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Newsletter September 30, 2006 The Traders Inner Enemy Market & Sector Review Rotation, Rotation, Rotation Largest Changes In Raw Numbers (21 Days) This Week's Economic Reports The Traders Inner Enemy I've seen traders sit quietly, motionless, appearing in control, while their minds are in such a twisted rage that they are incapable of closing a bad position. I have seen people curled up in their seats holding their stomach in physical pain from stress. I've been before the screen, myself, palms sweating, blood pounding, face flushed, and adrenaline pouring through my veins, as if I were in physical danger. All I was doing was watching numbers on a computer screen. Ever wonder what the inner enemy is, that makes this business such a battle? What are the forces that can bring out irrationality, even violence, while watching something as logical as numbers? Learning to conquer the inner enemy may be the single most important element in succeeding as a trader or speculator. While some fail and some succeed, the difference is not intelligence, it is not knowledge. It is the will to execute knowledge! Acquiring the requisite knowledge to trade is relatively easy, execution not necessarily so. Take for example the subject of weight loss. You can walk into any bookstore and find a countless number of books, by experts, on the subject of weight loss. Yet only 12% of those who start a weight loss program actually lose weight and only 2% maintain the weight loss for more than one year. That is a 2% success rate, which is even worse than the 5% success rate for people trading futures. Whether it is losing weight or trading, the most difficult part isn't knowing what to do or how, the most difficult part is making the decision to do it, and sticking to it. When following through is difficult, it is because our minds are still in a state of conflict regarding which course to take. What is the source of this conflict? Why is it that even when we know what we should do, it often seems impossible to do it? "My head tells me to stop, but my heart tells me to go for it," this common statement implies a dualism in the nature of human beings; the rational side on one hand and the emotional side on the other. Most people believe these two aspects of human nature are separate, unrelated, and often in opposition to each other. The acceptance of this dichotomy between emotion and reason, the belief that they are necessarily unrelated and often conflicting, is at the root of most human conflict. How can it be possible to lead an integrated, fulfilled life without suffering constant inner turmoil and frustration? If you accept the premise that emotions and reason are mutually incompatible, it is not possible. As long as you believe the soul is destined to permanently duel with itself, it will. This is the enemy that can make trading such a war. The way to end it, is to challenge the premise that emotions and reason are separate and unrelated aspects of human nature, which means focusing on the nature and purpose of emotions in human life, with particular emphasis on the role of anger and fear. Market & Sector Review Rotation, Rotation, Rotation In real estate, which has been in the news quite a bit lately, they say everything is location, location, location. Depending upon your time frame of interest and your favorite vehicle for trading most everything in the stock market will boil down to rotation, rotation, rotation. To illustrate what I am saying let's take three distinct moves in the market over this last year: the up move from the beginning of the year through its peak on May 10; followed by the down draft from May 10 through June 13; and the subsequent up move through Wednesday past. Fist we'll look at some of the popular averages, their respective percent changes during the above mentioned periods, and their rank in terms of percentage change of the 142 indices we follow. Take a moment and look at each period independently of the others, then combine the periods. Notice a few things in the above picture: the biggest winner (through May 10) of the ten indices displayed was the Dow Transports up almost 19%; although up, the biggest loser was the Dow Utilities up less than 1% over the same time period. As a brief aside, the biggest winner in that time frame was STQ (Steel Producers Index) up 58 1/2 percent. Nineteen indices were down during this time frame the biggest loser, Dow Jones U.S. Home Construction Index (DJUSHB), down 13.2%. In the second period (May 10 through June 13) the biggest loser happened to be the biggest winner in the first five months of the year, the Dow Transports. Interestingly enough the biggest winner was the Dow Utilities, the biggest loser in the first period - Rotation! In fact including all indices, DJUSHB was the biggest winner of all indices during this period rising 21.5%. Interestingly enough the single biggest loser in the first period. I think it is also worthy of note that in the latest period the winner is the Dow Industrials surpassing it's May highs and perhaps by the time this newsletter is sent out making new all time highs. The S&P-500 has also surpassed its May high, however still some thirteen percent from its all time peak. With the notable exception of the S&P mid cap index and the NASDAQ-100 index, the other indices rallied as well, however nowhere near their May high. Suggesting that this recent rally has been led by large cap stocks, not usually a good thing for the market overall. Moving on, let's look at sector/industry strength and rotation, rather than the popular indices. Instead of the Hemscott (MG) sector groupings I usually present, this week I will use Exchange Traded Funds (ETF). Exchange Traded Funds (ETF) can provide an excellent sector and industry group analytical tool for gauging sector/industry performance. I often use the Hemscott groupings and Exchange Traded Funds to confirm one another. I have for this exercise eliminated bond and foreign Exchange Traded Funds so we may get a feel for the sector rotation. Changing the above exercise just a bit for each period mentioned above: I will show the top ten performing Exchange Traded Funds; along with each listing will be that Exchange Traded Funds performance during the period of outperformance as well as the other two periods. Study each Exchange Traded Funds performance during all three periods. Note: had I included the bond and foreign Exchange Traded Funds they would have been adequately represented in the top 10 during each period. Notice that of the thirty Exchange Traded Funds listed above not one appears in the top ten for any two periods. Rotation! So who cares if the Dow Jones Industrial Average makes a new all time high, it's just a number. Had you invested in the Dow Jones Average six years ago you would now be about even for a compound annual return of zero (dividends not considered). Care not what the Dow Jones does, care instead which sectors/industries you are trading or investing in. "It is a Market of Stocks!" Largest Changes In Raw Numbers (21 Days) Report Explanation This Week's Economic Reports Have A Great Week! Bill Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.