Archive for December, 2008

Profitable ETF Trading Strategies: Sector Contrarian

December 29, 2008 Leave a comment

There is a new conventional wisdom beginning to emerge from the stock market these days and it says that there’s no way you can make money in a bear market unless you have the good fortune to be an expert market timer and bet against the recovery of the broad market. While it is true that having a sense of market timing can improve your bottom line, that’s not the only way to take advantage of the current turbulence. By paying close attention to a select group of exchange traded funds that represents important business and commodities sectors in the global market, an astute trader can find very reasonable trades with favorable reward to risk ratios which offer a way to trade these markets effectively.

Here is an example in oil, which can be traded using an exchange traded fund with a symbol of USO.

Go to any web-based free stock market charting website, like Yahoo finance and call up a 15 year chart on a barrel of oil using monthly candlestick charts.

You will see that this commodity trades in long powerful swings that can last months at a time. You will also see that at crucial turning points the reversal of the trend can be swift and violent. This means that to trade this exchange traded fund effectively, you must be alert to where we are in the current trend and be alert to the possibility of turning points at critical price levels.

Currently, we are near the bottom of the most violent selloff in the shortest period of time that oil has experienced in the last 15 years. A barrel of oil recently traded for under $30 a barrel while only a few months ago it was trading near all-time records above $130 barrel. A selloff of this magnitude is an indication of a market overreaction, where emotions have gotten in the way of rational judgment. This is entirely normal and should be expected.

In the last few days however, oil has put in the intermediate bottom and is prepared to make a traders reversal to the upside. This move is supported by the news of increasing violence between Israel and Hamas, coupled with a recent decision by OPEC to reduce oil production in order to bolster the price of barrel of oil. Taken together, these facts all point to the possibility of a short term rise in the price of apparel of oil of 10 to 20%, while the recent price reversal offers a definable support level at $28 a barrel. This is a reward to risk ratio of greater than four to one, and an astute trader can begin a buying program whenever he sees the price of oil actually going up during trading hours. This provides an additional level of security for short-term trading.

If you examine the behavior of the price of oil after the market opens you will see that in the last 200 trading days price moves in the direction of the opening gap. So, if you see oil gap up there is the good probability that it will close higher than the open that day. Conversely, if oil gaps down then you can expect the price to be lower by the end of the day. This relationship is not always so readily apparent in oil nor can it be used as a simple rule for any other exchange traded fund. Only by constant attention and analysis can you discover these kinds of tradable trends emerging from today’s volatile stock market. The rewards for this hard work make it worth the time for disciplined, pragmatic trader.

By looking for these kinds of favorable reward to risk ratio trades, a short-term trader is able to take advantage of today’s volatile stock market in a risk measured way that makes a lot more sense than simply dumping money into a passive mutual fund and hoping for success. Naturally, you must do your own due diligence and take personal responsibility for your results. Good trading!


Wired magazine on: networks and the future of warfare

December 27, 2008 Leave a comment

In a thoughtful article about technology and modern warfare, Wired magazine traces the birth of network warfare, its promise and its reality, which from their perspective was a near failure in OIF/OEF in the nation building phase because of technology’s inability to engage thesocial networks that are crucial to stability operations. The article contributes to the growing narrative that the early years of nationbuilding were a failure due to military retreat to centralized basecamps and a strategy of nationbuilding at a distance.

2 crucial snippets to whet your appetite:

In an article for the January 1998 issue of the naval journal Proceedings, “Network-Centric Warfare: Its Origin and Future,” they   [Cebrowski and Garstka] not only named the philosophy but laid out a new direction for how the US would think about war.

Their model was Wal-Mart. Here was a sprawling, bureaucratic monster of an organization — sound familiar? — that still managed to automatically order a new lightbulb every time it sold one. Warehouses were networked, but so were individual cash registers. So were the guys who sold Wal-Mart the bulbs. If that company could wire everyone together and become more efficient, then US forces could, too. “Nations make war the same way they make wealth,” Cebrowski and Garstka wrote. Computer networks and the efficient flow of information would turn America’s chain saw of a war machine into a scalpel.

The US military could use battlefield sensors to swiftly identify targets and bomb them. Tens of thousands of warfighters would act as a single, self-aware, coordinated organism. Better communications would let troops act swiftly and with accurate intelligence, skirting creaky hierarchies.

And yet, here we are. The American military is still mired in Iraq. It’s still stuck in Afghanistan, battling a resurgent Taliban. Rumsfeld has been forced out of the Pentagon. Dan Halutz, the Israeli Defense Forces chief of general staff and net-centric advocate who led the largely unsuccessful war in Lebanon in 2006, has been fired, too. In the past six years, the world’s most technologically sophisticated militaries have gone up against three seemingly primitive foes — and haven’t won once.

