Aside

Trades I am currently watching 07/29/13

Below are technical set-ups that I have on watch for the next few days. The dollar will be important this week with lots of economic data on schedule (FOMC Statement, GDP, Non-farm Jobs) as it looks to make an inverse H&S in the 81.20-.50 range with the 200day as strong support. International markets will also be front and centre with Spanish flash GDP coming up overnight tonight (Monday) and PMI readings coming from various countries throughout the week. The jobs numbers and unemployment rate will be important as the market attempts to speculate FED tapering time. I wonder if we are near an inflection point with sentiment towards economic data, i.e. bad being good and good being bad.

DXThe almighty dollar setting up an Inverse Head & Shoulder pattern. MACD looks to be rounding with RSI. golden cross seems to have almost no effect with all eyes likely looking towards the 200SMA

The general market continues the path of least resistance with a terrific  reversal throughout July. It has been eerily quite in the last few weeks and I would expect a sharp pull back to test the 20SMA in short order as traders continue to step in buying the 50&200SMA respectively. Overnight Sunday Asia-Pacific pulled back with the Nikkei leading the way to the downside and natural gas futures notably weak, off over 2% in early trading. spy

Will we see a pre E/R run up to new highs? Earnings are in two weeks, scheduled for August 15th, with the Aug. 80 calls looking attractive for a swing under 0.35 debit. Support at the 20SMA with traders Friday front running it, with lows of the day about a quarter higher.

WMT

Nam Tai Electronics looks like it is getting a little over bought (that doesn’t stop price action) with RSI breaching higher to an area last seen in February. Will look for confirmation to take a line short in the 8.45-8.85 area. Over 8.90 close is bullish. 

nte
After the recent pullback SodaStream looks to be putting in a bottom with MACD & RSI both rounding. (or potentially a bear flag) Earnings are scheduled this week for Wednesday with analysts expecting 0.57 EPS from 0.45 a year ago. Nice support in the 50.50-55.00 zone.

sodaSina.com has been strong like most social media companies recently (FB, LNKD, BIDU, QIHU) and looks to be starting a rising channel coming out of a multiple bottom over the last year and a half. Have it on watch to see how the market acts at the 10&20SMA possibly starting a small position. Earnings are Aug. 12th while Baidu increased Q3 guidance after delivering a strong earnings report the last week. 

sina
Paychex looks ready to explode higher after large volume and institutional accumulation over the last week. Although the MACD does look to be fizzing out, (or consolidation) the prior high made in May will be support to buy as well as the 50SMA. All time highs in at 43.50s.
payx
Natural gas has been incredibly strong since bottoming at around $2. I believe we are in the middle of a correction towards $3 and am seeing negative divergence in the MACD as well as RSI. Fundamentally there is value so I will not be one to short Exco Resources but simply look to enter lower because of growth prospects in the Marcellus shale. The 200SMA is a great place to look at stepping into a starter position.

XCO

Is Equinix a broken down pony post E/R or buying opportunity? The 200SMA acted as strong resistance with 50SMA providing a down trend and MACD signalling a cross this could be a short to keep on the radar. 12% YOY Rev Growth for Q2 2013. They had 9% income from operations growth from Q2 2012. Equinix has a 8.8B MKT cap @ 180 on 49.4 shares and 1.8B 2012 Revs w/ management targeting 13% YOY growth in the 2nd half of 2013. The Multiple is 63x. 


eqix

Long over 133.40 and short under 128. Some of the big institutions are surely playing games, notably DB and GS with price target wars. MACD and RSI are signalling a move higher although some divergence is occurring. 
tsla

After Greenlight Capital disclosed they have covered their JCP short “The most profitable of 2012” it responded well with strong price action, ending the day up almost 3%. Intra-day the 20SMA acted as resistance finally closing on the 10SMA. The 200 day moving average is clear resistance at this point although MACD and RSI both acting strong, correlating with a double bottom.

JCP
Good luck & skill.

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5 Summer Readings for the Capital Market Enthusiasts

“A truly good book teaches me more than to just read it. I must soon lay it down, and commence living on its hint. What I began by reading, I must finish by acting.” – Henry David Thoreau

“There are worse crimes than burning books. One of them is not reading them.” – Ray Bradbury

I have been reading relentlessly as I always do, but even more so now that the beautiful weather has arrived and my school break is still in full effect. I have read a lot of books in the recent months and plan to continue reading at least three books a week until September. Some of the books I have read are posted below with an average personal reading recommendation from one to ten (1-10).

