Sunday, May 16, 2010

Yet More Insight From Idiot Bloggers

Regular readers know that 3 things I subscribe to regarding the markets so wholeheartedly they should be tattooed on my you know what are;

  1. News conforms to the tape
  2. It takes a lot of buying to put a market up it takes a mere lack to buying to bring a market down.
  3. He who panics first panics best

I used to share this with clients during my prior life as a broker, some got it, many did not. I bring this subject up again as a prelude to something I read today at Rick Ackerman's great site Rick's Picks. Rick is a long time successful trader with a large following. thought I am not a subscriber to his services I do like to visit his site on a regular basis to keep up on Rick's thoughts and musings on the market.

Today Rick had a reader and long time market watcher of some 30 years submit a piece for a recent post entitled Why Traders Get Trapped in a Panic. The writers comments were extraordinarily insightful relating to the markets and in particular item #2 of mine above only taking it a much more cerebral step further. The comments are so insightful, so spot on I just had to share them with you (and wish yet again I was smart enough to come up with something like it!).

Rick Ackerman introduces the piece by saying this about the piece; "he explains why shouting "Fire!" on Wall St. is not quite the same as shouting "Fire!" in a crowded theater." So without further adieu:

“Many years ago, while reading John Kenneth Galbraith in “The Speculative Episode,” it dawned on me that the world wasn’t necessarily becoming a safer place, particularly on Broad and Wall. If you think about military history, we’ve gone from flintlocks during the Revolutionary War with a range of 40 feet to the Spencer Repeating Carbine at Pickett’s Charge in the Civil War (every Confederate soldier died), to Hiroshima. On Wall Street, we went from the ticker tape running three hours late on 16 million shares in 1929 to program trading in 1987 when we didn’t have the Internet and you had to call your broker to know what was happening that day in the market.

“Today, everyone has a quote in the corner of their screen at work or they watch CNBC at home. They are responsible for allocating their 401K online and many trade the rest of their nest eggs there too. The data processing capabilities out there can handle tens of billions of sell orders in a single day and on top of that, we have the CBOE and the E-Mini. Algorithmic Trading programs do umpteen trades a millisecond and make up 70% of the volume, one HAL versus another.

Technology Produces No Buyers

“The biggest problem, getting back to Galbraith, is that in the process of facilitating sellers, all the new technology does not produce any buyers. I know most will disagree with that, but keep in mind that demand is a state of mind. It runs away at the first sign of trouble. Put another way, the same emotions that motivate sellers cause potential buyers to hold off. Sell is preordained, but buying requires a complex greed analysis. Which leads me to my “glass theater analogy.” We are all familiar with the most common analogy for panic: when someone yells “Fire!” in a crowded theater. The problem, of course, is that there are 50 rows of seats, but just two aisles leading back to two doors on the back wall. Grown men and women may trample small children to escape getting fried.

“There are a couple of problems extending that analogy to the stock market, so I made some changes in my “glass theater analogy”. The biggest problem in the market is that, even if you choose the aisle seat, last row, you can’t escape unless you can find someone to take your seat. As Galbraith pointed out so many years ago, you can’t be a seller unless someone else will buy. (What a dirty little secret!). Another big problem, considering the speed of the technology today, is the basic transparency. It’s as though the back wall of the theater were made of glass, and all the potential patrons can see what’s happening inside. It’s right there on their screen! Who is going to take your seat when they can see the carnage going on in there? Which leads me back to last week’s mysterious plunge. First of all, remember that reading Alan Abelson the Saturday before the 1987 Crash, he indicated we had already had it with the 230-point drop the week before. The newspapers last weekend sounded a bit like a post mortem too. “The SEC is trying to get to the bottom of it.” I can save them the trouble. What do you expect when your weapon has a seven cartridge magazine in the butt compared to a single load, wad and ball. You get 1000 points in 15 minutes. Wait until the human nature kicks in again someday, in a big way. It might become 5000 points. You could retrace this bear market rally in a hurry.

Much thanks again to Rick and his astute reader who were gracious enough to share their thoughts with the rest of us in the blogosphere.

Are you starting to understand the venom in my tirades against propaganda TV (CNBC) most especially when they have the nerve to call us idiot bloggers when there is the above type of discussion going on in the blogosphere?

Either way, don't hold your breath waiting for a discussion as insightful as the one above from the likes of Kudlow Caruso-Cabrera, Insana, Pisani or Liesman from the station made famous by stock pumping and the octobox.

Good speculating to you all and please remember to never forget that "an investor is a speculator who made a mistake and will not admit it".

Open Positions:
Long 1 unit Direxion Large Cap 3X Bear ticker BGZ @ $19.34
Long 2 units Direxion Small Cap 3X Bear ticker TZA @ $12.06
Long 1 unit Direxion Emerging Mkts 3X Bear ticker EDZ @ $60.50
Long 2 units Direxion Financial 3X Bear ticker FAZ @ $19.65
Long 2 units Ultrashort Xinhua China ticker FXP @ $42.45
Long 1 unit Ultrashort Real Estate ticker SRS @ $49.10
Long 2 units Direxion Tech 3X Bear ticker TYP @ $10.52
Long 1 unit US Dollar Bull ticker UUP @ $22.52 stop @ $21.97
Long 1 unit ishares Barclays 20yr Treas ticker TLT @ 92.15 stop @ $89.68
Long 1 unit ishares Barclays 20yr Treas ticker TLT @ 93.48 stop @90.88
Short 1 unit ticker CRM @ $87.35 stop @ $90.47

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