The Black Swan

In Mr. Rithotz's latest week in preview linkfest, there is a link to an article in The Gaurdian that gives a quick review of a new book called "The Black Swan", by Nassim Nicholas Taleb. Here is a little excerpt from the article.

Markets tend to work on the basis that Black Swans either don't exist or appear with such irregularity that they are not worth worrying about. As a result, traders in the City of London went home on the night of August 3 1914 seemingly oblivious to the fact that a world war lasting more than four years would start the next day. Similarly, there was not the slightest suggestion on Friday October 16 1987 that the Dow Jones would lose more than 20% of its value the next Monday. The Nobel prize-winners Robert Merton and Myron Scholes, who put together Long Term Capital Management and convinced their investors that their models made it a sure-fire bet, had failed to factor in the possibility of a Black Swan - in the case of LTCM, the Russian debt default in August 1998.

I'm sorry but I simply do not agree with the author at all. To someone on Main street the crash of 87 might have come out of nowhere but not to the top players on Wall Street. Many of these players were interviewed by Jack Schwager in the first of his excellent "Market Wizards" books. The interviews took place not long after the crash and were very fresh in the minds of the traders. Almost all of them were expecting a large turn in the market and were well positioned for Black Monday. The only exception was the one trader that shunned technical analysis (he was trounced that day). I do not have time to post their comments tonight, but will try to do so in the near future.

Here is an interesting poll. In honor of the 20th anniversary of Black Monday, MarketWatch put a poll together. Although this is not scientific, I still like the fact that there is a ton of skepticism out there regarding the market's rally. While this blog is called The Novice Bear, I have been net long since September 4th after covering my shorts on August 16th. A poll like this makes me happy to be a bull.

Walmart (WMT): At Critical Levels

People like to use Walmart as a way to gain insight into the American consumer. I don't necessarily agree with it because I think Walmart, while huge in size, is a terribly run company. Their stores are disgusting, their customer service is a joke, and they get way too involved in politics. I avoid Walmart at all costs. It is my personal beleif that, besides Southerners, most people feel the same way I do and a low stock price reflects the company's shortcomings, not the consumer's.

With that on the table, let us assume that Walmart is indeed a good proxy for the American consumer and looking at its technicals is not a total waste of time. So what is the chart telling us? It has finished up a perfected TD Sequential countdown, which means that a change in trend might be at hand. It also looks to be forming an inverted head and shoulders pattern. If WMT can hold this level, look for it to get back into the trading range between 45 and 50. On the other hand, if WMT breaks 42 on a closing basis (the TD Sequential stop loss point) look out below.

Market Guru: Ken Fisher

Sometimes its too easy to be bearish. There are so many reasons to believe that the market will unravel and it seems that being a bear is the smart thing to do. The plain simple fact, however, is that it pays to be a bull. I learned this from Ken Fisher.

He is not a perma-bull by any means, but he realized long ago that the market can rise in the face of much worse things than what we face today. Get this, the market rose 20.3% in 1942, 25.9% in 1943, 19.8% in 1944, and 36.4% in 1945! Just imagine all of the bears that were burned during those years. Fisher writes, "Historically, if markets have been positive 71% of the time, and some of those negative years were only down-a-little, you're looking at very few years of truly scary, bearish, down-a-lot type."

Take a look at the S&P 500 chart and the calls Fisher has made during the last decade. It is pretty amazing.

Market Gurus: Grantham and Mauldin

There was a lot of fuss a couple of months ago when Jeremy Grantham came out and said that the entire world was in an asset bubble. Of course the press made a ton of noise about it because this was the financial advisor of Dick Cheney, and if our vice-president trusted him, he must know something. Typically, you would also find some reference to Grantham's 2000 market top call. What they don't tell you is that he has also called for another market top since the 2003 bull market began.

John Mauldin is an excellent writer and obviously a very smart man. I enjoy his free newsletter and must admit that I've been influenced by his arguments. He is quite bearish and has been calling for a top for a while. I wish I would have done this earlier, but on the chart I show some quotes from both Grantham and Mauldin and when they said them.

