While much has been made of the expiration of the Federal Reserve’s $300 Billion quantitative easing program, there are still many more ways in which the Fed can pump the markets with liquidity that need never be paid back to the recipients.  In this article, we take a look at the ramifications of some recent developments with regard to the Treasury and Federal Reserve that will again provide fodder to the equities markets, as well as revisiting our previous work on how money supply has impacted the economy and what it tells us of the potential correction down the road.

As we wrote two days ago, Treasury is effectively winding down its Supplemental Financing Program, the stated intention of which on its inception in September 2008 was to, “drain reserves from the banking system, and therefore offset the reserve impact of recent Federal Reserve lending and liquidity initiatives.”  Delving into the mechanics of it, here is what happened:

Treasury announced special auctions for cash management bills, the proceeds of which were placed on deposit with the Federal Reserve in a special account (as opposed to the proceeds being kept by Treasury to fund the government).  This allowed the Federal Reserve to use these funds (which topped out at $558.9 Billion in November 2008) to borrow or buy securities primarily from banks and broker dealers to help “unfreeze the credit markets.”  The Fed could have simply borrowed or bought securities with money it printed, but this would have expanded its balance sheet by creating excess reserves in the accounts that banks are required to keep with the Fed.  These reserves can be multiplied by at least ten times and used by banks for lending.  At the time, the Fed was rightfully concerned about inflation becoming unmanageable once the credit markets thawed, and about being able to keep the Fed overnight lending rate (fed funds target rate) above zero.  Accordingly, Treasury’s SFP helped to keep the Fed balance sheet under control (if you can call a multiple hundred percentage increase “under control”).  The amount of money that flowed into the financial markets from the SFP was the same as it would have been had the Fed printed the money; however, SFP money could not be multiplied by banks.

Congress granted the authority to the Fed to pay interest on excess reserves held by banks on deposit with it as of October 1, 2008.  This new tool obviated the need for the SFP as the Fed could now simply incentivize banks to not lend against their excess reserves (by paying them interest to keep their reserves at the Fed).  Accordingly, in November 2008, Treasury announced it would reduce the SFP, and it has held steadily at $200 Billion for most of 2009.

On Wednesday, Treasury announced that it would allow the SFP to “decrease in the coming weeks to $15 billion, as outstanding Supplementary Financing Program bills mature and are not rolled over.”  As we wrote above, Treasury issued special cash management bills as opposed to its standard arsenal of regularly auctioned bills (such as the 4 Week, 3 Month and 6 Month Bills).  We have identified these bills (all were 70 day duration) by their CUSIP, auction amount, primary dealer take (to be explained later) and maturity date (each of which is a Thursday):

Upon maturity, the SFP account at the Fed will be deducted by the total auction amount with the funds returned to the purchasers of the bills.  The consequences of this are:

1. Should the Federal Reserve require additional funds to finance its buying and borrowing of securities (Agency POMO, MBS purchase, TALF, etc.), it will need to print money in the amount that the SFP has been decreased.  This is not too much of a long term issue since, as we wrote above, it is able to pay interest on excess bank reserves to keep inflation in check.
2. Treasury can now issue longer term Notes and Bonds to replace the shorter term 70 day cash management bills.  This is more important to Treasury’s long term objectives, especially as it quickly approaches the $12.1 Trillion debt ceiling this fall.
3. Without the rollover of the $185 Billion in cash management bills, assuming constant demand for shorter duration bills, the regularly scheduled Treasury Bill auctions (4 Week, 3 Month, 6 Month, etc.) should experience increased demand, which will put downwards pressure on short term rates and keep the US Dollar carry trade alive and well (a topic for another article).
4. Because primary dealers will not be expected to buy any more of these SFP cash management bills, they may use these funds for other purposes.

As to 4, above, what might these purposes be?  As we have seen with the permanent open market operations (POMO), it appears that much of the stock market ramp (at least for the first half of the 2009 rally) was demonstrably accomplished with POMO funds paid to primary dealers that plowed the money into stocks.  We have also correlated large increases in bank non-borrowed excess reserves (green in chart below) with stock market ramps.  The chart from the previous post is updated here:

Indeed, because the major primary dealers are US banks, most of the $114.1 Billion returned to them upon maturity of the SFP bills will end up in this category of non-borrowed excess reserves.  Some of it may be required to support future Treasury auctions, especially if Treasury ups the longer dated auctions that have less foreign support (primary dealers are required to soak up excess supply at auctions).  Indeed, next week, the 2 Year, 5 Year and 7 Year offering amounts have each been increased by $1 Billion.  However, the potential is for at least a sizable portion of the $30 to $35  Billion to hit the equities markets each of the next six Thursdays after having been leveraged by 10 to 100 times or more.

