Tharp's Thoughts Weekly Newsletter (View On-Line)
A New Framework for Observing the Market by Van K. Tharp, Ph.D.
The Biggest Energy Story of the Next Generation Unfolds Before Our Eyes by D. R. Barton Jr.
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A New Framework for Observing the Market
What does it mean to say that a market will close higher or lower on a given day? If you say there is a 50% chance that the market will close up, it just means you are uncertain of the outcome. The 50% probability of the market closing up does not mean that there are no specific causes for it to turn up. The causes may exist, but you may not know what they are. Thus, the uncertainty is in you. All of the predictions you make depend upon your internal models. Yet people generally have a much easier time believing the uncertainty is in the market or in the environment rather than in themselves.
Lottery organizers realized long ago that a lot more people will buy lottery tickets if they can select their own numbers. Picking “their” winning numbers lets people believe they have a better chance winning than if they bought a ticket with numbers already printed on it. The winning numbers, however, have nothing to do with the ticket you purchase. They have to do with the factors controlling the machine that generates the winning numbers.
The stock market predictors and lottery number pickers exhibit a common bias – believing that manipulating data helps them increase the chances of a desired outcome. Psychological research has shown that merely thinking about an uncertain event can induce illusions of control and misplaced confidence about your chances controlling an outcome. However, once you accept that first, uncertainty exists, and second, that it is in you, rather than in the market, you will suddenly find you have a greater control over the market.
All models about the market come from you to some extent. And when you realize that all concepts of the market are made up, it means that you can make up new ones. New frameworks for perceiving the market can you give you a tremendous advantage in trading. Until those ideas reach a critical mass of people, they allow you to think about the markets in ways unique from other minds.
Discussing new frameworks for observing markets could probably extend into a lengthy book. However, I would like to suggest the following exercise to help you extend your thinking about markets to a non-ego viewpoint.
Write down on paper the central issue with which you currently struggle in the market. Also, write down a question concerning that issue you would like answered.
Get in a comfortable position, close your eyes, and bring your attention to your breath. Notice the air coming in and going out. After a while, notice how the air just seems to come in and go out by itself.
Look behind your eyes and watch your mind at work. You will see thoughts entering your consciousness and waiting for you to acknowledge them.
As each thought enters, acknowledge it and let it pass. This is like watching a ticker tape or a moving billboard. Give no value to any thought. Do not try to either reject it or hold on to it. Simply let each one enter, walk through your mind and leave. And if you find yourself holding on to a particular thought, just move your attention back to your breath.
After 10-15 min. when you feel centered and peaceful, open your eyes and just start writing about the issue that came into your mind. Just write without even thinking about what you’re putting down. And continue until you “feel” finished.
Close your eyes again and allow the central idea or concept that comes to your mind from the reading to expand in your mind. Ask questions about how this answers your question about the market. Again, write down what comes to you.
A Tremendous Vehicle for Self-Discovery.
If your mind makes up your reality and projects it out as if it is an external world, then the “external world” you see can be treated as a mirror for what is going on in your mind. This technique is particularly valuable in certain areas, including:
1) What bothers you or upsets you;
2) Upsetting patterns that continue to occur in your life;
3) People who seem to disturb you.
Noticing any of these is a good indicator of what is going on in your head. In each case, once you observe the pattern and accept that it is coming from you, you will have tremendous power to make changes in your life. To make changes, however, first you need to understand that your feelings are coming from you. When we are in the middle of intense feelings, sometimes it is difficult to understand that we are producing those feelings. Instead, it is much easier to assume the feelings are coming from an outside source such as the market.
To help you discover the source of your feeling, I suggest you keep a diary. Whenever you get upset, fearful, or have any feelings that seem to be out-of-control (i.e., caused by something other than you), write it down in your diary. Notice what you continually write down. Your reactions to trading losses or events that seem to occur in the market are a particularly good way of determining what is going on inside of you. Write your reactions down so you have a record of them.
Second, you might notice that some of the things that seem to happen to you are not so much feelings but patterns of events. For example, you have particular relationship problems that occur over and over again. You may have particular market problems that occur over and over again. Once again, a diary might be helpful in determining what those patterns might be.
