You Do The Math

Over at Money Skater's blog, in the comment section (link here), a blogger posted his trading record. I have cut and repasted the record below.

Total trades.......123
Wins...............123
Losses.............0
% Return on Capital 26.2%
From 20 July 2007

This record provoked doubt in the minds of the blog readers. The probability of such a string of trades was questioned. The blogger responded, "Mathmatically [sic.] impossible you say, not at all..."

Since the mathematical likelihood of such a string of trades was briefly addressed and promptly dismissed, I decided that it might be illuminating to examine the probability of making, in a row, 123 winning trades.

First, we must assign a probability for a trade being a winner or a loser. My own trading record shows that 4 out of 10 of my trades are winners (40%). A record of 70% winners would make an outstanding track record for the majority of traders (assuming the 30% losers were not greater than the winners). For the purposes of illustrating the mathematical improbability of 123 winning trades with no losers, I will give this blogger/trader a generous likelihood of success by assigning a 95% probability that every trade he makes is a winning trade.

Be sure to understand what this means. I am saying that with every trade he makes, there is a 95% chance that he will win. This is clearly improbable, especially when considering that we are going to let him make 123 trades in 21 days.

Now to the mathematics: Below I will list the probability of a string of 123 winners with no losers, based on decreasing winning percentages.

Winners _________Probability of 123 in a row
95% _________________.173%
90% ________________0.0002118708%
80% ________________0.0000000001%

As the number of winners is decreased, we quickly see the improbability of making 123 winning trades in a row. For the purposes of argument, lets assume this trader's system generates 99% winners. Still, the likelihood of him having 123 winners in a row is only 28.76%.

Still, I feel there is more to this story. This blogger did post the results of his paper trades, on his own blog, in May. The following is what he posted:

Total Trades…………………………..11
Wins…………………………………….8
Losses………………………………….3
Win%…………………………………..62.5%

Lets take his winning percentage of 62.5% and calculate the probability of a string of winning trades with 62.5% winners.

Winners In A Row__________Probability
5 _____________________5.96%
10_____________________0.568%
20_____________________0.0052%
30_____________________0.000047%
40_____________________0.00000043%

Obviously, the results show that it is absurd to go any further with these calculations.

Another element of this record, not before questioned, is why was it not posted on this trader's own blog? It seems to me that if one experiences such a phenomenal success, it would be posted on his own domain, rather than in the comments section on another blog. Furthermore, the fact that this blogger has never divulged a strategy, or even posted a single actual trade, in my opinion, casts doubt on this record.

What can we take away from this discussion? The most important take-away is that every trader can calculate the probability of experiencing a string of losers. For example, since I have 60% losers, there is a 1% probability that I will have 8 losers in a row. If I'm betting large on every trade, I need to know what my likelihood is for a series of losers. However, it is also important that traders understand the Gambler's Fallacy when seeking to use probabilities to increase their profits and decrease the likelihood of a blow-up.

Update: Our blogger/trader has updated the comments section to state that his practice of arbitrage is 100% risk free. Certainly, true arb is risk free. I'll leave it up to the intelligence of the readers to determine whether or not they believe that 123 trades, even with 99% win rate, can be executed without a single loss. Probability at 99% win rate is 28.76%.

Fed Cuts Discount Rate

Fed Cuts Discount Rate

Wow, holding GS and QLD overnight turned out to be profitable after all. As I type this GS up almost 10 points from my purchase price.

***Update*** Just sold half my GS in the pre-market @ $177.89 When the market gods give me almost 9 points overnight, I have to take some of it back. I'll let the rest ride a bit today, and see what happens.

***Afternoon Update*** Sold my other half of GS @ $174.23 and my QLD @ $86.35

I also bought another 250 of BEXP @ $4.60

At the close, I added another 500 BEXP @ 4.64

This Looks Like Panic To Me

Picked up 100 GS @ $160.86 and 100 QLD @ $83.15

Wow. That was quick. Stopped out on both QLD @ 81.75 and GS @ 158.09.

***Update*** That really hurts. Those stop outs had me miss a 10 point move in GS and a 3 point move in QLD. Ouch.

***Update*** Well I got back in the office to find the indexes trying to go green. I jumped back in GS 100 @ $169.17 and QLD 100 @ $84.97.

I'm holding both of them overnight. I'm about ready to throttle myself for setting my damn stops so tight on the earlier trades.

I'm expecting a bounce here. Nothing more. I think, as I've said for two weeks now, that this type of sell-off is not going to V-bottom back into new 52 weeks highs. There is likely more downside, and at the very least, consolidation, before any kind of sustained move upward. The fact that I didn't short this down on the last bounce has really pissed me off, as that was what I had planned to do, and didn't. I'm going to try and catch a bounce here or sacrifice another 500 bucks or so trying.

Hurricanes and Bounces

Yesterday I picked up 500 BEXP for a Dean Hurricane play.

This morning I bought 500 SWHC @ 18.00. I'm looking for a quick bounce from 20 day support. There is a tight stop under both.

***Update*** Added 250 BEXP @ 4.6775

***Update*** Sold 500 SWHC @ 18.08. I've got a meeting at 3:00 (right now) and don't want to stay long over night.

MVIS Institutional Holdings Decrease in Q2

Today is 45 days after the end of Q2. If the Nasdaq site is up-to-date, the above graphic should accurately represent institutional activity for MVIS in Q207. The Nasdaq site shows the breakdown.

I was wrong when I commented on another blogger's site that institutional activity would show an increase in holdings.

The graphic is posted in two parts, meaning you will have to click the upper and lower parts separately to enlarge them.

I Think This Guy Is Going To Get Spanked

August 10, 2007

Dear Valued Client:

Panicky investors are continuing to make mountains out of molehills. Even though risky sub-prime mortgages are a small part of the total mortgage market, this "sub-prime mortgage market meltdown" is having a big impact - way too big an impact - on overall markets. As the Federal Reserve (the Fed) noted in their Monetary Policy Report to Congress on July 18, the riskiest mortgages - sub-prime variable rate mortgages - are about 9% of mortgages outstanding, and they have adelinquency rate that had risen to about 12%. Mind you, not a default rate of 12%, just 12% behind on payments. The delinquency rate on subprime fixed rate mortgages was steady at about 5%, while prime rate mortgage delinquency rate was steady at about 1%. Sorry to drag you through the numbers, but as I see it, it adds up to a molehill. And, suppose the numbers do double. The delinquency and default rates would still be below historical highs, so maybe we get foothills.

I look at this senseless, indiscriminate selling as a smallish problem relative to the great big, generally stable, credit market. True, some dumb and/or greedy mortgage lenders, hedge fund managers, hedge fund investors, and lenders to hedge funds are getting spanked for their actions, but that is what our financial systemis designed to do - discipline excessive risk taking. And some other parts of the credit market are less liquid, as traders mill around trying to figure out what the precisely right price for a bond should be. Meanwhile, the Fed is doing its job -injecting reserves into credit markets to hold the overnight bank lending rate at the target of 5.25%. They adjust reserves every day; they've just used bigger numbers the last couple of days.

To reiterate. I think economic and company fundamentals are strong. We just completed an excellent quarter for economic growth and company earnings and I am confident that the third quarter will show similar results. Company balance sheets are robust and interest rates remain low. Consequently, I am equally confident that this downdraft in the equity markets will pass. It is precisely this kind of market turmoil that makes the case for a well-diversified portfolio that avoids excessive risks associated with big bets on exotic, highly risky securities. As always, please call your financial advisor with any questions or concerns.

Sincerely, Lincoln Anderson
Managing Director, Chief Investment Officer, Chief Economist
Linsco/Private Ledger
Member NASD/SIPC

Good Morning World

Good Lord, everywhere I turn there is a national media outlet doing stories on the sub-prime mortgage and credit crunch. When I start to hear National Public Radio, the Glenn Beck show, and the early morning T.V. news stations airing bits which are ultimately more complicated than their average viewer can comprehend, I begin to wonder, is this a bottom? Or is something much worse in store for us?

I still think there is more downside left. I feel this way because of all the media attention. Likely, Joe Chucklehead is beginning to catch-on that something is happening (but you don't know what it is. Do you, Mr. Jones?). I think that the public, whether they are retail investors or mutual fund owning 401Kers, need to panic a bit, and do some capitulating.

Also, everyone is waiting for the other shoe to drop. Who is willing to go 100% long until we see some honest reporting from the major financial institutions? Personally, seeing a major bankruptcy / blow-up will make me start wanting to put more money to work. Bottom line: investors need to see the worst-case scenario. Once our greatest fears are realized, then we can move forward.

Called In Sick

I need to take care of some stuff at home today. Later on, a nap will be in order.

Meanwhile I'm attempting to daytrade ALVR. I'm in 1K @ $11.54

***Update*** Closed out the trade for a small loss, selling 1K @ $11.43

Being Wrong Never Felt So Right

Read it over at Fly's place.