Also, though quantitative easing in the form of Treasury POMOs is ending soon as it approaches the $300 Billion ceiling, the Fed is compensating with increased Agency POMOs (another $4 Billion bought today, $285 Billion to date), not to mention a total of $651 Billion in mortgage backed securities bought by the Fed this year.

The above is our warning to the shorts.  Now, our warning to the longs.  Below is our updated chart of M2 Money Supply Volatility, that we first brought to our readers’ attention in late July 2009.

The unprecedented contraction in money supply, as measured by 13 week percent change M2 non-seasonally adjusted money supply(yellow in chart), only intensified into early September 2008, as evidenced by the double dip at the far right edge.  What this tells us is that the equities rally is running on vapors (likely in large part from the bank non-borrowed excess reserves portion of M0), with nothing to back it up (in the form of money circulating in the broader economy) once the vapors disappear.

Interestingly, Wednesday’s rally to 1074 in the cash S&P 500 touched a crucial level in the heavily traded SPY (S&P 500 exchange traded fund), which is the volume  weighted average price (VWAP) of the entire down move from the October 11, 2007 high.  The bulls and bears are thus at a crucial equilibrium point, and the coming weeks will announce the medium term winner.

In short, traders should be mindful of the potential for massive buying sprees as the $114.1 Billion is returned to primary dealers over the next six weeks (along with continued Agency POMO and MBS purchases) and also of the potential for the floor to fall out from under this rally once the funny money dries up.  The next downturn will not be instantaneous, and there will be warning signs, which we will report on as always.

We are neither perma bears nor perma bulls, but are fortunate to have the luxury of reevaluating the markets on a day to day basis and to be able to adjust accordingly.  True to history, it will be the longer term investors that will ultimately bear the brunt of this monetary and fiscal malfeasance.

Disclosure: No positions as of time of publication.

                          

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Can Money Supply Tell Us How the Funny Money Rally Will End?

Adam Guren

One of our missions at Wall St. Cheat Sheet is to “Provide investing and trading education from successful pros who practice what they preach.” Top 30 Trader Under 30 Adam Guren at First New York Securities is arguably the Lebron James of professional proprietary trading. I did a Market Wizards style interview with Adam back in May, so I wanted to do a brief follow up to see what he’s thinking as we head into September …

Damien Hoffman: Adam, now that emerging markets and BRIC markets have made a nice run in a short period of time, what strategy are you currently employing?

Adam Guren: This is no secret to everyone at this point, but I think that these markets are overdone.  I have sold September calls against my long BRIC positions and probably looking to get short at these levels for a correction.  The market has come too far too fast and I don’t think we will have a V-shaped recovery.  Its as if the markets experienced a serious car crash and are now just getting up and walking away like nothing happened.  Logically, this doesn’t make sense and we need to go through some kind of recovery phase at this point.  I don’t think we’ll correct down to our March lows, but a healthy 10-15% correction is well overdue.

Damien: Can you discuss whether there are any seasonal factors which will affect your strategy as summer ends and we usher in the typically bearish fall months?

Adam Guren: You basically touched on it in your question.  Historically, September has been one of the markets worst months of the year and I do not think this September will be any different.  At these inflated levels, we are setting up for a rocky fall.  That said, I believe that there will be some decent opportunities to get long some ETFs that might ‘overcorrect.’  Again, the BRIC countries are still a good place to be for a long term outlook.

If you are interested in Adam’s stock picks, they will appear in the September issue of our Premium Newsletter. Click here to start your free 14-day, no risk trial now.

                          

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How is Top 30 Trader Under 30 Adam Guren Trading Now?

Gilbert "G-man" Mendez, Head Trader at SMB Capital

We are proud to welcome our first full-time contributor, Gilbert “GMan” Mendez. GMan is the Head Trader at world-class proprietary trading firm SMB Capital. Reading the Tape is a trading skill too many developing traders lack. This skill helps professional intraday traders gain an edge over their competition.  So, at Wall St. Cheat Sheet we want to give you an inside look at how a proprietary trading desk uses this skill to improve their trading. GMan will be our guide. GMan’s column, “Reading the Tape,” will be featured at Wall St. Cheat Sheet every other Friday.

