Phil Pearlman's Blog

Here’s the thing about animal spirits.

They are not rational by definition. Propulsion is not guided by executive functioning. They are not frontal cortex.

Animal spirits are pre cortex. lower brain, instinctual, id, the amygdala.

Remove your preconceived notions of logic or the S&P’s historic P/E or job growth or even bollinger bands and how many standard deviations we might move away from a moving average.

Instead connect yourself, plug yourself into your distant ancestors who did not yet walk upright, who ate what they killed and lived and died by their wits. Take a swim and become one with the primordial water even…

Here’s the other thing about animal spirits.

They are normal, market native, periodic.

They are a phase as common as any other market phase. They arise regularly since there have been markets and this will always be the case.

Railing against them is a loser’s gambit.

Anyway, if you think we are in the midst of animal spirits as primary motivation of this market, then this move so far is peanuts.

 

Observing Ray Dalio provides investors the opportunity to learn from the best at what we do.

In Sorkin’s excellent CNBC interview from this AM in Davos, Dalio meanders through a number of topics from the Macro & Europe to Japan to gold to bonds.

Dalio, who started Bridgewater with 5M in 1985 and turned it into 130B, lays out a bit about his process and his view of the world now.

Must watch…

Part 1

Part 2:

 

 Related: Ray Dalio’s Principles 

 

 

 

 

 

There are so many out there who have missed this rally or who have been trying to short every rip.

Its excruciating for those who have not participated.

You will get tempted and tempted again to throw your hands up in the air and buy ’em higher like you just don’t care as you watch those who have been well positioned remain bullish or take their victory laps.

Yet, now is not the time to chase.

Last year, the $SPX rallied 13%. Beautiful. But even so, there were 2 corrections that lasted 2 months each, one for 10% and one for 8%.

You will get your chance even though it iss excruciating to watch the market grind higher without you.

I remain bullish long term, have no idea when the correction is coming and also don’t know where it will begin. But its coming.

Tie yourself to the mast and avoid the sirens.

Its the hardest thing to do in the universe but that morning you wake up in February or May and the world appears to be ending, you will be flush and ready to deploy capital rationally.

Related: The Tao of Missing a Trade

 

Its absurd that universities still do not formally teach the study of price behavior (technical analysis) and it seems academic finance is way out of touch with real market participants and real risk management.

The study of price behavior is as basic to markets as the study of human behavior is to psychology. It is directly observable. There is price, volume and time. Nothing is hidden or subject to conjecture. There is no implying.

There are really only 3 behaviors – buy, sell and hold and charts are, concretely, the visual depiction of the collective market exhibiting those behaviors.

Patterns repeat themselves. They do not do so perfectly and predictive validity is nowhere near 100% but that’s not the point.

The point is that there are behavioral tendencies which reveal themselves upon disciplined scrutiny and that there already exists a rich written history and archive of those tendencies.

Real market participants gravitate towards technical analysis for good reasons. It provides them an edge.

As mentioned above, behavioral patterns repeat themselves again and again across assets and time frames. These are the tendencies and they provide essential tactical information.

The disciplined employment of price study facilitates risk management. If you are long and wrong, how do you know? How do you plan ahead so that losses do not get away from you?

When a rational participant enters an investment or a trade, he must have risk defined. If he does not, he is placing risk management responsibilities on a future self that might be affected by the loss he is experiencing in the moment and we know that decision making while experiencing a loss is wrought with problems. Defining risk is a multi step process no doubt but an integral part of it must be an informed examination of price.

Further, and in reality, it is not only technically driven investors who incorporate price behavior. Real world fundamentally focused investors use price studies to find entry and exit points. They are already integrating technical analysis into their work.

Academic finance ought to be accelerating price behavior research and challenging students with what we understand, what we don’t understand, the questions that need to be answered and challenges for future study.

Instead, it goes ignored due to biases inherent in academia. Fischer Black summed it up like this:

In the end, a theory is accepted not because it is confirmed by conventional empirical tests, but because researchers persuade one another that the theory is correct or relevant.

Its a bias on the part of finance academia against technical analysis from a community that is still trying to prop up EMH and has moved so far  from the reality of markets they fail to acknowledge critical tools their students will be using in the future.

The good thing is that it is becoming easier for those learning asset management to find educational material in books and on the internet and so universities are only risking moving themselves further from being relevant much less essential.

This will need to change fast so that future managers will grasp the essentials of technical analysis before heading into a real world filled with real profit and real loss.

If you want to support technical analysis being added to curricula, please connect with the Market Technicians Association Educational Foundation. It is their stated goal to make this happen.

