SEVEN LOGICAL THOUGHTS THAT CAN RUIN YOUR FINANCIAL LIFE
This article also appears on Forbes The logical mind that has created most of the advancement we have seen as humankind is a detriment in the financial markets. While logic allows you to be a functional human being, having a firm grasp of what is illogical will be what allows you to profit consistently. What do I mean? Let’s start with a simple premise. In order to survive in the financial markets over the long run, you must view the market as a thief. It wants what you have and uses manipulation of emotion to get it. The primary emotions are that of fear and greed. It is coded in your DNA to become greedy when all is going in your favor. Similarly, when you are dying a slow death at the hands of a blistering foul wind, you are programmed to flee the situation. The market routinely manipulates the emotions of fear and greed, causing you to exit positions when the probability of achieving outstanding gains over the next 12, 18 or 24 months are at their best. Conversely, you are manipulated into buying situations that are inherently dangerous and have a high probability of working against you during periods of extraordinary comfort and joy. Routinely, issues of seemingly logical importance make their way into your psyche during the most crucial times. As an example, during the depths of financial Armageddon in 2008, it was seen as perfectly logical that the financial system as we know could be finished. The phrase “end of capitalism” was being thrown around like we were talking about the end of a baseball game. Logical thinking told investors that safety was of the utmost importance. Anything tied to capitalism was to be abandoned in the favor of cash. Preferably cash in a foreign currency of a third world country that wasn’t tied to capitalism. It was thought of as illogical to recommend heavy allocation into equities. The thought of the Nasdaq being near ten year highs just three years later would have been seen as illogical thinking. It became logical to think that the financial markets were destined for a sideways range at best, with a continued bear market and deep depression being the logical outcome. The logical mind failed investors, as it always does. The illogical thinkers came out ahead, as they usually do. The logical mind can also betray investors in individual stocks. The recent action in companies like Netflix (NFLX) and LinkedIn (LNKD) deceive the logical mind. In fact, the fuel for their fire is based on a logical dissection of a situation that can’t be logically understood. I have...
REASONING FOR ADDING LONG EXPOSURE TODAY
Past mid-day today, I updated Twitter saying I was adding to long exposure via broad market ETFs. I have said numerous times over the past couple of weeks that I highly doubt we will test the June lows. We got close enough to those lows today in the S&P that I thought the risk/reward warranted adding some long exposure. Let's look at a chart with commentary on the SPY below: click chart to...
HOW LOGICAL THINKING MAKES LINKEDIN A BETTER INVESTMENT THAN APPLE
The logical mind is a fantastic device for avoiding the pitfalls of society. It can prevent death, jail, isolation, depression, nudity and embarrassment. As an example, logic tells you that driving over 100 miles per hour on a busy freeway that averages 65 miles per hour can kill you. Logical thinking also tells you that the jokes you tell amongst your best friends on an inebriated Saturday night should not be told on Sunday morning at church. Logic can assist you in keeping your opinions of your boss to yourself despite having fantasies of embarrassing him to the point that he falls on the floor in shame and then slithers away, never to be heard from again. Logic also tells you not to stare at a pretty girl as she walks by in front of your wife for fear of ruining the rest of your night. Or potentially your entire week. And in some cases your life. Logical decisions are to be applauded. When a logical decision goes wrong, people proclaim that you suffer from bad luck or caught a tough break. They pat you on the back, offer you help and want to see you get back on your feet. Illogical decisions are to be shunned. When an illogical decision goes wrong, you are told about how dumb it was to even think of such a thing. You are offered little help because you are seen as a risk. Your thinking doesn't fall in line with others. Misunderstanding creates mistrust, which creates a self-reinforcing cycle of nothingness. You must then make the decision to become more logical or face life on a piece of cardboard, with a sleeping bag, a tin can and a pet that has somehow landed in the same position you are, having no choice but to stick by you. Given the type of foundation that has been built for logical versus illogical thinkers in our world, it is only natural that this would carry over to the financial markets. You can't suddenly shut down the mechanism that has gotten you to the point you are in life when entering the world of finance. Even if illogical decisions have created whatever success you maintain, a logical minded world will find a way to frame it according to logic, erasing the illogical aspects of your success. Perception is reality. Your logical mind enters the financial markets believing that it can thrive by making rational, well thought out investment decisions that have been formulated using the vast amounts of data available to you. Thus begins the process of losing money trading or investing in the markets. The...
QUICK THOUGHTS
- LNKD closed the day close to 108. I think the price action in this stock over the long-term is going to make NFLX looks like child's play. I wrote about the dynamic that will be involved in the share price over the long-term a few days after it went public. The article I wrote for TheStreet is here. It's a classic case of the logical mind being raped and pillaged by the financial markets yet again. The logical mind has a place in every facet of society and most businesses, except for the financial markets. I will be writing about the logical vs. illogical mind in the coming days. - I think we are entering an era where governmental policies and economics will diverge from corporate profitability and progress. We have already seen it over the past decade. While individual company balance sheets in the US have grown stronger, our countries balance sheet looks as if it can crumble at a moments notice. We are caught in a self-reinforcing cycle of inept, selfish politicians putting their own interests before that of the office and the people they serve. This creates gridlock in government at the most crucial of times. The steps needed to right the ship are not being taken because the political web has grown to such a point that effective economic policy doesn't stand a chance of moving an inch. - I mentioned during my routine weekend commentary that the easy money in the markets had been made. The first few days of this week have proved that beyond a doubt. Today's choppy, volatility ridden price action was the icing on the cake. It's not going to get any better. Turn off your screen. Take a trip. Read a book. Hang out with your kids. Go watch roller derby. Anything but mid-July trading. I can count on one hand the number of times July has been a good month. 17 years in and the month of July remains the same grind. - NFLX hit 300 today intra-day. I see no signs of the pessimism, doubt and logical analysis of the stock coming to an end. I wrote about NFLX going up further than anyone would expect way back in early February. It was the first article I wrote for TheStreet. As long as there is excessive doubt and an abundance of logical analysis that creates doubt in the name, there won't be a top. Technically I see no signs of a top, as well. $400 by year...