In addition to High Frequency Trading, Dark Pools are another issue du jour in the trading world. I caught up with Gilbert “G-man” Mendez to ask him how Dark Pools affect traders and what steps we can take to adjust to them.

Damien Hoffman: First, G-man, can you explain what are Dark Pools?

G-man: Dark Pools are sources of liquidity available to institutional and some, but not many, big day traders. It is a way for big orders to be traded amongst institutions as an alternative to filling a big order — think 30,000+ shares — in the open market.

Damien: Most people assume Dark Pool orders are kept off the order books. Is this accurate?

G-man: It is not that they are kept off the order books all together. These orders are just kept in a special order book available to only those who have deep pockets and need to trade large [share] blocks. I like calling Dark Pools the big money ECN [Electronic Communications Network].

Damien: How does this maintain a fair and transparent auction?

G-man: Just as any other ECN per se, it maintains a fair and transparent auction to those who have access to it. For the rest of us it is just a small inconvenience. Dark Pools just suck up some of the liquidity available to us active traders — that’s why they are inconvenient, not because I can’t tell where the big liquidity resides.

I won’t deny it, a very small part of my game is to get in front of these orders to make the “spread” — literally making a few cents on the trade. But since it is such a small part of my gains — less than 5% — then I don’t lose any sleep because I can’t see those orders. To me the big money is made identifying strong or weak stocks and going for the big move. When I can sense a large order coming into the market from reading the tape, I am going to get long whether the volume is coming in from easily accessible ECNs, Dark Pools, or both.

Damien: Can you further elaborate how individual traders should deal with Dark Pools?

G-man: I am a trader.  My job is to find patterns from which to profit.  I have developed  superior trading skills over the years.  Programs, Dark Pools, piker algorithmic programs, etc. just require some trading adjustments.  I will still find a way to make money.  I am glad that some of the above will be eliminated, but if they kept it all I would still be a consistently profitable trader.

Traders should embrace Dark Pools and find a way to trade with them. The reality is they are not going anywhere. As a trader I could endlessly argue about the field not being level. But I don’t take money from the markets by complaining or enumerating all of its disadvantages. I take money from the markets by adapting to it and finding patterns from which to profit.

When it comes to Dark Pools I just use the large volume traded on these liquidity pools as an indicator or hint that some big institutional fellas are pushing around size. These prices where the transactions take place tend to become quite important.

Damien: Can you give an example?

G-man: Let me tell you about this scenario I have seen happening a lot. I like to call it “The Trapped Program”. It happens often in stocks that are very in-play, meaning huge volatility, nice volume, tight spreads, and big traders pushing around size.

Let’s suppose I am trading the stock as it approaches support at $11 and it looks awful on all time frames in the charts. As the stock gets to support I spot a $11.03 ARCA [an all-electronic trading platform] offer holding — a repeating seller at the same price — for a little bit of size. This indicates weakness.  Now imagine a large bid at $11 is hit aggressively. The bid drops and now ARCA steps down to sell at $11, thus making the stock look very weak. A couple of minutes go by and suddenly a large white print for 100,000 shares goes off at $10.99. Not shockingly, there are no more ARCA orders at $11 or $11.03. The stock explodes to the upside. This $11 support now becomes significant and a great entry point for a long position the next time the stock comes down [to this level].

So, in plain English, the stock comes down to places where there is buying interest. An aggressive seller thinks the stock ought to trade lower so he comes down to sell very close to support. He gets others to believe the same, and they wipe out a large buyer at support. Convinced that the stock could now start going down, the seller steps lower and sells a lot at the previous support price. Then out of nowhere — meaning, a Dark Pool — another institutional player puts out a print for huge size right below the support.  The ARCA seller realizes that there is still buying interest right around that $11 level so he lifts. And the stock goes up very fast from that support level.

Clearly, as a trader it would be nice to see the big offer appear on the book so we could add to a short position. But as a tape reader I have learned to consider all the different possibilities on how the stock may trade based on what you see on the Level II. A sizeable print right below where we see an active seller makes me uncomfortable about my short. It makes me think the seller is holding up the stock while he gets his print on the Dark Pool.