Doing these exercises will not only help you understand more about yourself but also generate ideas for new market frameworks. Your trading will transform in the process!
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Hi Ho SILVER!
In his Trade of the Week, Ken finds a tradable opportunity in silver on Friday, November 23, the day after Thanksgiving. After AGQ (leveraged silver ETF) broke out of a sideways quiet channel (SQC) Ken explains his morning entries and midday exit in this two minute video.
The Biggest Energy Story of the Next Generation
Unfolds Before Our Eyes
Get ready for shock and awe.
The energy chart I’m going to share with you below is the most startling one that I’ve seen in quite some time. And unfortunately for our alternative energy friends out there, it has nothing to do with solar, wind or geothermal energy (or battery companies that continue to go bankrupt). Despite heavy government subsidies, most of the alternative energy sources being chased now will not reach a point of unsubsidized economic viability in our lifetime (if ever).
The bottom line for long-suffering alternative energy supporters is this: you’re going to have to suffer a while longer. As long as we have cost efficient ways to get fossil fuels out of the ground, their ease of use and energy density will win the economic argument—by a lot—every time.
And now we have new cost efficient ways to get gas and oil out of shale rock formations that was previously unreachable. Not only are these new methods releasing lot of energy, the huge untapped reserves in these formations are going to provide us lots of fossil fuel for years to come. Plus, the technology for getting at those reserves is improving almost by the day.
For this article series, I get to hearken back to my chemical engineering training. The name of the game for the next generation is getting more oil (and natural gas) out of the ground. And the reason is very simple: you can’t cheat the laws of physics. Or in this particular case, you can’t beat the energy density of good old-fashioned fossil fuels. And now it seem like we aren’t going to run out anytime soon.
Peak Oil and New Assumptions
“Peak oil” is a popular theory that had analysts predicting the approaching end of the fossil fuel era. Then again, they only considered the oil you could pull from the earth by sticking a glorified straw into the sandy ground of West Texas or the Middle East. (Peak oil theorist M. King Hubbert predicted a peak of oil production that would lead to a perilous production decline ending in replacement of oil as an energy source.) Many thought the peak had already occurred because global production had not exceeded the record year in 2005. Now, however, those folks are changing their tune - 2011 global production exceeded 2005 levels. Of course we will get to peak oil at some point in the future but for now, there has been a production surge because of new extraction technologies for shale deposits, tar sands and deepwater deposits.
North America is leading the way in this energy revolution. Oil from Middle East land-based wells is still the easiest to extract and therefore the cheapest to produce, but conventional onshore production has been declining since about 2005. This can be seen in the graph below where the dark blue bars are dropping year-to-year
But that’s not the shock and awe chart (it’s still to come…). If we look at the chart above carefully, you see a little sliver of yellow that has been growing over the last decade – onshore unconventional production. That’s stuff like tar sands and shale oil. For shale oil extraction in particular, the technology is getting better quicker and production is increasing by leaps and bounds. In fact, this is one of the few areas where prognosticators have under-estimated growth rates.
So, without further ado, sink your teeth into the chart below that shows crude oil production out of North Dakota. This chart is straight out of the U.S. Energy Information Administration website:
Where to From Here?
While oil from conventional extraction is dropping, the severity of the up sloping production curve in the chart above is startling – from January 2005 until August 2012 (the last month of reported data), production is up 739%! The increase in production in the Bakken region, combined with rosy prospects elsewhere in the country have led Raymond James energy analysts to estimate that U.S. domestic production will rise by 3.5 million barrels – per day(!) over the next 2.5–3 years. That would mean the U.S. would jump from producing about 28% of its own consumption up to almost 50%. While reducing U.S. foreign oil dependence may have geopolitical significance, this development is a massively important economic development also. The math is pretty simple: 3,500,000 barrels/day * 365 days/year * $88 per barrel = $112 billion per year. This alone would erase almost 25% of our current trade imbalance.
The energy game is changing – and while political unrest and other outside forces can temporarily disrupt oil prices, the longer term play in oil, as I stated emphatically in March of 2012, is still to the downside.
In our next article we’ll dig more deeply into the changing energy landscape. As always, I welcome your comments and feedback. Send them to drbarton “at” vantharp.com
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