High Correlation and Downward Momentum

History never repeats itself but it rhymes

-- Mark Twain

Talking about some statistics of the market, here are some good facts to know from Bloomberg

• High Correlation

Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market's biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 on Aug. 18, using 60 days of data, according to MF Global.

High correlation is usually the case in a bear market, when investors are liquidating equities as an asset class, Craig Peskin, co-head of technical analysis at the New York- based firm, wrote in an e-mail on Aug. 18. In a bull market, when investors are differentiating, we see low or falling correlation.

Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.

• The momentum of downward spiral

History shows the S&P 500 may keep sinking. The index plunged 16 percent between July 25 and Aug. 8. The eight declines of that size over similar amounts of time since 1928 led to additional losses averaging 17 percent, according to data compiled by Bespoke Investment Group LLC, a Harrison, New York- based research company.

Marc Faber on the market

Marc Faber is a wit ...

The Case of a Bear Market ...

For all the hoopla in the stock market, 2011 has been an extremely choppy market. At this writing, S&P 500 has gone no where since the start of the year. However the time is finally ripe for a bear break ...

In my last market missive, I talked about some dangerous signs pointing to market internal deterioration, let's review what has happened since May 15, 2011.



Nasdaq made a nominal high of 2887.75 on May 2nd after the relief rally from the Japanese earthquake and tsunami disaster. The high surpassed the 2007 Oct high of 2861.51 (It is simply eye popping to watch how powerful Fed could lift all asset classes by its massive influx of cheap money to the market). From early May to the middle of June, the Nasdaq dived 10% due to the European mess on bailing out troubled Greece. At the middle of June, the Greece problem was put aside and the anticipation of good corporate 2rd quarter earnings started the summer rally in earnest, with some big multi-national US corporations reported solid numbers, including IBM, GOOG, AAPL, BIDU etc. Here comes today, as the debt ceiling debate is over, this market is yet again in a critical juncture, where is it heading? The indices don't tell a full picture.

One striking fact about the last 5 months' market activity, shown in the above Nasdaq picture, clearly demonstrate repeated heavy selling from the institutions. Heavy volume sell off from the top (early march), followed by low volume rally to new highs (Mid March to end of April), followed by another boat of concentrated high volume liquidation (May to Mid June), followed by low volume summer rally. This pattern can be seen in many stocks and sector ETFs, e.g. oil ETFs, XOP, XLE, OIH; metals and ming ETF XME; industrials ETF xli etc. Repeated high vol sell off followed by low vol rally points to market topping process. Smart $$$ is leaving the market.




The internals of the market is rapidly deteriorating. The above picture shows the percentage of Nasdaq stocks above 200MA for the last 3 years. It is clear that the number of stocks participating the market rally since March 2011 shows strong negative divergence. With more and more stocks breaking below 200MA, the indices are only a few percent below their all time highs. What is holding up the market? One pillar (or the single remaining one should I say?) of the strength comes from some big cap tech stocks, AAPL, GOOG, BIDU, IBM, AMZN. When they finally start to top (they have yet to show signs of topping), the flood gate will open.


Looking at the market sectors, financials (XLF) and Semi conductors (SOX) are mired in their bear land; Industrials (XLI) finally breaks down last week. As the pillars of any bull market, these three areas are pointing further market weakness to come.

On the growth stock land, the whole cloud computing stocks are gone (look at RVBD, ARUN, APKT, FFIV, VMW, CRM etc); Some small innovative or niche market growth stocks from the March 2009 bull market are taken to the woodshed (e.g. OPEN, ACOM, PAY, etc). There are some selected retail stocks targeting the American affluents (and a few medical stocks) are still holding up (e.g. LULU, CMG, GMCR, FOSL, TIF, TPX, HLF, ULTA etc), however the names are getting thinner and thinner. (These stocks are yet another fact to know that those rich are less affected by this rapidly polarizing society where poor becomes poorer and rich becomes even richer ... how to protect your family and kids from this wealth zero sum game? learn to invest properly is certainly one way !!!)

How is the market sentiment now? No bears, the latest Market sentiment survey continues to show more bulls than bears, bulls 50%, bears 21% which is a remarkable contrast to Sept 2010, where bull/bear ratio is 40% bears to 30% bull.

As I went to an IBD meetup here in the bay area on late July, 2011, more than 60% of participants are bulls and one bullish argument they constantly cite is the fact that the average bull market length is 3.8 years and this bull market is only 2.3 years old and also the fact that we are in the 3rd year of presidential election which is usually bullish.

