Original article from Shareinvestor.com published on April 27, 2012
This article “Why more ignorant money is lost to less smart money.” by Conrad Alvin Lim was first published in the Apr 2011 – May 2011 Issue of INVEST magazine and is reproduced in this blog in its entirety. The author fills you in on the invisible hands at play that drives stock market action. An insight to the mindset vital to a successful trader in a marketplace where sentiments rule the day …
Through the years, trading has always been a pipe dream for most who wanted to get filthy rich. With the advancements in technology over the last decade, this pipe dream has been brought closer to home than ever before. Today, it is a very accessible dream to anyone and everyone. All you need is a computer and an Internet connection.
And of course, you need the right kind of market.
This is where the hype starts. We have been over-exposed to all sorts of advertising and promotional rah-rah that makes us believe that it is actually possible to make that fortune a reality. We see ads with winners making really fantastic profits from a single trade and we hear of friends who make a living from trading and living the good life. We see the rich and famous on TV that have made fortunes in the market. We read about people making fortunes from the comfort of their homes.
We believe we can be one of them. Worse, we believe it is really that easy.
What we don’t see in most cases is the real ugly truth. We don’t get to see losers, we never see the many hundreds or thousands that get wiped out and we definitely never hear what happens to the few winners when the market turns.
We never get to see how difficult it is for those successful few to make that living. We don’t see how much studying, hard work and endless hours of practice it takes to achieve that “easy” life. We definitely don’t hear about how much losses were accrued before the wealth accumulation started.
When the market is rallying at full steam, you always get to see new gurus hyping up their courses, authors of all sorts publishing their version of making a fortune from the market and everyone rushing to brokerages to get an account open. Workshops of all kinds will be touting their software that makes profits without the trader having to put in much effort. Some gurus will adapt their classes to ride the trend of the market – if Options is the way to go, you’ll get Options teachers by the dozens … if Forex is the flavor of the trend, then that’s what you’ll get lots of.
The market in itself is hyped. When everything is running up the charts, it is so easy to make money from the market. Everyone seems to be getting in on the action when a bull run is in full steam. The hype worsens as these bull-run winners put more money into the market to help the rally climb even higher. Pretty much like what is happening in our property market today. The “Aunties” and “Uncles” at the coffee shop also seem to have the best tips and everyone in the neighborhood is an expert at stock picking.
Scandals also abound when the market is in full hype. Hedge funds and pillion-trading are two of the many ways these scandals begin. In some recent cases, the owner of the fund starts living lavishly on his clients’ monies even before the fund is profitable. This adds to the hype. We see fund managers driving fancy sports cars and living it up in penthouse condos and sprawling landed properties. Everyone wants that life and the market can give it to you.
So the average Joe, or in our case, Ah Seng, joins the hype bandwagon and puts his hard earned money into a few bets in the market. It makes money for sure. The bull-run continues. So Ah Seng buys more and grows his wealth. He tells his friend, Ah Huat, about it and he joins the bandwagon. Soon, the market is flooded with Ah Sengs and Ah Huats who know little about the danger they just got themselves into.
The fact is the market had already been running up like mad which is where all the hype came from. By the time the new gurus, workshops and books emerge, the rally is almost always halfway there. This is when the aunties and uncles get wind of the easy money and this brings on the Sengs and Huats. Next thing you know, the market is over-cooked. Yet it continues to rally, albeit on suspiciously lower volumes.
The lower volumes are an indication that the smart money is already sidelined and waiting for the inevitable. The smart money knows when to get out and stay out. They know because the ignorant money has started to flood the market.
“When the market is greedy, you should be fearful.” ~ Warren Buffet
Then the inevitable happens – the market stutters and falters … the easy money slows down … volatility begins to rule the market … the ignorant money slowly realize that they have left their asses hanging in the wind without protection. But they’ll continue to live in denial because of the hype.
The market slides south. But not in a hyped-up crash, mind you. The market is a sneaky place that gives you more rope than you need to hang yourself repeatedly. It takes a slow and steady slide with the occasional bull-trap to keep the ignorant money believing that the correction is a “normal” thing in this business. After a brief reprieve to bring hope to those living in denial, and possibly bring in more ignorant money, the market continues its sneaky slide south. This goes on for a while and before the ignorant money realizes it, more than half the investment is down the toilet.
By this time, some of the gurus quietly “disappear” from the press, some workshops cease to exist, software traders start complaining that the systems are not working as promised, fund managers appear in the news for the wrong reasons and my class starts filling out with dozens of traders looking for a fix and a more realistic way to survive the market.
The market gets down to an impossible low. Gone is the hype and all that came with it. In its wake, it leaves a massive trail of destroyed lives and emptied bank accounts. The market is now “a dangerous place” when it was once a dream maker. The market is a “casino” when it was once an ATM. When the hype is all gone along with the money, people get serious and stay away from the market.
This is when the smart money returns.
And this starts a new hype cycle that brings in the new ignorant money.
The question you should be asking is not; “When will the ignorant money start to suffer?” If you thought of asking that question, YOU are the ignorant money.
The only question you should be asking is; “How do I become the Smart Money?”
To get the answer to that question, we commit to the next big mistake – The Education.
Most people know that trading is a stressful and dangerous job. Most also know that it isn’t easy and takes a lot of work and learning. Of course, there are the few who believe that the market can be beaten with a system or with some high-tech software. Then there are those who cling on to the ignorant belief that the market is a place that can get them rich quick.
Let’s not waste time discussing the dreamers and ignoramuses. Rather, lets look at the fellow who knows what it takes and is ready to work for it. Let’s look at the fellow who sincerely wants to learn all there is to know about this business but is unable or unwilling to get a formal education for it. It has been argued that one is able to learn about trading by reading books and obtaining information through the Internet.
So if it is that simple, why do so many still fail? The answer is just as simple; Learning the wrong thing without realizing it.
Most of the books available, either at bookshops or at the library are about INVESTING and very few are actually about TRADING. So what happens is that most people don’t realize the real difference between investing and trading and will assume the two to be the same with slight variances. That could not be farther from the truth.
