Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Textual Intercourse

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Well, I'm hunched over in a little plastic chair at a gymnasium where my kids are running around, and I'm using my son's portable Macintosh to type up a new post. I don't have my charts with me, so this is going to be an all-text post. Now all I need to do is think of something to say (I estimate I've done well over 5,000 posts during the course of Slope, and sometimes it gets a little difficult to think of the 5,001st topic).

FOMC weeks are a bit of a killer, because people spend the time prior to the announcement in an anticipatory funk. I'm not quite sure what the Fed could say to make this hyperbolic market go super-hyberbolic. I imagine a hint from them that interest rates sorta kinda have to go up at some point might freak people out. I, for one, am going to steer well clear of 2:15 EST on Wednesday. The spasms of the /ES around that time are, at best, amusing, and, at worst, horrifying. It goes without saying that any break in the S&P better than a meager few points is going to require some kind of "oh, crap!" reaction from the market based on what the FOMC says.

The well is also poisoned by the enormous incentive the investment banks have to prop things up through the end of this month (which will dictate the size of those enormous yearly bonuses). They are going to do everything in their power to prop things up. Everything.

In my own trading, I have become increasingly inclined to take large, and quite temporary, ETF positions. My favorite trading vehicles recently have been UNG, GLD, and GDX. Items that are very liquid, have a one-penny spread, and have pretty well-defined patterns have allowed me to scalp a few thousand here and a few thousand there to act as a salve against the hockey stick rise in the market. That is why – as I've tried to explain – my declarations that gold is in trouble seems in complete contradiction to the fact I am dropping big positions like hot potatoes.

But it doesn't come from a change in opinion. I am simply trying to get decent entry and exit points. GLD is a good example. I covered this morning at about 97.70 and I re-entered the exact same short late in the day at 98.20.

The overall equity market's uptrend is absolutely intact, and my shorting is speculative. Even if we drop to 950 over the course of days or weeks, the uptrend will still be intact. Only after we (a) push higher and fail to make a new high, then (b) snap below the aforementioned 950 do we have some serious breakage in bull-land. Until then, they continue to rule the roost, and they will continue to crow about it.

But the psychology is playing out exactly like I would think at a time like this. Hubris, obnoxiousness, and a sense of infallibility have seeped into the brains (such as they are) of the bulls. Depression, fear, defeatism, paranoia, and crushed confidence have swept across the bears (those of us who have survived this far, at least). And I say what I've said before – those uttering that they are "neither bull nor bear, but simply trade what they see" need to have Joe Wilson spring up and shout "You Lie!" to their face. Because such a trite truism is just as insipid and impractical as the quote that there are two rules to trading: "(1) Don't lose money (2) Don't ever forget rule (1)."

The bottom line is this – – it took guts, vision, and perspective to go long and stay long the market in March. Those who did – and stuck with it (I am not among them) have had tremendous success. It would have been all too easy to ridicule those folks back in March. No one is laughing now. The shoe is on the other foot now. The question is: how long will it remain there?

Answered Prayers

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Of the many cliches that get under my skin, the one that probably is near the top of the list is the all-to-oft cited Keynesian quote, "The market can stay irrational longer than you can stay solvent." It is used as a bullish refutation to trade rationally, since the supposition is that, yes, the markets are insane, but you yourself are even more insane if you don't simply hop on board and buy everything in sight. It happened in the late 1990s, it happened in the middle of this decade, and it's happening again now.

The fact is that there are many times where individuals who are critical thinkers have great difficulty in the equity market. If the definition of "smart" for a trader is based on the ability to make profits, than traditional definitions of intellect and reason go hurdling out the window.

Let's take a look at the late 1990s. I've lived in the Silicon Valley for a quarter of a century, so I've got a good sense of the pulse of the place. I also started my own high-tech business in 1992, so I was quite close to the zeitgeist of high tech during the 1990s.

