Sell in May? MAYbe not...

Here's an interesting chart on Investor Confidence Index from State Street Global Markets (http://www.statestreetglobalmarkets.com/en/ici/index.htm#cod)


I've seen some people citing this chart as an indication that investors are looking for a downturn in the market. However, if you look at the three places in this chart where there's a bottom (4/09, 11/09, and 2/10), they correspond neatly to lows in the Dow. The latest reading is lower than any of those. I'm currently over 36% in cash and was planning on "selling in May and going away". Now I'm not so sure.

In fact, looking at the last ten years of the Dow, the only time the whole "sell in May" thing would have helped you very much was in 2008, and that was quite an extraordinary year. Last year, it would have been a terrible strategy. As Jim Cramer said, it was more like "Sell in May, go hang yourself". So I'm going to continue looking for investing opportunites next month, but I'm going to tighten my criteria for suitable candidates and good entry points.

Market update: my overnight long ES trade last night paid off nicely with a 2 1/4 point gain and the market was indeed up today. I'm looking for more of the same tomorrow. Tonight, I'm taking a long NQ position at 2008.50 at 5:28 PM.

Sun Tzu and the Art of Trading

One of the most popular metaphors for trading is that it is like war. And one of the most famous military strategists was the ancient Chinese general, Sun Tzu. His work, The Art of War has become as much a staple at business schools as in military colleges.

If you haven't read this, you owe it to yourself. The whole thing is available online, for example at:

http://www.sonshi.com/learn.html

For a quick Reader's Digest condensed version of some of his more well-known quotes, you might check out:

http://en.wikiquote.org/wiki/Sun_Tzu

Here's one I like:

It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle.

The parallels to trading are obvious and the lessons are just as true.

Here's another good one:

Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.

When you trade, you are the general in command of your own army. Every dollar in your trading account is a soldier. The enemy is all around. I've found over the past two years that by learning to lead my troops more wisely I've come to achieve more victories and fewer defeats. And I owe a debt of thanks to Sun Tzu.

Market update: I'm looking for a rebound tomorrow. It may not hold, but I went long ES at 1182.50 at 1:39 AM. We'll see where it is in the morning.

Continuous Improvement

... or at least continuing improvement. One of my goals for this year is to implement at least one innovation every month that improves my trading. This month, I got three:

1. I discovered you can put pictures in Excel spreadsheets. Maybe everyone else already knew this, but I didn't. Now in my trading journal, I take a snapshot of the chart when I make a trade and cut & paste it into my journal. That way, I can go back and quickly see what the market looked like when I made any given decision. Everything is all in one place.

2. I learned how to use the Regression Trend Channel feature in eSignal. This turns out to be an interesting indicator. I'll be trying it out more next month and seeing how well it works.

3. I started looking at the Sharpe ratio and how I can use it as a performance metric.

Psychoanalyzing the Markets

My dad was a psychiatrist. He was also a very talented investor. I used to ask him how he was able to do so well and he told me that it was just a matter of "psychoanalyzing the market". He thought of the stock market as just another crazy patient badly in need of therapy. At the time I thought he was the crazy one.

Crazy like a fox, as it turns out. It's hardly a novel observation that the stock market runs on two things: fear and greed. Understand those, and you understand the market. I know, easier said than done. That's one reason I liked Dr. Brett Steenbarger's blog so much - he talked a lot about psychology there. "The market" after all, is just a reflection of the people who make it up. As a technician, I've recently come to believe that perhaps I should pay more attention to the psychology and the psychoses of the players.

Anyway, there's no shortage of proof on how this works. Consider the airlines. My dad deemed the airline industry to be "completely psychotic". He claimed that only a psychotic would get into such a business. And if you look at the lunacy going around the airlines these days, what with fares that change every five minutes and fees for all kinds of nonsense from pillows to carry-on bags, it's hard to disagree. I personally would not touch an airline stock with a 10 foot jetway.

Interactive Brokers First Quarter

Seeking Alpha (www.seekingalpha.com) just published a transcript of the first quarter 2010 conference call for Interactive Brokers, IBKR. This is of interest to me since I'm a customer. The whole thing is pretty long but here's a few highlights I found interesting (from http://seekingalpha.com/article/200629-interactive-brokers-group-inc-q1-2010-earnings-call-transcript?source=email&page=1):

"Year-over-year customer accounts increased by 21% to 140,000.
...
"This is evidenced by the fact that year-over-year equity per client account grew over 43% to an average of $119,000 per account even though more than 60% of our customer accounts are still small, having less than $25,000.
...
"Customer equity grew to $16.7 billion, up 74% from the year ago quarter and up 10% sequentially. The source of this growth continues to be a steady inflow of new accounts and customer deposits and, to some extent, customer profit." (emphasis mine).

IBKR took a huge pop after this, closing at $17.01 on Friday, a 5.33% gain.

It's interesting to note that over 60% of their accounts are under $25K, ie. they're not daytraders. It provides a nice benchmark for our own account siez, as individual traders. Of course, the average is $119K, meaning there's some heavy hitters in the mix. I'd love to see a curve of the account size distribution over there. I'd also like to know to just what extent "customer profit" contributed to their numbers. Remember, it's said that 80% of all traders lose money.

Anyway, I view all these numbers as positive news for the markets and the recovery in general. There's a lot of talk about us being in "a cyclical bull market in a secular bear market". That may be, but my own guess is that the bull still has some room to run. With "sell in May and go away" time approaching soon, I'll be moving my view to the longer charts to try and figure out when and if a correction might come.