Investing is much easier to learn – like learning to drive a Honda Jazz. It doesn’t take much to learn it and it is easily understood and put into practice without much difficulty. The trick thereafter is not to crash.
Trading, on the other hand, is a very different skill and mind set. It is akin to driving a Formula 1 car. Unlike the Honda where the manual version has the clutch on the left foot, the F1 car’s clutch is a very different mechanism and is controlled by the right hand. Unlike the Honda which packs less than 80bhp, the F1 car stacks up an earth-shattering 900+bhp which, in untrained and inexperienced hands, could end up killing the driver.
There is so much more to trading than investing. The skills involved are very different, the psychology is worlds apart, the knowledge needed requires way more weeks and even months to acquire and the amount of research needed to be a good investor is nothing compared to the daily research and monitoring the trader is required to do to survive the market day in and day out. Where investing requires little or no practice, trading demands hours and hours of practice time to hone the skill. The financial management skills are also extremely different in that the investor protects his capital by how much he invests while the trader requires a different skill set to manage his finances – its called “cutting loss” – something easier said than done.
So without realizing it, most beginners will pick up an investment book or visit sites hosted by investors or have contributing members who are investors and assume that all that knowledge gained will stand him in good stead as a trader.
And when things don’t work out, it gets confusing. The common query that follows is always, “Why is it others can make it but I can’t?”
You can’t blame the poor fellow because there isn’t much literature on this subject and even some so-called gurus don’t know the difference. But all you have to do to know that this is true is to just look at Wall Street – how come the investors don’t have to be on the floor of the exchange everyday while the ones on the floor everyday are known as traders?
Knowledge … a little of it can kill you quickly while the wrong kind will slowly bleed you to death.
Finally we look at a controversial reason why most traders fail – The Attitude
It starts right at the start where most newcomers think that the market can be a get-rich-quick plan. This is akin to thinking that the market is like a casino. Consider this fact – the house ALWAYS wins. So if you treat the market like a casino, it will make you feel like most gamblers do. Gamblers always win a few but lose a lot.
Some trade like the market is a system to be beaten. Such traders ought to give themselves more credit. You’re insulting yourself if you have this attitude. To think that the market is a system is to include yourself in that system. Therefore, the system you are looking to beat includes you. Give yourself some respect and while you’re doing that, give the market the same respect – we’re not robots in the market and we’re definitely not part of a system. We’re humans that are driven by emotions. The market is an emotional place, not mathematical. You cannot have a system to beat an emotion because there is no math that can factor emotional irrationality.
Then we have those that don’t realize how unscrupulous the market is. Their ignorance is evident when they correctly assume the market is not that clear cut but will still buy into the hype. What is obvious is that the market is made up of all kinds of people especially those who will do anything to get an edge, even through illegal and criminal means. It is also full of experts who have spent years in Harvard and Princeton and then more years with established institutions such as Goldman Sachs, Morgan Stanley and the like. They have hugely experienced mentors to guide them to become the next generation of world class traders. These people have so much leverage and influence on market sentiment and to make their advantage more unfair, they collude with their competitive counterparts in order to corner the larger market for their own gains. With such power, how is a three-day workshop graduate expected to beat the odds? Yet more and more look past the obvious and end up throwing their hard earned money to the power-brokers.
These are also those who buy into the idea that the market can be analyzed fundamentally with valuations. Such valuations do help to reduce risk. But that is an investment-styled strategy and not suited for trading. Trading is way faster and seldom allows the security time to flex its fundamental muscles before the next gyration takes out the profits. Read the previous lesson to know the difference between the investor and the trader and you’ll have a clearer understanding of this.
Others rely purely on technical analysis. I can’t deny that I base a lot of my analysis on technicals. But that is not the end all. All it takes is one bit of macroeconomic news and all that technical analysis is out the window faster than you can say “Cut loss!” Technical Analysis is great as long as there is no news to upset the prevailing sentiment and as long as volumes don’t dip. But the market is never so generous. So in the end, Technical Analysis is only a “best guess” … and contrary to common belief, Technical Analysis is not the best guess of when to buy or sell – rather it is most reliable when used to guess the best potential against the least risk or the most risk against unfavorable potential.
Then there are those who believe that a good tip from a trader is the key to easy money without putting in any effort. For this, I have only one analogy; will you take a heap of hard-earned money out of your wallet and give it to someone you hardly know and expect to get it all back after a few weeks? And if that person was trustworthy, would you still do it? And do you really believe that it will come back with more than you gave him? If in life we don’t make such practices, then the same principles should be applied in the financial world and most of all, in the market. The desire to get-rich-quick-and-easy makes simple people do really silly things with their money. And it is always only after getting burned that you hear those famous last words,” … if only I knew …”. Yes, you’ve heard the horror stories time and again and so has everyone else. Yet people continue to write new chapters into this horror story ever so frequently … all in the name of greed, gluttony and sloth.
The financial markets are like an office block in a busy business district. The people who go to work there are serious professionals who take what they do very seriously. They are highly experienced, very influential and extremely powerful. It is also like a hospital where the surgeons, doctors and nurses are highly qualified and trained professionals. People put their life in their hands everyday.
Then one day, some over-zealous graduate with three days of workshop knowledge comes into this office block and expects to beat everyone out of their jobs. Or this hyped-up graduate with only three days of experience comes into the hospital and expects everyone to trust him with their lives.
Okay, maybe that is a bit of a stretch but the implications are no different. Every professional takes years to study his craft and then spends more years honing the skills with hours and hours of practice and hard work. They also have a mentor to constantly guide them till the day they are ready to go solo. There is no easy path to success and there will be failures along the way. The financial market is to be respected and feared. There is no other attitude except humility that will help a trader survive it.
It is said that more than 80% of the market is made up of those who lose and less than 20% are winners. The truth is that those statistics apply to any profession – how many top rated lawyers, engineers, surgeons, etc are there compared to the many also-rans?
The big money is always at the top where there are few who have it while the small money is at the bottom where most have to fight for it. And there are only two ways to be at the top – either you are already there or work hard to get there.
I love to cook. I love preparing food for my family to eat. And my family loves eating what I cook for them.
