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"Stuff Traders Have Told Me"

Tyler Durden's picture




 

Forget what you may think about stocks, for good or for bad.  This is a trader’s market. By that, Nick Colas notes, we are in a condition where very specific old-school rules govern price action. No, none of these aphorisms will ever win a Pulitzer, but in a world where near-term sentiment clearly rules the roost these rules clearly matter.  After all, "The bank doesn't ask how smart you are when they cash your bonus check."

Via ConvergEx's Nick Colas,

Consider the ancient aphorism, “Don’t short new highs or buy new lows”.  If you ignored that one in recent days, you missed the new highs in the Dow and S&P 500.  Or how about the old ritual of a “Do Not Trade List” for those names where you’ve been burned chasing the herd?  Yep – that explains why momentum names are in the penalty box for a while longer.  And then there is another tattered piece of wisdom: “Instead of yellin’, you should be selling; instead of cryin’, you should be buying.”  No, none of these will ever win a Pulitzer, but in a world where near term sentiment clearly rules the roost these rules clearly matter.  After all, “The bank doesn’t ask how smart you are when they cash your bonus check.”

If you want to know the substance of someone’s character, watch them trade a real-money portfolio for a week or two.  Tell them they have to make money every day and will have their results posted to their Facebook page (if under 40) or on the cover of the WSJ (if over 40).  At the end of that period you will know more about them than their best friends, their spouse, and probably their shrink.  You will know how they cope with loss, rejection, euphoria, regret, praise and every other emotional extreme.  Only golf and high stakes poker come close to revealing a person’s essential character, but you can get lucky on the greens or at the tables for a day.  Two weeks of trading is a much more complete emotional crucible.

Over a few decades in and around trading desks, I have had the opportunity to watch dozens of very successful traders go about their business.  Most of them have a very set process for getting through their day.  They follow it without thinking, even if their personal demeanors are different.  It is sort of like watching a prison movie; there’s the snitch, the boss, the scrounger, the weasel…  But they all know the basic rules of getting through the day without getting killed.

Looking at the state of global equities – and especially U.S. stocks – it is clear that we are in a “Trader’s market”.  I mean that in the old-school sense of the words, as it denotes a heavily rules-based environment.  You can talk Shiller P/Es, Fed policy, ECB policy, Chinese slowdown, and any other 30,000 foot topic until you are tired from stamping your foot, arching your eyebrow and wagging your finger. It doesn’t matter at the moment.

Take, as an example, the old trader’s rule: “You don’t short new highs, and you don’t buy new lows.”  As an analyst, this one always infuriated me.  At the same time it has the odor of ancient wisdom about it, like the basement of an old beach house.  The chance that you possess the marginal information to catch a stock at an inflection point is essentially zero.  Traders know that; analysts tend to forget it.  You wait for the price action to stabilize before you take a position, for this means the market has truly absorbed the marginal investor’s point of view.  Then, and only then, is it time to take the alternative stance.

U.S. stock markets, specifically large cap equities, are making new highs.  Does it matter that the Russell 2000 basket of smaller cap names hasn’t done as well?  Not today. And probably not this week, if the price action pulls more money into equities.  Bottom line: don’t make the game harder than it has to be.  Don’t short new highs.

Moving on to something that may sound like witchcraft, but is actually a “Thing”: Do Not Trade lists.  Its constituents are names that a trader has either lost money on consistently or a whole bunch at once.  Now, imagine what names might be on a lot of traders’ lists at the moment.  Yep – momentum names that took a hit over the last two months.  After all, don’t forget the trader’s mantra: go with what’s working.  And those names were market leadership until early March.  When, all of a sudden, they weren’t anymore.  Bottom line here: the momentum names of 2013 are in the penalty box with a lot of traders at the moment.  They won’t be off the Do Not Trade list for a while.  Best to look elsewhere for new leadership.

On a different note, consider the homespun appeal of “Instead of yellin’, you should be sellin’; instead of cryin’, you should be buyin’”.  If you hear this one, chances are good that something has gone wonderfully right or horribly wrong with your pad.  In either case, your first instinct towards emotion is actually wrong. Celebration is for cheerleaders and 100th birthdays.  If you feel that euphoria/depression, chances are other traders feel the same way.  Which means the trade is over.

If there is an actual positive about the new highs on the Dow and S&P 500, it is that no one is “Yellin”.  In reality, no one seems to care.   It doesn’t make the evening general interest news, get retweeted 10,000 times, or dominate cocktail parties.  The bearish case continues to get serious attention.  Yes, the VIX is 2 standard deviations away from its long run average on the downside.  But that’s not really yelling.  That’s more like a bear yawning.