Good Morning World

I dumped ALGN on the open, incurring a small loss. It just does not make sense to be long here, until we get a clearer picture.

I will continue to hold MVIS.

Beulah the Market Hag

Can anyone identify the 5 Fat Girls candlestick formation?

Why not just go for a 10% percent correction?

What really scares me is that the fundamental credit crunch may over-ride the technicals, even after falling 10%. However, it seems likely the asshole dip buyer will at least make a showing at that level. We'll just have to see how many more Countrywides out their skeletons.

Nibbling On Select Stocks

Nothing major.

I bought 100 shares of ALGN. I've been doing some DD on them the past week, and I like what I see. I also like the charts. I will add to this when appropriate.

I should mention that my strategy of selling the first bounce would have been profitable. However, due to numerous factors, some of which have nothing to do with trading, sentiment, market psychology, etc., I did not follow through.

***Update*** Bought another 100 shares of ALGN @ $26.99

Great Day for Longs

As I noted earlier, I was unfortunately not able to really watch any of the action today, or trade. I was stuck on some crappy DOD computer with an old 15 inch CRT that made my eyes go dizzy. From there, I was able to check Yahoo, and could see the action in the indexes. However, if I tried to blog, or send comments, check email, etc., the network security would not allow it. Believe me when I tell you that there is nothing worse than listening to a bunch of government losers telling you stuff that you don't give a rat's ass about, while getting streaming quotes (15 mins delayed) through Yahoo, all the while knowing the markets are splitting the fricking skulls of the short-sellers.

After reviewing today's action, I think my plan needs modification. Specifically, this market still looks very unprofitable for a short-seller. For whatever reason, it seems to want to go higher. Sub-prime and credit crunch be damned. However, my inaction as of late, while it has allowed me to get a great deal of work done and meet some deadlines and not lose too much while the market dropped, has cost me some $$$ in terms of opportunity. Had I stayed with my winners (SWHC, ALVR), and just dumped losers, I would be a few percentage points higher for the year. Note to self: in times of market weakness, dump losers, but consider giving winners a wider berth.

My plan was to get short on the first bounce. Well the first bounce is here. Looking at the strength of the bounce, I'm not sure that getting short is a good plan. It is beginning to make more sense to me to wait for a pullback, and then get long. The question that I will be seeking an answer to is whether it makes more sense to buy potential breakouts, or to buy good stocks that have been beaten down during this correction. What say ye, readers o' this blog, on this matter?

On a side note, my 401-K is signed up for automatic portfolio rebalancing. Typically I catch it before it does it automatically, and I choose what funds I want to sell or buy. Well it rebalanced without me, and it looks like that mother humper sold some of my 3 index funds (S&P, Nas, and Dow) at the absolute bottom and moved the money over into bonds. What the hell?

Update: After reviewing charts and noticing the Nasdaq stopping its advance at the 50 day average, it looks as if there might yet be many shorts out there ready to play for more downside and longs who are selling into the strength. As much as I want to get back to trading, sitting on my hands until there is a clear picture (will there ever be?) is probably wise, although right now it really sucks.

Its Good To Be Back Home

Well Fly is back from vacation, so I am back home at Trade While Working.

Today I have a meeting out-of-town and will be away from the computer and the markets until this evening. I know it must always be coincidence, but I always feel like the days when I'm not able to watch the markets are days that could be pivotal. For example, I'm very curious to see whether the market extends its bounce, or fails. I would really like to pick up some QID if it fails. Alas, I will not be able to.

Anyway, look for this blog to get back to business as usual, soon.

Blogging In Flydom

For the weekend, and the first few days of next week, most of my posts will be up over at Fly On Wallstreet. Even the Fly has to take a vacation once in a while.

I will continue to journal my trades at this Trade While Working, but my market commentary and any other sort of ruminations will probably be posted over there, until he returns from vacation.

Good Morning World

Another busy day at work; another volatile day in the markets. This means that today will be another day that I will likely not trade anything.

If you follow trends, the short term trend is still down. However, a bounce from oversold levels is to be expected. I still expect the bounce to get sold, and that's how I will play this until something changes.

Here is a really funny read on the Plunge Protection Team.

Also, Bill Rempel has published an excellent article showing what can happen after the S&P has a 4.5% down week:

What Usually Happens after Big Down Weeks.

***Update*** I just sold my 1K @ $5.00 of MVIS that I purchased yesterday. This was a quick traded netting around $260.00 There was 50K sitting on the ask at $5.00, and I decided to take my money and run, which puts my MVIS position back at just less than 1/4 of my capital.

***Update*** On the odd morning that I don't check the news, I missed this- Coverage initiated on Microvision by Merriman Curhan Ford

Looks like I sold into the coverage.

Morning Update

I bought 100 more QID @ $46.01

Just a few minutes ago, I sold all 300 shares @ $47.08, banking about $400.00 bucks. The market is putting up some resistance at these levels. Depending on the rest of the day's action, I may buy the QID back.

On a side note, MVIS is punishing me. ARgggggg

***Update*** Added 1K shares of MVIS @ $4.73 I don't know why the heck this is selling off so much. I do know that there is a bright future ahead, and I want to be long for it.

The Trend Bends

Damn, I feel much better after today's action. We got confirmation today- the trend has bended, and it seems likely that there will be another leg down. See, unlike Vick, I don't really have a dog in this fight, (well, maybe a small dog) and so if the market falls, it does not destroy my account. Since I have about 70% cash, I can watch the action and remain fairly detached. I have to admit my stress level is declining, and I'm getting my goals met at work. Also, I like it when I paint a scenario and it actually plays out the way I paint it.

Let's look at a chart of the Nasdaq. You might wonder why I prefer the Nasdaq over the SPY or Dow. Well, many believe the Nasdaq leads in and out of rallies and corrections.

It is clear that today was a HUGE reversal today. That is one UGLY candle. However, the market internals from today were not as bad as one might think. I do not think it was a capitulation day. Based on the MACD and the RSI, the capitulation day may come tomorrow. Be careful though, as this trend is shaping up to be strong, and may need some time to work off the downward momentum.

Another 100 point decline will give the Nasdaq the 10% correction that the bears are rooting for. Honestly, what is another 100 points after last week's clobberage?

I still think this is a difficult market to trade. I'm staying away from individual stocks (unless one just screams to be traded) and sticking with the inverse ETFs. Today I picked up 200 QID and paid around $45.50 for it. If I can even squeeze a couple of points out of it, I'll be happy. After all, if one can preserve capital during these corrections, and then employ that capital on the rebound, he or she will do well. Any money made on the drop will be icing.

The key points here are that most indicators are showing a market that is near oversold. However, the volume and overall strength of this move could keep the market in oversold territory for some time before a tradeable bounce occurs.

Today I also closed out my ANAD position. I bought 200 more shares on the dip, in case the day turned out to be a buying opportunity. When it became obvious that the market would reverse, I sold all 500 shares for a small loss. I also bought and sold 200 SWHC for a wash.

The Best Offense Is....

You did not really think I would finish that cliche aphorism in the first line of this post, did you?

Although, I do think that playing the market defensively is appropriate in the near term.

It is too early to go short. Traders are likely to get whipsawed doing so. It is also too early to be buying aggressively, as I feel more downside is possible. Therefore, I will stick with a large cash position, while nibbling gingerly on a few carefully selected issues.

Whether the consumer is broke, or whether the CDO issue will blow up accounts across the globe is really just impossible to determine with any certainty. Why try to figure out how a host of variables, all of which seemed to be inextricably linked (but truly are not), will affect the markets? By the time everything is truly understood (if ever), it will be too late.

Instead, I think it makes sense to watch carefully to see if the current leadership is maintained, or if new leaders begin to emerge. Also, if one has a strong feeling the market is going to move one direction or another, but is having trouble determining leaders to buy or short, I might suggest getting long or short an index, such as the QLD or QID. The moves will not be as large, but one is less likely to miss out entirely while trying to cherry pick good stocks. Hat tip to Bill Rempel for that simple trick.

Finally, it should be noted that my time horizon is not very long- typically I do not want to hold a stock for more than 2 months. If your time horizon is much longer, this is probably a huge buying opportunity.

Today, I picked up 300 shares of ANAD. As I am currently playing things very carefully, I did not establish a large initial position. I will add more shares if the stock continues to hold its ground. What I'm looking for here is a quick percentage move which will allow me to book some gains while the market figures out where it is going.

ANAD had a nice move up after a good earnings report last week. With earnings as a catalyst, and the large volume gap up from a sound base, I feel this one may keep moving.

Blogging In Flydom

Just in case you missed the news, we've got a weekend blogfest going on over at Fly's Place. That's where my posts will be.

Check it out!

Oversold Short Covering Rally

It appears we will get an oversold / short covering rally today. My money will still stay on the sidelines. If I were at home, I might try to play the bounce, but at work, it is a recipe for disaster.

However, I'm inclined to believe that it will be time to start initiating some short positions once this rally stalls- probably Monday or Tuesday.

