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Interview with Mike Swanson 8/29/6


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Posted 29 August 2006 - 01:56 PM



Mark S. Young: I'dlike to introduce Michael Swanson of Wall Street Window. Mike is a regular contributor toTraders-talk.com and our primary gold specialist, and I'm glad to have him here. Welcometo the chat, Mike!

Michael Swanson: Glad to join you, Mark.

Mark S. Young: Mike, first of all, could youtell us how you got into this business?

Michael Swanson: Well, my background was in history. I got a MA in history in college andwas working on a doctorate and ended up dropping out to trade full time. In my first fewyears of college I inherited $15,000 and started to do some trading with that. I didn'tknow what I was doing though. I turned that $15,000 into about $50,000 buying someInternet stock I read about in a magazine and then turned that $50,000 into about $7,000in the course of a year. It took losing that money and then coming back for me to reallylearn how to trade and invest successfully. That seems to be a common story. I think thedifference between successful traders and people who never become successful is if theyadjust and learn from first setbacks. Most never learn and just do the same things overand over again, but not on such a volatile scale.

Mark S. Young: I recognize parts of yourstory in my own. I guess we could say that those who keep making the same types ofmistakes are gamblers rather than traders. I know in my case, I learned much more from theearly mistakes than the early successes.

Mark S. Young: So, you went from amateur topro. Tell us about that transition.

Michael Swanson: Well actually when I first started in a way I knew what to do. I justdidn't do it. Before I opened an account I read a dozen or so books on trading andinvesting and one of which called Secrets to Profiting in Bull and Bear Markets by StanWeinstein really gripped me - he laid out a method of trading that struck me as one thatwould work - but I didn't really apply it until I had that big losing streak. And a lot ofhis concepts I use today. But one thing that got me to stop losing I think is that Istarted to help someone else get started and I had to tell them the right things to do andnot to make the more gambling type things I was doing. By helping him I was lettingsomeone else see what I was doing and that controlled my behavior at the time I guess. Wehave helped each other trade for 7 years now and now run are partners in a hedge fund. Idon't think I need a partner to trade, there are benefits and drawbacks to that, but ithelped me go from amateur to pro.

Mark S. Young: This is a fascinatingco-incidence! When I first started trading, the first thing I read was that piece by StanWeinstein. I probably still have it around here somewhere!

Michael Swanson: It's a good read.

Mark S. Young: So, you run some money withyour trading partner. How did you get into the business of publishing your research?

Michael Swanson: Well it started out as asmall email list with some friends on it back in the late 1990's when everything was goingup. I'd just pull out my tc2000, look over a thousand stocks or so a night and make a listof breakout candidates. When they'd break out the next day most would go up at least 10%.I was buying them, selling a few days later, then buying the next breakout. That is whatreally got me to first build my account up and also build up a following. Eventually Istarted to charge for the service and I had to change my approach to. I don't do that typeof trading anymore. It's a different market now then it was then. That was really a oncein a lifetime market. It was so crazy.

Michael Swanson: I try to hold positions forseveral months now and ride out intermediate-term trends. The short-term breakouts stoppedworking for me in 2,000 and I found an intermediate-term time frame better for using moremoney.

Mark S. Young: It really was wild. So wasthe Bear that followed it. So, recently, you've been focusing on energy and gold stocks.Would you say that those sectors are your specialty or is it simply where you think theaction is or has been?

Michael Swanson: Gold stocks have become myspecialty. They are what I have really concentrated on for the past several years. I'vegotten to know people in the gold industry who know some of the fundamental trends of someof the smaller gold companies and I also believe I've come to have a good feel for thetrends of the gold market. There are some indicators that have worked well the pastseveral years to detect changes in trend - for instance the XAU/gold relative strengthratio. The action in the stocks tend to lead the action in the metal, so it’s bullishwhen this is trending up and if that trend changes it has been a reliable exit signal.There are a few other things too that work well with gold. But I don't really have anyspecial indicators when it comes to energy stocks. Just use the basics such as movingaverages and trend lines, so I tend to put more money and effort into the gold stocks asI've found that more profitable for me.

Mark S. Young: Back in 2000, I predicted asecular Bull Market in gold and the mining stocks. It looks like I was right. I traded inthem, and did well early, but then lost interest during their consolidation. It wouldappear that you did very well making them your focus. But going back, are you saying thatyou use fundamental analysis as much TA for trading the metals and energies?