 

Since September 18th, $AAPL, the largest market cap stock in the universe, has fallen 30% while the SP500 has managed to eek out a 1% gain.

This was a healthy rotation out of a single stock which contributed an outsized positive influence on the broad market during its glorious ascent for  almost  3.5 years beginning in early 2009.

If someone had said 4 months ago that $AAPL would crash and the market would hold steady, we’d have thought him ridiculous.

Meanwhile, Tom DeMark came out last night and called a bottom in the name.

If DeMark is right, this would be incredibly bullish for the broader market after digesting $AAPL’s extraordinary reversion so constructively.

 

More than 100 $AAPL charts have been posted to the StockTwits Charts Stream in the last day. I pulled four of the many excellent ones as they are key here to keep an eye on…

First, the Weekly via @stocktiger who notes the confluence of the major trend line and the 38.2% Fibonacci retracement level around 476. Great look and key key level.

Click Through on the charts for larger view.

 

Next, @Fibline charts the foreboding Head and Shoulders top pattern with the confirmed neckline break on this morning’s gap lower. The measured move looks like 300 (ht: @CVecchioFX).

 

 

 

Third, @OptnTradr with a nice visualization of the critical previous support level above 500 and how that has now become resistance.

 

 

Finally, this one from @HFTAlert which shows underlying pressure in the $AAPL. Its still under aggressive distribution.

 

 

Update: Adding a 5th here via @TradingPoints highlighting the 30% correction and monthly fib cluster. Joe is one of the best at this. period.

 

 

 

 

When you have a gargantuan speculative bubble, the majority of wildly overpriced assets never even come close to returning to their old high prices much less surpassing them.

400 years ago, at the height of tulipmania, a single bulb sold for the 34,584$ in Amsterdam and today, 400 years later, one sells for a quarter.

If you look at the great stocks of web dot one, you will notice that none of them have come even close to breaking the bubble highs set in 1999 or during the first half of 2000.

$ORCL would need to rise by 40% to make an all time high.

$MSFT would need to double.

$INTC would need to quadruple.

$YHOO would need to sextuple.

You get the drift…

Except, of course, for $AMZN which has not only surpassed its 2000 high around 113 but has more than doubled.

Indeed, Jeff Bezos won the internet.

Note: $EBAY, also an eCommerce play is the other of the original crew to at least be making a run for the money, now less than 15% from the ATH set a bit later at the end of 2004. It gets the Place. 

 

The above gif comes from the Vincos Blog and shows the dominant social network by country across the globe from June 2009 to December 2012.

Note the consolidation in the number of dominant sites over the 4 year period from 17 to 5.

Facebook has now established its leadership position in 127 out of 137 countries analyzed. As social media moves from infancy into adolescence  this pattern is important to note as it follows a similar trajectory to other industries throughout history. You can use search as an earlier example.  At first, a large numbers of smaller players vie for position and as time goes by, a smaller number of the most successful ones come to dominate.

My guess is that we are also observing a consolidation across more specialized, vertical, networks such as LinkedIn for professionals and Yelp for recommendations.

Good news for the leaders.

$FB $YELP $LNKD

 

Just spent some time with this excellent presentation by Ian Schafer and Deep Focus.

If you are focused on social marketing or the fundamental analysis of social platforms, this idea that “digital and social media has converged” should be no surprise.

So what are the implications and where does that lead? Take a closer look:

$FB $LNKD $YELP

 ht: Darren Herman

Here’s a quick note to young traders who are taking it seriously and attempting to carve out a profitable career.

First, most of you will not make it. So sad…

Second, most of you will not listen to what I am about to write. Whatever…

If you are one of the first or the second, well, you can stop reading now and move on or keep reading but just be aware that this is not going to help you so youre just wasting some minutes of your holiday.

If you are a part of a third group though, the minority, well then these words might just serve you well.

Successful market participation is a grueling process, a marathon. There are so many components and it is such a complex challenge that you must spend years improving while facing serious stress and financial setbacks. You will need to master multiple skills and it will take time.

For 2013, you will not need to or  be able to conquer it all.

Instead, choose one critical aspect of this craft to improve on and then make it your mission to crush that one thing.

For some of you, this will mean risk management but it may be something else like managing trades once you are in them or trade selection.

But whatever you choose, that one important thing, devour it, become it, crush it…

Focus on that one thing with religious fervor. Learn everything you can, seek guidance from those who have been successful, read about it everywhere, consume yourself in it, think about it when you should be doing other things and cultivate your own process.

Then practice practice practice that one thing you will improve in your trading until it becomes so automatic and so much a part of your routine that you do it every single solitary time as a function of habit.

Then read this post again next Jan 1, or in six months if you are a fast learner, and choose another critical skill to master.