losing the confidence of big players so easily in a short market correction such as this, what is safe? What kind of stocks will instil confidence? Especially for the long haul?
HC
"... if you've got a chart, I have an opinion!"
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holycow
Member
Username: holycow
Post Number: 1215
Registered: 08-2004Rating: N/A
Votes: 0
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| | Sunday, May 08, 2005 - 11:16 am: |
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OW,
It should be "End of Story. And for World Peace."
The world is quite safe at the moment except the USA - they are spending more to make sure "Fortress America" is inpeachable.
Cheers.
HC
"... if you've got a chart, I have an opinion!"
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dogalog
Member
Username: dogalog
Post Number: 1306
Registered: 03-2004Rating: N/A
Votes: 0
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| | Sunday, May 08, 2005 - 03:42 pm: |
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Professor Cow,
Been reading of this new book called"Mean Markets and Lizard Brains".No,it's not a cookbook but another yank expose on how we should think by aprofessor at Harvard in economics,with Masters in finance,economics,science,degree in biophysics AND a wide experience in private enterprise like Investment Banking.So ya gotta listen to him,hey?
Terry Burnham's ,his name and his gist is that We[like including him],we by using the lizard part of our brain can produce disasterous investment decisions by keeping a focus on past performance.He sees the past 20 years of growth in the market as unsustainable ,yet we will still look for patterns and take risks to achieve past performance in our investments.Ergo,we'll come a cropper now the Market is Meaner 'cos we basically think like a lizard.
Irrelevant to the Professor Terry that it's millions of years since we were lizards[if we ever were?that's an unassailable truth]basically Tassa says we should just put our money in the bank,accept the days are gone,and well not go flat out like a lizard drinking.
I'm greatly encouraged by this thesis,HC,can't wait til 'The Lizard Trader' gets published or better yet made into a movie.Maybe this forum's Terry could terrify a whole generation,revive as the Lizard King or something.
Anyhow,HC,i know how you don't buy newspapers so just thought i'd give you something to google.keep me informed on your findings.
cheers,
jr
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holycow
Member
Username: holycow
Post Number: 1216
Registered: 08-2004Rating: N/A
Votes: 0
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| | Sunday, May 08, 2005 - 05:56 pm: |
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Oh, sh*t!.... I think I need to clarify who I am too living in this "new age". Here is my disclaimer - I am Holycow aka HC AND I AM NOT Dogalog, Dr, DJ, and any other has yet created nicks...
I am quite good looking for a cow and have a harem of she-cows. So anyone wants free supply of milk, by all means give me a yell...
Ok, Dr, let's get back to Lizard Brains... I picked these two negative reviews because I think (great I have not even read the book yet) these two reviewers are plenty credible people. But I don't know them. Duh!
Reviewer: John D. Booth
There are quite a few nuggets of wisdom buried in this book, but you'll have to wade through a ton of anecdotes and glib cliches to get to the good stuff. At least 90% of the content this book could have been edited out without losing anything of real value. The reader is taken back through lots of funny scenes from all sorts of TV shows and movies, from the Jetsons to Top Gun, to Back to the Future, Hoop Dreams, Austin Powers, Star Wars, the Color of Money, Glengarry Glen Ross, the Graduate, As Good As It Gets, Blazing Saddles, etc. etc. etc. Lest we start thinking that the author's education is limited to Tinseltown offerings, he drops in a few references to The Odyssey and Anna Karenina near the end.
The first 60 pages are spent bashing a straw man of Burnham's own creation. The efficient-market theory he purports to take down is not the theory as it is actually articulated by its proponents, but Burnham's own ill-informed reconstruction. It's no wonder he is able to tear it apart so effectively. Sadly, his take on this academic debate does not supply any tools capable of predicting future market behavior. Instead, there emerge a few well-worn themes: buy low, sell high, and avoid emotional investing. The obligatory Keynes quote that in the long run we're all dead is thrown in as well. Fair enough, but all this has been written about a million times already.
In the end, the "truths" Burnham uncovers are undoubtedly true. Stock prices won't always outpace economic growth, the US won't always be able to run trade deficits, and there is a lot of money to be made in being a contrarian. Oddly enough, his truths all seem to be a variant of the idea that in the long run market forces punish irrational behavior. But I won't go there. I'll simply point out that this book, like all the others, won't tell you when corporate profits will recede, or whether that stock everybody hates will be up 20% next year or still out of favor.
