Somewhat Important Juncture for the S&P

The S&P 500 daily chart above (click to enlarge) shows the rising trendline that started last March was decisively broken yesterday. There definitely is technical damage and today's reaction to the third quarter GDP numbers should be telling. On the other hand, the series of higher highs and higher lows (one definition of a bull market) is still intact. It would be violated if 1019, the 10/2 low, is decisively broken. Also, the RSI is around the level that prompted strong rebounds in the past.

So, to sum up, some serious cracks in the bull market's armor but not enough to pronounce it dead and buried. We could be at the end of a correction in the bull move or in the early stages of a new bear move. The next few days (starting with today's behavior) will be key.

Some People Never Learn

John Meriwether, of Liar's Poker fame, is starting a new hedge fund, his third after Long-Term Capital Management (yes, that LTCM) and JWM Partners. As you may remember, his first was bailed out in shame in 1998. His second was closed a few months ago after being down more than 44% over the course of the financial crisis.

Meriwether will be using the same trading strategies that were used at both LTCM and JWM Partners. Indeed, why mess with a winning formula? I have no doubt scores of potential investors are already lined up.

Crying Wolf

Jim Cramer on the general unease with Wall Street bonuses (hat tip Felix Salmon):

When I took a Master’s reading communism we learned these things. I took seven courses in communism. Lenin when he came in in 1917 thought that the bankers were making too much money, and confiscated all the wealth. The peasantry felt terrific about it. The bankers, many of them, were killed. And there was a terrific surge of opinion that Lenin was a great man. It didn’t work out.

It’s very easy for me. I know that, I can do that rap, I studied it. I know most of Lenin’s speeches during the period. And it’s really about stringing up guys like John Mack and feeling great about it. I’m not being facetious. I studied Lenin, and I was very caught up in this notion that the peasantry should win.

This should leave me speechless but it doesn't. First of, as Barney Frank would say, what planet does Cramer live on? Leaving aside the fact that he not-so-subtly equates Lenin 1917 with Obama 2008 (people with a sunny disposition might point out that, as far as demented comparisons go, this is a slight improvement over Hitler 1933), who exactly, in this insane fable, is the peasantry supposed to be? The 99.999% of the U.S. population who will not be getting a six figure Wall Street bonus maybe?

Cycles

Must-read New Yorker article on cycles theory (hat tip Zero Hedge) and its most (in)famous proponent, Martin Armstrong. If you've watched the 1998 movie Pi by Darren Aronofsky, you'll find the story vaguely familiar.

The article does a good job at presenting cycles theory (and other non-traditional technical analysis such as Elliott wave) succinctly and with an open mind, though not uncritically.

Brigh Lights, Big City

One would think snorting cocaine and trading are not a good mix in the long (and not so long) run and one would be right, judging by this fascinating (in a sad way) Bloomberg article on the rampant cocaine use taking place in the City of London.

Bears Should Be Hugged, Not Hated

Interesting article in the latest Economist about bears and their usefulness to the market. It first describes the asymmetrical outcomes the poor unloved bears usually face:

Nobody loves a party-pooper. When asset prices are going up, most people are inclined to celebrate. The bears who argue that asset prices are about to fall tend to get dismissed as out of touch (dotcom skeptics supposedly “just didn’t get it”) or are likened to stopped clocks: occasionally right, but mostly wrong. If they dare to make money out of their beliefs by selling short (betting on falling prices) when a crisis hits, bears are decried as economic vandals and politicians call for their activities to be banned.

It then tells us about how useful bears are and how they should be nurtured instead of ridiculed during good times and despised during bad times:

Legend has it that Roman generals, when making their triumphal marches, were followed by a slave whispering “Remember, you are mortal.” The bears play that role for investors. Their arguments should be countered with reason, not ridicule. And the right to sell short should not be restricted arbitrarily. If regulators want to prevent future bubbles, they need to let the bears roam as freely as possible.

Besides being slightly condescending (bears exist for the sole purpose of reminding the bulls that they're not gods!?), there's a problem with this line of reasoning. Indeed, some people might argue that undercapitalized bears (and most bears are undercapitalized after an extended bull market) prolong bubbles by selling too early and buying too late, providing the short-covering fuel for yet another lunge higher. As everybody knows, it's only when the last bear turns bullish that the bubble finally bursts.

Trading Vs. Professional Gambling

Marcel Link in his excellent High Probability Trading is not the first to equate the skills of the professional gambler with the skills needed to succeed as a trader but he does it very convincingly:

[The professional gamblers] don't take unnecessary risks or gambles. They know when the odds are in their favor and will bet more when the odds get better. If the odds aren't there, they won't risk nearly as much, if anything. They know how to protect their winnings, and they know how to call it a day when Lady Luck is blowing on some other guy's dice. Having this discipline lets them come back to the table the next day. [...]

They know that losing is part of being successful, and as long as they do the right things, they are okay with losing; they won't try to make it all back on the next hand. They know that if they stick to their rules, they will make it back in the future by being consistent. [...]

Successful gamblers also know they don't have to be in every hand. A good poker player is disciplined enough to fold hand after hand until the right one comes along. [...] For the most part it's the amateurs who try to bluff. Pros do not do it nearly as much; they would rather go for the sure hands and sit out the rest. [...]

[The professional gambler] doesn't necessarily increase the size of his bets because he is on a good streak or has doubled his money. Very rarely does a pro make bigger bets because he has a hunch or feels invincible.

Delusional Day Traders

Blogger Felix Salmon has some harsh words for day traders in his post about Zero Hedge's rabid fans (emphasis mine):

You need to be a little bit delusional to be an individual day-trader, paying substantial sums for information, technology, and trading spreads every day and yet somehow reckoning that by zooming in and out of highly-levered ETFs you can not so much beat as utterly obliterate broader market returns. All day-traders think they’re above-average; they have to, otherwise they wouldn’t have the hubris necessary to do it in the first place.

Ouch that hurts.