“Money naturally flows to where the demonstrably best ideas are. “– Matt Bishop and Michael Green, The Capital Curve for a Better World
I was reading this article “The Capital Curve for A Better World” tweeted via Next Billion, and it got me thinking that money DOES flow to where the best ideas often are.
In the short term, those best ideas are coming in droves and dozens to those who are successfully long the dollar against all currencies except the USDJPY, those inverse-etfs that are shorting the markets and any device traders know of that can make money in a declining market. Also, a lot of people have redeemed their holdings in any rally whatsoever, taking losses for some, taking lesser profits from others in order to build cash balances and maintain a liquid position. Of course, day traders who are flat in every session are not considered in my musing.
(For instance, my dollar shorts were closed at 44.09, and instead I simply went long the USDPHP for the 3 month period. Acknowledging that the markets will get worse before they get better is something that a flexible trader does. To flow with the tide is what a trader is supposed to be doing. As Jeffrey Gundlach did say, traders are not policy makers. We are here to outperform the market and take it as it comes. I stopped trading Philippine markets for a month now, but I still observe it. Instead, I’m actively shorting markets where it is available instead.)
In a way, I also thought about the fact that the best traders who often transmit the virtues of stoplosses have come to that conclusion because the money flowed to them. By adhering to their strict disciplined stoplosses, money flowed to them. A deep understanding of recognizing that egocentricity of traders (either in not taking a loss) will lead to more risks rather than higher returns have enabled essentially for all the money to be harvested by the people who are prudent to have preserved cash balances in current times. What are these times?
These times are :
1.) There are many traders waiting for the markets “to come back”, rather than admitting having made a bad decision. These people will be “ipit” for a long time. My guess is 6-8 months. These unrealized losses will in turn become someone’s realized gains in the future.
A good article to read is Barrons that measures traders’ behavior against psychopaths. Here, the German study shows that traders’ desire to win at all costs, are stronger than that of psychopaths, and it is due to this inability to prioritize making money rather than being right that makes these traders go rogue and bust.
2.) Useful for Reading SFO Mag- The Free Magazine for Stocks, Commodities and Futures made by active traders themselves.
3.) Treasure the Zero position. De-risking in general is in order. If you must trade, find low-risk short setups.
4.) Best Views/Advice I’ve Read:
A.) Stephanie Pomboy: Straight Talk from a Market Contrarian
I expect the liquidity tide to recede, beaching all boats. It’s a question of picking the boats that are going to hold up better than others.
Gold didn’t go up because of inflation. Gold went up because the Fed pegged interest rates by printing dollars, which debased the currency, which fueled gold. Gold was going up because the Fed was monetizing.
B.) SMB Training’s Mike Bellafiore – On Internalizing Trading Setups
There is a humongous gap between exposure to a profitable system and internalizing profitable trade set ups. You may hear or read what to do under certain market conditions but your ability to actually do that during open market hours is not only about that hearing and reading. It is about the work you do to build the ability to make those trades make sense to you and then execute when the lights are on.
Someone else’s trading cannot fix your trading. Now it is up to you to do the work necessary to internalize those trades.
C.) Quantifiable Edges – Beginning of the Month is Not a Sure Thing-
The 1st trading day of the month is renowned for having a bullish tendency, and this has been the case since the late 80s. But this tendency has primarily played out during uptrending markets. During down times the 1st of the month has not been particularly bullish.
(Go to the link to see the images yourself. )
D.) Risk & Return – Just because everyone is bearish does not mean the secular bear market is over.
We will adjust our beliefs as necessary, but we do analyze markets in terms of various scenarios. Our baseline is that secular bear markets begin amidst tremendous investor enthusiasm and myopia along with corresponding bubbly valuations. We had all of that in the most extreme form ever in 2000.
A long period of large declines and succeeding ascents (along with the economic volatility such eras bring with them) that would end with the conditions of a long term bull. Those are investor apathy, low valuations on low earnings and low profit margins (in marked contrast to recent periods of average to high valuations on peak earnings and profit margins) that stay low for a while.
We aren’t saying the market is guilty until proven innocent, we belive investment dogmatism is a sure way to lose. We will say we want strong evidence as to why we should see things differently. In the short run anything can happen, but we believe the historical fact that markets have tended to cycle from high valuations to low valuations is not an historical accident and should inform our opinions.
E. FT Alphaville – We are in a third stage of a secular bear market, which is about to get nasty.
I think positioning and sentiment by late October 2011 will be such that markets are ripe for a decent squeeze.
My core message is bearish. Over the past month Kevin and I have looked closely for anything that could change our view and have come up with nothing. Even the hope that EM or China can go on a multi-trillion USD investment binge to re-ignite global growth seems pretty forlorn, as China’s last fiscal and credit binge in 2008 is proving very costly to clean up.
F. Capital Spectator – Quite simply, there was no place to hide from the selling. Well, almost no place.
Yesterday, the S&P 500 had made a very significant move technically. The support at 1101 has been overcome. What does this mean? Bears will reassert their control more vigorously. 1100 is an important level. Everyone loves round numbers, even the bears. If it turns out to be a consolidation only, and not exactly a reversal, there will be an opportunity later to reenter an abandoned commitment if desired. The early bird doesn’t get the worm in the markets. Remember that. Look for retests. To hell with the worm.
– The Faceless Trader