Good luck to those with the intestinal fortitude to trade this volatility.

Slumming

Sometimes, I admit, when things get crazy in the market, I have to go slummin'. It's never as good as I think it might be. However, on this occasion, I was rewarded by discovering a sweet little gem.

Here she is.

And for those of you who are scared to take a link, below is what interests me, but you'll have to visit the link above to get the links that were originally included in the message below.

This deal is a lot bigger than MOT only (MXC platforms)
(10 Ratings) 25-Jul-07 01:44 pm

Motorola uses their own designed chip sets in their phones and portable devices. (Duuhh!!!)The chipsets are called MXC Mobile Extreme Convergence and comes in many flavors. Now manufactured by Freescale of course, the semi spinoff from MOT. The MXC platform is used by Motorola, Nokia, Symbian, Sony/Ericsson and many other mobile device providers. Designing an ASIC and an Interface for this platform opens the way for embedding the PicoP in a multitude of other OEM mobile devices.

Companies using Symbian, supported by the MXC/iMX platforms from Freescale/MOT.

<<<<>>>>The following Symbian OS licensees have Symbian OS-based mobile phones in production and/ordevelopment: Arima, BenQ, Fujitsu for NTT DoCoMo, Lenovo, LG Electronics, Mitsubishi for NTTDoCoMo, Motorola, Nokia, Panasonic, Samsung, Sharp, Siemens and Sony Ericsson.<<<<>>>>

Jinx! You Owe Me 10 Large

Well after countin' my chickens before they hatched (rather loud counting, I might add), I probably should have known that today would bring punishment. I feel I must recap for my own sanity. Nassim Nicholas Taleb talks about how humans often need to create narratives in order to bring order and sense to events which are truly of a random nature, have no definitive start or end, and no definable cause. Such a narrative is probably what you are about to read.

After waiting 6 months for the MVIS contract announcement, I happened to have a meeting today, scheduled in a location with no ready computer access, and absolutely no way to observe any real-time action. Talk about rotten, stinking luck. Before leaving for the meeting, sometime around 8:35 a.m., I put 2K shares up in the pre-market, limit-sell at $6.80. It didn't hit, so I started moving my ask down in .5 increments. By 8:40, the ask was dropping more quickly than I could keep up with my limit-sells, and I absolutely had to leave for the meeting. No big deal. I felt certain the stock would open above $6.00 and run towards $7.00.

I called my wife around 10:40 and she checked Yahoo and said it was trading in the 5.80s. Ouch I thought. Also, she busted my balls a little for not selling in the pre-market. Double ouch. See, she really wants that property in the mountains. Anyway, I didn't spend a lot of time dwelling on it since there was really nothing I could do except wait until I get home.

Anyway, you know the ending. MVIS traded lower throughout most of the afternoon. By the time I got home, it was trading at $5.53. In the end, before the close, I sold only 1K shares, at $5.40. I decided that the stock is probably less risky now than before the contract announcement, and I've held it for so long, what the hell. I think it will go higher.

In other news, during the market meltdown today, I sold everything, literally everything else. I took a huge loss on GIGM. It is senseless that I allowed myself to take over a 2K hit. There were many techical sell-signals, and I chose not to act on them. From the analysis of my 2Q trades, I know that keeping losses small is what keeps me profitable. I should have cut GIGM loose 2 days ago.

ALVR and SWHC were both up on the day, but I sold them anyway. These were profitable trades.

PFWD was sold as well, for a small loss. PFWD was reporting earnings tonight, and I suddenly had a feeling I was gambling. Turns out that the earnings were good and the stock traded up after-hours.

The singular, overall reason that I liquidated everything is that I suspect the markets might be entering a phase of correction or consolidation. Secondarily, my stress level at home and work has been building, and I need a break for my health and sanity. If you somewhat follow how I trade, you know that when market meltdowns occur while I'm stressed out at work and at home, I typically sell everything. I'm not bragging about this or recommending it as a strategy. It is just what I do. Howver, pausing at this point will leave me up 14% YTD. I'm not really proud of that, but the year is not over.

Here is the breakdown.
100 NTRI @ $63.90
100 LZ @ $66.32
500 PFWD @ $16.40
1500 GIGM @ $11.75
1000 ALVR @ $10.64
1000 SWHC @ $18.00

I'm Fucking Rich!

Off to buy a bunch of stuff.

No, seriously, I have a meeting, out of the office, until 2:30. I have my Dad manning the account to handle the MVIS news.

Woohoooooooo!

***3:00 Update***

Wow, I'm finally back from my meeting. Turns out, I'm not so rich. When I wrote that message, MVIS was at $6.80 in the pre-market. Now I find out it is trading much lower, GIGM had its kneecaps busted, NTRI is puking on itself, and LZ is down as well. Crappola.

I've sold my small NTRI position, but not before losing like 700.00 bucks on it. I also sold LZ. I should probably sell GIGM as well, but it is sooooo oversold, I feel certain I will sell at the low. Long story short, if it weren't for MVIS, my account would be in really bad shape. What started out as a great day has turned to turds because I couldn't be on the computer to sell stuff when it needed to be sold.

I do not yet know if I will sell any MVIS.

GIGM Reaches 200 Day Moving Average

Holy moly will any of you out there please buy some GIGM? This is a winner of a company with a .52 PEG, 14.5 forward PE, and growing earnings at 40%.

It is now approaching its 200 day average. I have a full position in it, and am losing money hand over fist. I am willing to give it some wiggle room at these levels, but can't take much more pain.

This is about as "safe" an entry as I think one can find, if one doesn't mind trying to catch a falling knife.

Floyd County & Chateau Morissette

This past weekend, the Woodshedder family took off to Floyd County, Virginia to look at some property. We ended up looking at 9 different pieces of land. I'm not sure that we were really impressed by any of them. Land is getting expensive around that area as it is becoming well known for its music and artisans. Also, it is a quick 20 minute drive to Virginia Tech.

On Sunday, we drove over to Chateau Morissette. This winery, the largest in Virginia (if I remember correctly from the tour), makes my wife's favorite wine, The Black Dog. We enjoyed checking out the grounds and having a nice lunch outside. While we were eating lunch, the actual Black Dog, which is featured on the home page, was making his way about the small groups of people. There was another family who had brough their dog, an Austrian Shepherd, I believe, and The Black Dog and the Shepherd begain to sniff about each other. After a few short seconds, The Black Dog suddenly opened a can of whoop-ass on the the Shepherd. The owner of the Shepherd tried to pull the two apart, but his leash snapped. There were various odd screams from other onlookers. One would guess that these types never guessed a good dog fight would get in the way of their mediocre live jazz or their Chardonnay and Sangria. Anyway, after the fight, it was very funny to watch the various groups of people discuss the fight. The guy whose dogged got whooped mentioned something about "killing" the other dog. At that point, I don't think he realized it was The Black Dog that his dog scrapped with. I should note that neither dog was seriously injured.

All this prompted me to think that Chateau Morissette should make a t-shirt proclaiming "I visited Chateau Morissette and all I got was my dog's ass whooped."

I tell all this because I really have nothing else to write about. I did no research over the weekend, for the reasons above. Also, a few of my stocks are getting squashed, for whatever reason, and I just needed to recount the weekend's events and have a good laugh.

Will the Dip Be Bought?

Now normally, on a day like today, I would have sold off almost everything I own. However, I didn't do that this morning because typically I just end up buying everything back higher. A better strategy has been to wait out these pullbacks, or even try to add shares to winners. Will the dip be bought this time?

Further aggravation of today's sell-off has got to be caused by options expiration. I think that many would prefer to wait for Monday to make some new bets.

I think that today I will just hang on to what I have, and let the weekend sort things out. The momentum that has driven the market to these levels will not stop on a dime.

I should add that our network has been having problems today, and my network guru is out sick. Every time the network comes back up, my stocks are down another dime. I think I'm going to get out of the office and go find a cigarette.

Spent Almost All My Cash

Yesterday, I bought 250 shares of GIGM, SWHC, and ALVR.

Also, I picked up 100 NTRI and 100 LZ.

Check my Stockalicious account for more information in terms of prices.

It looks like ALVR may run today due to the CLWR deal. You all may remember I was in CLWR, but like an idiot, sold too early.

MVIS Started at Buy: 7 Dollar Target

*DJ Microvision Started At Buy, $7 Tgt At Canaccord >MVIS.

(END) Dow Jones Newswires

July 18, 2007 11:12 ET (15:12 GMT)

Copyright (c) 2007 Dow Jones & Company, Inc.- - 11 12 AM EDT 07-18-07

Evening Wrap Up

Well I ended up buying higher. Not a lot, just a little GIGM, 250 @ 13.3475.

Although I'm beginning to wonder why I'm waiting for a little pullback, as the strength in the Nasdaq was incredible, with the volume swelling. All this on a July day, and an options expiration week.

I'm likely to take Boone's advice and just start pulling the trigger on stocks offering good entries.

