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Thursday, May 20, 2010

Open letter to Mrs. Merkel

It appears governments don't learn from their errors... this is why I say markets don't change. They're the same today as they were 80 years ago, as they will be 200 years from now...

Human emotions are the same, fear, greed, desperation and most importantly the effect of herding...

Anyways, here's a nice letter explaining to our dear German leader, that the markets are not the cause/root of the problem... they are only a symptom of what's wrong... and expectedly the government still has it wrong.

Liebe Angie,

Kudos on your bold move to ban naked short selling in Germany. It takes a woman of real testicular fortitude to replicate the U.S.’s temporary ban on short selling in 2008, a move that worked like a charm. Sure the U.S. ban smelled desperate, backed up demand that was loosed with a fury immediately afterwards, and spooked the markets into a further slide, but it did succeed in stopping short selling during the prohibited period. As your goosing friend, W., might say, “Mission Accomplished.”

Much like a long-dead white male German who shares your initial, you know that markets always work best when the government compels investors to play nice, which, to quote an even-longer dead white male Frenchman, “means nothing less than that [they] will be forced to be free.” And excoriating speculators whose trades expose inefficiencies and re-align prices with values was a masterstroke. If only you’d connect the dots and start blaming the Jews, you could activate the Indonesian playbook that worked so well during the late-90’s Asian financial crisis.
Since at the moment you’re preoccupied with not dealing with this crisis, you may not have considered all the other societal problems that could be solved in similar fashion. Here’s a quick list:

Sanitation: Rather than having to deal with the pesky task of collecting, hauling and disposing of garbage, just attack the source of the problem: the vermin that congregate in and around the garbage. Remove the pests and the garbage takes care of itself.

Public Health: Treating disease is a costly, time-consuming and often complicated process. Instead, ignore the disease and focus on the symptoms, preferably the ones caused by the treatment rather than the disease. For example, cancer patients often lose their hair. Prescribe Rogaine and watch the cancer disappear.

Mortality: People have been trying to conquer this one for millennia, but no one’s tried the obvious: imprison undertakers. These vultures take advantage of the dead by profiting from their demise. Stop the undertakers and, ipso facto, life becomes eternal.

Crime: Confiscate all valuables. With nothing left to steal, thievery withers away.

Evil: Ban the media from reporting about bad things that happen. Once you’ve killed the messenger the message ceases to exist. And without the message, it didn’t happen.

Ugliness: It’s in the eye of the beholder, stupid. Ugly people aren’t really ugly — they’re just perceived as ugly by others. Force society to compliment every snaggle-toothed boohog on his or her appearance. Problem solved.

Erectile Dysfunction: Indict pharmaceutical companies that sell Viagra.

Incompetent Market Regulators: Crucify speculators.

I think you get the picture, Angie. There’s no end to all the problems that can be solved by applying your simple logic.

Mit freundlichen Grüßen unwahr,


Tuesday, May 18, 2010


As for the EURUSD, I'm not liking at all the price action, because... I'm long. I may have to cut my losses. The price action may be a bit different than the count I had put up before. This may still be the 3rd wave within a very big third wave...

Since I'm a bit lazy to draw a new chart right now, I'm going to put up a chart from a fellow poster from another blog. He's a very good chartist and I may have to agree with him on this one after seeing the last 2-3 sessions for the Euro, the momentum, breadth etc have been increasing by a lot making me suspicious we're still within the 3rd wave extension... If 1.20 doesn't hold, I'm out...

Here's the chart:

Today's high...

...1149 points !
Should I make a little mind refresher?

That was last night...(apart from the "Today's high" stuff)... how can some academics say the market is random is beyond me. It's not. It's probabilistically predictable... But academics keep talking, while real people keep making money in the markets... who would you rather listen to? Sigh...

Monday, May 17, 2010

Wave 3 impending?

As for the S&P 500 here's an update:

 We are at an important juncture... I think the wave patterns are pretty clear in this graph. You can see a lot of textbook 5 wave declines, even at lower degrees that are not labeled on the graph, but if you pay attention, especially wave degrees lower than the pink waves, you can see also 5 waves mostly between waves pink ii and iii.