Let's look deeper into the length of the bull market. This article was written in Jan 2011, so the current bull market length was shown to be 1.8 years.

Here are some important fact to know, as of the last bull market of 2002-2007, among the 15 market cycles from 1930

• The average duration of bull markets since 1932 is 3.8 yrs (median of 3.6 yrs)
• 80% of bulls lived past their 2nd birthday.
• Barely half saw their 3rd birthday.
• The average gain of these past 15 bull markets is 136.4%; The median gain is 101.5%.
• The last bull market lived less than 3 years is 1987 bull market which lasted 2 years 7 month.

We are now 2 year 4+ month into the bull market. Because the average bull market is 3.8 years long such that we don't have a case for bear market? NO, your conclusion is flawed, the distribution does not suggest you have a strong case.

As I am sitting here in caesars palace in Vegas attending the annual Blackhat hacker conference, I see some hackers constantly refreshing their browsers to read the debt ceiling news on Bloomberg as if the market's softness is purely due to the debt ceiling uncertainties. The fact is the market will go where it wants to go regardless what the solution of the debt ceiling is.

I don't know what will happen tomorrow or a month later. I careless about the news. The price, volume action at hand as of this writing on the indices, sectors, and stocks, however, point to an upcoming bear market.

Trading Like a Sniper: Blending Aggression and Self-Control

As I read the articles over http://traderfeed.blogspot.com, the "trading like a sniper" resonated with me so profoundly that I decided to make a copy and reference it here in my blog.

http://traderfeed.blogspot.com/2008/05/trading-like-sniper-blending-aggression.html

Traderfeed is a great educational site on trading psychology. I highly recommend it. Here is the full article on "trading like a sniper".

Trading Like a Sniper: Blending Aggression and Self-Control

In my recent post, I outlined how a trader's very achievement motivation can lead to "pressing": trying so hard to make trades happen that trading plans and rules are abandoned. This often happens when traders become frustrated with losses or slow markets and try to make up for the lack of results by sizing positions too aggressively or by taking too many positions. Traders press when they feel pressure, whether for profits, for action, or to achieve competitive advantage over other traders.

The result is a loss of self-control, as aggressiveness takes over and judgment takes a back seat. Successful trading may be discretionary or system-based, but it should always be rule-governed: controlled by basic considerations of risk management and opportunity. Indeed, this might be an apt definition of poor trading: when the need to trade overwhelms the need to preserve and add to capital.

One of my favorite posters in my office is of a military sniper in the field, peering out from ground cover. The caption beneath the picture reads, "The sniper's greatest weapon is a sharply honed intellect. He combines a mastery of stealth, situational awareness, ballistics and precision shooting skills into one of the most lethal weapon systems to ever strike fear into the enemy."

If the sniper became too aggressive and excessively bored with sitting in the field waiting for the right shot, he might leap from his cover and begin spraying the enemy with fire. Most of the shots would probably go wild, and the out-of-control sniper would quickly be located and mowed down.

No, the sniper waits for the ideal shot: "stealth" and "situational awareness" are essential tools of the trade. Being a sniper means combining aggression with exquisite self-control and judgment. It is controlled aggression.

Over the years, I've learned to trade like a sniper by not placing one trade after another in rapid succession. When a trade is concluded, I go flat and wait for a fresh setup. During the waiting time, I refresh my "situational awareness" (assessment of market conditions, my own condition), and return to my basic trading rules.

The idea is to trade only when I have an unobstructed view of the target. Everything else is waiting and preparing, staying low in a defensive posture. It's the time between those shots at the target that provide the self-control. It is difficult to press if you take the time to reassess, reload, and return to cover after an errant shot. With repetition, that reassessment and reloading become automatic: your default mode becomes one of self-control.

Plan. Trade. Reassess plan. Trade: It's a rhythm that combines the best of achievement motivation and aggression with the best of judgment and forethought. It's a beautiful feeling to plan one good trade, execute it to perfection, and then sit back and wait for the next opportunity. Any performance skill, honed and executed with precision, is a kind of work of art. I think the best snipers understand that.

Is market going to break wide open this summer?

After more than two years of bear market low of 2009, the case is finally ripe for a significant market break this summer. Although I am not in the business of making market predictions, the dangerous signs are lining up and you should expect a perfect storm soon ...

Although the market indices, Nasdaq, NYSE, SP500 are lingering near the 3 year recovery high, the underlying conditions are not printing a bullish tape and some of them are outright bearish.