1) Jim Rogers – Street Smarts: Adventures on the Road and in the MarketsImage

A great book by Jim Rogers cofounder of Quantum Fund (managed with George Soros) with his view on Asia, America, Singapore, Russia, Myanmar and parts of Europe as he travels around the world detailing his travels in an intriguing and inspirational story of his relentless journey of acquiring knowledge. I give it a rating of 8 and would recommend it to anyone interested in global capital markets.

2) Michael Lewis – Boomerang

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Michael Lewis is an amazing author and Boomerang was the last of his books that I had to complete. It was a tale of the most recent credit cycle that drowned the world in a title wave of cheap credit. He outlines the effects that it had not only on America but Ireland, Greece, Iceland, Britain and the rest of the euro zone briefly. Another rating of 8 and great read.

3) Robert Skidelsky – Keynes return of the master

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A synthesis of John Maynard Keynes life and best ideas. Ranging from economics, philosophy, and psychology to ethics and politics this book made for interesting reading and intellectual exercise. Another 8 rating and great read.

4) Nassim Taleb – Antifragile: Things That Gain from Disorder

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A rating of 8 is awarded and some ideas may take more than passive reading to understand. Just as human bones get stronger when subjected to stress and tension, and rumors or riots intensify when someone tries to repress them, many things in life benefit from stress, disorder, volatility, and turmoil. What Taleb calls “antifragile” is the category of things that not only gain from disorder but need it in order to survive and flourish. A great example is the opportunity that some may gain from creative destruction within the economy.

5) John Allen Paulos – A Mathematician Plays the Stock Market
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From the disastrous events of Enron and WorldCom to efficient market theory, technical analysis, fundamental analysis and risk analysis, Paulos does a great job of illustrating various exploitable biases, mistakes, and examples from an intuitive sense, as well as a sprinkle of agnostic reasoning in his conclusions. Follow along in his adventure and hopefully remember and don’t repeat his mistakes. A 9-star rating and an amazing book for anyone with a mathematics background or capital markets interest.

The Man In The Green Bathrobe and Mental Accounting

I was recently reading “A Mathematician Plays The Stock Market”  by John Allen Paulos and found an interesting story that resonated with me. I am a firm believer that once revenue is obtained, received or booked it has become yours and may be added to net worth or at the very least acknowledged as temporarily YOURS. There is no such thing as the “houses money” in my books, a loss is taken at face value with no justification. When you justify mistakes you do not learn the all important lesson rooted within it. Now here is a story that may illustrate exactly how ridiculous the concept of the “houses money” really is.

A man and his wife travel to Las Vegas to sight see as well as conservatively gamble. After a long night out, (and losing $1000 dollars) the man wakes up to find a 5 dollar chip sitting on the hotel dresser. He thinks of it as some magical sign or omen, springs out of bed and runs down to the casino floor, in such a frantic pace, he doesn’t even change out of his green bath robe. He ran to the nearest roulette table and threw it on to the red seven, which hit and paid 35-1 on his $5, or $175. He then continued to gamble and put the winnings on another single number, which in turn hit, leaving him with $6125. He continued this feat for another two wins, leaving him with $7.5M. The casino disagreed and would not take one last wager saying that they could not afford that payout if he were to hit again. The man ran to the nearest casino that agreed to take the bet. He threw the money on number 8 hitting once again. Ecstatic the man decides to let the 262.5M ride, only to lose it all on the next spin.

The man left the casino and began to walk back to the hotel room where he met his wife who was waking up and had asked “Where have you been?” The man replied that “I have been playing roulette downstairs for the morning.” His wife then responded “How did you do?”

The man casually replies “Not bad, I lost 5 bucks.”

The story of The Man in the Green Bathrobe illustrates a concept known as “mental accounting”.  Mental accounting is a tendency to value some dollars less than others and thus to waste them.

“More formally, mental accounting refers to the inclination to categorize and treat money differently depending on where it comes from, where it is kept, or how it is spent.” (Belsky and Gilovich 1999)

A person who has paid $10 for a ticket to a movie is less likely to pay for another ticket if he or she loses it than a person who loses $10 on the way to purchase the movie ticket is to cough up an additional $10 to buy the ticket in the first place. Why is this the case you might ask? It is because you assign a value of $20 to the movie in one scenario, where as your write off the first $10 and assign a $10 cost to the ticket in the second scenario. This is another example of mental accounting and the biases that can be attributed to it, depending on which accounts money is taken from or going to.

