Email that I received today

Discussions about the psychology of the markets and the masses as it relates to trading.
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ratio
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Email that I received today

Post by ratio » Thu Nov 11, 2010 7:46 pm

Markets Flashing WARNING SIGNS! Be Careful!

LinkedIn
Date: 11/11/2010
Subject: Markets Flashing WARNING SIGNS! Be Careful!
Hello everyone, I've never done this before with LinkedIn but I wanted to let my friends know.

I haven't kept touch with many of you but that's because I've been working on something important. I'll disclose the details later.

I sent the attached message out to my family and closest friends yesterday afternoon and this morning, and posted a message on my blog about this.

I hope everyone is doing well.

---------------------------------

Here's what I've been telling my friends today.

If any of you have a lot of money in the stock market. I'd suggest that now is a very good time to go to cash. 100% cash. If I were you I'd sell everything in my 401K etc. Sell mutual funds, etc. Individual stocks etc.

The market is ripe for a correction and it could get ugly again. My intuition tells me that it could get worse than we've seen in recent memory. Even worse than 2008 possibly.

I don't generally make predictions and this isn't a prediction exactly as the price could certainly go higher. The issue is that the risk/reward for staying in is wrong. The upside is much smaller than the downside and the market has just failed to exceed the highs of April of this year.

Historically that is not a good sign.

I just thought I'd let my friends who are not traders know.

Don't put the money in corporate bonds either. Put it in U.S. guaranteed funds or Treasury Bills preferably.

Definitely Avoid Gold!!!!

If you have your money in the big banks, BankAmerica, Goldman, Morgan Stanley, Wells Fargo, Shittybank, etc. you might consider moving it out. If things get ugly again there will not be another bailout, the banks will go down and your money will be frozen if it is below the FDIC guarantee level and lost if it is above it. Any banks with exposure to the mortgage mess are at risk. The problems there are far worse than the media wants you to know. I believe that thousands will be jailed for fraud before this is all over, including hundreds of executives. Far worse than the S&L debacle.

Consider good small banks where the service is good like regional banks, community banks or credit unions. If you like your bankers ask them about the company, if they say it is good and well run then you are probably okay. If you are dealing with cogs in a poorly run machine, take your money out and find a good bank. Talk to the people, don't look at figures and facts and data so much.

And I would not wait until tomorrow. It could cost you a lot.

- Curtis

AFJ Garner
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Post by AFJ Garner » Fri Nov 12, 2010 8:09 am

For some years I have kept cash in triple A rated money market funds and government securities; I do not like single bank credit risk. Nor am I so very keen on US, UK or European currencies or government credit risk but there you go.

For some years I have worked very hard indeed learning to design and code mechanical trading systems and to apply them to various financial markets. I was glad to be a mechanical trader in 2008 and am glad to be a mechanical trader today. Having tested my systems over many years of historical data I have a (perhaps not unreasonable) hope that my algorithms will get me out of my positions as appropriate (sometime after the trend has ended) and will get me back in again (sometime after a new trend has begun).

I went mechanical because it seemed to me better and more reliable over the long term than discretionary market timing.

I bought what was Veritrader and is now Trading Blox which I have been very very happy with. The software was originated by Curtis for back testing mechanical, rule based trading systems and has been hugely improved by the very skillful current proprietor. I reviewed a book (Way of the Turtle) written by Curtis and made some comments on it before publication. The book is one of the best written on the subject of mechanical systems trading.

I for one intend to continue to be a mechanical systems trader. The markets will crash in the future - again and again and again. I just don't know exactly when. Nor does my system. I hope and trust however that my system will enable me to ride the inevitable ups and downs in my account equity over the years to come with less emotion than would be the case were I relying on my rather ineffectual instincts.

I do not intend to revert to discretionary trading.

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Post by stamo » Fri Nov 12, 2010 8:17 am


nodoodahs
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Post by nodoodahs » Fri Nov 12, 2010 9:29 am

AFJ Garner wrote:I do not intend to revert to discretionary trading.
Mega dittoes.

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So what if the sky IS falling?

Post by Paul King » Fri Nov 12, 2010 12:03 pm

I know 2 things about trend capturing:
  • 1 Nobody knows what's going to happen next
    2 No exit strategy can get you out at the exact end of a trend
If you have positive-expectation trading rules that capture (rather than follow) trends then the situation today is no different than yesterday, 10 years ago, or any other time.

If you decide that the "sky really is falling" and get out based on fear of future events what then? When do you get back in? How do you capture some of the downtrend if the "sky does really fall"?

History tells us that once a currency has left the gold standard then it has started on its path to becoming defunct/worthless, so should we all load up on USD debt and wait for the inevitable devaluation that will occur in the future? Is this the end of the road for the USD? Who knows?

Personally I'd prefer to have exit strategies based only on price and let them tell me when I should get out based simply on price movement rather than opinion/fear/greed/analysis/guessing/<insert your favorite predictive technique here> or anything else.