Damien: G-man, thanks for this introductory lesson about Dark Pools! We are excited to have you contributing to our site and to continue making Wall St. Cheat Sheet a valuable place for traders and investors.

G-man: Thanks for the opportunity. The team at SMB is excited too!

We are proud to have hand-selected SMB Capital as a partner to offer our audience products and services to become better traders. If you are interested in learning more about SMB Capital’s world-class trader training or trader tools, please click here.

                          

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Reading the Tape with GMan, Head Trader at SMB Capital

Damien: Fari, why is High Frequency Trading one of the hottest new topics in the financial media?

Fari: HFT firms deploy co-located servers at the exchanges/ECNs and Dark Pools. As a result, they take advantage of seeing some of the order flow using very high speed computers with very low latency. The computers execute trades ahead of both retail and institutional orders. The execution times are in milliseconds due to co-location.

HFT is an extremely profitable business — over a $20 billion run rate now. These days, HFT can account for up to 60% of the volume in certain equity names. HFT firms also get liquidity rebates from exchanges/ECNs for their order flow they provide to the exchange — about $0.005/share.

However, this is not market making. Rather, this is artificial volume creation. As evidence for this fact, please look at share trading volumes in Citigroup (C), Bank of American (BAC), and CIT Group (CIT). On some days their combined volume is 10% of all US equities! That’s unbelievable! We have three stocks out of over 5000 names with a constant bid/ask present in the three to five cents range!

In addition to seeing the order flow mentioned above, HFT computers can see institutional flash orders. The Associated Press reported that, “So-called flash orders allow certain members of Direct Edge, Nasdaq and BATS exchanges access (for a fee) to buy and sell order information for milliseconds prior to that information being made available to the public. High-speed computer software can take advantage of that brief period to allow those members to trade ahead of those orders — at better prices — and therefore profit from advanced knowledge of buying and selling activity.” Sen. Charles Schumer is fuming about this issue.

Fari Hamzei

Damien: Is HFT the mystical black box de jour, or a fundamental change in the auction process?

Fari: HFT is a trading strategy, not a necessary component of the auction process. HFT is all high-speed algorithmically driven arbitrage — for example, pairs trading, cross-asset arbitrage, etc. HFT uses predictive models borrowed from the advanced artificial intelligence world. Examples include parallel neural nets. I have some experience in this area because I did some work for a major CBOE market maker back in 2000-2002.

High Frequency Traders claim to be market makers — a necessary component to the auction process. They claim the liquidity they add to the market has lowered volatility and helped narrow spreads. However, this is not true because, unlike a traditional market maker, High Frequency Traders have no requirements: No minimum size to display, no minimum time to display a quote, and no capital commitment to a client.

Damien: Do High Frequency Traders have an effective monopoly because they use cutting-edge computers as well as highly advanced mathematics?

Fari: I don’t think so. There are very low barriers to entry to becoming a High Frequency Trader. All you need is to become a client of a sponsoring broker.As a result, this will eventually cause market saturation and reduced HFT margins. Only the biggest, fastest  computers will be making money consistently.

Damien: How will HFT affect retail traders?

Fari: HFT will affect retail traders big time because HFT firms have no market making obligations. They can walk away during a time of duress in any given equity — for example, when a bad earnings report releases, Hight Frequency Traders can simply walk away and cause the stock to fall off a cliff, thereby seriously damaging the small retail trader.

A great real example is when the SEC banned short selling in 19 financial stocks last fall. We saw spreads widen by 40% and volume dry up. HFT firms could not participate because they could not quasi-safely arbitrage the trades.

Damien: What can retail traders do to use HFT to their advantage, or at the very least incorporate the awareness of HFT into a trading plan?

Fari: Retail traders cannot do anything. HFT happens too fast — even for institutional traders much less retail traders.

Legally, some form of restrictive regulation needs to be put in place, fast. Unfortunately, at best these regulations will go in effect some time in the future and cannot be retroactive. In my opinion, these are more reasons to trade stock index futures — which is what we do at Hamzei Analytics.

Lastly, I recommend retail investors learn more by reading excellent articles such as Zero Hedge’s “Goldman’s $4 Billion High Frequency Trading Wildcard.”