First of all, metals and commodities have rolled over. Metals, especially copper, usually lead market higher in recovery phase, and top ahead of the big board in anticipation of economic slow down. Copper peaked in February, which has since seen nothing but distribution. Copper has corrected 15% from Feb high, its correction has no signs to end soon. The climax run on Silver is another sign the commodity run for the intermediate term is over. The sharp run up of the silver and brutal sell off at the end of the April is a text book classic of the climax top, which usually takes months, if not years to recover in the chart world.

Secondly, the growth stocks, which always lead the market cycles are showing signs of topping out. One by one, growth stocks are rolling over, AAPL, BIDU, SINA, OPEN, FFIV, RVBD, SWKS, AAPL, GOOG. The few remaining ones such as PCLN, NFLX are all in late stage bases showing no constructive chart patterns.

Thirdly, defensive industries and sectors are leading the market which usually coincide with the market correction. Medicals, drug, health care, diversified services, chemicals are dominating the top ranked industry groups.

Market sentiment is also painting a bleak picture showing Bull/Bear ratio of 51%/18% in Investor's Intelligence survey, which is a remarkable contrast to Sept 2010, where bull/bear ratio is 40% bears to 30% bull.

History shows the third year of the bull market is usually choppy and difficult. Needless to say the uncertainty in this summer is already paramount: the end of QE2, the slowing of emerging economy, the possibility of restructuring of Greece debt, and incoming political battle on US debt ceiling.

Is market going to break wide open this summer? signs are painting a bleak picture.

I suggest you all to move your 401k to CASH -- perfect storm is brewing ...

After more than two years of bear market low of 2009, the case is finally ripe for a significant market break this summer. The dangerous signs are lining up and you should expect a perfect storm soon ...

I will write a thesie this weekend ... In the mean time, I suggest you take a very defensive stance on your money, espeically if you have a big stake in the market.

价值投资：智商与智慧，哪个更重要？

http://chinese.wsj.com/gb/20110512/LJN093910.asp?source=UpFeature

价值投资：智商与智慧，哪个更重要？
2011/05/12 09:39:10
刘军宁

在投资界，没有人认为愚笨是一种资产。投资被公认是智力密集型的活动，投资界是人精扎堆的领域。有人会问，投资市场上有蠢人吗？从动机的角度来衡量，绝对没有蠢人。每个投资者都对自己说，“我才不傻呢，我来投资是要赚钱的。”然而，所有人在投资生涯开始时都是始于盲目无智的状态，都是蠢人。所有人都是带着与生俱来的智商去投资，却没有几个投资者在一开始就带有大智慧。对投资者而言，智慧与智商各自有多重要？投资成功的关键是什么？智商，还是智慧？

哲学是关于智慧的，其含义是爱智慧。投资哲学是关于投资智慧的，即热爱投资智慧。智慧永远是这个世界上最稀缺的东西，投资的智慧更是如此。智慧是人人欲求的，但是得到的人却很少。什么是智慧？按通常的理解，智慧是指某个人具有不同常人的理解、洞见和相应行动的能力。智慧毕竟不同于专长与知识。一个投资界的专业人士可能有丰富知识和技术专长，却未必是很有投资智慧的人。最智慧的人也未必是知识最丰富的人。尤其对专家和学者来说，他们可能掌握大量的具体的数字性的知识，但这些东西掌握得再多也不可能使人更有智慧。所以，一个人的智慧程度和所掌握知识的多少不必然成正比。

正是道德把知识与智慧区分开来。知识是关于事实的，智慧是关于道德的。一切知识与事实都将淡去，只有道德才能引领我们生活、投资。没有道德，就不能得到真正的智慧。一切智慧，归根结底，是有关人类如何才能更好生存的智慧，投资智慧也不例外。

西方的智慧传统是由两个支流合成的，一个是雅典的智慧，一个是耶路撒冷的智慧。希腊智慧中的宇宙是数学与物理的宇宙，而耶路撒冷智慧中的宇宙，是道德与信仰的宇宙。雅典智慧起源于古希腊的哲学与科学探索，是以苏格拉底、柏拉图、亚里士多德、阿基米德、毕达哥拉斯等哲学家、科学家为代表的关于理性和科学的智慧。我们今天很多的自然门类，都是在古希腊起源的，像几何、代数、物理学、原子论等等。耶路撒冷智慧起源于旧约的智慧书，故也称为旧约智慧。耶路撒冷智慧是强调信仰、道德与实践，是对财富的超验性质的理解。其代表人物是旧约圣经中的大先知如摩西、亚伯拉罕、以后许多的犹太商人。巴菲特被称为Oracle of Omaha。其暗喻是，上帝关于财富有一整套的神谕。谁领悟了神谕，谁就获得了财富。保守主义投资者注重实践的、道德的智慧，看淡精确的、科技的知识。