But there’s more to just cooking than meets the eye. Today, when it is so convenient to order in or “ta pau” or just eat out, why, in my busy schedule do I still persist to cook at least seven meals a week for my family?
It is my form of therapy. It serves as a means to calm me and slow me down from the fast-paced nature of the market and the hectic schedules that my life presents. Most importantly, it reminds me that this is Life – this is what Real Life is all about and everything we do is about this.
This bowl of salad represents the end product.
This is what we see served to us when we eat out. We dig into it without considering anything else except for how it looks, tastes and fills us. Some of us will be concerned about its freshness, crunchiness and its calorie levels. Others will be considering the value-for-money factor. After finishing every last morsel of the salad, we move on to idle chit-chat or slam our faces in our mobile coms while someone else clears up the mess.
For most, this is life … their life – meaningless, routine and superficial. For them, instant gratification is normal. It is a way of life and thus becomes an expected given. As long as they can afford it, these expectations must be met. They care little for cause and consequence because this is what affluence is all about. This type of life breeds sloth, gluttony and pride.
This sort of existence always leads one to chase dreams that are unrealistic and unachievable. It inevitably makes one pursue the wrong things that almost always never delivers on its promise. It makes victims out of the naive, gullible and ignorant dreamers who will insist on living in denial and will never own up to their flaws even when hit with failure. Instead, they will look for the next best thing with the next best promise of instant gratification.
I should know – I was guilty of it. Then bankruptcy hit me and woke me up.
Let’s get back to that salad and let me show you what went into making it …
I found a packet of greens that I bought a little less than a week ago. Some of the greens were soggy and spoilt but there were bits that were still fresh and crunchy. I had to sort them out.
It took 20 minutes to clean and sort out the rotting greens from the good greens. On the right, you can see how much of it I cleared out. On the left, more than half the pack was still in good shape. In the sink, you can see from the colour of the water (compare the colour of the steel surrounding the water-filled basin) how much work went into sorting them out.
Wouldn’t it have been easier to toss out the whole bag and buy a fresh lot instead?
Yes … and if you were thinking that, then you’re missing the point – that’s sloth – that’s exactly the type of life I don’t desire because it starts me down a path that’s all too familiar and undesirable to me.
I painstakingly removed all the rotting bits from the fresh bits even though it took time to do it. This is the same approach I take in business and in trading – I remove as much risk and liabilities as I can before I consider taking the next step in my analysis for my trades or business. I never rush the process and will pay special attention to every detail before making the next move. Likewise, I don’t want my family eating rotting greens so I will take the effort to remove that risk.
Then I had to boil up the pasta, two hard boiled eggs, slice up the sausages and braise them along with the pasta, slice up the tomatoes, shiitakes and onions and start laying up the salad. The greens, shiitake and onions were mixed one layer at a time, each time adding olive oil, my own blend of herbs and peppers, a sprinkling of salt and garlic power, then I lay over the next layer of greens and repeat the process for at least four layers. This way, the flavours are properly and evenly blended with the greens when I toss them.
Next, the cooled pasta is laid down like a bed on the top of the greens and the sausage slices (also cooled) on top of the pasta. Around the edge of the bowl go the tomato slices and to top it all off, the hard boiled eggs are sliced and take their pride of place above the whole heap. Finally, one last sprinkling of salt, herbs and parsley flakes.
Wouldn’t it have been easier to just toss everything into a bowl and mix it all up? After all, we’re going to gobble it all down and it won’t make a difference in our bellies, right?
Yes … and if you were thinking that, then you’re still missing the point – that’s gluttony – that’s exactly the type of habit I despise because it pays no attention to detail, its slovenly and smacks of ill discipline.
Although I never attended cooking school, I am a graduate of Taste & Smell from the University of Culinary Trials & Errors. I have studied my craft and applied my methods with almost surgical precision. I pay attention to detail and am constantly looking for ways to improve the style. I am more interested in the process than the final result just like I am more intrigued by the journey than the destination. This way, I get to enjoy every bit of the entire experience and not just savour the end result.
I took this same approach when I decided to take trading seriously. I studied the craft and practiced painstakingly to improve my style. I broadened my knowledge of the business by learning economics, risk management, history, monetary policy, politics and psychology. I applied through trial and error everything I learnt. Like cooking, sometimes things didn’t work out so you start over with a new plan. With no one to guide me, the market became my test examiner while my wit became my teacher.
Wouldn’t it have been easier to just get some financial expert to tell me what to buy? Then if I lose, I can blame him instead?
Yes … and if you were thinking that, then you’re still missing the point – that’s pride – that’s exactly the kind of attitude dreamers have. They want to get rich quick without any effort and yet hold someone else responsible. Regardless of who is irresponsible, the bottom line is you are going to lose your money and you’ll be too proud to admit that you were too cowardly to pull the trigger yourself.
In my younger years, I used to rush to get to the final product. (Maybe that’s why I never finished what I started.) I was impatient, stubborn and proud. As a student, I didn’t care much about the learning process as long as I knew I could get my answers right. (Maybe that’s why I flunked out.) As a Film Producer, I didn’t care much about the process and got others to take care of the processes for me as long as my end product was approved. (Maybe that’s why my productions had low profit margins.) During my media days, I hired people to manage the process so that I wouldn’t have to. (That’s why I lost everything.)
But all that changed when I was hit with bankruptcy. As a result of not knowing the process behind running a business, I could not account for why I had failed so spectacularly. I couldn’t hold anyone responsible for my company’s collapse and I certainly could not blame anyone for my stupidity and ignorance in financial management. I had only realised my errors when I studied the process that led to my downfall, after the fact. It then became clear to me why I had failed so many times in the past without realising that I was repeating and compounding the same mistakes with each episode.
This totally turned me around and gave me a greater appreciation for studying the process, planning the process, working the process, improving the process and learning from the process. I began to enjoy the journey more than the destination. I fell in love with the concept of working it instead of instant gratification. I realised that things last longer if the process is well thought out and executed with passion.
I learnt that a really good bowl of salad is one made with love, patience, passion and from painstaking attention to detail.