HOW VHC MADE ME FEEL LIKE I WAS LOCKED IN A ROOM WITH A PERSON FROM CHINA, ZIMBABWE AND MEXICO
With every trade I make in the markets, I have a scenario plotted in my mind of what a stock that I am long or short should do. For short-term trades, I typically initiate positions around areas where I know what to expect under most circumstances. I bring this up because a stock that I was short since Friday (VHC) managed to take the route I least expected today. That caused me to push the ejection button and parachute out as I became unsure of what to expect next. Whenever my road map in the markets becomes clouded, I have learned to turn the car around and wait until the roadmap is clear before driving another mile, risking getting lost and never being heard from again. With VHC I had the following ideas: 1. Following the strong close on Friday I was expecting either a sharp gap up or perhaps a somewhat substantial down open. Instead, it opened up slightly down and just drifted around for the first hour of the day. Coming into the day, I knew that this type of action in the first hour of trading was the worst case scenario, as it opened the door to dull sideways trading. Dull sideways trading in a heavily shorted stock that has been dissecting the shorts is nearly always a bad thing for new shorts. I fell into the new shorts camp. One strike against me. 2. I knew that 40 would be an area that would create a substantial amount of stops to go off for momentum players and shorts who had enough of the pain. Stocks are attracted to nice sounding round numbers just as they are to important technical levels. When VHC broke 40 today it may as well have broke 38.72. It acted as if the number meant absolutely nothing. Just kept drifting around the 40 level. No hysteria amongst shorts and no momentum players really playing along. Two strikes against me. 3. My thinking then became that the short sellers have been rinsed from the picture for the most part, when they see that there isn't much trading activity above 40, sellers will come in bunches and drive the stock price down. The stock traded below 40 again as the day wore on. This was the sellers chance to seize momentum as VHC failed to cross a significant round number with any conviction. Take it the other way. Close the stock at 38. What did it do? Just drifted around 39.50 for most of the day. It ended up closing the day at 39.88. This was strike three. Three things happened today that...
TRADE UPDATE – VHC
Took a roughly 2.60 point loss on VHC short at 39.60. All out. The price isn't doing what its supposed to around key points. I'll go into this further tonight. Not a fan of carrying a loss on a short-term position for two days while the price is playing confusing games. Rather move onto a trade I am clear on.
8 CHARTS THAT WILL MAKE YOU SEEM A LOT SMARTER THAN YOU LOOK DURING THE WEEK AHEAD
click on charts to enlarge
THE EASY MONEY HAS BEEN MADE
On June 15th, I said the following: "Bottomline: Either way you look at it, your risk from these levels is extremely well defined. Barring a statistical “black swan” type of event, the odds of profit heavily favor buying into some long positions here. If you want to get fancy, you can wait for a break of the March lows, with the understanding that you may miss out if that scenario doesn’t come to pass." Things have changed quite a bit over the past few weeks. While I was expecting the market to shoot up, I wasn't expecting a Nasdaq 100 to be nudging up against a new yearly high so soon. The risk/reward equation has shifted dramatically. The easy money has been made. We are going to enter a period of volatility, shakes and nonsensical daily movements that add up to absolutely nothing when all is said and done. A company will report outstanding earnings and the markets will fall. A company will report terrible earnings, the market will rally. The remainder of July should be more confusing than fun or profitable. Earnings should be good across the board along with guidance. The amazing rally of the past few weeks is telling us that this will be the case. There isn't much that can be reported, in terms of earnings, to make the market move up too much higher. Thus, the sideways chop I'm expecting over the next few weeks. Just as certain groups of investors tell us when an important bottom is approaching. There are also groups of investors that can tell us when a short-term or even long-term top in the markets is approaching. What I have been seeing amongst short sellers last week, along with the action I have seen from momentum players chasing high volatility names is one more indication that the markets are going to be getting difficult over the near term. In other words, the easy money has been pulled off the table. What we see from here is a fight for every dollar that becomes available. With that said, if you missed out on the point where the risk/reward equation most favored your play a few weeks back, now is not the time to be greedy, pushing the envelope further. Now is also not the time to be fearful that you are underexposed to equities and missing out on gains, while your competitors in the market have been reaping the benefits of substantial equity exposure. Taking profits and opportunistically searching for trades on the short side seem to be the play to make during this coming week. I will be going over...
VHC SHORT SELLER PANIC
It's not just in VHC. I see a short seller panic taking place in many of the heavily shorted names. Momentum players have been entering the picture, as well. This, of course, makes life much more difficult for short-sellers as they see a new round of buyers step in to take the price higher. We've had a rare string of substantial up days in the markets since the June lows. I think that we are due for a period of rest. I will be going over this in more detail tomorrow during the weekly chart review. I put on a short position in VHC mid-day on Friday. The stock kept rising as the day moved on and it closed near its highs. I have one more allocation to make into the stock. I'll probably do so on Monday morning. I think it is nearing a short to intermediate term top here. Reasons are in the chart below: click to...