Newsletter

October 14, 2006

The Character of a Trader

Market & Sector Review
Thinking Contrarily

Largest Changes In Raw Numbers (21 Days)

This Week's Economic Reports

The Character of a Trader

What does it take to be a successful trader? Experience? A good "feel" for the market? Mastery of technical and fundamental analysis? While these elements are important, reaching the highest level of "facts and figures" expertise is not in itself sufficient. To achieve real success as a trader, no matter how you define it, you must have all the ingredients of a trader's psychology: good character, a certain personality type, and a particular way of thinking.

Analytical tools and the mental ability to apply them intelligently are absolutely essential to be a success in trading, but genuine success as a whole, takes more than a good brain. It takes Character!

Webster's dictionary defines character as "the complex of mental and ethical traits marking a person." Do you put your own interests and those of your family first? Or are you more concerned with the well being of others? Do you choose honesty over lying, integrity rather than hypocrisy, productiveness over idleness? Can you consistently weigh, based on an internal sense of right and wrong, justice versus mercy, rationality versus emotional whim, pride versus humility? The process of making those choices and decisions may seem intuitive and hard to explain, but in all cases it begins with your own personal sense of morality and ethics - in other words, your character.

Your character is set by what you value, what you strive for. Your overall ethical structure - your values and your beliefs - determines character: it determines what you do.

For example, suppose two people both value money. That is, both want to make a lot of money. One has a healthy view toward money, seeing it as a means to many desirable ends. The other however holds the subconscious belief that "money is the root of all evil."

If both make a lot of money, the first would be more likely to enjoy it, spending it for a nice home or dream vacation. The other person however, may find it impossible to truly enjoy his money. He may feel a vague uneasiness when spending it, or may be guilt-ridden when booking that dream vacation. If that second person made his money trading the markets, in all probability, his guilt will force his subconscious to lose most if not all of it.

Are your character traits suitable for trading? Definitely worth thinking about!
Market & Sector Review
Thinking Contrarily

I believe contrary thinking works over time not because the public in general is dumb and always on the wrong side. It works because when a trend becomes mature; that is when the news media picks up on the trend and begins to report. It is then that the uninformed become aware and unfortunately many join the party in its very late stages. Examples abound: the Internet bubble in 1999 and 2000 a perfect example; oil in 2006 another. Remember when analysts began recommending internet stocks by multiples of revenue as opposed to earnings, had you ever heard such a thing before?

More recently do you remember the forecasts for $100 per barrel of oil with some going as high as $150 to $200 per barrel? When you begin to hear what a normal person would consider being outlandish forecasts, it's time to begin thinking the other way. Often when markets (stocks or commodities) are making new highs accompanied by outlandish forecasts for where we are going, I begin to think sell. Likewise when markets are declining and the forecasts come in for severely lower prices, I begin to think buy. Notice I said begin to think, I did not say jump in and buy or run for the exits. Simply adjust your strategy. These are what I like to call a point of recognition: where one recognizes the strong moves in place but begins to ask; is this beginning of the end?

If you recall the September 30 newsletter when I discussed Rotation, Rotation, Rotation, weak groups become strong and strong groups become weak. During the past couple of weeks I have been hearing forecasts for much lower energy and metals prices, this after an already severe downward move. Some commodity prices off their respective highs by some 25% or more and now we hear and read of much lower prices ahead. Is it time to put on your contrary thinking hat? Let's explore.

I believe it was last week when I heard a report on CNBC that Shell Oil's chairman is expecting sharply lower oil prices ahead. The light bulb went off and the contrary thinking hat went on. Perhaps he is right but let us take a look at a little spreadsheet I put together from the relative strength tables on ETF's, indices, and industry groups. How does this sector stack up at the moment?