Damien: Fari, thanks for taking the time out of your busy schedule to help us better understand this mysterious niche in the markets. And, congrats on your recent quotes in Barron’s!

Fari: Anytime. Thank you very much!

If you are interested in real-time market analysis, click here to follow Wall St. Cheat Sheet on Twitter.

Click hereto read my Review of Fari’s excellent book Master Traders.

This article was originally posted at Green Faucet.

                          

Post from: Wall St. Cheat Sheet

Demystifying High Frequency Trading

Trader Mark

Trader Mark has one of the best analytical finance blogs on the web, Fund My Mutual Fund. Like a great lawyer, he takes time to collect excellent evidence from various sources. Further, his fundamental analysis is second to none.

Mark’s site, Fund My Mutual Fund, caught the attention of Barron’s a couple years back as an example of how the web was democratizing the world of investment advisory. Since then, Mark has continued to improve his offerings and garner more pledges toward his goal of starting his own fund. I caught up with Mark to ask him about his methodical investing strategy …

Damien: I have been following you for almost two years now. When I first started reading your posts you were geared toward solid fundamental analysis and longer term positions. However, since the crash you’ve become more nimble and traded more often. Can you explain what caused this strategy shift?

Mark: I still hold core positions.  I like to trade around a core position with a traded position and shoot for a specific percentage gain with the traded position.  What used to take months or quarters to gain in percentage  now takes days and at most weeks. This is due to the extreme volatility and herd behavior in and out of the market or specific sectors.  So, my strategy has not changed much, but the violent volatility in the markets has.

Damien: Have you altered your investing framework in any specific ways to adapt to the volatility?

Deep Blue in locker room before beating Kasparov at Chess

Mark: Yes. I have focused more on technical analysis versus fundamental analysis because playing the charts has dominated much of the past year or so — especially when the future was, and is, so murky.  For example, I see many stocks with extreme price earnings (PE) ratios, and these stocks just continue up as people worship at the alter of price momentum (as Doug Kass likes to say).  People will abandon a stock with an 11 PE if its not working, even if it has growth. At the same time, those people will chase a stock with a 50+ PE so long as the herd is chasing with them.  So, to make any return you have to be part of the herd — at least in the short to intermediate term.

Damien: I’ve noticed a similar phenomenon where investors are illogically chasing stocks despite incredibly poor economic data. What can a true investor do when the economy and stock market diverge, thus causing smart investments to perform illogically?

Mark: Great question.  I actually wrote a piece about the divergence of the economy and stock market that, in retrospect, was published early in this rally — I wish I had listened to it myself more firmly because I would have profited a lot more. The article is titled, “The Current (and Coming) Disassociation Between Economics and Stock Markets.” In the article I go into detail about why this phenomenon occurs and why I think we will see this divergence as markets react to different mechanics than the economy.

Damien: Returning to strategy, is there a specific reason you favor your investing style and framework?

Mark: I am generally left brained: rational, analytical, and objective.  So, when I first came to the market a long time ago, I thought I’d set up some spreadsheets.  I wanted to find some anomalies, exploit them, and be rich.  Sounds simplistic, but that’s how an analytical person thinks.  That was in the mid ’90s.  Now, in this era we have super computers trying to find minute divergences they can exploit in fractions of seconds. So what chance does a measly human have?

Damien: Not much when you are using Excel to battle against what amounts to an arbitrage money vacuum with the power of Deep Blue.

Mark: Exactly!  So it comes to down to two paths: you can either follow the analytical path and be a very patient investor waiting for the market to come to your viewpoint — we call those value investors — or, you can turn to other strategies.  As John Maynard Keynes says, “The markets can stay irrational longer than you can remain solvent.”  I believe Warren Buffet or Benjamin Graham said, “In the short run, the market is a voting machine.  In the long run, it’s a weighing machine.” Essentially, you have to stay on the right side of the markets or you’re doomed.

So, a long time ago I discovered analysis has a place, but not as much as I anticipated.  Emotions rule in the short run.  It’s all about fear and greed.  Economics are good for providing a landscape in which to invest and find some major themes.  However, economics is relatively useless over short periods of time unless you are going through some historical periods like we saw in 2007 and 2008.  Keep in mind, in October 2007 the S&P500 was at all-time highs.  If it was a great “forecasting” tool for 4-6 months out — which is a popular dogma in the stock market — the market failed in this instance.  Which, by the way, is related to another of my major conclusions: I don’t believe the market is an efficient discount mechanism in the near term — see 1999 for evidence.