Not all it could be., April 11, 2005
Reviewer: Trevor Cross "persepolis" (Hingham, MA United States)
I was eager to read this book, especially given the quality of the endorsements on the back cover (Taleb's book is excellent). The author does make some good points, including the "Losers Average Losers" strategy of dollar-cost-averaging (taken from a quote by Paul Tudor Jones).
He also acknowledges the asymmetries of risk aversion and
risk seeking behaviors. And his analysis of the real estate market (growth rate of prices versus rents) is spot-on.
But none of this is original stuff and I was expecting more from an author with such an august background. For example, his audacious conclusion that the success of US equity markets over the long term can be explained in terms of "survivorship bias" is based upon someone else's research (which he refers to but doesn't bother to analyze in any detail).
Moreover, he makes light of the work of Jeremy Siegel when in fact Siegel publicly stated that the tech market was overvalued before the NASDAQ melt-down (you can link to the appropriate WSJ article on Siegel's web site). Indeed, much of his "irrationality" thesis surrounds the inflated tech stocks of the late 90s early 2000 time frame. He ignores the fact that the rest of market (excluding the tech bubble) has continued to perform along historical averages. Moreover, (and this is a common mistake) efficient market proponents (and "mainstream" economists) have never stated that markets can't have bubbles, nor that investors can't behave irrationally.
His movie metaphors are fine at first but soon become tiring and sophomoric. I also thought it rather risible to quote Noam Chomsky when describing the Cuban Missile Crisis. Since when is Chomsky a knowledgeable source on the Cuban Missile Crisis? Perhaps I am missing something here.
So while there are some good and entertaining parts of the book, I can't recommend it as a noteworthy addition to one's financial library.
Ok, I only have one question - how the hell a lizard could grow to the size of a cow? Nope! Don't bother to explain, next I am afraid you are gonna tell me we all evolved from some kind of bacteria!
.... not on a Sunday! No...!
But seriously Dr, I have read enough of this kind of academic/invest/psychology/market wisdom blah blah blah kind of literature that sometimes I wonder if all these books were to collapse on me, their combined weight would squash me to the size of a lizard(?).
I don't want to belittle this professor's achievement but I think I will give the book a pass (probably read it for free from a local library) and I will act like an arrogant cow insisting that I know everything and sticking to my pet theses that I have been espouting all over backpage.
They are really simple stuffs if only people/investors can adhere to them. With hindsight, let's summarise:
XAO Weekly
I hope no one will laugh at my ignorance here.
I also hope people who only want to INVEST/TRADE LONG can see the TOUGH part of this simple "buy low sell high" strategy is to get the TIMING RIGHT!
How do we know when the market has reached a top? Or a bottom?
Well, here is a simple solution - try using the WEEKLY MACD on the INDEX for timing and see if it helps. You BUY when the MACD crosses up the ZERO line, and you SELL when the MACD generates a SELL SIGNAL.
You may not get it right at an OPTIMUM. But you still would be able to pick enough meat for the next season.
Give it a try and then you tell me.
Looking forward - let's try this "idea" - don't buy until the MACD has crossed DOWN the zero line, wait for it to recover back up the ZERO LINE then you begin to buy your stocks.
Assuming this is just a short term intermediate correction, you will not get the MACD to cross lower than the zero line, in that case you watch when it bounces off the zero line or near it. After the MACD generates a BUY signal, then you buy your stocks.
See the following chart for illustration.
XAO Weekly
1) I think it is self-explanatory.
2) need to clarify this one - with weekly MACD you are forgoing precision (of entry/exit) for more "secured" and safer entry/exit points. So there's a trade off somewhere. And this is meant for simple straight forward timing for people who prefer the FA approach (plus a little TA).
2) Caveat Emptor here coz I don't want no responsibility for others' loss. This a CYA act for me.
HC
"... if you've got a chart, I have an opinion!"
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holycow
Member
Username: holycow
Post Number: 1263
Registered: 08-2004Rating: N/A
Votes: 0
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| | Saturday, May 14, 2005 - 06:40 pm: |
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thought I will do a little explanation on the above MACD "diagram" to the FA'ers - you buy when you see a green arrow, you sell when you see a red arrow. Generally you use MACD on index chart like XAO to "get an idea" for timing and how the overall market is doing.