The point of the chart is to remember to not take the so-call gurus advice too seriously because they (especially these two guys) are wrong as much as they are right.

Elliot Wave is no theory

I really dislike Elliot Wave "theory". First of all, as a scientist I hate the misuse of the word theory. (Dow theory is guilty of this also.) A theory is a self-consistent model for describing the behavior of a related set of natural phenomena. In this sense, a theory is a systematic and formalized expression of all previous observations which is predictive, logical and testable. You want to see how predictive Elliot Wave "Theory" is? Take a look at the predictions by the method's most famous practitioner. (Click on the picture for a larger view) This was taken from http://www.cxoadvisory.com/ and, as you can see, Prechter's predictions are horribly wrong. I can only hope that with such a awful track record that there aren't very many people who still pay attention to his newsletter.

How long can someone stay bearish? What would it take for him to turn bullish? Would such a moment mark the ultimate top of the market?

Weak Volume As Correction Ends

I keep hearing about how volume has not been confirming this latest rise. This shouldn't be a surprise as this type of weak volume is typical when coming out of a correction. People are still cautious and have yet to jump back in with both feet. Just look at the chart above. It shows the S&P weekly as the summer correction of 2006 ended. Volume was extremely light, but we all know what happened after that. A strong steady rise for nearly 6 months.

Here are two more S&P charts that show weak volume on the recovery.

Speaking of Retail: Do Technicals Trump Fundamentals?

I have no plans to go long with K-Swiss, but the charts do look interesting. Both the weekly and daily charts have completed perfected TD Sequential countdowns. I'm posting this mainly as a reminder to myself to see how DeMark's indicator does with this hated stock.

VFC Corp: This chart is setting up pretty well

Being an apparel maker, VFC probably isn't the first stock that comes to mind when thinking about going long. I have to say, however, that the chart is looking pretty good. Its long term trend is up (see weekly chart below) and it just finished a TD Sequential countdown. It had a sign of strength a few days ago and has sold off the gains, which tells me that there is a big seller still. I would wait until the TD Sequential is perfected, which would require an intraday low that is lower than 78.72 while simultaneously closing lower than the close two day previous. If we get that then it might be worth looking in too.

Market Charts

I like to listen to Basil Chapman, purveyor of the Chapman wave, on TFNN every once and a while and he has been steadfastly bullish through the whole summer. While all the bears were pounding the table before the big subprime sellof he would consistently counter with the simple phrase, "look at the charts, are they bullish or are they bearish?". Of course the charts did look bullish and possibly even more bullish now.

While I expect some resistance as the S&P, Dow, and Nasdaq all approach their highs, looking at the charts today, I'm sure Basil would agree that they look bullish.

Ion Geophysical (input/output)

I've traded Mitcham Industries successfully in the past and was looking to get into Input/Output for some time, which is another seismic imaging company. On Monday IO finished off a perfected TD Sequential countdown and I was able to get in yesterday for 12.65. I like the long term story of IO and hope to hold a core position in it for the long term.

Thanks Target

I picked up some SVU a few days ago after it signaled a TD Sequential buy. Thanks to Target and Lowes, that position was hammered today. Interestingly, with its big decline, Target finished up a TD Sequential buy countdown of its own. It will be fun to see how this turns out.

Crude oil ready for a pullback?

Light sweet crude completed a TD Combo sell countdown the other day. It looks like it is time for a pullback. I would look for gold to follow crude oil down. Note: These will be retracements, not long term tops.

Microsoft Failure (MSFT)

I think one of the things that kept bringing me back to The Big Picture over and over again when I first started dabbling in the market was Mr. Rithotz's love of good music, excellent band recommendations (I grew up a huge REM fan), and a complete lack of respect for Microsoft. When I first started reading about the business world I was always shocked by how often people would fall all over themselves handing out complements to Bill Gates and his company. Microsoft never has, and seemingly never will, come up with a truly unique and innovative product. They just rip off other people's ideas and do a better job at selling them. When reading The Big Picture, it was nice to know that a few other people felt the same way I did.