Fractals working at their best. So, we are now at a possible juncture to a new degree third wave, in which case if it happens we should go much lower...

What can we do to improve LMP and more stuff

There have been some worries on what could happen to LMP in case of a market meltdown.

Well, to be blunt, I would expect them to get decimated along the market of course. What we could do though, would be to whenever Zé Manel gave a sell signal, we could expose ourselves just to the alpha of LMP portfolio. What does this mean?

Simply it means that we would be "betting" on the outperformance of the portfolio versus the S&P500 even if the portfolio were to decline, if positive alpha was achieved, it would make money.

Alpha simple stating is the outperformance above the broad market that a manager/investor can create to a portfolio. So if someone would've gained 15% on his portfolio while the market gained 10%, it was said that the alpha would be +5%. Of course on any given year, this measure is useless. What is really valuable is a consistent positive alpha from managers or portfolios. This means one could go for a market neutral strategy such as being long the portfolio while short the broad market, and absorb the alpha return on itself and either make money or lose much less than the market.

Outperformance could either be a better performance on the positive side (+15% vs. +10%) as well as on the negative side( for example the manager losing -15% while the market losing -25%: this is a +10% alpha).

So what would be the most convenient, would be to be exposed both to the market returns + the alpha given by the manager whenever the market as broad is bullish and whenever it's bearish we would want to be only exposed to the alpha.

While I still haven't backtested this idea, by using Zé Manel, I'm confident it may give back positive results.

Also, I'm working on a strategy that I've been having on my mind for quite sometime... We would be using Ze' Manel as well in order to time diferent indexes and so far the results look promising, although the resolution of the backtest so far is yearly only, I will provide soon enough results with more resolution with weekly data points, in order to have better measures on drawdowns, etc.

The returns though, clearly look much stronger than a passive buy and hold on the market including the dividends paid.

There is a problem for a person to remain disciplined with this strategy. As you can see, the average return of the strategy is very very stable both on arithmetic average as well as on CAGR.

Also take a look at the 10 year rolling period returns. Both on buy and hold and the strategy. The strategy would've underperformed during most of the 90's. Would you have stuck with the strategy at that time? The main secret here is not to gain big... it's to maintain a stability and not to lose much when bad times come around. Also the buy and hold returns during the 90's, I would say they are difficult to be repeated as it was the biggest bull market in human history... Well, at least I don't expect such euphoria anytime soon. And stability pays off... check the last 10 year rolling period which stands for the annual returns for the 2000-2009 period.

The 10 Yr Rolling returns, are much more realistic from an investor standpoint since investors don't invest all at same time, and a high CAGR could be due to early big gains on a time series. For example look at Warren Buffet. His long term return is 22% a year. Does this mean people investing on him would achieve that? Not likely, most of that 22% return is concentrated in his early days and a 10 Yr Rolling period is much more transparent when it comes to assessing the robustness of an investing strategy and what an investor could expect in a long term investment of 10 years for example beginning at anytime (although past performances are no guarantee of future performances of course).

VAMI is simply the Value Added Monthly Index, and tracks an hypothetical $1000 investment at the beginning of the period. In this case $1000 would have turned into $68,000+.

Of course since the risk adjusted returns are way bigger on the strategy, so one could leverage it up 1.5x or even 2x's. Although the drawdown would be bigger than the one from unleveraged, this would still be about less than half of the S&P. I mean most people in 2008 suffered through 60% drawdowns, isn't that nerve wrecking ?

Even if a strategy doesn't make as much CAGR as buy and hold (which this does more actually), wouldn't you rather have a 9-10 annual return with much lower downside, than have 11-12% returns with chances to watch your account being cut in half ?

I know I would...

Friday, May 14, 2010

Bull's Eye

After the past 10 months I've been commenting about the 1.23 level. We are now under that territory at 1.23 and a few sprinkles.

