Newsletter

November 5, 2005

Trade Stress Free

Market & Sector Review

This Week's Economic Reports

Member Update: Now when you search through stocks within a group, the relative strength data will be a percent of that stocks group average and not the broad market. This will allow you to quickly determine which is the strongest / weakest within the group you are looking at. Remember the difference here is they all may be advancing relative to the broad market but they may not be advancing against other stocks within the same group. We are also looking at the possibility of using a linear regression or possibly the slope of the linear regression line as opposed to the moving averages. If anyone has any strong feelings along these lines please let me know.
Trade Stress Free

As we all know the markets are often unpredictable, certainly uncertain and your ability to generate profits depends on how well you navigate. Trading can certainly be hectic and if left unchecked, the sense of uncertainty can become stressful. Negative emotions associated with stress in turn can contribute to trading errors. With the upcoming holiday season, there are added pressures of inconsistent market conditions, shopping, and meeting expectations of family and friends. When trading it's most important to combat stress and become as stress free as possible.

You can't completely remove stress from the trading environment, but you can prevent the stressful aspects of trading from making you feel overly anxious and fearful by developing a stress management plan and following it. Try to minimize the impact of stress as much as possible. Stressful emotions can build up, and if not released occasionally, you can become overloaded. Some ways to manage stress include (1) avoid caffeine, (2) exercise regularly, (3) minimize daily hassles, and (4) seeking out social support. Caffeine helps many people wake up in the morning, but too much, may often elevate your nervous system to the point of making you hyper-alert to the slightest form of stress. Stress can also be reduced through regular exercise. Tension builds up during the trading day, and a regular exercise program ensures that pent-up frustration and tension are released. It's also important to reduce stress in your environment. Daily hassles, such as time pressure, traffic congestion, or feeling over-extended can build up psychological tension and loiter in the back of your mind. Try to minimize these hassles and relieve the pent-up tension. However you cope with daily hassles, don't ignore them; don't try to pretend they aren't important enough to deal with immediately, as they can accrue and cause you great strain in the long run.

Social support from friends and loved ones is a good and effective way to cope with stress. When extremely stressed people have a person, or persons, with which to vent their frustration, they are able to better cope with the stress. Having others who are also traders will help relieve stress when you understand they experience the same stress as you do. Oftentimes, merely expressing stressful emotions of anger, fear, and frustration can make one feel optimistic, empowered, and ready to tackle new stressors with renewed vigor. While friends and loved ones can help relieve stress under the right conditions, they can also be a substantial source of stress, especially during the holiday season. Not just anyone can serve as a vital member of one's social support network. Ideally, people in one's social support network should be good listeners; they should actually want to hear about your unique problems, support your feelings, and help you alleviate stress. Some relationships are uplifting, but other relationships provoke frustration and anxiety. This may be especially true for traders, since not everyone in a trader's social support network understands trading or is supportive of it. For example, suppose a loved one is not supportive of trading, and frequently provokes anxiety by saying things like, "How much did you lose today?" or "When are you going to give up trading and go back to your regular job.". Thus, it is vital for your psychological health to seek out the right kind of social support.

During this upcoming holiday season don't let stress get the better of you. Try to stay calm and relaxed. Enjoy yourself as much as possible, and you'll be rested, relaxed, and ready to tackle the challenges.

Market & Sector Review

The following was posted by author Gary Smith (How I Trade for a Living) and I just had to pass it on. Gary posts infrequently on various message boards on the Internet and when I see his name I always click and read. You can visit Amazon.com to purchase his books or the ones mentioned below. This illustrates what I have been saying about searching for stocks and forgetting the indices (as much fun as it is to attempt to predict the indices) and utilizing sound money and risk management principles, only Gary says it much more eloquently.

If you are among the multitude who are seeking certainty and reliability - a system, indicator, or guru you can count on to tell you what to do you may want to skip this long winded post. This is not the typical razzle and dazzle post on picking tops and bottoms or whether you should be a bull or a bear.

I placed my first trade 39 years ago and have a library of 500 to 600 trading books, yet I doubt I can forecast and predict the market any better than someone who has been at this for 39 days. It's a good thing too that I can't predict or forecast because I would hate to think how little trading capital I would have accumulated over the years had I been burdened by the overconfidence that comes from believing I possessed the gift of market prediction.

This past month (October 2005) is a shining example of my ineptitude at fortune telling. I was *consistently* ultra-bullish nearly every day this month for a variety of factors. The Hulbert Sentiment Index, the NYSE Balance Index, insider buying, net outflows from domestic mutual funds, corporate buybacks and mergers, and tops on my list, the never before seen humongous shorting by the public above that of the NYSE Members. Despite my ulta-bullishness, the market didn't accommodate as all the major indexes, the Dow, Nasdaq, and the S&P will close negative for the month. I was wrong, wrong, and more wrong.