One I really like is Lubrizol. Fly has offered it as his "gun to the head" pick. The chart is really nice, and the name is sexy. They report next Friday.

Nasdaq Index to Go Shanghai?

Making guesses about what an index will do in the short term is foolhardy. However, because I really do not care about being right, and am truly more concerned about what is probable, I will undertake the foolhardy task.

As noted in the chart, I will be a buyer or will add to existing positions should the Nasdaq pull back to the area of 2650s. If it doesn't pull back, I will still be a buyer, but at much higher levels...yuk yuk. I am expecting some weakness in the short-term due to options expiration, summer doldrums, and digesting of recent gains.

Based on the chart, should the Nasdaq continue up from here, it seems it might go Shanghai. I find a pullback to be more probable this week.

It Works Until It Doesn't

It Works Until It Doesn't

If I had a dime for every time I've seen perma-bears, conspiracy theorists, and severely mentally depressed gloom-and-doomers (that's right, they are all the same, at least they all seem to hang together) say "It Works Until It Doesn't," I'd probably have more money than all the bears out there poo-pooing the current state of the market.

"It works until it doesn't" is their fav explanation for just about everything. When asked why the market keeps going up in the face of the CDO blow-ups, when asked why global liquidity is any different than U.S. liquidity, when asked why the American consumer still has money even though the housing market needs bed sheets, all of these guys like to say, "It works until it doesn't."

What the hell? What kind of asinine response is that?

Let's examine the true value of the aphorism.

Some common items that we use daily, that will work, until they do not work, are cell phones, cars, marriages, and airplanes. Obviously, when a cell phone quits working, its an inconvenience. When your car breaks down on you, typically it can cost you some time and money. What about a marriage? A bad breakup may cost you time, money, and emotional stress. However, when your plane quits working, assuming mid-flight, the cost may be more than can be weathered by a mortal soul.

Looking at the saying "It works until it doesn't work," in terms of the hypothetical situations described above, it becomes very clear that it is absurd and ridiculous to rely on this phrase to flesh out an argument or challenge a thesis about a market conundrum.

How many of these same people are married? How many fly regularly to their business meetings? How many jump in a cab and use their cell phone on the way to a hotel? Does the fact that any of these items are working, but may suddenly stop working, keep them from taking a cab, or getting married in the first place? Or do they take a boat to their honeymoon?

Likely, when one encounters this aphorism, the true meaning of the insidious phrase is "I really have no clue what is happening in the market, but I need to always be right, so I'll say something that can not be proven wrong."

Please, when you find someone using the "It works until it doesn't" routine, refer them to this post.

Ugh. Back to the Real World

Vacation was very nice. I am hating being back at work today. My children are hating it too, after spending a week with all their cousins and Grandparents, and being at the beach all day, everyday.

I took pictures with my cell phone of where we were staying, as it seems from my comments section that some of you doubted the poshness of the Woodshedder family's vacation digs. Problem is, I can't figure out how to get the pictures from the cell phone to the computer. You see, I just got a cell phone when the dog went missing, so folks could call us while we were out of town. Yep. You read that right. My family did not have a cell phone until a couple of weeks ago. To tell you the truth, I can not stand people who are on the damn cell phone all the time.

While I was gone, my positions did well, but it seems I missed a huge rally while having a lot of cash. Such is my luck. I really wanted to make a nice post with charts and stuff, and my plan for this week, but I fell asleep unexpectedly, so this post will have to do.

From what I see, I am extremely bullish, but am likely to wait for a bit of a pullback before putting the rest of my cash to work. What I would like to see is the Naz re-test its breakout level. When/if that happens, I will likely add to some of my currents positions, especially SWHC. I will also be scanning this week for some breakout opportunities, and some pullback plays.

Hellgate FTW

I just found this advertisement for GIGM's much awaited release of Hellgate, London.

A Shout Out!

Haven't forgotten about the blogosphere. We're still enjoying vacation. Internet access is limited, and has to be pirated from the crappy Holiday Inn, which is luckily situated close to a bar, close enough for me to get their wi-fi, sometimes. It looks like right now I've got a strong signal.

Anyway, just wanted to give "It's Not the Economy, Stupid"at the bears and shorts....I've been having a good chuckle at what must be transpiring in the blogosphere during this huge short-crushing rally.

We'll be back Saturday night. Until then, good trading.

Summertime Blahs

Blah blah blahs.

I have to say congratulations to the Bulls who were saying to buy this last dip. Admittedly, I didn't, and in fact, I picked up some QID (although I got rid of it the next day). Nice work folks.

I didn't make any trades today. We are leaving for vacation on Saturday, so I'm trying to keep in cash since my access to the internets will be limited.

Nasdaq Closes 2 Points from 52 Week High

However, the volume on the $COMP looks to come in tepid, at best. Maybe the bears headed out today to buy some fireworks? I think there is nothing more American than our Technology Index hitting new highs as we go to the holiday celebrating our independence. Hmmmm..... When I put it in those terms, it almost makes it un-American to be a bear. That just goes to show how easy it is prove just about anything using eloquent rhetoric and deductive fallacies.

Today, for the first time in a few days, I made some trades. I just couldn't resist with the market plowing on upward.

I bought 500 ALVR as a breakout play @ $9.62, then added 250 at the close @ $9.87.

I also picked up 500 PFWD, another breakout play, @ $16.92. I've traded this one before. It looks like it is done consolidating.

Then, I added 250 shares of GIGM @ $13.70

I still have 41% of my portfolio in cash.

Today MVIS retraced some of Friday's gains, on about 2/3rds of Friday's volume. This is normal, and to be expected. There are still warrants to be liquidated, and there are likely to be many shenanigans to be witnessed as some of the 5 million shorts begin wondering if they are going to stay short and chance a contract announcement or gamble that one will not come as planned.

Q2 2007 Discretionary Trading System Results

I apologize for the size of the table below. I couldn't get things to cooperate tonight. Clicking on it should give you a bigger view.

• The data is generated from 102 closed trades, which were fully executed between April 1st and June 29th, 2007. There are a variety of types of trades represented (breakout, bottom-feeder, volatility squeeze, etc.) represented within.
• To calculate R (risk), I used an initial risk of $500.00 per trade. I used this figure as that is typically my max pain level. The results show that most of the time I'm risking much less.
• The statistics show that my average loss was much smaller than my initial risk of $500.00. I used Tharp's suggestion of taking the average profit per trade ($140.00) and dividing it by the average loss ($157.44) to develop my Expectancy of 0.89R. If I would have used my average loss of -$157.44 for my R calculations, they would be roughly 3x larger than represented in the table.

Some thoughts on the performance:

• I really like that the standard deviation of my losses is smaller than my average loss. This shows that I kept my losers within a tight range in terms of how much I loss before I sold.
• The standard deviation of my winners show that the results vary widely, meaning I could have very small winners and very big winners. I would like to increase the size of the average winner and decrease the standard deviation of win size. I have a feeling to do that will require a better system for exiting.
• My average win was almost twice the size of my average loss.
• This system was underwater from April 11th to May 17.

If you want to peruse the spreadsheet with all the trades and statistics, you can check it out here: Q2 2007 Discretionary Trading System Results

As always, comments, questions, and suggestions are encouraged.

Schadenfreude

As I write this, MVIS is up 8%. My buys in the middle 4s will likely be the icing on the cake of my riches.

Now of course, me being the realist that I am, I have to admit to myself that MVIS could open Monday at a buck a share. It is certainly possible. I just have to say that to quell the MVIS haters, and to be honest with myself.

I also have to say that there are a few things that are bothering me that I just want to rant about.

1. I can not stand bloggers that analyze a bunch of data, be it macroeconomic or fundamental data regarding a company, and then never produce a profitable play. What is the point? Are you here to regurgitate your own opinions or are you here to make money?

2. Herb Greenberg can write about a company, even if he doesn't have a position, and still get paid for what he writes. I can not figure out why a blogger who does not get paid for what he is writing would write incessantly about stocks that he has no position in. Something about that smells.

3. I get angry at bloggers who will laud their good calls while sweeping their bad calls under the rug. It makes it worse when they get defensive when challenged on their bad calls.

4. I can not stand bloggers who blame market makers for everything that happens to a stock. Similarly, I can not stand bloggers who have conspiracy theories about the government manipulating data to prop up the stock market.

5. I can not stand bloggers who claim a block of shares was sold short. There is no platform, data feed, etc. that lists real-time short sales. Any blogger who says he knows for sure it was a short sale is lying, unless he placed the trade himself.

Thanks for letting me rant.

Gigamedia and Microvision

Today was a great day, all the way around. I took the day off to run some errands, and to hopefully sweep up some cheap MVIS.

Not only did I get some more MVIS, but I picked up some GIGM on sale, added 250 shares of SWHC @ $16.99, and then watched as the markets put the shorts on notice that the Fat Lady called in sick.