Think twice next time you use mental accounting, attempting to catch yourself and act a little more rational just by acknowledging  your limitations/biases as a human.

sto

 

Check out 5 Summer Readings for the Capital Market Enthusiast  for some summer reading ideas.

Berkshire Hathaway’s 222.5 Million Dollar Mistake and 4 Other Intelligent Quotes.

The quotes below are from the early 1990s Chairman Letter’s from Warren Buffett in regards to difficulty of investing, diversification, management performance and a common investment mistake most people make (even Buffett), jumping in and out of companies shares.

“Investors should remember that their scorecard is not computed using Olympic-diving methods:  Degree-of-difficulty doesn’t count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.”

The statement above came at the end of a discussion of how meaningless the beta of a stock & past price movements are in relation to “Value” and  reminds me of the methodology of K.I.S.S, or keep it simple stupid. Complexity leads to mistakes, or at the very least a more vulnerable system.

“Before looking at new investments, we consider adding to old ones.  If a business is attractive enough to buy once, it may well pay to repeat the process…..Late in 1993 I sold 10 million shares of Cap Cities at $63; at year-end 1994, the price was $85.25.  (The difference is $222.5 million for those of you who wish to avoid the pain of calculating the damage yourself.)  When we purchased the stock at $17.25 in 1986, I told you that I had previously sold our Cap Cities holdings at $4.30 per share during 1978-80, and added that I was at a loss to explain my earlier behaviour.  Now I’ve become a repeat offender. Maybe it’s time to get a guardian appointed.”

Yes, Warren had made plenty of mistakes (US Air preferred, Berkshire Hathaway are other great examples) most he claims are in regards to opportunity costs and the business he understood but remained from purchasing.

“Casey Stengel described managing a baseball team as “getting paid for home runs other fellows hit”  and is how Warren sums up working with the all important management team that has been assembled over the years at Berkshire Hathaway.


The importance of not chasing Wall Street darlings, hot industries, commodity based businesses (unless they enjoy THE low-cost producer position) or new issues.

“Fear is the foe of the faddist, but the friend of the fundamentalist.”

“As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label:  “Competition may prove hazardous to human wealth.”

47 Cognitive Biases That You May Be Able To Exploit

The list below is assembled from various sources including books, Blink, Nudge, Subliminal, Predictability Irrational, Sway, Made to Stick, The Science of Fear, The Black Swan, The Guinea Pig Diaries, Thinking Fast and Slow (a must read) and also internet source Wikipedia. Additional insight may be found in the books listed above and I have also attached links to resources that may be valuable for further research below.