Michael Swanson: You got in earlier than Idid. I got in the first quarter of 2002. If you read Stan Weinstein's book and grasp hisstage analysis theory, gold stocks bottomed in 2000, and went into a stage one base andbroke out of that to enter a bull market in 2002. That was the reason I got into them.Unfortunately right now almost every sector in the market has run up the past few yearsand is in a stage three topping position - or consolidating - time will tell. The onlything I see that has the potential to go from stage one to a stage two bull market aredrug stocks later this year. Technical analysis is the most important thing for me. Butsometimes I'll use fundamental analysis to narrow down a list of potential stocks to buy.But I don't use it to make my buy or sell decisions.

Mark S. Young: As far as your fundamentalviews go, are you just looking for sectors that you can make a pretty sound case forlonger-term fundamentals to be improving?

Michael Swanson: When it comes to sector Iam more interested in the charts, whether the sector is in a bull or bear market orconsolidating. I read the economic news, keep up with what is going on, and have my owntheories about the macro-environment and where the economy is headed that isn't in themainstream. I think we're headed for some sort dollar crisis. But I've found that it isvery difficult to trade off of the macro-picture or predict it. If you would have told mein 2000 that the Nasdaq was going to fall like it did I would have thought a lot of badeconomic news would have come out. But what happened to the economy was quite tame. Fewsaw the housing boom and how it helped generate consumer spending. I didn't see thatcoming. So when it comes to sectors I don't really direct my attention to them by lookingat fundamentals or the economy.

What I tend to do is look at the charts first and the try to understand the fundamentalreason for what they are suggesting to have more of a conviction of what they are saying.That can help you decide how long lasting a trend can be.

For instance right now the housing stocks are deeply oversold. They look like they areready to rally and if you bought now you could make some money. But we aren't entering anew housing boom next year so it would have to be more of a short-term trade than along-term hold for someone trying to play that I'd think.

Mark S. Young: I know what you're saying.I've never seen anyone translate economic analysis into timely trading. The correlationsare there, but it's got to be one of the toughest things to figure out how to play.Regarding housing, to be sure, it's hard to make a case for a new bull there, but thenagain, we know that Bear Market rallies can be a thing to behold. It's just clear thathousing isn't likely a good long term buy just from looking at the sector and the economiccycle.

Michael Swanson: Well a problem witheconomic analysis is timing. You can be right, but it seems like whatever you expect tohappen always takes longer than you expect.

Usually I use fundamentals by looking at the earnings of individual stocks. If I can findstocks that have high relative strength in a sector and good earnings growth than I'drather put money in them then in something with little or no earnings. This really appliesto the gold market, because there are a lot of stocks in it with no earnings. One of thebest performing stocks a few years ago was Krystallex. It was more of a promotion. It hasno earnings. One would have been better to put money into a Yamana Gold or Goldcorp thathad similar relative strength and real earnings with growth.

Mark S. Young: So you'd rather trade in goodinvestments rather than wildly speculative stocks...no matter what their relativestrength?

Michael Swanson: For the most part. Althoughwith the gold stocks I've been able to get in a few of the more speculative ones, becauseI've had contacts in the industry who pointed me out to them. You have to really know thestory early and get in them before they run up huge though, because many of them arepromotions and I'm always a little worried. For instance one of my best stocks last yearwas a silver company called Silvercorp based in China. I bought it for like 3 and soldaround 5 or so. It was a big profit, but I thought the company was over promotional andsold. It went to $18 after I sold. But then I bought into one private placement for a goldcompany before it started to trade. It ended up getting halted a few days after it openedup by the SEC for suspicion of illegal insider selling in offshore accounts. So thesmaller stocks can be a wild ride. Because of the potential for huge returns I'll put alittle amount of money into them, but just a small portion.

Mark S. Young: That's an important notionfor newer traders, ESPECIALLY in the miners. Let's stress that. Diversification is keywhen trading in more volatile sectors and in more junior or speculative stocks. There arescam artists in every sector, but in small companies, shells, and promotions, you have tobe especially cautious and expect that there's a good chance that ANY of them could blowup overnight.

Michael Swanson: That's right. The thing isthough that a lot of people don't realize that.