As the years went by, things made less and less sense to me. People usually point to pets.com as the best example of this, but I think it's a poor one. At least there is a really big market for pet products. I prefer to remember companies like RealWords. They raised something like $170 million for a business whose entire premise was that real words (like "books") were easier for people to deal with than URLs like amazon.com – – I don't remember technologically how it was supposed to work, but they were selling off rights to English words so that, I suppose, people who used those words would get directed to a given company web site. So, for instance, if you typed in "ugly cars", it would take you to Ford.com or something like that.

Of course, any decent search engine does the same thing. There were hundreds of companies that received the typical funding round of $20 million for some of the lamest ideas on the planet. I remember one public company – a pink sheet – called PinkMoney.com (PMKY was the symbol). They basically sold cheat sheets to students. And, for a while, it had a pretty monstrous market cap, considering the puny size of the outfit. 

Anyway, as 1997 become 1998 became 1999, and things were becoming out-of-this-world insane, I became more and more convinced that *I* was the crazy one for doubting what was around me. Of course, ultimately, March 2000 happened, and tech stocks have never been the same since.

Now let me stay clearly that I am a big believer in well-run organizations that sell a quality product or service. I think the reason the "Four Horsemen" (AMZN, RIMM, AAPL, GOOG) are so huge is because they make superb products and services . My family is a enthusiastic customer of Amazon, and I think they are fantastic. I feel the same way about Google and Apple. (I'm an iPhone user, so I don't have personal experience with Blackberry, but obviously it's a raging success). So I am thrilled to pieces when a company thrives – – it means employment, happy customers, happy shareholders. Hurray, capitalism!

But stocks should not be confused with companies. And when reality departs far, far from valuations, deluded souls like me go right up a tree. It happened again, of course, during 2004-2006, with the housing mania. And people like John Paulson shorted and shorted and shorted the subprime market, taking losses all the way up………….until it finally was slapped in the face by reality and made Paulson billions.

So now we're dealing with the "Dot-GOV" bubble, and surviving a market like this takes a combination of (a) risk management (b) patience (c) perspective (d) enough capital to survive. I believe that I've got all four of those. My trading style tends to make money quickly but lose money slowly. I don't get my jollies out of losing money slowly, but it's better than getting wiped out, because when the bough breaks, and the cradle falls, I'll be there to prosper from it.

I'm starting to see my own "green shoots", in spite of the persistent rise. Late on Thursday, I shorted sixteen stocks – – all of them new positions – – in one of my accounts. At the close on Friday, almost all of them were showing a profit. Nothing huge, of course – – collectively, up about $1000 on $160,000 in positions – – but the cold fact of the matter is that they bucked the tide. In spite of the overall strength in equities, the positions were well-chosen enough that they still closed green. Which means, of course, that any softness in the market will make these positions blossom.

My point in all this? I am focusing on individual positions much more than the indexes. I called for 1050 as the counter-trend top, and we're there. I played that rise very poorly, and I believe I've learned lasting lessons from that experience. But…..now that we are at these levels……I remain vigilant and optimistic. Because I can, in fact, remain solvent longer than the markets can be irrational, and when they become rational again – whether it's Monday or next year – I will profit handsomely from it.

A Sloper Writes about Blow-Off Tops

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Just to be clear – – since it seemed to have eluded a few the last time I did this – – the text below is written by a reader of this blog, who was kind enough to share it here……………

In a former life, when hormones and beer lust ruled the roost, I traded currencies in London hours out of Sydney.  Staring at the screens from my monastic cell today, reminds me of those misbegotten days trying to guess where the squiggles are going to turn next…

A comment from a broker in London comes to mind, we are in the casino playing craps…"You play with fire sometimes"…he wasn't talking about my expertise at rolling dice but a mean reversion trade that I'm prone to putting on.

And that is where we are now.  The market is running hard.  It has all the hallmarks of the blow-off top.  To be short at the wrong level hurts.  Do you cut the position or add to to it?

What does a blow-off top feel like?  When will exhaustion set in?  And where will a retracement, assuming there is one, take us?