I finally discovered the secret to long-lasting and truly gratifying success – its not the end product but the process that makes success.
Success belongs to those who
work at it the hardest and
believe in it the longest.
This is the same approach to which I raised my kids. Nothing could be done in haste. It was never going to be a one-time lesson for all time. The lessons had to be taught one painstaking event at a time. I gave my kids my undivided attention and made sure they were loved every bit of the way. I made them my best friends when they became teens so that I would be theirs. This made me the first and last person they would go to if ever they needed a friend to lend them a ear or simply a shoulder to lean on. I changed my ways so that my kids would have a good role model to mirror and a dependable friend they could trust.
I still continue this painstaking task today knowing that there is no instant gratification in raising my family. There will be more lessons between now and when they become parents themselves. And I will still be guiding them on how to be good parents when the time comes. There will be no expectations from me when they finally come into their own. I will die knowing I did my best for them because this is what I lived for.
And it was all because of a simple bowl of salad that took me one hour to prepare for my family.
Happy National Day
to all my Singaporean readers!
Parent to child;
“You must study hard, spend 6 years in primary school, 4 to 5 years in secondary school, 2 to 3 years to get a diploma and another 3 to 4 years to get your degree before you can consider a professional job. Life is not easy and there are no free lunches. You have to work hard to become rich and achieve your dreams.”
Three days later, the parent signs up for a three-day workshop to become a full-time professional trader on the promise that no hard work is involved, it is easy and you can become a millionaire and achieve financial freedom like it was a free lunch.
Parent to child;
“Don’t lend money to anyone. People can’t be trusted. When you have money, they all want to be your friend. When you don’t have it, they don’t know who you are. When they owe you, they will avoid you. Never trust anyone with your money because you are never going to get it back”
Three days later, the parent puts the family’s life savings in a leveraged fund with a banker they hardly know who will ask for more investment power later who cannot promise that you will get it all back. When its all gone, the banker doesn’t seem interested to do business with you anymore.
Parent to child;
“Money is hard to earn. You must learn to spend wisely. Buying things without thinking is reckless and immature. You must plan to buy what you can afford and only buy what you need. You must stay within your budget. Shop around, do your research, wait for discounts and save as much as you can. Don’t just buy because everyone is buying the same thing.”
Three days later, the parent pumps more than 50% of his investment capital into a company he hardly knows anything about. He buys it without researching its fundamentals, he averages up as the stock keeps rising without waiting for a dip and he bought it because his friend had a tip from a friend that everybody else was buying it.
Parent to child;
“You mustn’t feel bad about losing, son. Sport is about participation and completing what you started. It’s about training, concentration, emotional control and doing your best. It’s about playing by the rules. If you did everything right and you put in 100%, then it is not a loss but a personal achievement. You should be happy and proud about that.”
Three days later, the parent is ranting and raving about losing money in the stock market. He broke his own rules because he lacked practice. He had gotten emotionally attached to the trade and had been living in denial. He procrastinated, was preoccupied with business issues, had become complacent and didn’t concentrate on his stock position. He didn’t take his profit when he had it because of greed and didn’t cut his losses until it was too late because of fear. He was angry because he lost money …but he won’t blame himself.
Parent to child;
“Don’t believe everything you hear. People like to lie to you and tell you things you want to hear so that they can get what they want from you. The only reason they are nice to you is because they want something. They will lie, cheat and double-cross you just to get what they want. The more convincing they sound, the more they are lying. You must check them out properly first.”
Three days later, the parent jumps into a stock with all guns blazing because there was some news about it. No research was done because the article was written by a ‘credible’ analyst from an established institution. The price target given was so realistically achievable and tempting and the reason for the “Buy” rating was so convincing that Eskimos would have bought a fridge.
Just like that and July is done and dusted. It was a really busy month and I had a great time.
WATMY27 completed their Tutorial on 20 July after two brain-busting weekends.
Then on Sunday 27 July, I was at KLCC at the largest book fair I have ever been to. Very impressive. It is so good to know that Malaysians still read books and the proof were in the many basket-trollies I saw laden with massive amounts of reading material, lining up in droves towards the cashiers. Keep reading, Malaysia!
Then on 30 July, WAT73 completed their Tutorial in Singapore at 1am on Thursday morning after eight mind-crunching weeks. Now their journey to the next level begins!
You’re staring at the Singapore Debt Clock as of 1 August at 12:20 SG time. Indeed, we’re the richest country in the world and one of the top 10 most expensive places to live in. But we also have the highest household debt in the world.
The interest per year on that debt is a staggering S$8,255,403,808! That works out to S$262 per second. With a population of 5,399,494, each citizen’s share of that debt (including non-working adults, children and infants) is a world’s record high of S$70,662.
Why is this important? Those who remember, will recall this posting from end 2011 …
We, or our personal debt, will be our greatest downfall because it is currently our greatest threat. Most who can afford their lifestyles now are living on a shoestring that has been carefully budgeted to a ‘T’. The problem with that is that all it will take to hurt them is a rise in interest and/or borrowing rates or a cut in salary or worse, a job loss.
If, and more likely, when it happens, defaults are going to go through the roof and we’re going to see this country’s most major recession since SARs. Already, the cracks have begun to show as property prices fall. Stubborn/greedy, overleveraged and inexperienced home investors who should have sold their liabilities last year now start to panic. The flood of sellers usually follows … and it often happens in quarter three …
And remember, I warned us all three years ago about the dangers of cheap money and the gulf it would have created between the rich and the poor and how it would bring us down. Its all here in this blog … buried and forgotten.
But I don’t forget.
All over the Internet, analysts and economists are writing that this bull market is becoming unsustainable. There are quantified reports too that this is now the third, and arguably the second biggest stock bubble in history after 1929 and 2000.
Liquidity is also drying up as the Buybacks that have kept this rally going for the last year are coming to an end. Plus with Tapering ending in October, the easy money days are numbered.
I never thought it was possible but the DOW hit 17,000 in July on 30% of the volumes that saw it rise to 14,000 in 2007. Much of that rally was from the Buybacks.
