Let’s Talk Strategy

“it is utterly useless for us on the outside, who buy and sell comparatively small blocks of stock, to conjecture about what “they” are doing.   We cannot know what the insiders intend to do, but we can see their orders on the tape when they execute them.   That is why my plea is for everyone of us to have no mere opinions of his own, but to allow the actions of the market to tell him what is passing.”
(Humphrey B. Neill, Tape Reading & Market Tactics, 1931, New York: B.C. Forbes Publishing Company; 14th printing, 2003, Vermont: Fraser Publishing Company)

When Nicolas Darvas was interviewed by Time Magazine in the early 60’s and it came out that he made almost 2 million dollars in the market in 18 months (while he was dancing around the world!), he noted that he read and reread Neill’s book (along with Gerald Loeb’s).   Neill’s book has been reprinted many times and I happened to find it on the shelf of my local Barnes and Noble store.   Neill dedicates his book, “to my losses, with a deep appreciation for the experience and knowledge which each loss has brought me.”

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The 10,000 Bounce

"Just when you think you have the key to the market, someone changes the locks."

So Dow 10,000 held.  This number means so much to people that had it simply given way quickly, we probably would have been hit with a climactic sell-off that would have ended the decline.  But we did not.  The Dow had fallen from 10,507.97 to 10012.36 in only 6 days.  Does a 200 point rally nullify a 500 point decline?  Is this a bottom? 

To me, little has changed. The market is still in a down trend.  The Dow would have to close 300 points higher for me to start to consider the bull case. Yes, even in spite of Yahoo and Google, the exceptions that prove the rule. I did not stop out of MHS, my lone holding, today.  The  new high index I described yesterday climbed from 12 to 28, still a paltry number of stocks that traded at new highs 10 days ago and closed higher today than 10 days ago.  After earnings season is over there will likely be a lull during which traders will focus again on inflation, recession, deficits and the Fed.

I have been using the term bear market–and this habit is dangerous.  It is much safer to say that the market is in a down trend.  Once I choose to use terms like bull or bear market it influences my judgment and it leads to predictions.  For example, if one labels the market as a bear it implies that it should last a certain amount of time that bear markets typically last and end in a certain way.  One tends to marry a scenario.  I may hang onto this scenario in order to be right (ego again).  Ever get so attached to a story  that you can’t observe what is actually happening?  It happens all of the time in the market.  People say things like, we should have a consolidation period followed by a rise or fall,or the market needs to rest.  The talking heads do this every day when they pontificate about what should unfold.  (So did I, when I said above that the market will enter a lull post-earnings.)

But I try not to predict.  I analyze the current market trend.  Are we rising, declining or stable or is it impossible to discern.    Right now, I believe  the trend is still down.   I never know how long the trend will last.  When my rules and indicators suggest a turn, I can turn on a dime and slowly wade back into the market on the long side. There is plenty of time to catch the real rockets after they have left the launch pad.  More on strategy this weekend.

Please continue to send me your questions and comments.  I value your support.