Going through them in turn…

What does a blow-off top it feel like?


1) It hurts – not only is the price running against you, the market scorns your views.


2) It's fast – adding to a position, at what you think is a good level, quickly runs against you.

When will exhaustion set in?


1) It's parabolic – prices can run, and typically do run, further than you expect.


2) The popularly accepted target level – the market psychology is one of trying to catch the last x% of the move.  There is a feeling of certainty that the market will reach the given level (in our case, XJO to 5000).  The buyers at current levels are looking to capture that last x% and then get out.  The sellers are already set or too scared to jump in.  The exits will be overcrowded as we approach the 'target' level.

Where will a retracement take us?


1) Buyers of the dip – the blow-off top will have sucked a lot of these reluctant buyers in for fear of missing the big trend.  They will be the first to sell on a break of the up-trend.


2) To the last level where long term buyers were left hungry –  Support will first appear where the under-invested but cautious investors are waiting.  Logically this will be at the top of the head of the 'head & shoulders' that shall not be named.

So back to my broker, my response was that I'm looking for the market to come back to the trend. 

I will add to the short as the 'popular target' approaches.  At its simplest, the short trade is looking for a move back to longer term support.  If we break lower from there so be it.  If, against the wash of fundamental data, the market finds legs, I'm happy to go with that too.  My experience suggests there is a trade to be made from betting against the parabolic move…

All Ye Need Know

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The market's closed. Take a break from charts for a bit and invest a few minutes watching both of these. Waiting for Godot is probably about the closest thing I have to offer which captures my view on the absurdity of life. Plus it does a superb job showing what Mole and I would be like in the desolate landscape together, metaphorically speaking. These videos are the beginning and end of the play. Watch and enjoy!



Persistence and Resistence

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I've read before that, for an active trader, in a given 52 week year, there are only a few weeks that "make" the year. It's like the old saying about how life comes down to a series of moments. The trouble is, you never know when those moments are going to come.

I haven't had a "moment" in the market for a while. In other words, this market has been pretty much a big fat drag for me for most of the year. And I find myself – like yesterday – staring at the screen as the market drew to a close saying, out loud (for the umpteenth time), "I hate this {colorful gerund} market."

Now, if you had asked me in, oh, early October of 2008 or February of 2009, I'd tell you the only thing I didn't like about the market was that I hadn't poured more money into it. Because it was like an ATM machine for me. So it was easy to make money, and my only failing was not pushing more aggressively. Whereas, these days, I am fighting like hell just to keep on an even keel. I have never worked so hard for so little.

Let me illustrate with a couple of equity curves. The first (whose dollar figures I've eliminated, but it's the "big one") is like this:

0905-trust

See that green tinted area? That represents the six-week period where I made virtually all of my profits in 2008. That's key for me: all the other times, represented in the leftmost yellow, represented day after day after day of a total slog, boredom, and frustration. I was working like mad for nothing. And them – voom! – my equity curve absolutely exploded higher. Times like that is what makes people thinking trading is "fun", but the "fun" it outweighed by the "sucks" by a pretty huge ratio. You just have to be able to tolerate the sucky part more than, oh, just about everyone else.

My 401-k account makes a similar point:

0905-ira

Make no mistake, not a day goes by that I'm not trying my best to make money. But it only works a portion – sometimes a minority – of the time. The first green zone was great for me since I was trading ultra-ETFs (which, as we all know, are verbotten by our deal Principal Brokerage friends now). The yellow that follows was a pretty big draw-down due to the market's brief resurgence. And then the next green zone was the lift I enjoyed from lottery plays. And now I'm back in the yellow zone, just grinding away.

The point I'm making – which is just as much for me as for you – is that these graphs remind me to be patient. I am a very, very, very frustrated trader right now. And I've been equally frustrated before. But, every morning, I amble downstairs to my trading system, fire it up, and try to do the very best I can. Because those green zones are worth the wait.