With the overextended pessimism going on, and the naysayers, I am becoming more confident we'll see a big rebound soon. Looking at the structure, the 5th wave extension keeps ongoing, but it is my view it will soon be over in order to give place for a rebound.

Anyways, since the trade is so overcrowded now, I am starting to build a long position on € against the $. Needless to say that I am going against the trend right now, so it's a bit swimming against the current. But at times, when extremes happen, one has to know when to stop. I think we are under such circumstances right now... I will keep adding new positions on the way down. Note, that I'm not averaging down, I have already established my risk on this trade, but instead of going all in I am scaling in until my total risk position is filled.

Here's a weekly current view of Euro:

Wednesday, May 12, 2010

Update on LMP

After the sell off last week, we were able to buy the stocks we have wanted to add to our portfolio for quite sometime.

Unfortunately, we weren't able to take advantage of the -10% intraday move. That would have been a great move, but since this is an end of day portfolio, where our purchases are made at open prices, buying the shares during an intraday move is dishonest since it's not replicable and I could easily say I bought at the bottom.

This way, buying at open, is not only repplicable but also the most transparent way in my opinion to display the results, other than through an audited track record.

Anyway's, it seems that our wait paid of, since before we were beating the S&P500 by 44% points, and today we are beating the S&P by 51.22% points, which translates to an increase of 7.22% on our overperformance.

Let's hope the portfolio keeps overperforming in the future.

So far this is how the portfolio stands:

Thursday, May 6, 2010


Today's move was crazy. Although a very good day for me... probably one of the best ever in the trading department.

With today's move I was so eager I could buy the stocks to LMP during intraday, but that would be to break the rules for soomeone that follows us, since not everyone is able to follow the markets intraday. LMP stands for transparency of our purchases, so ALL purchases are made at the open price, so the portfolio can be easily replicated by anyone...

So tomorrow we will be buying at the open the following stocks:


All in all we're gonna have a bit of discount compared to March. Although my belief is that this selling cycle is not over yet, and it may as well be a new longer term downtrend... but let's not think of that right now.

Have a look at this thing:

Good luck everyone.

Black Swan

Ladies and gentleman...

We have ourselves a black swan event (well not so much but I just wanted to post this...):

Panic Mode

We are now on panic mode...

I don't know if this was a bad tick on the data, but I doubt it since it was across ALL BOARD... I saw Apple going -20% and S&P touching 1050's which is a -10% decline !!!

I'll update more stuff in a few...

Euro and Market Psychology

A little update in the €uro, now that we're almost reaching our target, I think it's appropriate to make an update.

For the past 6 months, the EUR/USD has been declining relentlessly from 1.50 to around 1.28. It was such a nice move. Trendy, with not many retraces, etc.

All in all, a 2200 pip move, which I hope most of you were able to grab. Now what for the EURUSD?

Well, here's a graph updated with EW labels and my expectations to the mid-term future:

As you can see, the structure is beautifully textbook: 5 waves down, with what appears to be an extended 5th.

In terms of psychology, it is behaving just as predicted, and here EW can be of help too. Let me quote Robert Prechter in EWP and wave personalities:
Third Waves - Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable. Increasingly favorable fundamentals enter the picture as confidence returns.[...] Strength. Breadth. Best fundamentals. Increasing real prosperity. By the end, the underlying trend is considered up.
Fifth Waves - Fifth waves are always less dynamic than third waves in terms of breadth. They usually display slower maximum speed of price change as well, although if a fifth wave is an extension, speed of price change in the third of the fifth can exceed that of the third wave. (...) Even if a fifth wave extends, the fifth of the fifth will lack the dynamism that preceded it. During advancing fifth waves, optimism runs extremely high despite narrowing of breadth. Market performance and fundamentals improve, but not to levels of wave 3. Psychology creates overvaluation

The quotes are of course under a bullish view, so you just have to switch the adjectives to the opposite side, so instead of saying "increasingly favorable (....) as confidence returns" we would say "increasingly unfavourable as fear returns". The same for the fifth wave.