Lest we forget, I have reasons to be bearish given the negative January Barometer at the start of this year and last year’s miserable Black Friday/Cyber Monday numbers. And although we close above the December Low by the end of Q1, the first quarter was negative for the year.
Maybe the market lost sight of its traditional fears as a result of those massive Buybacks but the bottom line is clear – the market is over valued with less than 25 of the S&P500 components’ PE Ratios between 2 and 15. More than half have PEs above 20 and a third have PEs above 25. The real nail in the coffin is that earnings haven’t been that stellar to warrant such overvalued PEs for most of those companies.
In a nutshell, it’s a stock bubble. By my calculation, it’s the third biggest stock bubble in history with the worst liquidity ever.
Given that its been a tumultuous year on the geopolitical and economic front, it wouldn’t surprise me if the market collapsed spectacularly from now till the end of the year to teach us all a lesson in the consequences of easy money policies.
Latest Edit (31 July AMC)
The DOW fell -317 points on the last day of the month and triggered a Death Cross on the 10 and 20 DSMAs – the most serious since April and January this year.
It was the single biggest loss since 1 February and the second biggest drop for the year.
It has also put the DOW in the red for the year in one single session.
August can the most volatile month of the year and is known for its extreme volatility. August 2014 has 21 trading sessions and no public holidays. The month starts and ends weakly and the middle of the month is its strongest period.
August is fast catching up with September as the most (historically) bearish month of the year. Since 1987, August has been the worst month on the DOW, S&P and NASDAQ.
- August starts in reliably weak fashion
- The first trading day of the month has seen the DOW go down 10 of the last 15 but up 4 of the last 6.
- The first nine days of August are the weakest first days of any month.
- The second week continues the weakness while the Friday of the second week is reliably bearish.
- Expiration Week of August is its most bullish week.
- The Monday before August Expiration has been up on the DOW 13 of the last 19.
- August Expiration Friday has been bullish with the DOW up 8 of the last 10.
- The week after Expiration Friday is bullish but not as bullish as week three.
- The Monday after Expiration Friday is reliably bullish and the Friday following that Monday is also reliably bullish.
- August traditionally ends poorly but has been ending stronger in the last 10 years.
- The second-last trading day of August has been down on the S&P 14 of the last 17.
- August 29 is the Friday before Labor Day on Monday 01 September (Markets are closed) making it the eve of a Three Day Weekend. Watch for a rally before the holiday weekend.
- Crude stays on the high range but tends to weaken late in August
- Nat Gas continues to show strength
- Gold and Silver is strong in August
- Copper stays weak
- Soya and Corn are also weak in August but Corn tends to have counter-rallies depending on the weather
- Wheat maintains its strength
- Cocoa starts to get very volatile
- Coffee bottoms in early August and reverses upward by mid month
- Sugar is at its lows in August.
Now we go into the worst three months of the year. Given that the market has been anything but normal, I will be cautious about shorting anything ahead of time. Let’s not forget that’s how the hedge funds got into the red in May and June.
Let’s play it smart and wait for it rather than anticipate it. For those who know how, your best strategy is to be hedged.
Once again the season for farming, construction and engineering is at hand. Thus, it is meet that we revisit the industry that supports all these infrastructure-based sectors – Heavy Equipment & Machines.
The last time we featured a similar industry was in November 2011. That report would have given you a 23.4% average return in three months. We’d like to see if we can repeat that success with this report.
Click here to read more: http://www.patterntrader.com/product/sector-report-1406-heavy-equipment-machines/
June was a month of recuperating and rest so there isn’t much to update. The first week was spent in Paris and Normandy – the girls went shopping in Paris and the boys went to Normandy to commemorate the 70th anniversary of the D-Day landings. The photos and commentaries of that memorable trip are on my Facebook album here:
Apart from that, it was a thankfully uneventful month that allowed me to put my feet up (literally) and let them recover. As I write this, I am so happy to say that my right foot is well recovered and I am getting back to fitness again with regular swims and gym sessions. I pray that this is the end of a two and a half year ordeal and the end of a chapter that has plagued me since 1996.
Its good to have my feet looking normal again. Now I just need to work to make it feel normal and regain the form they used to have.
America’s GDP contracted but almost everything else on its economic kaleidoscope is showing signs of an improving economy. Employment is back up to pre-subprime levels and the inflation rate seems to be staying constant. The CPI, however, is getting scary.
The DOW is on an elevator to heaven and reports are emerging that this will continue over the next six months. Wall Street is very bullish and advocating that the rest of us do the same.
I would suggest prudence and defense while you stay long on the market. We are, after all, in the worst quarter of the year with August and September being the most bearish months of the trading year cycle.
After not selling off in May or June, I fear any sort of correction now will inevitably be a severe one.
While the rest of the world grapples with incredibly high inflation rates and rising household debt, the answer to what could crash the market next would be exactly that – Inflation. We’ve not had an inflationary crisis since 1974. As a reminder, the conditions that led to that crisis is not that different from the circumstances we are facing today – excessive printing of money, divergent monetary policies and rising commodity prices.
Yields on the 2, 5, 10 and 30-year bonds have also been indicating a level of doubt in risk by flattening on the longer terms. PE ratios on more than 65% of the S&P stocks are indicating grossly overvalued levels.
Yet there is no doubting that this rally still has legs. Just be careful when its legs run out of steam – what follows is usually termed as “collapse”.
July is the start of quarter three and is the best month in the worst quarter of the year. The three months of Q3 are extremely varied with July being extremely volatile (reputed to be the most volatile), August being the most bearish in the last 20 years with no reliable patterns and September, known famously for having the lowest volumes of any month and the most bearish of the calendar year over the last 80 years.
July 2014 has 21 full trading sessions, one half day and a public holiday (Independence Day on 4 July). July is known for its volatility with huge swings either way. It is also the start of the third earnings season of the year when companies are known to pull back on their guidance and become conservative about their outlooks.