This brings me to the topic today. I received an XBox 360 for birthday (I must admit that I love playing Guitar Hero) and hooked it up today. Not surprisingly, the POS did not work. So instead of sending it back right away, I went into Gamestop and talked to the super-gamer in order to get his advice. To make a long story short, the dude tells me that he has had to send his Xbox back to Microsoft 3 separate times. Some other guy in the store overheard the conversation and came over to tell me he has had to send his back twice.

So while not happy about the whole situation I get back home to hear the guys on Fast Money go on and on about how great the Xbox is and how Halo 3 is going to make MSFT billions. They also tell the audience how great the price action in MSFT was today. I'm not sure about the long term prospects of the stock, but I can tell you that the action today was certainly not bullish, at least in the short term. The price failed a breakout of the 50 day moving average and remains in a downtrend.

Synchronoss Tech. (SNCR): What a wild ride!

In a recent post I examined the faulty base pattern of SNCR and explained why, at the time, it was not forming a cup with handle. My main problem was that the base pattern was not long enough and needed to be at least 7 weeks long. Since then, SNCR has continued its basing pattern and eventually broke out of a 7 week base on huge volume. I love the fundamental story of SNCR so I waited for a pullback and picked up some shares. After a modest up day following my purchase SNCR came tumbling down on massive volume.

I'm not sure what the catalyst was, maybe it was an insider stock sale, but I was not about to get shaken out of my newly purchased growth stock. Instead, I purchased some Oct 40 calls for 3.40. With an implied volitility of 80%, I was reasonably sure that we would be back up a couple points in the near future.

Well it took only one day as SNCR has rocketed back up 7% as quickly as it came down and I was able to sell my calls for 4.40. Not bad for a single day. I'm sure I could have hung on for more but I put in my sell order and didn't want to be greedy.

ESCO Technologies (ESE): TD Sequential and TD Combo Buys

I recently got my TD Combo scan up and running and was looking for a stock that had near simultaneous TD Combo and TD Sequential buy points. It looks like the best is ESCO Tech.

The stop loss is at 27.33. As for a price target, the first would be the TDST line at 36.11. For the more adventuresome, go for the 48.00 mark at the top of the gap.

TD Sequential Caught the Gold Move

Ever since I finished my little piece of VB.net code that searches for stocks that are near their TD Sequential buy or sell points I've been amazed by its effectiveness. The chart below is just another example of it giving the absolute perfect entry point, this time for the Gold ETF (GLD). I must admit, it would have taken some guts to buy it on the exact completion of the countdown.

Some Low Risk Nasdaq 100 Buys

Sure there is plenty to worry about. The dollar is tanking, inflation is out of the bottle, and the economy looks to be slowing, but the market likes nothing better than "climbing the wall of worry".

I'm a buyer here and plan on picking up both IBD type growth/momentum stocks and stocks that are at low risk entry points. For the later, I use TD Sequential.

The three chart below are all Nasdaq 100 members that are at or very near their TD Sequential buy points. I would only buy these as a trade.

Supermarket TD Sequential: SuperValu Inc. (SVU)

For fun, here is another good looking entry. It was perfected on 9/17/07 and has a stop loss of 35.99.

TD Sequential Buy of the day: Fidelity National Info Serv (FIS)

The above chart looks like a nice TD Sequential Buy. It perfected its buy on 9/18/07 and has a stop loss of 42.89. I know nothing about the company but look at the longer term chart below and you will see that the price is coming into support and looks to have finished a retracement.

On an interesting note, Credit Suisse issued an "outperform" rating on 9/19/07. I wonder if the analyst uses TD Sequential signals also?

I'll check in on this pick later.

The Loonie equals the Dollar....ouch

I can't believe it. The Canadian dollar is worth as much as the US dollar. The depressing thing is that pretty soon the Loonie is going to be worth more.