You can also apply MACD on your individual stock and compare them against the index MACD, that way you get an idea if your stock is "following" the wider market. So, let's say if your stock is still not showing any red arrow in the MACD chart but the index is having one, you should check out why your stock is different - it could be a very strong stock sitting in a very strong sector and you may want to hold on for a while.
The important point is you have to be cautious when the index is showing a red arrow in its MACD chart. This is because the index is a composite data which make up in parts by many component stocks. If it is showing a red arrow, the minimum assumption you should make is - a large number, or the heavily weighted leading stocks in that index are in trouble. If the leaders are in trouble, you don't expect the rest of the alsorun are going to put up a good fight. Right?
The message it sends out is simple - it's time to retreat. And it is saying sell before the rest of the weaker stocks begin to follow the leaders and start a stampede. Last two weeks were exactly that - the selling accelerated with almost every stock getting some "punishment".
So looking forward, what'd you do? Now that you have seen MACD just given you a "live demonstration"? Do you still want to show your disdain to this little quirky line? Or should you give yourself a little more open space to find out more?
Let's take a look at the following charts:
XAO Daily
1) look at the points 1 to 5, they show the MACD generating a buy signal. Look at point 1 and compare to point 5, should you be rushing out to bet all you have? A quick answer here is NO! Take a look at the price chart and get a "proportional perspective" - the 2003 MACD signal is a "genuine" 24K gold buy signal because the index is at a bottom.
Does the chart at point 5 give you the confidence that the current level is at a low, and possibly give you "good value"?
2) I think point 5 in MACD is just indicating how "severely" the stock market has been punished in the last two months. It is quite different from Point 1 because point 1 was arrived at the END of a long correction starting from 2002 March.
On the other hand, point 5 has not been through the "time test" yet. It has just gone through less than 2 months of whacking - there's still plenty of fat around. So, at best I am assuming it is showing a possible short term rebounce due to the severe beating the stocks had got. The stocks are not "skinny" enough to put on more weight so soon.
3) So we leave this chart and MACD at this point and let's wait and see if it has any sort of "credibility" in looking ahead for us. The point is this - as a FA'er, it doesn't hurt for anyone to utilise this very simple TA technique that is readily and easily AVAILABLE TO YOU HERE IN IC. You are doing yourself a dis-favour by not wanting to find out more. Really!
XAO-BHP Weekly
4) I was doing my usual analysis... and I thought may be the best way to show why it is not a good idea to go long at this point is to really show it in chart.
The index chart is on the left and the BHP chart is on the right. So far the index has dropped about 8.68%, at the same time BHP has dropped 18.87%!
Let's say you buy your stock now assuming it is cheap, you know what's your assumption here? You have just assumed the market will be able to recover all these lost ground and then will be able to surpass it and move higher!
What's the chance of that happening?
For that to happen, the index has to regain 9.51% at the current level. BHP has to regain $3.68 or 22.36$ to move back to 19.5. Is this a big ask or what?
So you reckon you have a good odds here?
To me. the least anyone should/could do is to check out the profit/eps required to "take" the stock back to its old high. And to surpass their previous heights, you are looking at not just better numbers, you need much much better market sentiment than that prior to the correction.
So realistically, how good the chance can that be? I don't believe human exuberance/emotion can be turned on and off like tap water, can it?
5) referring to the weekly MACD on both charts, you can see the gap between the two lines are widening - basically it is saying the momentum downward seems to be accelerating on a longer term basis. However this may/will change if the market were to improve as indicated by the daily MACD. So, I'd probably give it more time to see how all these will turn out , but on a weekly basis, the MACD is cautioning us that the market rout is not over. So there's really no good reason to go long and turn extremely bullish.
HC
"... if you've got a chart, I have an opinion!"
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holycow
Member
Username: holycow
Post Number: 1264
Registered: 08-2004Rating: N/A
Votes: 0
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| | Sunday, May 15, 2005 - 07:02 pm: |
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A little encouragement goes a long way... but am I seeing too much exuberance within too short a time? We will see. Here's a chart to "ponder" for caution...
XAO Daily
HC
"... if you've got a chart, I have an opinion!"
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msparks
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Username: msparks
Post Number: 135
Registered: 10-2004Rating: N/A
Votes: 0
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