Blogs of Note

This was the most commented on feature in last month’s newsletter and we are pleased to present two more member blogs for your review.

Deltatide – Market Quantitative & Technical Analysis (http://www.deltatide.com/)

Maintained by Christopher Gurkovic, CMT. Chris started Deltatide Capital Corporation and practices technical analysis in the New York area.  Deltatide was founded by Chris as a platform for the Gurk Oscillator. You can contact Chris at gurk@deltatide.com with any questions.

This site provides information about and updates on the Gurk Oscillator or (G.O.), which is a short-term market overbought/oversold trading indicator.

“It can help you trade the market or help you to better time your portfolio entry and exit points.  New signals will register anywhere from a few days to a couple weeks apart.  In general when the G.O. gets overbought it is a better time to be selling; and when the G.O. gets oversold, it is a better time to be buying.  I have further refined the buy or sell signals, by indicating a "turn date" for when the oscillator is expected to change trend direction.  Either moving from overbought towards oversold or vice versa.  Just like the tide changing from high tide to low tide or low to high, the G.O. gives an indication of when that change is going to occur.  It does not always exactly nail which wave washes up the beach the furthest before the tide goes out; however, it generally does give a good signal of when the tide is going to change.   And sometimes it does nail it.  As with any indicator, it is never 100% accurate, and you should take your own steps to protect or stop out in case it gives a bad signal or moves further than your threshold. 
    
Usually the G.O. ranges from around -40 or -50 to +40 or +50; however, it can reach levels higher or lower and the extreme readings do not always indicate a stronger signal.  In fact, sometimes it could be just the opposite.  I have found that the +/-20 level tends to be significant.  If the oscillator travels lower than -20; and then I can project that a "turn date" is coming for the G.O. to turn and go up, it is generally a good time to buy.  Conversely, when the oscillator is above +20, and I can project a turn date coming for the G.O. to turn and go lower, it is a better time to sell.  I will announce these signals when I see them, by stating buy or sell.  After the turn date, I generally state if the model has you holding.  Sometimes it is very unclear until additional days of trading data are factored in to proclaim the turn date.  I will generally post this in the adjoining commentary, as the signal may be unable to identify until after the fact.  Typically the signals go from buy to sell or sell to buy, and it is best to hold your position until the signal reverses from one to the other.  Since this is not always the case, I will often go to neutral, when the signals are not clear.  As I stated above, it does not always predict which wave washes up the beach the furthest, so sometimes it is better to trade out when you see a good level.  Very short term traders can try to catch each wave with the knowledge of which way the tide is moving, but I am not trying to catch every wave with the G.O.  In addition, sometimes I can see a turn date coming before the G.O. gets above or below the significant level of +/-20.  I will go to neutral in this case.  You can think of these instances in comparison to a storm blowing by off coast.  At these times the tide stays elevated without going to a normal lower tide level, before it goes higher again.  In a normal market, the signals will travel evenly back and forth from buy to sell just like the tide from low to high.  Often, outside factors are the cause of two same signals in a row, and extra caution is warranted.
     
Whether you are using the oscillator to trade the market. or help you enter or exit portfolio positions, it is meant to be used as a tool to give you help in your own decision process.  It is calculated for the broad market in general, not individual stocks.  I use various market internals such as volume, advancers and other data in the calculation.  Personally, I trade the S&P 500, but people use it to help them trade bonds and other vehicles.  As stated it is merely a tool to aid you, use it at your own risk.”

Musings of a Trader (http://musingsofatrader.blogspot.com/)

Isam Laroui, CMT, has been trading stocks professionally since 1996, first at a couple of Wall Street proprietary trading firms, then independently starting in 2004. After years of using rudimentary technical analysis in his trading, he set out to get his CMT designation, which he earned in 2006.

In a recent post, Isam discussed contrary opinion:

“Contrarian Investing: Pitfalls and Misconceptions

The old quip "Just because you're paranoid doesn't mean they're not out to get you", to which I'll add: "and even less that they won't get you" nicely illustrates a very common misconception when it comes to contrarian investing. In its simplified version, the misconception goes something like this: if a majority of people think something bad is going to happen then it won't happen.

On the face of it, this sounds ludicrous, doesn't it? And yet that is essentially what many market strategists have been saying for the past month in one form or another. They point out that an overwhelming majority of economists, various pundits, and now even our President-elect have been warning us that 2009 will be a disastrous year with rapidly rising unemployment, rapidly falling economic activity and more generally alarming statistics all around. This, the would-be contrarians contend, is proof enough that all the bad news have been discounted and that investors should position themselves, against the majority, for a better-than-expected 2009.

The problem with this line of reasoning is that its underlying assumption, essentially the folk version of Contrarian Theory, that most people are wrong most of the time is just plain wrong. Martin Pring, in his excellent Investment Psychology Explained, reminds us that the Theory of Contrary Opinion says that "the crowd (i.e. the majority of investors or traders) is actually correct most of the time; it is at turning points that they get things wrong". As any behavioral economist will tell you, accurately gauging the majority opinion is extremely difficult to start with. And even if one could correctly (and not only anecdotally) assess what the majority opinion actually was, "this knowledge [would] still result in frustration, because the crowd frequently moves to an extreme well ahead of an important market turning point". As John Schultz wrote in a 1997 Barron's article: "The guiding light of investment contrarianism is not that the majority view - the conventional, or received wisdom - is always wrong. Rather, it's that majority opinion tends to solidify into a dogma while its basic premises begin to lose their original validity and so become progressively more mispriced in the marketplace". In other words and to paraphrase Keynes, the crowd can stay irrational much longer than a trader can stay solvent.

The fact that so many people are making the contrarian argument that 2009 will be better than expected compounded with the fact that many things that are widely expected to go right could go very wrong, the most important of which, in my opinion, being the stimulus package (remember how it was supposed to be signed on Inauguration Day, then before February and now before March) lead me to be very wary of the contrarian bullish case. I don't doubt that the market could mount a few technical counter-trend rallies throughout the year but the idea of a sustained bullish move seems a little extravagant.

After being so wrong for so long, the majority opinion may unfortunately get this one right: 2009 may indeed be a very bad year.”

We would like to continue highlighting other valuable resources for traders. If you have a blog that would benefit members, please send us a note at editor@mta.org so that we can feature it