Damien: Mark, thanks for taking the time to better explain your framework for investing and trading. I think you do a great job and recommend investors take note when you ultimately launch your fund.

Mark: Thanks, Damien.

To learn more about Trader Mark, click here to visit his website Fund My Mutual Fund.

If you are interested in real-time market analysis, click here to follow Wall St. Cheat Sheet on Twitter.

Interested in more Trading 201? Check out these posts:

Filter the Noise: How to Make Stellar Trades with the Up-Volume/Down-Volume Indicator

Iron Condors: Options Video Tutorial With Steven Place

Level 2: Video Tutorial With Brian Shannon

Don’t Get Burned – Confirm

Learning to Take Losses Without Trauma

Nip Tuck: Don’t Chase

Chasing the Pot: What Happens in Vegas Happens on Wall St.

                          

Post from: Wall St. Cheat Sheet

Trader Mark Discusses Trading Strategy

South Beach in a Lamborghini

Consider the following familiar scenario:

You’ve been watching a stock for an entry and you’re certain you’ve analyzed it six ways to Sunday.  Oh, it’s a winner — you know it.  So you enter (certain you’re on your way to a buying a Lamborghini) when without apparent forewarning, the trade begins to reverse against you.

At this juncture usually we have the eyebrow-raising sense of disbelief and the spattering of your favorite expletives depending on your position size.  If you’re really nuts, you bang your fist or something like that.  (If you get crazier, I’d recommend working on control or taking up another occupation because there is no room for giant emotional swings in the realm of successful trading.)

You are now at a determination point — a moment of re-evaluation. Is the stock going to continue moving in the anticipated direction, or should you cut losses and take your lumps? We quickly refer to our trading strategy to confirm that the initial value conditions that triggered the entry have not been violated.  They are, indeed, intact. What now?

Where else can we look for more direction or illumination on the reversal? Enter the Up-Volume/Down-Volume (UVOL-DVOL) chart.

For the sake of clarity, or for someone new trading in the market, the UVOL symbol represents the number of stocks ticking up in the NYSE while the DVOL symbol represents the number of stocks ticking down in the NYSE.  In the day trading environment, the UVOL-DVOL chart can provide you with benefits including:

•    Assistance with timing your entry more efficiently;
•    Assistance with timing your exit more efficiently;
•    Alerting you to potential market reversals; and,
•    Determining future market direction when price candles are choppy.

Below is a view of the S&P Futures (ES) and the corresponding UVOL-DVOL on Thursday of last week (I’ve embedded some notes on how to view the charts):

Notice:
•    The morning begins with dissonance … a clear indication not to initiate a position if you are risk averse.
•    At about 11am or so, the smoke clears as the charts are in confluence (i.e., in sync).
•    This adds reliability to the breakout pattern as the day begins to trend.
•    Note: on a trending day, the ovals show touches at the moving average as reliable entry points.
•    On a clearly trending day, this indicator is most effective.

Though it may take a little time, I urge you to study these charts.  If you want to become a good technical trader, it’s important to hone your pattern recognition skills.  The stronger this ability is, the better you will become at entry and exit.

If you don’t already have 30 indicators on your charts (joking, of course, you really shouldn’t have more than 3 or 4), then consider adding UVOL-DVOL.  Though it will take some time and attention to use the UVOL-DVOL indicator in the way I discussed, it is a relatively accurate measure of market direction.  Further, when used properly this indicator provides the potential to increase your profit margins significantly.  For me, it’s all about filtering the noise …

Have additional questions or comments? Click here to follow Anne-Marie on Twitter.

If you are interested in real-time market analysis and trades, click here to follow Wall St. Cheat Sheet on Twitter.

Want to learn more about Anne-Marie? Click here to check out this interview with Wall St. Cheat Sheet.

                          

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Filter the Noise: How to Make Stellar Trades with the Up-Volume/Down-Volume Indicator

If you don’t participate in Steven’s StockTwits Brunch on Saturdays at 10 AM EST, you should. Also, if you are interested in an inexpensive yet platinum quality mentor for trading options, you can sign up for Steven’s Premium StockTwits Service by clicking here.

This video was posted with permission from Steven Place at Investing With Options.

