I’d like to recommend a book to you. I’m reading “Elite Minds – Creating the Competitive Advantage” by Dr. Stan Beecham. Dr. Beecham is a disciple of Bob Rotella (one of our all-time favorite Chairman’s Club guests) who encouraged him in the 1990’s to pursue this field. Because of his background in running, the book has a somewhat cult-like status in the running community (you can see this from the reviews) but it’s far bigger than the psychology of running and athletics. This is one of those books that you read and can’t put down.
There have been two main themes I have been mentioning since the beginning of this year:
1. There were too many people bullish coming into the year. As I mentioned in the first commentary of 2014, in 31 years in the industry I had not seen a year enter where bullishness was so high. Everyone came into the year “all-in” and this is type of sentiment is rarely, if ever sustainable.
2. The second theme was the fact that the emerging markets were declining significantly. For those of you who will be in our Trend Following Summit this weekend, you’ll see all the short signals which were triggered in November and early/mid-December in Latin America, especially Brazil, and in other countries such as Turkey (TUR). Many of these countries have lost 15% and more in value in under 10 weeks and have provided substantial profits for those who were short the Country Fund ETFs. Last week was a very big week. If you have an interest in learning how to find and trade these trends, please contact our office at 888-484-8220 ext. 3 and we’ll send you a recording about this weekend’s Summit.
One of the things I was taught many years ago from Kevin Haggerty, who ran Fidelity Capital Markets Trading Desk, was that “price precedes news”. This is some of the best advice one can take in. Prices in the emerging countries began declining well before the news. This week, especially on Friday, the news was finally widely disseminated.
This is beginning to look like January 2008 volatility wise and I’m sure others will point this out. The difference is that the banks were essentially dead then and no one knew it at the time. Unless there’s a major country about ready to drop something bigger on the world (that’s the concern right now), the historical probabilities now favor a good bounce. There are dozens of S&P 500 stocks trading with ConnorsRSI readings under 5, a rare event and one that is either telling us that this is transitioning into a bear market, or more likely that the selling was overdone and a short term upward move is near.
Fear, as measured by volatility and VIX spiked on Friday and this is another good sign a short-term bottom could be near. Using fixed risk (fixed dollar amounts) there are very good risk/reward opportunities in place.
PBS did a fascinating 1 hour piece on Steve Cohen from SAC Capital, and the government’s investigation of the firms trading practices. This is eye opening and well worth watching when you have the opportunity. (link)
Alan Lafley: Playing to Win: How Strategy Really Works
This is a good article from last week’s New York Times Dealbook:
If you’re interested in Weekly S&P options, this short video from the CBOE on VXST is worth watching.
The ISE believes they have created a cleaner version of the VIX with a new index they call VolDex. You can learn more about VolDex on the ISE website http://www.ise.com/etf-ventures/voldex-voli/