Monday, September 21, 2009

Currently Trading? Watch Yourself!

Sorry it's been quiet around here folks.

There really hasn't been much to talk about and things have been very busy at work so I haven't had much time to blog.

I will continue to be here but my posting may be reduced until things settle down at work. Like everyone else right now, the heat is on to produce in the corporate world as we march through this brutal recession/depression. My situation is no different.

Back to the markets:

It's amazing to me that the market can continue to ignore all of the negative news and continue to move higher. The market has truly turned into a casino at this point.

I have thought a lot about why the market is acting so irrationaly rigth now. It has pretty much morphed into nothing more than a bubble blowing/specualtion machine.

I believe one of the key reasons the market is acting this way is the ease in which the retail investor can now go long or short via leverage.

Inverse ETF's can be bought just as easy as any stock. Etrade, Think or Swim, and the other trading platforms have now made buying options a piece of cake.

As a result, the ability to speculate in the stock market has become much more accessible. More importantly, investors can also speculate using much higher leverage than ever before.

This is a very dangerous developement because many of the people using these financial instruments have no idea what in the hell they are doing.

Wall St has taken advantage of the new "leveraged" retail investor IMO.

I mean think about it:

The number of "fish" in the trading pond is now larger(easier access to speculate) plus they are highly leveraged via ETF's and options. This makes the average trader a sitting duck for the wolves on Wall St.


Because the retail investor becomes much easier to manipulate as a result of being so highly leveraged. This makes it easier to force them out of positions. They don't have the deep pockets to sit on positions especially when they are leveraged up. Don't think Wall St doesn't know this. As a result, it doesn't take much to force them to cover.

The best analogy I can come up with here is poker. The poker pros love when the "fish" take a seat at the table because more times then not the "fish" will be taken to the cleaners. The same goes for Wall St.

Why is Wall St so much better then the retail investor?

A) They know information before you do. How many times has the market moved before a big announcement was made? Is this fraudulent? Of course, but it is what it is and it's a HUGE advatage.

B) This is their profession! They are much more experienced when it comes to the intangibles like trading sentiment.

C) Wall St is filled with math geeks that graduated with 4.0's from MIT. These geeks can use their quants in a market like this to look for inconsistencies in the markets which enables them to find numerous trading opportunities. HFT's anyone? Short covering rallies?

I mean just think of all of the short covering rallies that we have seen recently. Many of these rallies are triggered by the trading desks when they place huge long positions on stocks or ETF's that are too heavily shorted. Commercial Real Estate is the most blatant one that comes to mind.

This one defies belief in my view. There is no rational reason that we have seen many of the REIT's double or even triple from the lows. Defaults continue to soar, most of them can't rollover their debt, and the retail consumer continues to collapse.

Most of these companies would be dead if the mark to market accounting standards hadn't disappeared. The only reason the REIT's are alive is because the government refuses to kill them.

The Bottom Line

Wall St is lining their pockets with the retail investors money.

I believe the reason this rally has been so sharp is because many of the retail(and some professional) traders continually keep getting caught short.
Remember: Calling tops and going short is just about as successful as calling bottoms and going long. Both strategies usually put you in the poor house.

Go surf the net and you will see what I mean when it comes to the leverage being used by the average investor:

Hop on any trading site/investment forum and see what investments they are talking about. It's very rarely a stock. It's almost always the SPY, IYR, SDS,FAZ,SRS etc.

Many are convinced that they are the next "Warren Buffet" of trading. They pull charts and graphs and try to scalp a few points on the S&P. When this collapse is done, I would love to see what the average return is for the average day trader.

Let me also say that there are a small select few that can do this and make money consistently. However, the majority will end up getting toasted for the most part. A 50 year veteran trader in the trading pits once told me "Jeff: Traders die broke". I have always remembered those words.

It's time to get back to fundamental investing folks.

What ever happened to buying and holding a stock that you like? What ever happened to buying treasuries and CD's and focusing on preserving capital when the economy takes a cliff dive? I guess this "old school" type of investing is way too boring in this new greedy ADD world that we live in.

What's sad here is most traders will blow themselves up just like they did after the tech bust. What's scarier this go around is the speculation is 10x worse because we now have highly leveraged ETF's with terrible "slippage" that weren't available during the tech bubble.

I will be the first to admit that I dabble in these trades but it's never more than 10% of my nest egg. My advice is to stay away from trading right now. The fundamentals are non existent, and the market is totally irrational at this point.


Anonymous said...

Hi Jeff:

I am curious to know more about the quote, "Jeff: Traders die broke." expressed to you by the 50 year veteran trader in the trading pits. Would you please elaborate. For example, was he talking about pit traders, futures traders, all traders? Interestingly, his generalization captures himself.

(As an aside, a facetious way to interepret his quote as it applies to him, is that so long as he is making money, he won't die. :) )

Back to reality, given that he is speaking from 50 years of experience, I give his quote a great deal of weight but wonder whether it can be more qualified.



Anonymous said...

I work in the banking industry and have noticed some people (seniors) looking for higher returns so they are investing in the market now, so I would say we are getting closer to a peak. This is typical, as market approaches Dow 10K people will feel so bad they missed the run from 7K to 10K they can't take it anymore and jump in, the exact opposite of when the market bottoms.

Jeff said...


He is a good friend of mine and he meant traders in general die broke.

He has always told me that only a very few have the gift to be able to read sentiment and have the discipline to consistently make money.

Another one of his favorite sayings is "it's just a numba".

What is meant by that is traders don't really care if the market is going up or down. Its the trend and how the market is moving that matters.

flipdippy said...

Damn. Look at those PALM shorts getting their nuts squeezed.

Shoulda woulda coulda.

Jeff said...

anon 2

Couldn't agree more. The market loves to inflict maximum pain so once it sucks everyone back in it has the tendancy to then roll over.

I feel we are nearing a peak as well. The trend is still higher for the short term. Let's see what comes out of the Fed and the G-20.

These two events have the ability to shake things up.

This week will be interesting to say the least.

Jeff said...


Look at gold. To the moon!

Sorry about PALM. It's hard to put long positions on at this point isn't it?

this move looks about done.

Anonymous said...

Hi Jeff:

Thanks for the additional information on your trader friend. It was very helpful.

Please do not hesitate to share more of his insights. Fifty years of experience goes a long way in giving one perspective that many of us would not be able to become aware of otherwise.


Anonymous said...

This has to be the ultimate test of will power and faith for the bear investors. It is getting harder and harder to sit on the sideline while watching the market shoots to the moon. My fingers are twitching for the trade button. Don't know how much longer I can hold back. *sigh*

Jeff said...


No problem. His advice to me now is all about capital preservation.

This is not a time to be putting massive parts of capital to work.

Jeff said...


You can be bearish and still go long.

I have been long metals for awhile now. I wouldn't get into them now.

I think this is a good time to be in cash.

The time to short is coming but right now the trend is higher.

Jeff said...

post up around 8