How could this be? The network-centric approach had worked pretty much as advertised. Even the theory’s many critics admit net-centric combat helped make an already imposing American military even more effective at locating and killing its foes. The regimes of Saddam Hussein and Mullah Omar were broken almost instantly. But network-centric warfare, with its emphasis on fewer, faster-moving troops, turned out to be just about the last thing the US military needed when it came time to rebuild Iraq and Afghanistan. A small, wired force leaves generals with too few nodes on the military network to secure the peace. There aren’t enough troops to go out and find informants, build barricades, rebuild a sewage treatment plant, and patrol a marketplace.

Madoff: a matter of scale

December 25, 2008 Leave a comment

a nice meta-insight from Lew Rockwell, that puts Madoff in perspective as representative of the direction we were heading as a nation. His opinion:  the difference between Madoff and the government: a matter of scale

Madoff’s scheme played into the belief that wealth was not something to work for, but something to scheme for. It could be generated by playing your cards right, hooking into the right networks, and finding the right “investments.” The people with whom he dealt had, it turns out, some internal sense that there was something a little bit shady about the whole operation. But they dispensed with this sense when the fat checks arrived, and concluded that whatever was making this perpetual motion machine operate, it did work.

But listen: the government right now is using the same tactic to convince you that it is saving you from the recession. The whole scheme partakes of the same sense of denying reality that characterized Madoff’s scheme. And I’m not just talking about Social Security, which is almost an exact replica of the Ponzi version, except that at least Charles Ponzi didn’t force people to give him money. I’m speaking of something broader. The entire financial system that is propped up by the Treasury and the Fed is based on the same idea: that something out of nothing is possible.

So they will jail Madoff. Wall Street would flog him if it could. He is disgraced for all of history. But meanwhile, the likes of Bush, Bernanke, Paulson, Obama, and all the rest are still riding high, even though their scheme is far larger and more egregious.

Most of us like to believe that we wouldn’t have been tricked by Madoff. But are you being tricked by the elites who claim that they can conjure up a trillion dollars to stabilize our economy by clicking a few buttons on a computer screen? Most people are. Certainly the press seems to have bought it. Many people were outwitted by Madoff. Many more people are today being outwitted by the government and its central bank. And it will all end in disgrace and disaster, only on a far, far grander scale.

The path to mastery, with emotional intelligence

December 24, 2008 Leave a comment

 The studies in the Cambridge Handbook of Expertise and Expert Performance  describe  the path to mastery as:

(1) Deliberative Practice 

(2) Time spent at Deliberative Practice 

(3) Assistance from a mentor. 

Deliberative practice can be broken down to:

(1) Identifying a long-term outcome 

(2) Breaking down the skills that lead to that outcome into its component parts. 

(3) Engaging in practice sessions that: 

     (a) Have their own predefined goals 

     (b) Have benchmarks to measure progress and 

     (c) Have immediate feedback. 


 Discover (November 2008 )  has an excellent interview with Antonio D’Amasio,  a neurologist who asserts that robust decision-making involves our emotions as much as our reasoning capacity. His thesis can be found in the quote from the interview: “It’s not that I am saying the emotions decide things for you. ..It’s that the emotions help you concentrate on the right decision. You (your cortex) still have to do some of the work, but the emotions give you a head start.”

D’Amasio says our reasoning depends on a supply of ’somatic markers’ to make a decision. ‘Somatic markers’ are past emotional experiences that serve as a guide. He believes that his studies of brain-damaged patients demonstrated that:  “where emotional experiences are not present, then there are no somatic markers i.e. no foundations for the decision-making process. This process includes what shame, stress etc feels like.”

His work contradicts the idea we make our best decisions as emotionless robots. Hethinks not only is emotionless decision-making not possible, it would not even be desirable. Somatics have an essential role to play in the decision-making process.  Emotions warn us long before reason when danger lurks. Sometimes however, they may react to ‘danger’ not present in reality but rather in our imagination. To employ our emotions emotions, the keys are when feeling strong emotion:

(1) to become aware of them. 

(2) to question whether their source is valid i.e. is it a real and present danger or an imaginary one; and 

(3) to act in accordance with (2). 

It may be that the best way to manage our emotions productively is with thorough preparation which includes visualization. Since our mind cannot tell the difference between what is real and imagined, a mental rehearsal will blunt a possible traumatic event so that we can deal with it effectively should it occur.

Finally in the interview,  D’Amasio suggests that because somatics take time to form,  the speed of 21st century life blunts our conscience. And, when that happens, – when our reason is cast adrift from our emotions – we are left free to justify any act.