First, let's look at GIGM. I have been trading in and out of this stock for many months. GIGM has quarterly earnings growth of 167%, year over year. Its forward 2008 PE is 15.45. Short interest is currently 12% of the float. This gem is on sale at these prices.

As evident from the chart, today's blow-off-bottom presented a perfect buying opportunity, so I started my initial position, 500 @ $13.10. All signals are go at this level. However, it is trading under the 50 day average, so I would expect some resistance as it approaches the average. Even selling at the 50 day will give over 1 point of profit. A stop underneath today's low is typically how I play this type of set-up.

Now for MVIS. I made two purchases today, one block at $4.52 and one at $4.74. These shares are not included in my account I keep with Stockalicious as they were purchased in an accounts I keep for my parents. Certainly, this could be a dead cat bounce. There are likely more warrant holders who want to liquidate at higher prices. Because of the pressure from the warrants and the shorts, it would not be unlikely for MVIS to retest the $4.40s. I have seen it happen many times. However, I would not have purchased shares in the .70s if I thought the probability of more downside was likely.

I am absolutely dying to read the spin the MVIS haters/shorts put forth from here on. Let's recap what has transpired.

• The dilution has been priced in. No more anonymous hedge fund writers predicting a swift down move when the warrants are converted.
• MVIS has no debt.
• MVIS has enough cash to fund operations for over a year.
• Short interest keeps building, and is now around 10%, and is likely to have increased tremendously over the last few days.

So again, I'm sure the shorts will get creative, but the reality is that either MVIS comes through with a major contract, or they do not. I predict that with Tokman's track record, and the company firing on all cylinders, that the shorts are likely to begin covering, in anticipation of the contract. I feel that a contract announcement is more probable than a competitor getting to market first, or MVIS dropping the ball entirely.

Finally, the FOMC could wreak havoc on the markets tomorrow. I will likely not trade anything, except for maybe adding more GIGM. I will have stops in place for both GIGM and SWHC. I do not feel certain that longs are safe, but today's action was extremely bullish.

The Pink Elephant in the Room: MVIS

If you think MVIS is going to blow up, and you are wondering what the heck I'm doing with 6K shares (over 25% of my capital) invested in it, then read this post here.

Frankly, I'm rather surprised at the Schadenfreude exhibited in the blogosphere since MVIS has been selling-off.

If you are new to trading or holding a stock that has tripled in 9 months and then gets diluted by 25%, file this recent experience under "Sell When This Happens." When stocks get diluted, they almost always get punished. It's an easy short and a very high probability one at that. I was hoping it wouldn't be as brutal with MVIS, with expectation of the contract announcement mitigating any impact. That being said, several months ago I made the decision to hold my shares until a contract announcement is made. While it hurts to watch MVIS take the hit, what is happening is certainly not out of the ordinary, and does not change my conviction to hold until the announcement.

A 9 month chart can also provide some perspective.

After moving from $1.35 in October of 2006 to $5.90 in June, and then getting diluted, a correction to the first Fibonacci level (a 38.2% fall from the high) looks probable. I would not be surprised by a quick Wednesday morning move taking MVIS down to the low 4s, but I fully expect a bounce by the end of the day as all indications point to it being oversold at those levels. I believe we will see some basing action taking place in the $4.40s to $4.70s.

However, another possible outcome is a 50% retracement of the Oct-June move, taking the price to the $3.60s, leaving the stock at long term support levels. I do not think this is as likely as the scenario above.

Keep in mind that the correction from the January highs to the February lows was ~30%. It hurts, but it is not the end of the world.

When Time Machines Break: A Mid-Year Look At The Pros' Fearless Forecasts

On December 27th, 2006, BusinessWeek Online published Fearless Forecasts from the Pros.

The pundits, strategists, and prognosticators fearlessly predicted the mid and year-end numbers for the Dow, the S&P, the Nasdaq, and the Russell 2000.

As June comes to an end, it is time to examine just how accurate the pros have been in their mid-year forecasting. Due to constraints of both time and space, this first installment will examine only the forecasting for the Dow Jones Industrial Average.

Out of the 80 pros polled, only 74 made a prediction for the mid-year Dow. William Greiner from UMB Asset Management was the most bullish, predicting 13,750. Greiner's forecasting was accurate enough in 2005 to be awarded the BusinessWeek Stock Market Strategist of the Year.

The most bearish pro was Vinny Catalano from Blue Marble Research. Catalano's prediction of 10,600 was more than 3 standard deviations from the mean analyst prediction of 12,604. Joining Catalano with a greater than 3 standard deviation forecast was Barry Ritholz of Ritholz Research and Analytics, author of a very successful finance blog The Big Picture. Ritholz's prediction of 10,750 puts both him and Catalano in the group that can only be described as way out there.

Monday's Dow close of 13,352 puts Charlie Crane of Scotsman Capital Management in the running to peg Friday's mid-year number. Crane's 13,350 prognostication is flanked on both sides by pros who may find their predictions very near the actual mid-year number, barring any extreme volatility between Tuesday and Friday, June 29th.

Charting the Pundits' Prognostications

• The red square and bar denote predictions that fall within a tight range of the close of 13,352 on Monday, June 25th.
• 9 of the 74 pros are within 2% of Monday's close.
• 6 of the 74 pros' predictions were farther than 2000 points (>15%) from Monday's close.
• The standard deviation is 603.92
• The distribution is negatively skewed -1.42

Stay tuned for more analysis of the Pro's Fearless Forecasts.

Machined Gunned!

Well MVIS got hammered today, but I stayed long, as I'm still a believer.

Other than that, when the markets get confused, so do I, and my trading today showed it.

I've been watching NTRI for a break out its current range. It looked to be breaking out of it today, so I bought 100 @ 67.47, with a stop under $66.00. Then, when the markets started dropping, I sold out of it at 66.31.

Also, HANS has been trading very weird lately. Again, when the markets get confusing, so does my trading, so I sold my 300 HANS @ $43.34.

I also sold my BKI, 600 @ $15.18

Then, I picked up 200 QID @ $47.37

I have a lot more to write about (like my QID purchase) but not enough time. Hopefully tonight I be able to explain my thinking more clearly.

Short Squeeze Part Two- SMSI

Lady luck has truly shown down on me lately, as I've trashed the shorts 2 days in a row, experiencing ~20% gains during each move. Just a few minutes ago I sold half my position in SMSI- 500 @ $14.84. Due to this success, the account will likely close at a new YTD high.

In other news, I again sold ALTR, 500 @ $22.76

I am beginning to not trust this market, hence I'm still sitting on nearly ~40% cash.

Finally, can anyone tell me why HANS gapped down this morning and continues to sell-off throughout the day? Was gaining compliance a "sell the news" event? If so, where's my memo?

***Update*** Sold off the 500 shares of SMSI @ 14.6325. I'm going home. I plan on getting a post or two up this weekend.

Short Squeeze

It was certainly hard to stay focused at work today, with the above going nuts.

Good Morning World

Should be an interesting day, with Microvision calling in their warrants.

Yesterday, I sold out of my VRGY position, taking a small loss when I sold 200 shares @ $29.13

More updates later- I'm going to watch the open.

***Update*** Sold 600 BKI @ $15.41 for a small gain. This looks like it might retrace a bit before moving up again. The chart still looks great.

***Update*** Sometimes I do stupid things. Right now I'm just sitting back chuckling at myself. Here's why. I chased BKI! And then, I waited til the absolute top to buy (kept moving my limit order up). My purchase 0f 600 shares at 15.65 effectively top-ticked the stock. It was so stupid that I'm not even mad at myself.

***Update*** Sold 100 shares of LNN @ $42.95 for a one day gain of about 13%. I still have 200 shares left.

Just sold another 100 shares at $44.03. I had a limit order in at $44.95- my luck was it top ticked at $44.94.

Now just sold final 100 shares at $44.95. I did 27.5% on this lot. This sell may have been a tad premature, but I feel confident that when the shorts are done covering, it will retrace pretty quickly.

***Update*** Doubled my position in SMSI, buying 500 @ $12.49

SMSI Seems Like a No Brainer Here

Check PRs and news articles on yahoo. This is extremely oversold.

I picked up 500 @ $12.37

Also picked up another 100 HANS @ $42.97 I'm going against my instincts here, which are to dump this like an ugly Betty. However, every time I do that, the stock surges upward. This time, maybe it will be different?

***Update*** Added 100 LNN @ 37.60

Too Much Cash and Too Much Momo

So I keep waiting for a pullback to spend some of this cash, which is running now at about 30K. Everything just keeps going up. Now, to be sure, I'm not complaining. I just wish I would have spent some more of it. Its thoughts like, "If I would have just bought twice as much of this or that" which can really be annoying.

All in all I'm holding 5 winners and 2 laggards. The laggards are VRGY and ALTR. When I think about it, 2 out of 5 is not so bad. VRGY and ALTR were bought as breakout plays, but didn't breakout, so they will be dumped before too long. My other breakout play, BKI, looks like a dream.