One problem is that a lot of gold newsletters only recommend the small speculative stocks.They are a part of the industry in a way. There are a few I find worth reading who aretotally independent but not many. Jim Dines is one good one.

Mark S. Young: Jim is a legend. He's alegend because (in addition to calling the Internet boom) he's one of the few junior goldstock analysts who plays it straight.

Michael Swanson: Exactly.

Another thing is that the gold industry is really small. There are only 20 or so goldcompanies trading on the US exchanges that have good production and earnings growth, so itis hard not got get interested in some of the smaller companies.

Mark S. Young: Yes, because the industry isfairly small, there's only so many places to put money. When big money wants to go intothem, it really has to look hard for places to go.

Mark S. Young: Thus, a good trader can'tcompletely ignore the smaller, junior companies since they can have some big moves ifsomeone decides that they want to own them.

Michael Swanson: I've even had that problem.I'm not managing that much money in the scheme of things. The fund has about 5 million inand Andy and I are probably trading an additional million or so directly. Plus with thesubscribers I'm probably influencing another few million. Last December we sold out of thefund and three other hedge fund managers I know sold out on the same day and we moved goldstocks down. The gold market isn't that liquid. One nice development though is the new GDXexchange traded fund. I've been using it in my own account and in the fund too. A fewtimes the past few months instead of selling a bunch of gold stocks I just shorted the GDXas a hedge. I've used it on the long side too.

That might be a microcosm of the whole stock market though.

Mark S. Young: I've been thinking the samething. Any thoughts on that?

Michael Swanson: The way it trades now. Itseems much more influenced by larger traders making individual trades. Volatility hasshrunk the past few years as hedge funds have come to dominate the market and displace theindividual investor who was a much larger player in the 90's and now isn't really a factoranymore. There are a lot of signals that used to work in the past that don't work anymore.

For instance in 2000 I started to short stocks. And it worked really well for me forseveral years. I was using the VIX, put/call ratio, and investor's intelligence survey totrack sentiment and then the 60 minute stochastics for entry points. Then in 2003 Icontinued to do this and it no longer worked. The investors intelligence survey had morebulls than bears all through 2003 and the market kept going higher. Right now there is aninteresting shift in this survey. There are more bears than bulls than have been seen in along-time. I'll be very interested to see what the market does. That's something I'd liketo talk with you more about over the next weeks as things unfold as that is your area ofexpertise.

This is one reason I ended up gravitating towards the gold stocks. What had worked for meto judge the trends during the bear market stopped worked when the cyclical bull marketstarted in 2003. So I ended up focusing on more what was working for me - the gold stocks- instead of trading the Nasdaq and DOW as I had done before then.
Michael Swanson is using a different version of Yahoo! Messenger. Certain features may beunavailable.

Mark S. Young: I have some thoughts on thatmatter too. In fact, the use of sentiment at tops is one area where I've been trying helpfolks not get fooled. We'll have to talk more on that later. But going back, I've beenwondering what effect the EFT's have been having on less liquid sectors. I mean, whatabout the Russell's out performance for so long? Is that working a lot like the gold ETF'sand those thinner juniors?

BTW, there's a simple elegance just in focusing on the young secular bull market (in agiven sector). You're to be credited for that.

Michael Swanson: I've found it a lot easier.Hopefully if we do get a cyclical bear market correction over the next year - which Ithink we will - then a lot of sectors will line up for a new bull market a year from now.But we'll see. Yes, though I think the ETF's have impacted the Russell out-performancetoo. It's probably true of all sectors.

Mark S. Young: Mike, I'm interested in youroutlook going forward, but before we go there, I have to ask you my "toughquestion"; What is your favorite or most indispensable indicator (or type ofindicator)?

Michael Swanson: Well in any market, stock,sector - whatever it doesn't matter what it is I'm always using the daily and 60 minutestochastics. If the sector is in a bull market I'll look for a dip that causes the dailystochastics to get oversold. When that happens I'll flip to the 60 minute stochastics fora buy signal and use that as an entry point. I used to short during the bear market doingthe same thing. Right now as we are talking I have a chart of the XAU up. I think bottomedin June and is now consolidating to go breakout in a few weeks. Gold and the XAU bothdipped hard yesterday and are down this morning, but the 60 minute stochastics areoversold. If they cross over and give a buy signal I'd use that an entry point and if youwanted you could then put a stop at the days low.
Michael Swanson: If you get stopped out, youcould then sit back and reassess things. Maybe try the same thing again if you still thinkthe bullish trend is intact. I'm not doing this with the gold stocks, because I'm alreadyin from what is on average a lower level, but using this an example of how I use thatindicator and trade.