Now I don't trade the indexes anymore believing there is no edge there so I trade individual stocks. But my stock selection was almost as bad as my ultra-bullishness on the overall market during this past month. In the 32 trades I placed I was wrong on 26. That's an over 80% failure rate! Pretty pathetic wouldn't you say?

Yet, as clueless and wrong as I was during October (much like I am the other months) I will come out of this month with a nice profit. That's because I focus my energies not on predicting, forecasting, indicators and the like, but on money management/risk control strategies. Or to quote John Hayden, the author of one of my favorite trading books, The 21 Irrefutable Truths of Trading, " Money management or risk control strategies are the most critical requirement for a successful trader. Without exception, every outstanding trader will tell you that it is the most important factor that determines your success."

To me, money management is nothing more than our ability to weed out our losers as quickly as possible while just as quickly building up our winners. In fact, accumulating wealth in the trading game comes solely from our ability to work with our winners. On an unrelated topic and about the only controversy I might stir up here is my utter disbelief at seeing some of the self proclaimed trading wizards who average down on their losing trades. I believe Paul Tudor Jones said it best that only losers average losers.

For what it's worth I firmly believe that people attempt to predict the averages in order to, in their minds determine when to buy stocks and when to sell stocks, all stocks. The major averages for the most part are unchanged this year however some stocks have put together stellar performances despite the ups and downs in the averages. Look at, what everyone knows, APPL, GOOG, the metals and mining stocks, and energy stocks, to mention a few. This week we were lead higher by the transportation stocks (Dow Jones Transportation Index made a new all time high), and as one of our members so aptly pointed out to me in a mid-week communication, Insurance stocks were really on the move.

While I only have one long term holding in this sector, I totally missed this sectors set up and move, well you can't get 'em all *grinning*. But let's look, in perfect 20/20 hindsight what we might have seen along the way that should have brought yours and my attention to this sector and its components. You may find when looking deeper that some of these stocks will seem a bit overextended. That's OK, just watch pullbacks they may present some good opportunities. First let's look at a portion of the Industry Group Report (Picture taken mid-week), Relative Strength Table.

This report was sorted by Relative Strength rankings over the last 6 months. The top insurance group by this measurement is MG(432) Accident and Health Insurance. Notice the ranking a month ago and two weeks ago slow but steady improvement, same with the relative strength as measured over the last year. Next notice the shorter term relative strength numbers and the rising moving averages, all good. Let's take a quick look at the chart. Note: I use TC2005 as my data source for the Media General industry groupings, if you use another data source you can look at similar sector charts, for instance in this case stock charts $IUX (S&P insurance index). They will often be similar.

What we see are two very bullish longer term charts both breaking up from approximately 3 month bases. The weekly and monthly charts look even more bullish as this group is approaching its 1998 highs. So lets assume now this group is of interest, obviously the next step is to click on the link (atop the Group Report) to search through stocks within groups, in this case 432.

As you might be aware when you search stocks within groups you receive the relative strength ranking against all stocks trading above 10 and this relative strength is measured against the broad based New York Stock Exchange Index. But you also receive the recent relative strength as a percent of its moving average but this relative strength is measured not against a broad market index but rather the stocks respective group average. What I'd like to do is show a few charts in this group with both relative strength against the broad market and relative strength against its respective group, in this case MG 432 Accident and Health insurance. You will note how all the stocks are strong relative to the broad market, but not necessarily as strong, even weak when measured against their group.

Take a moment and look at the charts below, notice the differences visually between the two relative strengths. All have positive relative strength lines against the broad market yet two have declining relative strength lines against other members of their group. Had you been fortunate enough to purchase any or all of these stocks the approximate advance over the September/October highs has been so far: 4% for AFLAC (AFL); Everest Re (RE) - Unchanged: AON (AOC) 9%; and Principle Financial Group (PFG) a little over 4%.

I hope it is fairly evident to you which of these stocks you would have chosen as the strongest in the group. Now as an exercise for this weekend if this is a sector of interest, go to the groups report relative strength tables and sort by symbol so all the insurance sub groups appear together. I think you will find other insurance groups making more dramatic statements than Accident and Health and that may be of interest to you depending upon your trading style. If you do not have access to the Media General Group averages try and compare these groups against the S&P Insurance Sector (IUX).

Finally the largest changes this past week report, which I have personally not as yet reviewed.

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.