S&P 500 Inverted Head and Shoulders and Low Volume

The above chart has a ton of information in it. Let's just start out with the inverted head and shoulders (HandS) pattern that is outlined. Notice how the left and right shoulders held at the important TDST support lines shown. (Both of these lines were formed when the market tanked back in February, one on the way down and one on the way up.) The idea with HandS patterns is that people buy when the price holds support. The head then pierces the support lines and washes out a ton of weak hands. After a quick move back up, the market moves down again, shaking out some more people while picking up more strong hands before the big move up.

I have always had a problem with identifying HandS patterns. They always seemed very arbitrary to me. But since I've been drawing the TDST lines on all of my charts I keep coming across HandS patterns like the one shown above. Usually it is the normal HandS, where there is a bounce off of previous resistance, followed by a piercing of that resistance and then a failure. Finally there is one last test of the top most TDST line and then it is goodbye. I'm going to post everyone I see from now one.

I also have a possible explanation of the strange lack of volume in the recent weeks. This volume has confounded many of the price/volume disciples and have really killed the bears (of which I am not anymore). This downturn started when many of the high dollar quant funds began losing money. For some reason, the methods they have used for years suddenly began to fail them. This was quickly followed by a massive run on those quant funds and the failure of many. Without cash and the repricing of risk, the massive amounts of leverage that are required for the funds to work were no longer available.

Goldman Sach' biggest and most popular has just announced that they will cut back leverage, reduce risk, and take longer time frame positions. You should read the article.

What does this mean? Less leverage means fewer shares bought or sold. Reducing risk means fewer shares bought or sold. Longer time frame positions means few trades. This all adds up to less volume, which really screws up those people that compare price and volume to make their market calls.

Wow.

Looks like it was a "throw a dart" type of day, but my longs did pretty well. Sorry for the lack of posts recently but I had my friends in town for my bachelor party. (I'm still trying to recover.)

Disco Biscuit Retailer Leading the way? (Buckle In. BKE)

There is little doubt that this is a difficult market. I should be in cash, just waiting for things to even out. Since that is boring I'm just going to hedge my new long TD Sequential long positions.

The retailers have been getting hammered. Stocks like Chicos and the like can't seem to find a bottom, which is why I'm amazed that Buckle Inc is still doing ok. I hate this store. They used to sell some cool stuff, but now it seems they only want to sell to the clubbing disco-biscuit taking type. It looks to me that BKE is near the top here and would present a low-risk short. It also seems to be forming the right side of a head and shoulders pattern. Notice how there is resistance at 36.50, a breakout above it, and then a failure. The stock is trying to get back above that same resistance level but seems to be losing steam.

I'm going to short it on the next bounce.

Market TDST Support: S&P 500 and the Russell 2000

Something I think that is interesting is that the S&P looks like a retest of the lows would coincide with a completion of the TD Sequential countdown. We will have to watch this closely. If it fails, look for a move down to the lows of last summer.

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The small caps are just building cause to get by all of the support levels. I got rid of my October 79 IWM puts yesterday for a nice gain.

Faulty Base Pattern: Synchronoss Tech (SNCR)

Sometimes it can be easy to forget about the time component of basing patterns. A good example was the sharp pullback of SNCR last month. Naively, one might assume that because the price pattern of SNCR resembled a cup with handle, its basing pattern must also be considered a cup with handle. In reality, however, SNCR met none of the strict criteria defined by William O'Neil, most notably of which was that its basing time frame was much too short.

While I understand that many people seem to have many different definitions of the cup with handle, if we are to use the definition of the pattern's discoverer, William O'Neil, there can be little argument about whether or not SNCR was actually forming a cup with handle. Here are some of the cup with handle requirements from O'Neil's "How to Make Money in Stocks".

1. The cup pattern can be as long as 65 weeks, but must be a minimum of 7 weeks.
In the weekly chart (shown above), SNCR has only a 3 week cup formation.