Interested in more Trading 201? Check out these posts:

Level 2: Video Tutorial With Brian Shannon

Don’t Get Burned – Confirm

Learning to Take Losses Without Trauma

Nip Tuck: Don’t Chase

Chasing the Pot: What Happens in Vegas Happens on Wall St.

                          

Post from: Wall St. Cheat Sheet

Iron Condors: Video Tutorial With Steven Place

If you haven’t already read my review of Brian’s book Technical Analysis Using Multiple Time Frames, you can by clicking here. Brian’s book is a must-have for any new or intermediate trader.

If you are interested in real-time market analysis and trades, click here to follow me on Twitter.

This video was posted with permission from Brian Shannon at AlphaTrends.

Interested in more Trading 201? Check out these posts:

Don’t Get Burned – Confirm

Learning to Take Losses Without Trauma

Nip Tuck: Don’t Chase

Chasing the Pot: What Happens in Vegas Happens on Wall St.

                          

Post from: Wall St. Cheat Sheet

Level 2: Video Tutorial With Brian Shannon

This article was originally printed in the March 2009 Issue of our Premium Newsletter.

We may have to wait a while to see bargain valuations in the stock market. However, the market should rise quickly when the next party gets underway because the Boomers are now in a classic position to chase the pot.

“Chasing the pot” is a gambling phenomenon which occurs when a player has lost a significant portion of money and needs to bet stronger if they want a chance at recouping losses. For example, if you lose 50% of your money, you must double the remaining half to return to even. In order to double your money, you surely can’t stuff your cash in mattress-like Treasuries yielding 2-4%. Instead, you are forced to take on large risks for the possibility of earning large rewards.

Unfortunately, most Boomers and older retirees have lost a bowel-movement inducing amount of their wealth. Visions of retirements spent at Cheesecake Factory and on Princess Cruises currently seem more like ideas from past lives. But have no fear, the always-get-what-they-want Boomers are here! In my opinion, this generational trait will be the key target of sales pitches from future Wall Street hucksters (and other salespersons).

Thus, once the dust settles and the Prom venue is ready for the next bull party, Boomers will feel as though they have no choice but to bet on stocks. Want to double your money this year and get back everything you lost in 2008-09? Alternative energy and health tech stocks are your time machine ticket back to the glory days.

Now that Boomers are dizzy at the table waiting to chase the pot, we can nearly guarantee that the next bull run will once again reach bubblicious proportions. Just think: Boomers shrugged off the dotcom collapse to pile into the housing and stock markets despite “cross my heart hope to die” promises to never chase another bubble or stay too long in a hot market. Regardless of these worthy intentions and pinky swears with spouses, greed always wins because “this time” is never different. The dealer is shuffling the deck. Stay tuned for when to ante up.

If you are interested in real-time market analysis and trades, click here to follow me on Twitter.

Interested in more Newsletter reprints? Try these posts:

The Thrill of a Tril’

                          

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Chasing the Pot: What Happens in Vegas Happens on Wall St.

Last week I made a lovely scalp trade during a powerful short squeeze. The chart below shows I had a predefined entry point (A) in the event that the market popped in the final hour. As a result, I also had a predefined stop-loss point (B) and a $51 target which gave me a 2-to-1 reward-to-risk ratio. Thus, I was able to enter safely, take some quick profits into the initial move, and take the remainder at my target.

Simon Property Group (SPG)

Now, let’s compare the above planned trading to unplanned emotional trading. Let’s say I saw the shorts squeezing and started getting excited. I did not preplan any entries or stop losses, so I was most likely late to the party and did not know whether the trade displayed the minimum 2-to-1 reward-to-risk ratio needed to be profitable over the long term. As a result, I would not know when the trade was too risky and taking the trade could cause more harm than good. Suppose I followed my William Wallace alter-ego straight into battle and entered closer to $50.70. Then, the Brits flanked me:

Simon Property Group (SPG)

This is what we call “chasing” a move. You never want to chase a move because once most of the reward for other traders has been made, a growing number of them will be getting out of their position to lock in profits. In this example, we would have gotten our faces ripped off as profitable traders ran for the emergency exit.

I am writing a more thorough article on the importance of planning trades. Stay tuned …

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Craving more Technical Analysis wisdom? Try these posts:

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Post from: Wall St. Cheat Sheet

Nip Tuck: Don’t Chase