So let's take this into what happened since the high. We have the wave (3) in red which as we can see was the strongest part of the move in terms of breadth, and where fundamentals started to deteriorate, as also at that time the trend was unmistakable.

Then, it came wave (5), which is the current wave we are, although it's almost finished. Again, during 5th waves PESSIMIS runs extremely high despite narrowing of breadth. This is the time, where the public acknowledges what is going on. Fundamentals are at its' worst, and the euro is on the spotlight on the media, etc.

What has been going on since wave 5 on media? We now see inumerous economists calling for the end of the €uro, fundamentals are at its' worst with Greece pretty much in ruin. Portugal is pretty much going through the same path as well, although not as bad as Greece... yet.

Newspapers, and not only the financial ones, give notoriety to doom and gloomers and other financial talkheads at this point, everyone is now calling for the end of Europe and Greece and €uro currency, riots and manifestations in Greece, talk about ultimate pessimism...

For the past 2-3 weeks all I've been seeing on TV, and other types of media is everyone so bearish on Euro right now. Today, when reading a newspaper, 10 economists were calling for the end of the Euro. Tell me about pessimism...

I only ask: Where were the talking heads calling for the end of € when it was trading at 1.50 ? At that time, of course optimism reigned. We were as well in a fifth wave, but on the opposite side (bullish) so everyone was optimistic on the €. I saw people calling for values of 2.00 for the EUR/USD.

So what to expect now that pessimism took over pretty much everyone? It's time for the market to do the exact opposite thing.

I think, we are still missing one more down wave, as in the graph I posted, to conclude the wave structure. This may take us to the 1.25 level which is a strong support. Nevertheless, my view is the next big move will be to the upside, not the downside.

As for a target on the upside, well since it will be a corrective wave, the structure is a lot more difficult to predict, but the target box is a good figure of the target, especially the mid-line of the box around the 1.390ish area.

At the middle of wave [2] of course, fundamentals will stop deteriorating or at least will have that appearance. The Euro may lose the spotlight for a bit, when people will think the worst is now over...

Again quoting Robert Prechter on waves personalities (again this is under a bullish view so you have to switch the adjectives around... since waves 2 under a bullish view is a down wave, the adjectives are negative in here... so under a bearish view a wave 2 will have positive characteristics in terms of psychology):
 Second waves often retrace so much of wave one that most of the profits gained up to that time are eroded away. This is especially true of call option purchases, as premiums sink drastically in the environment of fear during second waves. At this point, investors are thoroughly convinced that the bear market is back to stay. Fundamental conditions often as bad as or worse than those at the previous bottom. Underlying trend considered down. Does not carry to new low.
 But once this wave [2] is over, wave [3] will begin...and at that time the downtrend will be unmistakable to anyone and the crisis will be already deep ingrained...

Wednesday, May 5, 2010

Look at that... target almost hit...

Look at that !

Remember the trolls last year claiming for the end of the US Dollar? Where are they now? Where is hyperinflation that would send the dollar down the toilet? I don't see them...

Today the Euro hit 1.28 against the dollar. My long term target last year was below the 1.24 area as minimum target. We are now almost hitting that target...

Here's a snapshot for prosperity:

Here's the graph posted back in February claiming a rise to 85 level on USD Index. This level may be indeed a mid-term top for USD (bottom for € in this case):

Tuesday, May 4, 2010

Music on loop...

After a short-selling ban from the Greek government last week, we knew what would happen. We know better, and it seems the politicians can't figure it out themselves. I really don't know who teaches economics and other things to them.

So, history doesn't repeat, but it often rhymes. Well, just like any other time, when the government banned shorts, this measures had done nothing to prevent the declines...

I bet the greek politicians are scratching their heads right now:
Ok we can't blame the short sellers now, who should we blame then? Easter bunny perhaps?

Today the Greek stock market fell -7% ... seriously when will these guys learn a thing or two?

But no problem, we rather use the government's decisions as contrarian signals ... :

Monday, May 3, 2010

Markets as an art...

Sunday, May 2, 2010

Quote of the day

The stock market is efficient at expressing the herd mentality.

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