Other than that I do not have much to say. We are in a heck of a bull market, and it looks like it will power over just about anyone or anything that gets in its way. I'm not one for making predictions over a long time horizon, but I think that if good earnings reports start to pour in, this run has the potential to continue.

I feel strangely un-profound at this moment, and the result is that I have nothing really good to write about, so I'll let you move on to another blog.

***Update***
I did sell out of ALTR at the close. 500 @ $22.36 The stock is near 50 day support as well as the lower Bollinger Band. I hate to sell it near support, but I do not like how it traded today in the wake of MCHP trimming its outlook. I only have a small loss in ALTR, and I like to keep them that way.

The Failure of the "Experts."

If the market is always right, then why are many "experts" saying that it is wrong?

One does not have to read very many blogs and newspapers or listen to very many television pundits to know that many of the so-called experts have been calling for a bear market. To my memory, it seems to me (admittedly anecdotally) that many of these writers and pundits have been calling for this bear market phase since the end of 2006, some for even longer. Despite their dire predictions of a recession, a sub-prime blowup, a housing market meltdown, and high inflation, the market has chugged right along. To read a bit of humor which gets at how frantic some of these experts have become, Bill Rempel wrote the following on his blog:

The Next Phase of Bearish Punditry

"Expect to see this soon, at a bear blog near you:

The government is lying to us, and we are actually in a deflationary recession now. They managed to hide this from us through a clever fakery of job numbers and GDP calculations, depressed gold prices through central bank selling, and hedonic adjustments to the CPI. The entire reason the yield curve de-inverted is because the government is manipulating the rates through sales of long bonds. There will come a point in time when the banks run out of gold and bonds to sell, and the damage to the economy will be too obvious to hide. Then, oh, then, the truth will come out! As soon as those stupid, moronic bulls realize this, the stock market will collapse. Just you wait."

Why the market is smarter than the experts.

If one accepts that the experts are wrong, and the market is right, then it becomes important to understand WHY the market is smarter than the experts. In James Surowiecki's The Wisdom of Crowds, the author elaborates on the conditions that often exist within crowds which allow them to make more accurate predictions and provide better solutions than the so-called experts. Some the examples given in the book are of the jelly bean count (widely replicated--the median guess is usually very close to the actual number of jelly beans) and the estimation of the weight of an ox by a crowd of spectators.

The author asserts that in order for the crowd (and by extension, the markets) to be smarter than experts, the following criteria must be met:

Diversity of opinion: Each person should have private information even if it's just an eccentric interpretation of the known facts.

Independence: People's opinions aren't determined by the opinions of those around them.

Decentralization: People are able to specialize and draw on local knowledge.

Aggregation: Some mechanism exists for turning private judgments into a collective decision

Traders need to ascertain if the criteria are currently being fulfilled in the market. If they are not, there may be a failure of crowd intelligence, and the market may be going through a bubble period, or may be experiencing a period of irrational pessimism. For example, during the 1999-2000 bull run in the Nasdaq, the average barber and bartender became stock market “experts.” All independence was lost as nearly everyone jumped aboard the technology train, heading to instant riches. As independence was lost, so went diversity of opinion, until POP! the bubble burst.

The market in June of 2007 seems to meet all the conditions necessary to be smarter than the “experts.” The current high levels of short interest function as a proxy for Diversity of Opinion. Independence seems to be present as there does not seem to be a glut of average Joes entering the market (Think about the Shanghai market as an extreme lack of Independence) The explosion of Web 2.0 and proliferation of bloggers point to Decentralization of knowledge, and Aggregation (which the markets do all the time) is evident with the availability of a range of brokerage options, from full service to discount. Almost anyone can now participate in the markets.

Why are the experts not as smart as the market?

This issue needs a blog post of its own, but I will lay out some simple ideas about why the experts fail.

Experts typically suffer from a lack of cognitive diversity. Simply put, they operate within a narrow framework of thought. One person simply cannot aggregate all varieties of data, opinion, research, and experience as efficiently and effectively as the market does.

Experts also suffer from a lack of humility. This overconfidence in themselves creates a plethora of biases which diminish their capacity to receive and aggregate information which is counter to their beliefs.

Finally, information cascade can result as the experts seek the opinion of other experts (usually they seek out experts who have the same beliefs as they do.) Typically, if they are presented with information that is congruent with their own beliefs, it confirms what they thought (their beliefs are correct), and if the information from other experts is not congruent with their beliefs, it is dismissed as being incorrect.

If they are often wrong, why are they still considered "experts?"

I believe that what we are currently witnessing in regards to many experts calling for a bear market and literally being wrong month after month is simply an example of survivorship. We do not see all the writers, pundits, and analysts who were consistently wrong, as they are now out of work, or have moved to a new career, or have changed their opinions. What we are left with are those who have not yet been fired, or humiliated enough.

Finally, what the wisdom of crowds shows is that even though many of the experts are consistently wrong, as traders, we still need to consider their points of view. We must aggregate all available data, consider other points of view, remain humble, and above all, never consider ourselves to be experts.

Buying Some Breakouts

I've established feeler positions in the following:

BKI 300 @ $15.27
VRGY 200 @ $29.99
HANS 200 @ avg. of $43.30

MVIS and Black Swans

Well first off I took out $2500.00 from the account to pay for a nice vacation at the beach, coming up in July. I believe that Stockalicious will keep my YTD gains the same, even though I withdrew cash. Just in case you cared, or were paying attention.

Of course the other reason the account took a hit today was because of the MVIS retracement. Fully 25% of my portfolio is in MVIS. There has been plenty to say across the blogosphere about MVIS, and many have differing opinions on what the future holds for the company. Obviously, I believe the company will make-good on their promises. However, when one holds 25% of portfolio value in one position, there are some risks, not to mention the volatility when the position retraces (like today). One must understand the risks and be able to stomach the volatility. When considering risk, Black Swan type events must be considered. A Black Swan is an event that cannot be planned for and is one that typically is completely unexpected. Some might call it a worst-case scenario. However, Black Swan events can also be positive. How does this apply to MVIS? First of all, lets consider a worst-case scenario type event. Now by the nature of a Black Swan, it is difficult to predict what the event might be. Lets say for Microvision that the Black Swan is that a competitor (previously unknown to the market) is able to produce a better PicoP type projector, and is able to get it to market and land the big contract with Nokia, Motorola, etc. For this illustration, lets say that it drives MVIS stock down to $1.00 a share. Where the stock would actually trade during this type of event is hard to say, but I believe the company has enough products in the pipeline that it would still receive some value by the market. For my portfolio, in this type of event, I would lose $4.30/share, which would cost me $25,800. This would put my portfolio value at $87,106, and at a loss of 16K for the year, and roughly 15% down. Knowing this may allow you to consider my weighting of MVIS differently. I could easily weather a worst-case scenario Black Swan, and still live to trade the very next day.

Many writers will only mention the worst-case scenario Black Swan and do not like to mention that Black Swans can also be positive. Best-case Black Swans can often be a new, disruptive technology. It may be a development which suddenly frees the world from reliance on fossil fuels, or it may be the development of a full-color laser projector which turns the average cell phone into a full-fledged media player. In this example, I am of course considering that MVIS's technology could be disruptive, and could present to the cell phone, video game, automobile, and aerospace industries a Black Swan.

Now lets consider that the positive Black Swan occurs. MVIS finds itself in contracts with Sony, Nokia, NASA, the U.S. Military, and GM. (Before you chuckle, MVIS has signed agreements with 2 of the 5 aforementioned industries). To stay conservative, lets say the stock goes to $10.00/share. Again, I'm being conservative. I now make $4.70/share, or $28,200.00. My account swells to roughly $141,000.00, giving me a percentage gain of almost 40%.

You do the math. 15% loss vs. 40% gain. That is almost a 3 to 1 reward to risk.

I normally avoid being rude or crass on my own blog, but I'll tell you, you've got to have balls for this folks, and a desire, above all else, to be rich. Many can lay around wondering what if. Many can live their lives in fear of what might happen. Me- I live my life in fear of two things: that I will never be filthy rich, and that I miss out on a great exciting life because I allow fear to control me.

If I have time tonight, I'll update the blog as to what trading I did. SWHC reported numbers AHs, and they look great. The stock is trading up nicely. Unfortunately my shares will get called from me tomorrow.

New Highs Soon for the Nasdaq?

I've spent the last few evenings with my wife and kids, conciously trying to stay off the computer and this blog. I figured that with the markets in transition mode, it would be a good time to regroup and wait for some more data to emerge to guide future direction. Well, the markets seemed to think that we got that data today in the form of the Fed's Beige Book.

Looking at a chart of the Nasdaq, it seems that this last dip was just what it needed to build up some strength for the next leg up. The MACD is below the negative line, and the Stochastics just crossed over, giving a buy signal. Both have plenty of room to run. Last Friday's bounce made a perfect touchdown on the 50 day average. Furthermore, it seems likely that a lot of bear bets were made over the last week or so, and if the market continues to move up, they will have to be unwound.

