Author Archives: JLTrader

Why Is the Price of Oil so Low?

Hovering below the $50 level the price of WTI crude, the American benchmark, has been cut in more than half since the highs of $107 reached in June 2014. It is now in a price range not yet seen since the depths of the 2009 recession, coming after a precipitous fall paralleling that in the second half of 2008 when we had the biggest financial crisis of past generations. Continues here

A Look at Facebook’s Valuation

facebook_like_thumbThis week marks the six year anniversary of the bull market in US stocks and six months since Facebook passed $200 Billion in market capitalization. While the Nasdaq has increased in value a little bit over three times during these six years, Facebook capitalization has gone up some twenty times over the same time period. Although not publicly listed until May 2012, its value in Spring 2009 was unofficially set around $10 Billion when Digital Sky Technologies bought a 2% stake for $ 200 million. I remember the comments at that time questioning what seemed like such a high valuation and the comparisons being made with MySpace, a failed social network which had been all the rage a few years before.

Despite all the skepticism, Mark Zuckerberg’s company is currently worth more than much older tech giants like IBM or Intel Corporation as well as brand name icons like Coca-Cola or Visa. These companies that have been beaten out in capitalization terms generate much more cash than Facebook does and have a long history of doing so and yet they are not rewarded by investors, who seem to prefer exciting companies.
So where does the excitement come from lately in case of Facebook ? I guess it’s a combination of high earnings growth – mainly from the mobile market – and large acquisitions – like mobile messaging service WhatsApp, Instagram or virtual gaming headset maker Oculus VR – which are expected to pay off big.
If Facebook will continue to defy its skeptics as it has done for at least the past six years, it’s everybody’s guess. For the time being there are I believe three things worth remembering:
1. It is very inspiring that in just eleven years someone in his early twenties could create from scratch a company to rival the biggest listed companies in the USA.
2. You can’t predict the future, even if you think you have all the angles figured out – those who witnessed the failure of MySpace were very quick to point out that Facebook will be just a repetition, but on a grander scale. They have been proven wrong time and time again.
3. Don’t short something you don’t understand just because it seems too pricey. What today is considered ‘extremely’ expensive, might become ‘insanely’ expensive tomorrow. As famous British economist John Maynard Keynes is reputed to have said: ‘Markets can remain irrational longer than you can remain solvent’.

Six Years of Bull Market for US Stocks

bull-market-This past Friday marked the six year anniversary of the bottom in US stock market as represented by the popular S&P500 and DJIA indexes. It is surprising when we realize how far they’ve come since Friday March 6th 2009. That day, which just like yesterday, was a jobs report day (NFP), saw a low of 666 in S&P500 and 6470 in DJIA. These were the lowest points in those two indexes since September 1996 and April 1997 respectively. Compare that with yesterday’s closing levels of 2072 for S&P500 and 17856 for DJIA, a rise of more than 200% for the former and more than 170% for the latter.

Another gauge of how different things are six years later is the nonfarm jobs report. Employers cut 650k jobs in February 2009, after another cut of 655k in January. The unemployment rate rose to 8.1% in February from 7.6% in January. All these numbers painted indeed a bleak picture. Six years later, things are completely different though: 295k jobs were created in February 2015, coming on top of another gain of 252k in January. The unemployment rate is  5.5%, down from 5.7% in January.

The Lazy Trader And The Screen-Time Myth

This post was triggered by an article on Tradeciety: Why Being a Lazy Trader Will Make You Profitable. I wrote a reasoned comment at that time but here we are two months later and it still hasn’t been published. That makes me wonder why would you put a comment form in the first place if you’re not willing to engage with your readers. The article, if we manage to overlook that horrible metaphor ‘lazy trader’ makes sense more or less, with one glaring exception: ‘The Myth of Screen-Time’ paragraph.

The author starts the paragraph by bashing the 10k hour concept as applied to trading. For those who haven’t heard of this concept before, it originates from Malcolm Gladwell’s book Outliers: The Story of Success. Gladwell posits that one needs ten thousand hours of practicing a skill before getting very good at it. If that number is the correct one or not, it doesn’t really matter, the essence behind it has been known for a long time, hence the saying ‘practice makes perfect’. If we agree with the obvious fact that one needs experience before hoping to become proficient at something, how can we say that it isn’t so with regard to trading ? It doesn’t make any sense.

The paragraph continues with the inept comparison between someone who watches TV series and movies for thousands of hours without becoming a Hollywood director and the trader who wastes time being glued to the screen. Over 99% of people watch TV and movies for various reasons: because they enjoy it, to pass the time, socialize and so on, which have nothing to do with them wanting to become a Hollywood director. What does that have to do with a trader studying charts, reports, news as part of a working process with a definite target: to become a better trader.

The type of trader your are, short term or longer term oriented, will  influence the daily screen time required. But before you can really call yourself a trader, there’s no getting around putting thousands of hours in front of the screen.


Unpublished comment

Debunking the Consistent Profitability in Trading Myth

MythBustedThis post was inspired by an email exchange I had over the weekend with a reader of my site who, in his own words, is ‘an absolute beginner’. He was surprised when I told him that even experienced traders can have negative years. So it lead me to think about this common misconception that most people who are new to trading have: that after a learning period, who the most naive among them think it’s not longer than two months, they will reach the stage of ‘consistent profitability’ – a sort of trader’s nirvana – in which they will very rarely experience monthly losses and never have negative years.

I believe this myth is perpetuated mainly by a good percentage of those who sell trading systems and educational services, for reasons too obvious to elaborate here. So what anyone interested in this subject should do is look at those who actually trade – and have been doing it transparently for years, as opposed to those who are just selling trading related stuff. A good place to start is Altegris Manager Rankings. We can find here some famous names, like William Eckhardt, who together with Richard Dennis started the ‘Turtles’ experiment in the 1980s and was also featured in Jack Schwager’s New Market Wizards; Jerry Parker, an original Turtle; Salem Abraham, featured in Michael Covel’s The Complete Turtle Trader, and others.

Let’s now see how ‘consistently profitable’ some of these traders have been during the last ten years (2004 – 2014): Salem Abraham had 4 negative years, William Eckhardt two, Jerry Parker three, William Dunn three and we can go on and on like this. What we can see is that it’s very hard to find a trader who doesn’t have a negative year once in a while. If we look deeper, at the monthly results, we can see streaks of five or more consecutive losing months. How’s that for ‘consistent profitability’ ? :)

In conclusion, the real trading, as it can be observed by looking at professionals with decades of experience, is often very different to what new traders imagine or are lead to believe by unscrupulous salesmen. The sooner one deals in facts, rather than fantasy, the better it will be for him.

Being Successful in Trading by Not Trading

“My philosophy has always been to stay out of the market as much as possible. The less time I am in the market, the less risk I am taking. If dictated by market conditions, I’d rather make X percent having significant market exposure in only three months of the year than make the same amount while being in the market all the time.” – Mark Minervini in Stock Market Wizards by Jack Schwager – Continues here