The upshot of all this is clear, if unexpected: U.S. equity markets are going higher in the near term.  If they aren’t, they still are not going to have a “Road to Damascus” experience and change course.  That’s how a trader would see this market, based solely on the price action.  Yes, you can parse the data a 1,000 different ways, but in the end the only thing that matters is where things close.

Which brings us to our final bit of trader’s wisdom: “The bank doesn’t ask how smart you are when they cash your bonus check”.  There are plenty of ways to prove your intelligence.  But only one way to prove you know how to trade.

 

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Wed, 05/14/2014 - 17:51 | 4760719 CrashisOptimistic
CrashisOptimistic's picture

Here's what traders tell me:

10010111001010001001111101010001001000

Wed, 05/14/2014 - 18:17 | 4760796 ACP
ACP's picture

Looks like quote stuffing to me!

Wed, 05/14/2014 - 19:01 | 4760953 max2205
max2205's picture

Ben told me to stay long 3X TNA till Janet exits menopause

Wed, 05/14/2014 - 21:26 | 4761303 aVileRat
aVileRat's picture

Snarky comments aside, yes. This is a good article and can confirm that like a live fire drill you will learn more on a -3% dip day about yourself & your team than any amount of scrutiny/psych scans or booze cruise nights.

And nothing gets a desk angrier than when some pinhead on TV runs his mouth. Which, is a good thing because like a SSBN you know people are "on" when the place is silent & thinking.

For many desks right now, it's a full on, gloves-off fight right now for alpha. Retails do not see it, but the average fund is down about 7% for the month, 9% for the year or more. Ton of long-only asset managers who after being smug for 12 months BTFD'ing were smoked hard and are long PEG:3.0x bullshit they were dumping funds into. 

I can see the vol. getting nasty as every trick on the book is run to both keep down companies who "beat" so managers do not look bad vs. the benchmarks as they get out of the wrong "fundamental trades" like GM/Avon/Coach who many pinned their careers on.

 

 

 

Wed, 05/14/2014 - 20:48 | 4761229 prains
prains's picture

What the fuck are you trading in a corrupted rigged casino market?? Trading implies a fair and honest exchange of goods. How's printing billions, giving multicorps and the banks all the fresh print a TRADE??

 

Did I just stumble back in time to 2007 ?? when the fucktards ruled the world with impunity....

Wed, 05/14/2014 - 23:41 | 4761573 Carpenter1
Carpenter1's picture

Same "wisdom" that gets slaughtered every crash. Guys like this are too cynical to ever see something real approaching, it's always a trade to them, which is why they end up broke at the end of the day.

Wed, 05/14/2014 - 17:56 | 4760733 Cattender
Cattender's picture

Traders are Stupid.. this thing is getting Ready to Implode!

Wed, 05/14/2014 - 17:57 | 4760737 Cattender
Cattender's picture

i know, i know.. it's DIFFERENT THIS TIME!!!!!

Wed, 05/14/2014 - 18:00 | 4760743 There is No Spoon
There is No Spoon's picture

when bears are yawning is probably the worst time to buy stocks.

Wed, 05/14/2014 - 18:03 | 4760753 AccreditedEYE
AccreditedEYE's picture

This is exactly right. All you fools trying to short CAT and hand your $ over to HF managers, or pick the top, or shout victory after the market pulls back 150 bps AFTER a 3000 bp move. Wake. The. Fuck. Up. Believe me, you'll know when the flow changes and they'll be plenty of chance to hop on board. Till then, buy 'em up.

Wed, 05/14/2014 - 18:09 | 4760774 CrashisOptimistic
CrashisOptimistic's picture

You're half right.

You'll know when it changes.

But there will be no chance to hop aboard.  It will all happen on a Sunday night before the open, and the circuit breakers will trigger at the open. 

And if you're in, you'll lose it all.  Not a 30% drop.  Not 50%.  All.

Wed, 05/14/2014 - 22:03 | 4761403 TheRideNeverEnds
TheRideNeverEnds's picture

Sunday lock limit on the spoos is only 5% and the way things have been going they would probably halt trading if they went down 10% intraday.  They then call an emergency FED meeting whereupon Janet announces the plan to directly purchase 10bn in e-minis per day; they reopen that night locked up limit followed by the largest one day rally in history as the shorts get BTFO.

Wed, 05/14/2014 - 20:41 | 4761207 Cthonic
Cthonic's picture

Problem these days is when the flow changes to the downside, there is no borrow available.  Pretty soon multiple broker accounts won't matter cause they catch out all the cross-account shorting against the box...

Wed, 05/14/2014 - 18:08 | 4760772 Rainman
Rainman's picture

Such is life in the bucket shop.