Mark S. Young: So you're using the Stoch'sas both trend and Overbought/Oversold   indicators?

Michael Swanson: No I use them just asoverbought/oversold indicators. I use them for potential entry points.

Mark S. Young: Gotcha.

Michael Swanson: I have to use the overallchart pattern and position and slope of the moving averages to determine the trend. I findthe stochastics useless to identify a trend. If something is trending up overboughtstochastics indicators don't mean much, but oversold readings make good entry points.

Mark S. Young: As a follow up, are you usinganything to keep you from "catching falling knives" with the stochastic? LarryKatz once told me that in some markets, a buried (rising) stochastic isn't a sell signal,but rather a sign of strength. I've found him to be right many a time.

Michael Swanson: Katz is right. I don'treally have anything special to stop from catching falling knives. I don't try to buy whena stock or market is in a downtrend - just when it is in an up trend so usually that isn'ta problem. And if the trade is wrong I just exit and sell, so it would take a big gap downto cause a loss to be more than usual.

Mark S. Young: Basically as Stan Weinsteinwould advise (waiting for the market to enter a Bull before buying)...

Michael Swanson: Actually Weinstein isbullish on gold stocks to. Every once in awhile I get a copy of his service. I'm not surewhat else he is saying now though. I think gold stocks are going to consolidate andbreakout over the next few weeks. We should know for sure soon though. They should bounceback up to their recent highs over the next few days and if they do their Bollinger bandswill shrink and practically touch. This is what has happened the previous few Augustsbefore they had September rallies. If the XAU were to close below 140 though than thistime might be different or there may be more consolidation.

As for the rest of the market - I'm very interested to see what happens. On one hand I'mbearish on the market. And have been the past few months. Last year I started to warn of acoming cyclical bear market because most sectors topped out and started to drop - with thesectors that had led the cyclical bull market that started in 2003 leading the decline.Which is a sign that a bull market is coming to an end. Then the sectors that assertedleadership - commodities, gold, energy, etc. - were sectors that lead at the end of a bullmarket too. And of course we are starting to see some life now in more defensive sectors -tobacco, drug stocks, utilities, REITs, are all leading sectors so far this year. So themakeup of the leadership and rotational pattern certainly suggests we are starting or in acyclical bull market. But a rally here wouldn't shock me, especially with the very bullishsentiment readings from a contrarian stand point. So I'm interested in the character ofany rally we may get will be and what the sentiment readings do to know if my thesis thatwe are entering a cyclical bull market is correct. I'm not putting any money on thisthesis though. I'm not short and am heavily long gold stocks. But I'm hopeful that abearmarket comes, because there would be a huge potential to get in new sectors as they turnup a year from now.

I've found the broad market frustrating the past year- a lot of sideways action. Andoutside of commodities I've experienced it to be hard to make money in so I'd look forwardto an environment like that.

Mark S. Young: Yes, in order for us to makemoney longer term, we need some volatility and maybe even some bargains.

Michael Swanson: Yep. I don't know whatthey'd be though. Guess we'll have to keep our eye on the charts.

Mark S. Young: So, Mike, Anything else toadd?

Michael Swanson: Not right now I think we'vecovered a lot and thanks for taking the time to talk with me. I'd like to talk with yousometime in the next few months about the sentiment readings, because it’s a subjectI'll be very interested in and will need to brush up on with you.

Mark S. Young: I'd be happy to. I've gottensome nice insights today, too. I'm sure folks will have a question or two. Will you becoming by Traders-talk.com to answer them from time to time?

Michael Swanson: Sure, I'll get in the dayafter you post the interview to see if there are any questions or responses.

Mark S. Young: Great and thanks, Mike. Thatlink is www.traders-talk.comand I suggest folks check out the Fearless Forecasters message board as well as our NewMarket Analysis Area where you're a regular contributor.

 

For more information about Mike Swanson: clickhere

For more information about Mark S. Young: click here