Straddling the fence: the challenge and rewards of the practitioner-scholar

December 23, 2008 Leave a comment

here is a snippet from the author’s preface to the CIA’s Psychology of Intelligence Analysis. It is an excellent free resource from our CIA. 

He captures for me the essence of the challenge of being the practitioner scholar: being the transmission gearbox between the world of rigorous, focused, research-oriented scholarship and the broad, immediate world of the practitioner: who is looking for tools to help with the current problem or opportunity. Hopefully a tool that have some grounding in the world of theoretical soundness as well as utility.

The practitioner-scholar has to co-exist in both worlds: staying connected to the cutting edge of reported research to remain current, and yet living in the practical world of projects, issues, problems, opportunities and results; in other words grounded in what the immediate needs on the cutting edge of practice are.  This requires  skills in:  research, searching, filtering, integrating, summarizing essentials without oversimplifying, communicating, and most of all accepting the limits of our ability to progreess in both directions simultaneously.

here’s the snippet:

This volume pulls together and republishes, with some editing, updating, and additions, articles written during 1978-86 for internal use within the CIA Directorate of Intelligence. Four of the articles also appeared in the Intelligence Community journal Studies in Intelligence during that time frame. The information is relatively timeless and still relevant to the never-ending quest for better analysis.

The articles are based on reviewing cognitive psychology literature concerning how people process information to make judgments on incomplete and ambiguous information. I selected the experiments and findings that seem most relevant to intelligence analysis and most in need of communication to intelligence analysts. I then translated the technical reports into language that intelligence analysts can understand and interpreted the relevance of these findings to the problems intelligence analysts face.

The result is a compromise that may not be wholly satisfactory to either research psychologists or intelligence analysts. Cognitive psychologists and decision analysts may complain of oversimplification, while the non-psychologist reader may have to absorb some new terminology. Unfortunately, mental processes are so complex that discussion of them does require some specialized vocabulary. Intelligence analysts who have read and thought seriously about the nature of their craft should have no difficulty with this book. Those who are plowing virgin ground may require serious effort.

“Paying” for bailouts as if they were taxcuts

December 22, 2008 Leave a comment

I am surprised not to see a suggestion from either side of the aisle, that suggests “bailouts” should be paid for in the same way tax cuts: by identifying dollar-for-dollar tradeoffs.

By government standards, the Big  3 bailout is a rather modest sum when you stack it up against the Department of Defense budget.  Republicans arguing on principle that $17B should not be spent on supporting domestic industry are silent on the financial disaster of the department of defense budget which is an order of magnitude larger.

At least a dollar spent on the Big 3 automakers has a remote chance of returning on the investment. And yet we’ll routinely shovel money at defense contractors who, knowing how the re-election and “jobs in the district” game is played, are adept at keeping their gravy train running on time. I mean, seriously, we are talking about spending 10’s of thousands of dollars per copy on autonomous robots that will see around a corner of a building in a hostile land, where our national interest is defined by some as free-market access to oil combined with the potential for a little more stability in the Middle East. If we were energy independent, how morally compelling would the interventionist argument be?  Probably less convincing than the non-intervention we have undertaken in Africa in the face of measurable human atrocities on a genocidal scale. Oh, but there’s no oil in Africa.

Detroit has to sell a dozen cars to generate enough profit to be taxed in order to buy that throw away robot which can never, ever generate an additional dollar of revenue downstream. It can only be maintained with more dollars until it is obsolete, or destroyed, in which case it will be replaced at a higher cost with a more capable model.

Hardly a dollar of the DoD budget addresses the security of  our own border. we spend more money on the security of the borders of other nations than our own, while we remain singularly incapable of preparing for, managing and rebuilding internal national disasters, having created another new department to mismanage that task in the last 5 years.

Farmers and automakers; remember the crucial difference…

December 21, 2008 2 comments

I am trying to appreciate the difference between paying farmers not to grow crops and to prop up their prices with government subsidies and the outrage expressed by conservatives at paying automakers not to make autos (as canada joins the team in shoveling money at the Big 3) 

This time its different though, because the same government that has brought you HUD,  pay for play, Homeland Defense, public education, $600 hammers, $50B  unaccounted for from the TARP, deficits as far as the eye can see, Medicare fraud, Fannie and Freddie, the Tennessee Valley Authority, the SEC oversight of the financial markets, post-Katrina accountability of public funds,  a DoD that is unauditable, and the ultimate Ponzi scheme of all: Social Security are going to be overwatching the Big 3

Categories: Markets, politics Tags: , , ,