  1. Anchoring – Humans put too much weight on the first piece of information offered (sometimes the average), commonly seen when we are estimating or making another type of judgement. (Wall Street analyst’s can commonly be found as the culprit.)
  2. Availability Fallacy The easier it is for us to recall an event the higher probability of occurring we give to it. A great example is in the media, how obscure and freakish some of the stories reported are (particularly involving death) as others involving the same outcomes in generally greater quantities are tossed under the rug. (i.e. 6,000 die annually during trips to foreign countries vs. 35 million citizens travel abroad safely)
  3. Bandwagon Effect (Argumentum Ad Populum) – We are overly influenced how we behave and act as a majority or crowd, the fallacy concludes that we believe something is true because the majority believes it.
  4. Blind Spot Bias – We fail to compensate for those biases that we are aware of.
  5. Big Man Bias – A person of authority is perceived to be taller than he/she actually is.
  6. Choice-supportive Bias – Attributing positive characteristics to an option one has selected or attributing negative characteristics to an option that has been forgone. False memories may be born from interpretation of the experience or event.
  7. Conjunction Fallacy – Occurs when specific conditions are thought to be more probable than general ones. A great example from Daniel Kahneman & Amos Tversky helps to illustrate the fallacy in layman terms, “Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice and also participated in anti-nuclear demonstrations. Which is more probable?”
    a) Linda is a bank teller.
    b) Linda is a bank teller and is active in the feminist movement.
    (85% of people go for option b although a is clearly more probable.)
  8. Consistency Bias – Remembering your past opinions and behaviour as resembling your present opinions and behaviour, even though they don’t.
  9. Contrast Effect – An enhancement or diminished stimulus or feeling related to performance. (i.e. Lifting 50 pounds than lifting 25 pounds will feel like less than half of the original weight.)
  10. The Decoy Effect A change in preference between two options due to the introduction of a third option. (Generally the introduction of the third option makes one of the first two options look better than previously thought.)
  11. Distinction Bias – When two options are side by side we over-estimate their differences or they appear more distinctive when viewed together verses in isolation.
  12. Endowment Effect – When we own something we over value it and perceive it as more valuable than it is.
  13. Extremeness Aversion – A tendency to avoid extremes, making an intermediate (middle ground) choice more likely to be chosen. (i.e. I don’t want the most expensive, but I don’t want the cheapest either.)
  14. Forer Effect – A tendency to believe general, vague descriptions suitable for anyone are accurate descriptions of ourselves. (i.e. Why we tend to believe, or at least partially believe, fortune tellers and horoscopes.)
  15. Framing Effect – We make different decisions in regards to the same situation, based on how the option is presented. (i.e. You will undergo a surgery that has a 95% survival rate, but object to a surgery with a 5% death rate.)
  16. Fundamental Attribution Error – When explaining another person’s behaviour, we assign too much weight to his or her personality and not the situation.
  17. Gamblers Fallacy – The belief that isolated or random events can be influenced by the past. (i.e. I flip a coin 10 times and it lands heads 9 times in a row, an illusion that tails is more likely to present itself.)
  18. Halo Effect – Judgments of a person’s character can be influenced by our overall impression. If you like one aspect about someone the positive feeling “spills over.”
  19. Hindsight Bias – The belief something was more predictable prior to happening than it actually was. The bias leads to a feeling of “I knew it all along” and can more easily be expressed as “hindsight is 20/20.”
  20. Ikea Effect – We over-value an object if it was difficult to assemble or we constructed it ourselves.
  21. Illusion of Control – Believing we can influence or control outcomes that we clearly cannot.
  22. Illusionary Correlation – Perceiving a relationship between variables when there is none. “I always choose the slow check-out lane.”
  23. Just-World Hypothesis – Believing the world is fair and people get what they deserve. (Unfortunately good things happen to bad people and bad things happen to good people.)
  24. Lake Wobegon Effect – People over-estimate their positive abilities and under-estimate their negative ones.
  25. Law of Similarity – If two things look similar, humans believe that they are somehow related, whether they are or not.
  26. Mere Exposure Effect – An expression of liking something or someone because we are familiar with it or them.
  27. Omission Bias – The tendency to judge harmful actions worse than equally harmful actions.
  28. Out-Group Homogeneity Bias – Seeing members of our own group as being relatively more varied than members of other groups. (i.e. Derogatory remarks like “They all look the same” stem from this bias.)
  29. Overconfidence effect – Related to “Lake Wobegon Effect” when humans are “100% sure” or “99% certain” when in reality they are not associated with that high of a probability.
  30. Patternicity – Finding meaningful patterns in meaning-less noise. (The cloud animals or constellations humans erroneously see.)
  31. Planning Fallacy – A human tendency to underestimate the time it takes to complete a task.
  32. Primary Effect – The weight of initial events more than subsequent events that follow. “First Impressions.”
  33. The Pygmalian Effect or Golem Effect – If a human is expected to perform better they will do so, or if expected to perform poorly they will do so. A self-fulfilling bias.
  34. Reactance – The urge to do the opposite of what we have been told to protect our “freedom of choice” predisposition.
  35. Recency Effect – The weight of recent events more than earlier past events.
  36. Reminiscence Bump – Your mind over represents events that occur between ages 10-25. Lifespan_Retrieval_Curve
  37. Romeo Bias – Men generally overestimate a woman’s sexual interest in them.
  38. Rosy Retrospection – We often rate events in retrospect more greatly than if they had just happened. (Vacations and traveling are great examples.)
  39. Self-Serving Bias – When you attribute internal factors to success but attribute external factors to failures.
  40. Source Amnesia – The inability to remember where, when or how we have previously learned a statistic or fact.
  41. Spontaneous Trait Transference – People unintentionally associate you with what you say about the qualities of others.
  42. Sunk Costs – We allow costs that cannot be recovered to influence our decisions. (i.e. You pre-purchase a baseball ticket and then hear they are calling for severe thunder storms but you decide to go anyway so you don’t lose money. The decision outcome would be presumably different if you had “won” the tickets.)
  43. Unit Bias – The irrational urge to finish an entire unit. (a plate of food)
  44. Valence Effect – Overestimation that the chance of something good will happen.
  45. Von Restorff Effect – Something that stands out like a sore thumb is more likely to be remembered than other items.
  46. Zeigarnik Effect – People remember uncompleted or interrupted tasks better than completed or uninterrupted ones.
  47. Zero-Risk Bias – We will overpay for the complete elimination of risk. (This is easily found in grocery stores with “organic produce.”