2. The bottom of the cup should be rounded and give the appearance of a "U" rather than a very narrow "V". The reason given is that "this characteristic allows the stock time to proceed through a needed natural correction with two or three final little weak spells around the lows of the cup. The "U" area is important because it scares out or wears out the remaining weak holders and takes other speculators' attention away from the stock." I think it is pretty obvious that SNCR is more V-like than U-like.

3. Volume should dry up at the lows of the pattern. The lowest point of the V pattern in the daily chart of SNCR corresponds to the highest volume spike of the entire pattern, so the criterion fails as well.


I have been watching SNCR myself, but given that the recovery was much too quick, I have been waiting for another pullback to retest the lows on lighter volume. Such price action would undoubtedly form a double-bottom formation, which is another excellent basing pattern.

Paul Tudor Jones Quote

Sometimes I get blamed for being a little too "gloom and doom". Sometimes I think those people that say that are right.

While reading some old interviews I came across the following quote from Paul Tudor Jones that made me smile and feel that I wasn't alone.

"I think the financial community, particularly Wall Street, was dealt a life-threatening blow on October 19, but they are in shock and don't realize it.

Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build. If the economy starts to go with the kind of leverage that is in it, it will deteriorate so fast that people's heads will spin. I hate to believe it, but in my gut that is what I think is going to happen.

I know from study history that credit eventually kills all great societies. We have essentially taken out our American Express card and said we are going to have a great time. Reagan made sure that the economy would be great during his term in office by borrowing our way into prosperity. We borrowed against the future, and soon we will have to pay."

The moral of the story is that the USA did face a recession but we made it through without another great depression. Our great society wasn't killed by its excesses.

I find it interesting that Jones was worried about the use of leverage in 1987. Given the huge amounts of leverage used in today's markets, I wonder what he thinks now? He probably is quite bearish, but as he learned then, times will get tough but somehow we make it through.

Follow up on NCI Building Systems (NCI)

Wow, NCI made a nice showing on an ugly day. A couple of days ago I posted NCI as a TD Sequential play. I didn't buy any because of the underlying fundamental story about commercial construction and also because earnings were out today.

It just goes to show that technicals can trump fundamentals on the short time scale.

Snap-On Inc. (SNA): More TD Sequential Buys

I think my portfolio is delta neutral right about now. I stepped into another long TD Sequential play recently. Snap-On Inc has completed its countdown and is at TDST support. I'm targeting the next TDST line as a point to take profits.

Dodgers 6 Cubs 2

I was at Wrigley tonight watching the Dodgers beat the Cubs. It was my first visit since I moved to Chicago. Great place to see a game, but I was less than impressed with the baseball knowledge of the fans.

RTI International Metal Inc. (RTI): Perfected TD Sequential Countdown

Here is a TD Sequential countdown, with perfection, that I will step into tomorrow. The price is near a TDST support line and the upper line gives me my price target.

Although bearish, I just keep getting the feeling that everyone is a bear right now and I'm not feeling very comfortable with that. What is it that they say?

"The market tries to take the most money from the greatest number of people in the shortest amount of time."

NCI Building Systems (NCI)

I have been working hard all weekend and finally have been able to code up a working scan for charts that are nearing the 13th day buy signal of a TD Sequential countdown.

The chart above is NCS. They specialize in metal supply for non-res construction. (Not quite a hot sector in today's market) I'm not going to buy it but I just wanted to identify the signal before tomorrow's earnings announcement and see if the technicals trump fundamentals (in the short term) like so many technicians like to say.

Notice that the buy signal was perfected.

Broadening Tops in IBD 100

I was going over the IBD 100 yesterday and noticed quite a few broadening top patterns. Such patterns are difficult to time but are usually very bearish. We'll have to see what happens with these.

You'll notice Flotek Industries on the list. This is getting close to a major pullback. FTK has gone way too far too fast and with growth to moderate in the coming quarters I expect to see a 40% haircut. As you might know, I owned FTK last year and rode it from 7 to 15 (pre split). I would now like to make some money on the short side.

Their last 10K report little progress with their petrovalve products. Most growth is still coming from their specialty chemicals and I would expect some of the big names to begin offering their own "green" chemicals.