A letter to my daughter

One of my daughters who is uninterested in actively managing her
retirement funds wrote last week asking me if it wasn't time to get
back into equities. This is my reply:

Hay!

You will recall that we have discussed that a hands-off way
to "invest" was to be long a rising 200 day moving average and
short a falling 200, as you can see on this 20 year chart of the
S&P 500 Index. The gains can be amplified considerably by
using leveraged trading instruments that will return multiples
of the underlying move - up or down - in the S&P.

When the 200 day moving average turned up in August, I was
erroneously not a believer because the economic news was bad,
getting worse, and historical seasonality told me to expect some
significant lower trading in the coming months. The lesson is
that a technical trader should be locked in a (nice) room to trade
charts and be given no access whatsoever to the outside world.
That kind of objectivity can be more easily achieved by trading
in much smaller time frames where the cycle is just a matter
of hours, or even considerably less.

Whilst uncommon, there have been other periods when equity
markets have advanced in the face of deteriorating economic
conditions as they are doing now. (There are logical - if not
likeable - reasons for this in the present instance, but that is
another story.)

These days, there are bright people opining that equity markets are
in a "bail-out bubble" that is going to burst just any old time now.
There are just as many others who opine that liquidity will continue
to trump or that the economy is to improve and the markets are
but discounting the future. I have been of the bubble camp, and so
far we are wrong.

For my trading style, I do not have to care or be right about the longer
term direction so here is the best I can do: Technical stuff suggests the
likelihood that equity markets will be trading lower in the near term.
If, however, that is wrong, or if right, and the S&P fails to make
and hold a lower low, then the hands-off trade is long with the
rising 200.

Edited by selecto, 17 October 2009 - 05:15 PM.

Thank you for posting the letter.

Usually (make that almost invariably) when I get a call or email from a relative asking if it's time to get in this market or that, it is one of the best signals I can get that the market is going to reverse. My sister, as one example, has been worth her weight in gold as a contrary indicator over the last 20 years. Hopefully your daughter's timing is impeccable as well, because I went 50% short Friday and looking to go for more Monday if the setup doesn't blow up on me. Kimston

You are a good father Selecto. Interesting that the 200 day ma is currently around spx 910 where there is a big gap.

http://stockcharts.com/c-sc/sc?s=$SPX&p=D&yr=0&mn=9&dy=0&i=p59541413764&are=1378.png

Edited by Russ, 17 October 2009 - 09:39 PM.

For my trading style, I do not have to care or be right about the longer
term direction so here is the best I can do: Technical stuff suggests the
likelihood that equity markets will be trading lower in the near term.
If, however, that is wrong, or if right, and the S&P fails to make
and hold a lower low, then the hands-off trade is long with the
rising 200.

Nice letter....the 200dma will keep you out of trouble if you're an investor! I think it's a great technique for LT capital management. I'd like to use your post to inquire why so many are bearish.....

I just don't see any of the basic technical stuff or reasons for being bearish that great traders here are sighting. Starting with the basics: price, MAs, A/D lines and NHs/NLs, EVERYTHING is confirmed bullish...even the last swing. What is everyone seeing that I'm not? The basics are saying be long. Every one of the basics I mentioned is objective on any chart. You have to look for derived indicators or the derivitive of derived indicators to TRY and FIND way to be bearish. What are the two or three top traders here (they know who they are) who have been bearish for a couple months minimum seeing that I'm not? I don't have any great skills...my skillset is keeping it simple and looking for trading ops in groups and individual stocks. There are at least a couple traders better than I am at calling the indexes who are saying TA is bearish....again I ask...

What are you looking at? The big picture stuff is all bullish?

The irony is that I even cut back at the end of the week. I took on some shorts. I'm still slightly overall long at reduced levels. It was more for risk control and burnout than anything else. I'll be reevaluating this week (after OPEX).

Edited by Cirrus, 18 October 2009 - 08:28 AM.

Many thanks to you Selecto for posting your letter and all the astute observations you make through your posts.


I am adept at dealing with the short term gyrations of the market, shift gears and do very well when I trade what "is" as opposed to what should be but I can't trust my own instincts or analysis when it comes to market turns or longer term projections.

This is what led me to use an independent, simple, unambiguous guide to decide which way to face in the markets.

I have a blended position of outrights and option spreads most of the time and on my overnigt positions I try to maintain an overall posture that is close to the market's condition as it is recorded on John Bollinger's site by the two colored bands under the Market Chart. (A good friend of mine is going by Lowry's)

On Bollinger's Market Chart page the combinations are green/green, green/yellow/ yellow/yellow, yellow/red
red/red on the way down and the reverse of it in an uptrend. Often there is hesitation in the market and the above progressions become an alternating mix.

Since currently it is green/green I even buy breakouts(which is not my nature) hang on to longs with more confidence and have less patience with shorts. In the current condition breakouts lead to runners and due to rotation there is a party for momentum traders. This condition of course will end sooner or later but I'd rather not guess when.


Here is the link to Bollinger's site:

http://www.equitytrader.com/


Regards,

F&D

In the few cases that going long with a rising 200 dma failed were when the higher time frames were still having their moving averages declining. In this market we didn't have the 200 dma rising until the market was already entering into the bubble territory, the commodities have been resilient during the declines since summer. As of right now, we still have for example 400 dma declining. There will be entering into a deep correction at a minimum around new year as we are also running out of stimulus, Fed is also thinking they won't be able to keep doing this forever. I think the market will mostly roll over in winter and remain in a trading range...