- The first trading day of July is the most bullish having been up on the DOW 19 of the last 24
- The second day immediately becomes bearish
- Thursday 3 July is a shortened trading session ahead of Independence Day
- Friday 4 July 2013 is Independence Day – Markets are closed
- The Monday after Independence Day is usually volatile
- The second week is usually bullish but can be volatile as earnings season begins
- The third week (Expiration Week) is prone to wild swings
- Monday of July Expiration Week has been bullish on the DOW 7 of the last 10
- July Expiration Friday is bearish with DOW going down 8 of the last 13
- The volatility from week three tends to carry into week four and gets worse
- The Monday and Tuesday of week four is reliably bearish
- Tuesday 29 July – FOMC Meeting (2 days)
- The Friday of week four is bullish
- The last day of July is traditionally bullish but down on the NASDAQ 7 of the last 16
- Crude finds support in late June/early July
- Nat Gas is good to go long around mid month till mid October
- Gold and Silver finds some strength in July till October
- Soya stays weak and tends to bottom in July
- Wheat maintains its seasonal strength
- Corn traditionally stays weak in July but is known to make sudden rallies depending on the weather
- Cocoa tops out and reverses down towards the end of July
- Coffee stays weak
- Sugar gets choppy because of harvests in Brazil and India
As I get my life back in order again, I will be relishing the months ahead as I slow my schedule down and get back to trading again. It has been a fast and furious eight years to recover what I lost from my bankruptcy and build on what my peers have taken their lifetime to achieve. I’m glad that I can now slow down and enjoy life a little more.
After all, what is all the hard work for if you can’t enjoy the fruits of your labor? I am not a slave … I am a free man.
Last month, I had a last minute emergency on my right foot just before I had to fly off to KL for my book launch. The 30-month-old surgery wound flared up and had to aspirated at Changi Hospital at the risk of getting infected. Nothing untoward happened thereafter and the wound looked like it was starting to heal again.
Prior to this, the issue with my right foot had been planned to be addressed later this year around July or August with a surgery scheduled to end this problem once and for all. After the KL book launch, we decided to move up the schedule.
However, things took a turn for the nasty. On the weekend of May 9 – 11, the wound flared up again while I was in KL for a booster with WATMY26. It was a struggle to get home on that Sunday and thought it best to check into SGH just in case. The wound had started to look and feel really bad and I feared infection had finally set in. I was warded while waiting in line for surgery. However, my surgeon was out of town.
Minutes turned into hours and hours turned into days. I had been starved on and off several times for hours in preparation for the surgery that never happened. It didn’t help that Tuesday 13 May was Vesak Day. By Wednesday 14 May, I could take no more. My right arm had become so sore from all the saline and Augmentin they were pumping into that vein that I could lift the arm at all. It hurt so bad that they had to switch veins. They couldn’t find a better vein on my left arm after some probing which made my frustration and pain worse. I was hungry, constipated and miserable.
In spite of all this, I have to say that the nurses at SGH Ward 75 really did everything they could to make me comfortable and happy.
Then I got the good news – my surgeon was back and was on the way to see me that Wednesday morning. I insisted that I didn’t want to be poked anymore till he came and assessed my situation. If I wasn’t going to get any surgery done, I didn’t want to and couldn’t take any more poking.
Surgery was schedule for Monday 19 May at 8am. It went well without any complications. As I write this from home after more than a week’s rest, I am healing well and the wound looks very healthy indeed. I pray and hope that this is the last episode in this very painful ordeal.
Now I need rest … lots of it.
Not just for my foot but for my whole body, mind and soul. I need to slow down and even get away from everything to just live life and enjoy it.
Since before my discharge from bankruptcy, I have been working like hell to make up for lost time and build up what my peers have taken their lives to make. I was starting from scratch, from negative in fact, to build a future that my peers had 30+ years to achieve. It has been a mountain to climb especially when you’re doing it in a hurry. Its never going to be easy at age 43 to have nothing at all and make something of yourself.
I can now look back and tell myself that I have done enough for now. There’s still much to do but it can wait. My kids are on the verge of becoming adults and I want to live and enjoy their last years in teenage-hood. I want to spend more time with my long-suffering wife and give her what she so rightfully deserves – a good life. I want to spend time to enjoy what I have achieved and take the time to plan what I want to achieve moving forward. I need to take time off to think about how I can improve what I have and make things better for the Tutorial, my school and my students.
There is still much to do but it can wait for a bit.
I need to breathe and smell the roses, give thanks and be grateful for what I already have.
And I will start by thanking everyone who has supported me and helped me back on my feet from bankruptcy. Thanks to all my graduates who have kept faith in me and continue to support our cause. And thanks to God for the most amazing seven years of recovery in which He has given me the strength and courage to help others do the same.
MAY IN REVIEW
On the weekend of 2 – 5 May, WAT72 got their weekend tutorial. For a small group, they sure had a lot of questions! Thanks for an extremely active weekend, guys. It was really great fun.
I now only have two batches of Tutorials left to complete – the Weekly Batch (WAT73) in Singapore starting June 11 and the Weekend Tutorial in KL on the weekend of July 11th. After these two batches, I won’t be doing another batch till October or so.
I think my competition is going to be very happy about this! Enjoy it while it lasts … because I will be coming back with a vengeance – bigger, better and still the best.
MARKET MATTERS (As of 26 May, BMO)
Not much for a Sell-In-May, was it? Market actually broke to higher highs this May instead of selling off like it usually does. But let’s not forget what happened last year – we didn’t sell off in May 2013 but June took a very nasty drop instead.
Dow Jones – 1 year as of the close of 23 May 2014
DOW and NASDAQ close above the year’s opening price on Friday. DOW has closed all of only seven sessions this whole year above the year’s open. This is the DOW’s worst opening five months since 2008. And its looking like 2014 is going to be volatile like this just as I said it would at the start of this year.
S&P500 – 1 year as of the close of 23 May 2014
The S&P is by far, the best of the major indices … which is not necessarily a good thing because S&P was the best performing index in 2007 and 2008 just before the big drop.
VIX – 1 year as of the close of 23 May2014
The VIX dropped to its third lowest close since 2007 and its lowest in 14 months. Would you read that as “greed” or complacency?
With the major indices fighting to get free of their major moving averages, I expect the volatility to get worse and I suspect that last year will repeat itself this June by selling off big time.