Paul

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Post by sluggo » Fri Nov 12, 2010 1:31 pm

I have a feeling the message is directed to " ... friends who are not traders ... " (paragraph 6)

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Post by Paul King » Fri Nov 12, 2010 1:37 pm

Ah, yes, maybe a different subject line may have been a good idea - I didn't even notice the "not traders" part half way through the message I received.

"Markets Flashing WARNING SIGNS! Be Careful if you're a buy-and-hope investor!"

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Post by AFJ Garner » Fri Nov 12, 2010 1:58 pm

sluggo wrote:I have a feeling the message is directed to " ... friends who are not traders ... " (paragraph 6)
Non traders are perhaps above all others the most unsuited to entering or exiting the market based upon intuition or discretion. At least professional discretionary traders will have rules of a sort: over valuation, under valuation, demand and supply and so on.... The average non trader will not have a clue. As usual therefore, I suspect that the majority of non traders will, almost by definition, continue to enter and exit in the majority of cases at the wrong time. They will occasionally read the tea leaves and chicken entrails correctly, but mostly not.

I would rather say to my non trading friends:

1) Learn some simple rules for mechanical market timing;or

2) If you don't want to learn a few simple mechanical rules, then don't market time at all on any basis - buy and hold.

3) If you buy and hold, then spread your assets very widely over as many different asset classes, currencies and jurisdictions as you can.

Market timing or no market timing, asset allocation is the key - or so we futures traders believe. Ignore customary bullshit ( EG a US citizen should only hold the dollar, a UK citizen sterling and all the other old rubbish). Go global, spread wide and keep it all for the long term. Re-balance occasionally. Some of your investments will inevitably hit the pan but overall your chances of a reasonable long term return should be good.

That is what I would advise my non trading friends.

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Post by td80 » Fri Nov 12, 2010 3:19 pm

I agree with sentiments here that there is no reason to veer off the automated track.

However, as I have brought up on these forums before, this does present an interesting talking point for US citizens: How do you trade and clear through non-western banks/clearing firms should we see an actual systemic melt down/chaos?

Some people may think why bother because it is guns + butter time at that point, but on the contrary we have seen worldwide systemic failure before (most recently, 1930s) and vast fortunes could be made if you avoided the default risks.

It seems only convoluted "gray" structures with private banks in asia could possibly address this concern when counter party risk and capital controls become a possibility in the western financial system.

I have myself stuck with American firms that have solid underwriters for insurance but as we know insurance could be worth jack-all if we get a big enough spike in that TED spread again and the dominoes start coming down here.

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Post by nodoodahs » Fri Nov 12, 2010 6:00 pm

AFJ Garner wrote:Non traders are perhaps above all others the most unsuited to entering or exiting the market based upon intuition or discretion. ...

3) If you buy and hold, then spread your assets very widely over as many different asset classes, currencies and jurisdictions as you can.

Market timing or no market timing, asset allocation is the key - or so we futures traders believe. Ignore customary bullshit ( EG a US citizen should only hold the dollar, a UK citizen sterling and all the other old rubbish). Go global, spread wide and keep it all for the long term. Re-balance occasionally. Some of your investments will inevitably hit the pan but overall your chances of a reasonable long term return should be good.

That is what I would advise my non trading friends.
We are very much on the same wavelength here. Especially today, it is so easy with ETFs to have a truly global allocation, invest in alternative structures, etc., that there's no excuse for a buy+hold investor to not be diversified. You can get currency, commodity, bond, real estate, stock, etc., with as few as a dozen easy to buy ETFs and get returns very similar to those "hedge fund investors" get through a passive allocation.

For example, buy all of these:

SPY - U.S. stocks
EFA - Foreign developed market stocks
EEM - Foreign emerging market stocks
IYR - REITs in the U.S.
RWX - REITs in the foreign developed markets
GSG - commodities, a combined index that includes energy, agricultural, industrial metals, livestock, and precious metals.
HYG - high yield debt in the U.S.
IEF - U.S. Treasuries.
LQD - U.S. corporate debt.
BWX - foreign developed market treasuries.
PCY - emerging market treasuries.
DBV - currency carry trade.

at a size of 1/N for each position and rebalance annually. At $8-9 a trade for 12 trades a year the transaction costs aren't high at all, even for a tiny little 401k self-directed account. Which is what I've said to my non-trading friends.

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Post by alp » Fri Nov 12, 2010 9:49 pm

http://www.curtisfaith.com/2010/11/12/s ... y-to-come/
Curtis wrote:The mortgage crisis WILL blow up and when it does there will be many big banks to fall, and many bank executives in jail. Don’t let it be your bank.

Get your money out of BankAmerica, Shittybank, Wells Fargo, Goldman, Morgan Stanley, etc. while you still can and before any panic sets in.

This is pure risk management. If there is even a 20% chance of the worst case scenario, you don’t want to have to deal with the effects when you could have taken a few simple steps now.
In such a worst case scenario of many big banks falling, which measures do you expect? A freeze on funds withdrawals so as to prevent further deterioration?

As I see it the problem is that almost everything revolves around the banking system. For instance, where do major brokers deposit their clients' funds other than on behalf of "big banks"?

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