Yesterday afternoon I sold off TRW as it traded beneath its 50 day line. Of course today it rebounded, but oh well, as it is important to close out a trade if it fails the criteria for which it was entered. It is also just as important to know when to re-enter a trade. At the close today, I picked up another 500 of SWHC @ $14.78. I am anticipating my other 500 shares getting called from me tomorrow or Friday, and I don't want to have to re-buy them above $15.00

Tonight I will be running some screens and looking for new candidates. I will go into Thursday with over half cash.

***Update*** The following are some symbols that looked promising. These were returned from the BobV32x filter and the Close at HOD plus 10% increase in volume. You might find them interesting. I like posting them here because it saves me having to write them down and take them to work.

(Bobs) SUG, ALTR, ICON (HOD+10%Vol) NOVL, HAS, CPWR, TEK, AMIS, SCS, NSH,

And from the 52 weeks highs list, I like VRGY, PRX. What I want to do with all of these is compare the ATRs per Marlyn's suggestion to help me weed out the ones less likely to move.

Bull Traps

Looks like Friday may have caught a few bulls. I know I got caught, although I do still have a large cash position. Plainly, I was a little premature buying back some of my positions.

Anyway, this morning I decided that I'm not ready to go short, so I'm going to continue to sell-off stocks and build cash. To that end, I once again sold PFWD, 500 @ $15.98, taking a very small loss.

Also, as much as I don't trust the market right now, I still really like ALVR, so I doubled up my position on this morning's dip, buying 500 @ $9.15 Other than this purchase of ALVR, I will likely not be making anymore purchases.

Monday Wrap-Up

Well, it was inevitable-- the account closed down a little today, mainly due to MVIS shaving off a little more than a nickel.

My other stocks traded as if it were summertime. Oh wait, it is. ZZZZzzzzzzzzzzzzzzzzzzzzz

The Nasdaq action suggests consolidation on what looks like very light volume. The latest volume information I have shows approximately ~1.6 billion shares traded.

At this point I think it is wise to trade lightly and to keep some powder dry.

Good Monday Morning

Bought 200 TRW @ $38.56

I have been wanting to experiment with options. There is only so much one can do on paper, so I decided to sell some covered calls today. I sold 5 June 15s @ .20 of SWHC. This netted a profit of $86.00 I'm not really concerned if the shares get called or not. In terms of learning how everything works, I'm kind of hoping they do get called so I can find out how my platform handles it and how I am notified. If they do get called, I will have netted about $160.00 from the trade.

More later...

Beautiful Bounce from 50-Day Average

While screening with Stockfetcher, I came across this chart for TRW. It had a nice bounce from its 50-day average, and closed at the high-of-day. The pullback to the 50-day is often reported to be a favorite buy-signal for institutions. This will be interesting to watch to see if it can continue its uptrend after such a long run. One strange statistic about TRW is that the short interest in May was only 600K. I may throw some change at this one as I like trades that have a clear place where the trade fails. For this trade, the lower Bollinger Band (not shown), the 50-day average, and the whole number 38 must hold in order for the trade to not fail.

The filter that found TRW is screening for stocks that closed at the HOD on a 10% volume increase over the previous day. There are a few other stocks this screen returned that look interesting to me. Q, IRIS, TUP, CAR

When Is $1,000,000 Worth More Than $1,000,000?

This article will be the first in a continuing series about randomness and luck in the financial markets.

I pose the question, "When Is $1,000,000 Worth More Than $1,000,000?" as I believe it is a good jumping-off point for this discussion.

Let's first consider two people, both who have recently reached retirement age with $1,000,000.00 in the bank. We have a small business owner who managed to save and participate in a retirement plan over the last 20 years of his career, and we have a man who was rear ended by a drunk-driving UPS truck operator. The jury awarded him the prize just as he was hitting retirement age. Both men are in possession of $1,000,000; however, is the money worth more in the hands of the small business owner or the victim of a DUI?

We often hear stories of the men and women who win multi-million dollar lotteries, and are then broke and in great debt within a few years of winning the prize. What is our reaction to those stories? Do we sometimes feel that they deserved to lose the money because they never really deserved to have it in the first place?

Let's examine how this might apply to traders and investors.

Again, lets compare two traders. One averages $1,000,000 per year by using complicated options strategies. These strategies could be described as low-risk; yet, like many low-risk strategies, the rewards will not be absolute and are limited by the strategy. Our second trader can best be described as a gunslinger. He is no stranger to 7 figure returns. He typically seeks out bio-tech companies with drugs in the approval process and puts down a significant portion of his capital as the testing nears completion, betting on a new homerun drug.

Both traders finish the year with $1,000,000; however, is the amount worth more than $1,000,000?

If the option trader were to lose everything (not very likely, as he has quantitatively identifed almost every scenario that could affect his strategies) would we feel any sympathy for him? How about the gunslinger? Would we feel any sympathy for him if he lost his $1,000,000 due to making a bad bet on a company like Dendreon?

Do we unconciously assign more worth to the 7 figures in the hands of the option trader?

Let's go back to our two individuals, the retired small business owner and the DUI victim. The small business owner has proven that he can manage his money. He is likely to leave the money he has saved in an interest bearing account of some sort. The DUI victim has no track record of saving or investing. Before his accident, he believed he may have to work until he was 70. What are the chances that he will be a good steward of his prize awarded by the jury? Which sum is worth more?

Luck and Randomness

It should be clear that in each hypothetical situation we have an individual who arrived at his 7 figure sum by a strategy which is probably able to be repeated across different times as well as different fields. Whether the small business owner was a doctor, or a lawyer, or even a teacher, his strategy of saving and investing is likely to be replicated by many with similar success. However, our DUI victim and our gunslinger have gained their 7 figures through a series of events which can only be described as luck and randomness.

Do we as traders and investors place a value on the method of earning money? Does the method used to earn the prize assign a value on the prize that is higher than its intrinsic worth?

The questions are important to consider. If we often win money in the markets through luck and randomness, are we then more likely to place a lower value on this prize? Does assigning a lower value mean that we are more likely to use high-risk strategies when the capital is deployed? Can we also describe one trader as being "better" than another, even if they earn simliar returns?

As I continue my articles on luck and randomness, we will consider the above questions and begin to explore alternate histories.

Although I've been considering these issues for some time, my thinking has become more solidified on these issues as I read Fooled By Randomness, by Nassim Nicholas Taleb. I will be borrowing some of his ideas and thinking in order to examine luck and randomness. You can find the book under "My Favorite Trading Books" link.

Good Afternoon World

What a pleasure to get back to computer access and find the account sitting at YTD highs. The only bad news I have is getting stopped out of HANS, .10 cents from the low.

My BobV32x system pick, MDCO, needs to get closed out today. Looks like I'll take a small loss on that.

Other than that, I doubt I'll trade anything else today. I had plans to add to ALVR, but it moved without me. I'll have to wait for another pullback. This weekend will be a good time to review this week's market action, looks at some charts, run some screens, etc., to determine whether we are looking at just a pullback, or more of a correction.

***Update*** This market is incredible! However, I'm not convinced the bulls are out of danger yet. As I was in almost 60% cash, I am re-establishing small positions in stocks I sold off yesterday.
500 SWHC @ $14.84
500 GIGM @ $14.93

Can't The Bears Use An Oversold Indicator?

I mean for Christ's sake, the friggin' futures are down again this morning. It must be the late-to-the-party crowd jumping on the short side a couple of days too late.

And just in case you weren't paying attention, I said about a week ago, that when this guy starts taking directional trades, that it would represent a market top. Was I right, or what?

I've got a meeting starting at 8:00 a.m., and it is out of the office. So I will not have access to the markets until around lunchtime. I've set stops on all of my positions except for MVIS. That will just have to do for now.

I noticed on my local news station that they had one of the CNBC pretties talking about the market tanking. When that stuff starts happening, its time for a bounce. I fully expect for a flat to green day today.

To Mother Market: I Smote Thee In Thy Nether Eye

Yes, if you read Chaucer, you know what I did to Mother Market today. If you have to ask, then you should have paid more attention in English class.

For you math majors, the account finished green today.

Basically, I sold off almost everything today, harvesting some nice profits. The only relatively dumb move I made, in my opinion, was buying back 500 shares of PFWD @ $16.13. At the time I was distracted by two salesmen who were, surprise surprise, trying to sell the company schwag. Instead of punching both of them, I made the mistake of hitting the buy button.

Anyway, I have more that I want to write about concerning today's action, but I am scheduled for 5:00 o'clock cocktails, and after a day like today, I don't want to be late getting into that action. More later.

Good Morning World

I sold 300 SWN @ $46.91. This made a profit of about 400.00, or about 3%. There looks to be some support around $46.00, and I'd consider buying it back around that level.

The Nasdaq is bouncing around just above the 20 day moving average. I will begin to get a tad concerned on a close beneath ~2570.

More updates later.