One can readily see that this sector has declined substantially from earlier peaks. Relative strength rankings continue to deteriorate, and from this chart alone, there appears no reason to buy; at least at this time. We can see from looking at the industry groupings that Oil & Gas Drilling and Exploration is the weakest of the sector followed by Independent Oil and Gas. Oil and Gas Pipelines is the strongest group in this sector followed closely by the Major Integrated Oil and Gas Companies. This is also reflected in the weakness of the Oil Services Holders (OIH) vs. The Spider Energy Sector (XLE) and the Powershares Winderhill Clean Energy Portfolio. There is a reason for this, let's see what that reason is by comparing some component stocks.

The data has been compiled at different times during the week and I have highlighted some areas on this spreadsheet that will very quickly tell you what is working in this sector; and what is not. Although it appears below as a picture if you wish to have the spreadsheet to sort, please feel free to send an email and I will gladly forward it.

For newer members some definitions: These are only definitions to guide you, not buy, sell, or hold signals or recommendations. Trend definitions: short term or very short term is the position of Welles Wilders Parabolic SAR (If you are not familiar with this technique go to the site's learning center, click on Step 4, then click on Parabolic SAR); Intermediate term is UP if the 50 day simple moving average is rising and DWN if it is declining; Long term is UP if the 200 day simple moving average is rising and DWN if it is declining. Accumulation: if the moving average of accumulation is rising and the accumulation number is above that moving average Accum is printed in the column; conversely if the moving average of accumulation is declining and the accumulation number is below the moving average then Dist is printed in the column. Finally Distance from 200-day moving average column above (which appears in reports as RTN). There is a tendency, repeat tendency, for a stock or market to move back towards the 200-day moving average if it reaches a level of 20% above it or 10% below it. Another way to look at this, is as an overbought/oversold indicator; the column will read sell if the stock is 20% or more above its 200 day moving average and buy if it is 10% or more below its 200 day moving average. Moving average direction is not a consideration. In the above picture I have used oversold instead of buy. I may change that in the reports soon.

So what is working? Quite simply it appears to be dividends or dividend yield! I have highlighted all with dividends greater than six percent. Notice that many are in up-trends and under accumulation, even though their relative strength ranks appear to be low. Low relative strength rankings are not always a bad thing. It really depends upon what you are looking to accomplish. For instance during my brokerage days I had a client with a very interesting goal from his trading account: Simply at the end of each year he would take his trading profits and buy AAA rated corporate bonds with the money for his retirement. Bonds no longer have coupons but his goal was simply to be able to clip coupons each month (with a brand new pair of scissors of course) and deposit the money in the bank to spend and enjoy.

At the moment, technically, there appears to be no bottom for oil, as I write this trading at $57.50 per barrel some 25%+ off the July highs. Supposedly bullish news is met with new lows. Forecasts are beginning to look for $40 per barrel or less. Thursday morning on CNBC I listened to a short interview where the analyst is predicting $20 per barrel over the next four to eight years. Is it time to think the other way? Is it time to put our contrary thinking hat on?

The other side of the argument of course; are oil prices close enough to a bottom to begin probing the long side? On Wednesday I heard on CNBC an interview with T. Boone Pickens founder of Mesa Petroleum and BP Capital, he is predicting at the moment $70 per barrel oil before $50 per barrel. If it is still available (I do not know how long they keep these interviews) you can listen to the interview here: T. Boone Pickens Interview
Add to this interview, an article I read on Bloomberg: Commodity `Supercycle' Not Over, Morgan Stanley Says

While I personally do not like attempting to call bottoms, or tops for that matter, I do believe it's time to begin watching the energy sector very closely for opportunities that may present themselves, soon. Ideal scenario would be for some base building over the next several weeks, improving relative strength during the base-building period, Followed by a breakout.

Finally let's look at a comparative chart of the Groups, ETF's, and Index mentioned above along with the current price of Oil, as of Wednesday 10/11/06 close.

While this chart may be hard for you to read, make note how for the most part the stocks appear to be holding well, even as oil prices continue to decline. Notable exception being the Oil Services Sector (OIH). Do the stock buyers know something? Although early, perhaps very early, a sector worthy of attention and following closely for opportunity.
Largest Changes In Raw Numbers (21 Days)

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.