June is the last month of Quarter Two and is a rather bearish month. Traditionally, this is more so if May had sold off. June 2014 has 21 trading sessions. There are no public or trading holidays in June.
- June starts out well with the first two days of the month being rather bullish
- The first day of June has been up on the DOW 18 of the last 25
- However, in 2008/2010 the first day has been bearish with 2011 and 2013 down -2.2%
- The first week of June ends very bearishly
- The second week is the exact opposite of the first – it starts bearish and ends very bullishly
- The Friday before expiration week is the most bullish day in June
- The Monday of Expiration Week has seen the DOW go down 10 of the last 16
- 17 June 2013 is FOMC Meeting Day
- June Triple Witching Day (Expiration Friday) tends to favour the bears although in recent years, it is non-conclusive with mixed results – DOW down 7 of the last 14
- The week after June Expiration has been down on the DOW 14 in a row with 21 of the last 23 being bearish
- Watch for Portfolio Pumping in the last week of Quarter 2 as fund managers illegally jack up the prices of their portfolio’s underperforming securities
- The last day of June has been bearish with the DOW going down 15 of the last 22 and down on NASDAQ for 6 of the last 8
- Crude continues its strength but tends to consolidate in June
- Nat Gas moves lower
- Gold continues its downtrend
- Silver bottoms out
- Copper rallies
- Soya tops out
- Corn continues its decline
- Wheat finds a low and reverses up sharply in mid June
- Cocoa starts an uptrend
- Coffee continues down
- Sugar finds a low and bounces into July
Just like that, we come to the last month of quarter two and the market has had little to show for 2014 being bullish. Now we move into the heart of the worst six months of the trading year – June for being the most unpredictable, July for being the most volatile, August for being the most bearish in the last 20 years, September for being the most bearish in the last 80 years and October for having the most major stock market crashes in history.
A graduate of mine from K.L., Jeanne Kong wrote a piece on her Facebook page which is definitely worth reading because it very much reflects my own sentiment for Malaysia and Singapore moving forward in the short to medium term.
The STI, as I mentioned at the start of the year, closed in negative territory without much fanfare so much so hardly anyone noticed it closed 2013 in the red. YTD 2014, its looking very toppy again and economic circumstances still don’t justify this top …
Our GDP is definitely not growing after three years since the high of 2010. If anything, we cheated technical recessions three times by revising the past numbers upwards, once by as much as 11% from -4.7% up to +6.9% … how does one make an 11% error and still keep their job?
And while GDP stagnates, Inflation stays at record high levels amidst stagnant wages, low interest rates and increased consumer spending … and if you thought that didn’t make sense …
… unemployment is spiking just like I said it would two to three months ago. Remember all those job losses I talked about in the recent monthly updates? Well, things are getting worse with every week that passes.
Here’s an interesting statistic for you; every time our Government Budget dipped, the STI made a major correction in the following months.
In mid-May, I will be doing a full summary of the Singapore and Malaysian economies just before the half-year mark. By then, we’re going to be privy to more numbers and revisions. I suspect, the shit is travelling up towards the proverbial fan again.
It’s time to think of survivability and protection. It’s time to be defensive!
Trade Safe & Happy Hunting Always!
Here’s a really good dose of weekend edutainment starting with the 98 minute award-winning documentary that will blow your mind away, “The Four Horsemen” … truly visionary stuff.
Then there Mike Maloney’s 5th episode of “Michael Maloney’s Hidden Secrets Of Money“. In this episode, he also shows where he believes we are in the following cycles:
Quality Money/Quantity Currency
NOTE: Maloney is a known Gold Bug.
Just for good measure, here’s two more Maloney videos worth watching …
“Here Comes The Next Great Depression”
… and “A Warning For Americans – Atlas Shrugged”
To cap it all off, don’t forget to read my latest Facebook note on
Hidden Erosion of Corporate Worth Since The Government Abandoned Money
By Robert Prechter
Happy reading and have a great weekend!
I’m sitting at home.
After 60 agonising hours of being warded at Singapore General Hospital, I am finally at home and temporarily untortured. But the ordeal is not yet over …
In November 2011, I had an operation done to remove a gouty tophi from my right foot (big toe). It had become so huge that I couldn’t wear normal shoes without much agony. The operation went well except that when my surgeon stitched me up, the same wound was actually undergoing another gouty attack. Thus, while it healed, a new but smaller bunion formed. This bunion never really bothered me over the next two years.
Then four weeks ago, just hours before I was to depart for K.L., I had to go Changi’s A&E to get the wound looked at because it became inflamed and posed a threat of infection. The doctors initially refused to aspirate the fluid for fear of aggravating any infection but later agreed with me that it would be better to aspirate in a clean environment than to have it burst in the middle of K.L. over the weekend. After puncturing and getting most of the fluid out, the foot was “back to normal” and I went to K.L. without incident or discomfort.
Then over the past weekend, on another trip to K.L., the wound leaked and I felt some pain. Upon returning on Sunday 11 May at 10pm, I immediately went to SGH to get it checked and once again, the fear of infection was the prime concern. They shot me up with antibiotics and scheduled to have the wound operated on to remove the gouty tophi and clean up any infection. However, the threat of infection was just precautionary as I showed no signs of fever, high blood pressure and severe pain that normally accompanies an infection. I was warded and put on the waiting list for surgery.
And it was a long waiting list given that Tuesday was a holiday and all.
While waiting, I had to fast ahead of the surgery. They pumped me up with plasma and antibiotics till my right arm became so sore from the inside out. By Wednesday morning, my arm could take no more. Now as I write this, my right arm is stiff and sore and unable to lift anything.
Starved, in pain and frustrated with all the waiting, my surgeon, Prof Inderjit Singh returned from a trip just in time to stop my misery. I was talking a walk outside the ward, wandering quite aimlessly and feeling totally depressed. I have never been happier to see my surgeon and I am not ashamed to tell you that I almost cried with relief to see his familiar face walking towards me. He stopped the needles and made an assessment on my foot. He then sent me home with instructions to stay off my feet with a stack of antibiotics for good measure. He assured me that the wound was not infected and scheduled me for surgery on Monday, 19 May first thing in the morning.