***Update*** Sold 1000 GIGM @ $14.85 for a small loss.

***Update*** Sold 1000 SWHC @ $14.90 for a big, fat, man-sized gain of 14% or ~$1800.00 This trade is one of my best of the year in terms of execution.

***Update*** Sold 500 PFWD @ $15.98
The market is speaking. Are you listening?

Wednesday Evening Wrap Up

The account closed green today, and I feel really good about that.

SWHC finally made its move, and it made me feel like "the man" to have a stock run after I was already fully positioned. Couple that SWHC move with a profitable daytrade in the Qs, and the day turned out to be a success.

MVIS held strong today and formed a bullish hammer, while SWN attempted to crash my party. SWN may need to be sold tomorrow. I'd like to note that the Bollinger Bands around HANS are closing in extremely tightly. I am of the opinion that the volatility squeeze will have to happen soon. I am considering adding to my HANS position as my belief remains the volatility will be to the upside.

The Nasdaq closed lower on average volume. I still see no reason to not buy this dip.

Knocking Off Early Today

I'm leaving the office in a few minutes and heading home. I've got a sick baby and some painting to finish.

As for today's action, I don't think things are as bad as they seem. Most everything I'm watching is trading way below average volume levels. I have every confidence that the dip buyer is going to step in at some point and stabilize things. The Nasdaq is still a good ~20 points above support at the 20 day average. Therefore, it would be healthy and normal to see the 2570 area.

***Update*** Lets play "catch a falling knife!"
Long 1000 QQQQ @ $47.06- This will be liquidated before the close.

3:23 ***Update*** I caught the knife, selling 1000 QQQQ @ $47.24

What A Lucky Stiff!

Last night I used Stockfetcher to screen for stocks making a new 52 week high, and for stocks that closed at the high-of-day. The screens returned several hundred stocks, and I just scrolled quickly through the charts, and saved the ones I liked. I ended up saving 22 stocks. This morning, while at work, I saved the symbols into my platform, and checked for any pre-market action. The one stock that stood out in the pre-market was ALVR, as it had traded some small lots and looked to gap up. The chart was showing a strong candle orginating from the 20 day average, and was extended just beyond the reaches of the upper Bollinger Band. I typically do not purchase stocks trading above the upper band. When the morning gap down occurred, ALVR held strong, and so I purchased it. I say all this because it turned out to have a killer day, and was one of only a few stocks that actually closed green from the 22 symbols I started with. I'd like to think I have some superior pattern-recognition skills, but I'm sure it was just luck that I picked the big winner. Anyway, I'm posting the chart because it makes me happy to look at it. As for tomorrow, the surge in volume tells me there is more upside left, and probably an a.m. gap-up. I will consider selling into the gap-up, although stocks that surge like this on strong volume typically will continue the run, albeit after some consolidation.

Today the account finished down a tad. I was very happy with how everything performed. Unfortunately, Stockalicious must be having a server malfunction because their site will not load and my kewl Stockalicious widget will not appear on my blog. Therefore, you have to trust me that I had a decent day, without my widget cheat-sheet.

I doubled my position in GIGM, adding 500 shares at $15.18. If you recall, I sold out of this position on Friday. Now I am back in, with a full position. The stock has caught a serious bid the last two days. SWHC also seems on the verge of running again.

The BobV32x system pick MDCO also closed green, on average volume. It closed 7 cents beneath my entry. It has 3 more days to show me the money.

The Nasdaq finally closed firmly within the Bollinger Bands, unfortunately on large volume. I'm continued to be concerned by the divergence between price and volume, but will continue to stay bullish until the technical picture changes. Note that bullish investor sentiment levels are reaching extremes.

Good Tuesday Morning World

I bought 500 ALVR @ $8.90 I found this one last night from a Stockfetcher screen.

More updates later.

Nasdaq Again Closes Outside of Bollinger Bands

I would feel better if volume was better than average. It's not. Today my chart shows volume on the Nasdaq pegged right at the 50 day average.

Today marked an interesting hallmark as I took my first system pick, from the BobV32x filter- MDCO, buying 250 shares @ 20.15. I set my stop at 4%, or $19.34. We'll see how this trade works out. The filter actually generated two picks, but I only took one. I plan on taking on a max of two positions from this system once I get more comfortable trading it.

I also sold CLWR, 400 @ $19.04 as it looked to make a really ugly reversal candle. This gave me a small loss of about $140.00 I also sold out of LNN, as it looks like the momentum has perished. I sold 300 @ $33.74 for an approximate profit of 4% or just over 400 bucks. I have to say that LNN did pause at the 20 day average today, which normally I would find healthy. However, the huge short interest and the recent series of lower highs made me liquidate.

I also re-purchased 500 shares of GIGM @ $14.90 as the stock caught a serious bid most of the afternoon. $15.00 may still be serious resistance. We'll see.

I have about 26K in cash, and I plan to screen for breakouts and bounces over the coming days to put it back to work. I'm working hard to not be too anxious as the Nasdaq can not trade outside the Bollinger Bands too long before retracing a bit. While, as always, a trip back to the mean would be healthy, if the strength continues, the Nasdaq may just ride right up the upper band for a while.

Backtesting Results: BobV32x

First, I must thank Marlyn and Jim for getting me started testing using Stockfetcher, and for designing the Blow-off-bottom (Bob) filter. I'm not sure which one, Marlyn or Jim, designed the particular Bob known as V32x. I believe they both made tweaks. Please take a look at their blogs to find out more. (Marlyn is on hiatus from blogging, but there is loads of good information still on his blog).

Anyway, Stockfetcher does not allow one to backtest more than 2 years data at a time, and they do not allow testing from more than 5 years ago. I decided to pull together all the 2-year tests, testing BobV32x as far back as allowed, up to the present. The results are very interesting.

Here is the filter and the parameters I used within Stockfetcher to get the results.

show stocks where close is between 15 and 35
and average volume(90) > 500000
and close 2 days ago <> volume 2 days ago
and close > open
and low > low 1 day ago
and close 2 days ago <> close 2 days ago and close > close 1 day ago

Maximum Trades Per Day: 2
Maximum Open Positions: 2

Stockfetcher provides very basic statistics for their backtesting. I wanted to take it further and see how the strategy performs in terms of R, and plot a chart of the equity curve. One test that I'm not smart enough to run in Excel is to produce an R multiple distribution. I have the data if anyone wants to run that distribution.

The results show that on average, this system produces bigger losers than winners, but the system also has twice the number of winners than losers. I did include $14.00 roundtrip for commissions in the results. The max drawdown from equity peak to trough was 15.5%. The beauty of this system is that it keeps initail risk at 4%, but the stops are only hit about 11% of the trades. It also produced a string of 15 winners in a row, while the longest stretch of losers was 5 in a row.

Finally, I allowed each position to be only $10,000 (including commissions), even though the theoretical account could have allowed more than that after the equity increased. Increasing position size as equity increased would have probably resulted in greater gains.

You may view all the trades generated by this system in the Excel Spreadsheet, as well as some of my calculations right here.

Note: I have edited this post a couple of times, and it seems that when I do, blogger has deleted some information, specifically from the filter. The post may have been up for a while without all of the data. This post is correct and has all the information intended.

Nasdaq Closes Outside of BB

If one looks at the times when the Nasdaq has closed above the upper Bollinger Band in the past year, he will find that typically, within a day or two, the index reverses to trade back within the bands. Even worse, a doji was formed today, on lower than average volume. What does this mean for us Monday? Who knows. What it means to my trading strategy is that it is time to cut some laggards and build up a little cash.

I sold GIGM today because it looked like it might close beneath the 50 day average. This was a hard call to make, as I really like the company, and the stock. However, I feel it might make a double-bottom around 14 before moving up again. There really is no near-term catalyst to drive it over $15, and the company forecasted a weak 2nd qtr. I noticed it did catch a small bid at the close. I will be a buyer again on strength over $15 or a re-test of the $14 area. I made a couple percent profit on this trade.

I added to HANS today because there is going to be one heck of a volatility squeeze, hopefully sooner than later, and hopefully it will be UP.

CLWR continues to outperfrom, although it could not hold above resistance at $20, so I did not add any. Volume did swell today. The Fly used to have a position in CLWR, and sold it all, and now seems to hate the stock. I think he is punishing it by not buying it back.

Finally, SWHC closed above $14.00, and PFWD has experienced 2 days of high-volume churn, probably as recent buyers of the 15 buck follow-on shares unwind their easy money. PFWD may have to be sold if it can't hold $16.00

All in all it was a killer week, and I was able to finish it off making another couple hundred bucks today. I am hoping to get a post or two up over the weeked, so stop back by if you get the hankering.

Good Morning World

ARWR news was released. Check Fly's site for the update. It feels like a sell the news event to me, so I sold out, 1K @ 7.405. This makes a nice gain of almost 1 grand or 13% in a few days.

Most everything else I own is ripping upwards. More updates later.

***Update*** Bought 100 more HANS @ $40.32
Sold 1000 GIGM @ $14.57