Wed, 05/14/2014 - 18:10 | 4760778 Atomizer
Atomizer's picture

OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February.

- Mark Twain

Wed, 05/14/2014 - 18:11 | 4760779 potato
potato's picture

"everybody wants to be a trader, but ain't nobady want to make no big-ass trades"

Wed, 05/14/2014 - 20:37 | 4761195 Cthonic
Cthonic's picture

Erie paraphrase of Ronnie Coleman ~ "everybody wants to be a bodybuilder, but ain't nobody want to lift those heavy ass weights"?

Actually it's the reverse problem with novice traders, lack of position sizing discipline.  Few have heard of the Kelly criterion and fewer still properly employ it.

Wed, 05/14/2014 - 18:15 | 4760785 RabbitChow
RabbitChow's picture

Yup, BTFD doesn't work, and neither does BTFATH.  But there's all kinds of money on the sidelines.  They're waiting to get in -- Now is the time to jump in, come on in the water's fine.  

Wed, 05/14/2014 - 18:28 | 4760825 QQQBall
QQQBall's picture

I missed the one about don't fight the FED

Wed, 05/14/2014 - 18:28 | 4760830 GooseShtepping Moron
GooseShtepping Moron's picture

Having never traded before, I think I would likely get creamed right out of the gate when I started up. There would be a pretty steep learning curve I'd have to ascend before my performance became indicative of my underlying character. That being said, even bad traders probably make more money than the bottom 90% of the work force. Being a trader seems to be more a function of "belonging to the trading class," which is a destiny the individual has but little power to alter. The correct birth or the proper set of circumstances in youth can ensure membership in it, but apart from that it's very unlikely you will even get the chance to test your mettle in that way.

I believe in my heart that I could have made one heck of a ballet dancer, free safety, or concert violinist if I had been trained in that direction from the start, but since my life didn't take those turns I will never know.

Wed, 05/14/2014 - 21:27 | 4761319 OC Sure
OC Sure's picture

 

 

The presumption here is that all traders are on a salary or commissions structure trading other people's funds however there are those who are not and for those who are not being bad can never be.

 

Wed, 05/14/2014 - 18:35 | 4760855 Cattender
Cattender's picture

i can't wait for this Fucking Market to start sinking..

Wed, 05/14/2014 - 18:35 | 4760856 GreaterFool1965
GreaterFool1965's picture

"Buy downside protection when nobody else wants it", that's what professional option traders say...

Wed, 05/14/2014 - 18:42 | 4760879 SheepDog-One
SheepDog-One's picture

Come off it, the only thing going on in so called trading is buy today and hope the Fed keeps coming to your rescue. Whatever.

Thu, 05/15/2014 - 16:33 | 4763967 bdub2
bdub2's picture

There is more to it. In retrospect--aka hindsight--aka I have no idea what I'm talking about because after the fact everyone's a genius--
It's this:

just because economies collapse, decline, slow down in gdp and ramp up balls to the wall in corruption, doesn't mean it translates at all to the stocked markets.

Markets are like women the more...
...to hell with it

BTFDAAF - (always and forever)

Wed, 05/14/2014 - 18:50 | 4760897 bdub2
bdub2's picture

Cool ZH. The greatest knowledge derives from 'lived-it' advice. This info trumps every single "but but but Hellicopter is printing and still no jobs! This house is coming down!" data point of the last five years.

YOU, yes, you. will never have it figured out.

The best you can do, the best you can aspire to, is to have your tombstone say, "not a jackass". Some people know what's going on. About 5 % of the world...and even so, 99% of those people are clueless.

If you know someone from the last, leftover group, you'll hear truth.

Most of us will die in the dark.

Wed, 05/14/2014 - 20:00 | 4761118 Seize Mars
Seize Mars's picture

LOL

..."it has the odor of ancient wisdom about it, like the basement of an old beach house."

Good one, like "the door opened, then shut."

Anyways this article is correct:

..."If you want to know the substance of someone’s character, watch them trade a real-money portfolio for a week or two.  ... Two weeks of trading is a much more complete emotional crucible."

Goddmaned right. It kind of takes you apart, and you do find out who you are, for realz.

Wed, 05/14/2014 - 20:36 | 4761199 TheLooza
TheLooza's picture

If it's premarket and you are sweating in your bed (west coast), your position is too big. 

Wed, 05/14/2014 - 21:05 | 4761274 OC Sure
OC Sure's picture

 

 

 

"But only one way to prove you know how to trade."

 

"That's all the fun there is - being right by using your head." - Jesse Livermore

Wed, 05/14/2014 - 21:16 | 4761295 Umh
Umh's picture

Thanks.

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