This is much sooner than I had expected but this doesn’t help the problem with my schedule. I still have some outstanding engagements to fulfil but Prof Singh assured me that the surgery would be a minor one compared to the other surgeries I’ve had over the last 30 months. But he did advise that I should take time off to recover and rest. I do have several previews to fulfil over the next few weeks but that is all the work I will be doing for now till my next class in a month’s time.
I have known for some time now that my body has been breaking down. I have known that I needed to take better care of myself. But I have been stubborn. I have always put others before myself and now, it has been at the expense of my health.
A good friend once told me that if I wished to continue to help others, I have to take care of myself first. I am of no bloody use to anyone if I am sick as it will only make others worry for me. He was right and now, those I want to help are worried for me.
Yes, I have been selfish and now I pay the price.
No more. I will be taking better care of myself and after my surgery, I will be slowing down and taking time off. I will never make anyone worry about me ever again. Especially my loving and over-caring wife. Its time I starting taking care of her instead.
At the end of it all, I close this day on a high after reading my student’s frank and honest post on his blog about my new book, “Winning Psychology Of Defensive Traders” and the Tutorial which he attended a couple of years ago. You can read his review here: http://sgyounginvestment.blogspot.sg but don’t stop there. His blog is a must-read for anyone who wishes to get more insight to what every good financier should know.
Well done on a fine blog, Sing Heng.
Now, I am going to take things easy. And I am going to start by getting a good sleep tonight.
It was another busy month and it wasn’t helped by my right foot when it chose to swell up the old surgery wound 9 hours before I had to depart for K.L. for my book launch. I spent more than four hours between 11pm and 3am in Changi Hospital to temporarily fix the problem and have been on solid antibiotics since then.
April was a rough month for me and a mental strain. Too many challenges and trials in a month that has otherwise been good to me in the past. Maybe this is a sign for me to slow down?
On 29 April, I wrote “Taking a long break” in which I mentioned that I would be slowing down for the rest of the year.
I will be running only two more batches in Singapore; WAT72 (starting on 2 May) and WAT 73 (starting on 11 June) and one in K.L. (starting on 4 July). After that, I will be taking a long break to recoup during which I will be having my fourth operation in three years. The break will give me time to heal properly.
The earliest I may return to teaching could be in September. However, if circumstances don’t improve by then, I may choose to return in November.
The Tutorial will be undergoing some administrative changes within AKLTG during this period and I expect things to get busier and better after I return with overseas engagement taking up most of my time.
During this break, I will also be reorganising how The Pattern Trader Tutorial & Tools will run in the future and how it will move forward for the coming years. Change is necessary as the brand expands. How the changes will shape up is something I need time to work on. Thus, this break will give me time to clear my head and plan for the long term future.
I guess the break will do me some good. Time to clear my head and start planning the next phase for the business.
WATMY26 for their Tutorial between 4 to 7 April and after a weekend of brain pounding education, the class survived and left me with yet another memorable session. Thanks WAYMY26 – teaching you reminded me about why I love to teach so much.
On the weekend of 25 to 27, “Winning Psychology Of Defensive Traders” was launched in Kuala Lumpur and Penang. The Malaysians finally got their books. MPH was on hand to support the event and sell the book along with the other best-selling AKLTG publications.
On Tuesday, 29 April, WAT71 completed their Tutorial and will now go into Tutelage for the second half of the education – the hands-on application part of the whole package. Keep up the good work, WAT71!
How much longer and how much higher can this rally go for?
As of the close of 30 April, the DOW faces 16,600 for the third time since December 2013 and is barely above its year’s open of 16,572.17. Not a good place to be going into May, notorious for selling off. The S&P is faring no better.
S&P500 – 1 year as of the close of 30 April 2014
The broad-based index is on a Head & Shoulders (left shoulder in March) and also looks due for a correction in May. The neckline is on the 1,845 support while the support on the DOW is at the 16,000 to 16,100 confluence.
VIX – 1 year as of the close of 30 April 2014
The VIX is showing little sign of fear – something that the Contrarians would read as Complacency at 13.41 – but it would be prudent to note that the Fear Indicator has been making higher lows all through April. I’ll be keeping a close eye on the VIX through May for signs that the market could sell off big time.
May 2014 has 21 trading sessions and one public holiday. May is infamous for having the year’s most fearsome correction. Some Mays in years past (also in 2012) are known to have wiped out the whole year’s gain in a single month. May starts well but almost immediately goes into one of the most bearish weeks on the trading calendar.
- The first two days of May are the month’s most bullish days
- The next three days are the most bearish
- The second week of May tends to be more bearish than the first
- The Friday (9 May) before Mother’s Day (Sunday 11 May) has been up on the DOW 12 of the last 19
- Expiration week tends to be a little bullish
- The Monday (12 May) after Mother’s Day has been up on the DOW 14 of the last 19
- Monday (12 May) before May Expiration has seen the DOW gain 20 of the last 26
- May Expiration Friday (16 May) has been down on the DOW 14 of the last 24
- The week after Expiration Friday tends to be bearish
- Friday (23 May) before Memorial Day (Monday 26 May) has seen the DOW go down 8 of the last 13
- Monday 26 May is Memorial Day – Markets are closed
- The day after Memorial Day (Tuesday 28 May) has been up on the DOW 19 of the last 27
- May tends to end well but has been down on the DOW 10 of the last 17
- Oil tops out in May and starts a downtrend
- Nat Gas also tops out but tends to consolidate in May
- Gold continues its weakness
- Silver tends to peak and reverse in Mid May
- Copper usually makes a correction in the middle of the month
- Soya tends to peak and start declining
- Wheat continues its weakness
- Corn consolidates in a sideways fashion
- Cocoa also consolidates
- Coffee weakens
- Sugar consolidates at the lows
It’s been a great run but all good things always come to and end. Could this notorious month of May be the beginning of the end of the five-year-old bull? I certainly hope so – the correction is way overdue.
Trade Safe & Happy Hunting Always!