在投资领域，雅典智慧是关于价格的、数字的、公式的，其代表是那些被称为宽克（quants）的人，他们数学极好，数理分析能力极强，有些甚至是高能物理学出身。他们相信，商业的世界是数学物理的世界，数学的精确性是分析最复杂的人类活动的基础。耶路撒冷的智慧是关于道德、信念、价值、审慎、自律、耐心的，其代表是保守的价值投资者。他们相信商业的世界是道德与实践的世界。

这两种智慧有高有低么？这取决于我们用什么尺度来衡量。在投资领域，如果我们需要精确与量化，雅典的智慧高一些；如果我们追求正确，哪怕是模糊的正确，耶路撒冷的智慧重要一些。价值投资的名言是：“宁要模糊的正确，不要精确的错误。”

耶路撒冷智慧还有一个重要的特点就是强调道德在智慧中的极端重要性。人类最高的智慧是对道德秩序与道德生活的规则的认识。当与道德有关的智慧涉及到人类如何发现财富的本质及其增值方式时，投资智慧的问题就产生了。耶路撒冷的智慧相信，财富的本质及其运行方式，不是由人决定的，而是由人发现的。道德既是实现成功投资的手段，又是衡量投资成功的标准。对投资者而言，借助不道德手段的成功是脆弱的、低度的成功，不合道德的成功是不合格的成功。按照耶路撒冷智慧的看法，投资智慧的本质是道德智慧。投资智慧的任务是探寻价值的本质及其获得方式，投资者在天人秩序中的位置及其使命，寻找并践行价值投资的指导原则。

与智慧相关的是智力（亦称聪明，以商数来表示）。两者通常被认为是含义很接近的一组概念，仅有高低之别：智慧要高于聪明。听说过有大智慧投资软件，没听说过有高智商投资软件。然而，我认为，智慧和聪明是有性质上的差异的，而不仅是程度上的。我更愿意把智慧和聪明看作是反义词。智慧与聪明既是邻里关系又是对手关系，智慧甚至包含一些与聪明相对立的东西。比如说，愚和拙是聪明的反义词，但是却可能成为一个智者的特征。常有人用愚和拙来表明自己有智慧，比如说，大智若愚。再比如守拙，作为一种信念与行为方式，可能无关洞见和预见，却是一种很高的智慧。看过电影《阿甘正传》的人都知道，主角是个“愚笨”的智者。在日常生活中，聪明往往会当作一种贬义词来用，智慧总是用于褒义。有人会说，聪明反被聪明误；没有人说，智慧反被智慧误。

在投资中，智慧比智商重要。用戏谑但很认真的话说，人类智商的绝对高度是249，任何人的智商高度都不可能高达250，吉尼斯记录好像是228，故人类智商的中等高度是125。巴菲特印证了这个看法：“我的成功并非源于高智商。只要你的智商在125以上，就足以胜任投资的事业，有中等以上的天资足矣。”在中等智商的前提下，决定投资是否成功的关键不是智商，而是智慧。妨碍投资取得巨大成功的往往不是太笨，而是太聪明。

高智商不仅不是一定能在投资上取得成功的保障，相反要格外警惕那些高智商的投资者。智商越高越容易产生致命的自负。越聪明的人被聪明所误的可能性也越大，代价与损失也越严重，也越具有毁灭性。智慧更强调克服人性的弱点，强调人要恭谦、审慎、耐心。这些都不需要高智商，反而，高智商往往是获得这些智慧的障碍。

智商也许是天生的，智慧在相当程度上则是后天的，主要来自经验。智商是与行动无关的生物性特征，而智慧却需要落实到行动上。我们很难提高自己的智商，却能大大提高自己的智慧。成功的投资不需要高智商，但是需要高智慧，而保守主义投资哲学是价值投资的最高智慧。

（作者刘军宁，北京大学政治学博士，中国文化研究所研究员，著有《保守主义》、《共和·民主·宪政》、《权力现象》等。文中所述仅代表他个人观点，您可以通过新浪微博与作者联系。）