Tharp's Thoughts Weekly Newsletter (View On-Line)
A Follow Up To My Faulty Memory by Van K. Tharp, Ph.D.
Ken Talks about Edges at the Swing Trading Workshop
A Workshop Without the Travel
For the first time, VTI is offering a Workshop via online video.
You can now learn all the material from the Tharp Think workshop without traveling to North Carolina. This material is the perfect fit for our first video webinar since traveling for a one-day workshop is difficult for many of our clients.
By watching the Tharp Think Video Workshop, you will learn:
- How to control your risk by playing along with Van's famous marble game. More people have "Ah-Ha" moments playing this game than any other exercise on position sizing™.
- How to set your objectives for trading in a way that works for you and that helps guide all of the other decisions you make in your trading.
- Plus, all of the other Tharp Think principles.
You get all of this for the same price as you'd pay for the live workshop, but with the extra luxury of watching from your home or office and at your own pace. You can even watch the workshop as many times as you'd like during your 60-day subscription.
To preview the video, click here.
Learn more about the Tharp Think Video Workshop here.
A Follow Up To My Faulty Memory
Last week, I told you the story of my first trade—I bought Poloron Products stock as a teenager. I explained how I now realize that my memory of the stock price over the years is actually very different from what actually happened. To read the article from last week, click here.
After the article ran in the newsletter last week, one of my friends sent me a complete data set for the stock from 1962 through when it went bankrupt in 1981. However, it still doesn’t explain why I was able to buy shares of stock issued in 1983. I don’t know if the prices in the chart below are split adjusted or whether these were the actual prices.
My memory was that I bought the stock at $8 when I was 16 years old in 1962. So, if these prices are not split adjusted then I had to buy at $8 at the end of 1966. At that time, I was 20 years old and in college, I don’t think I was thinking about the stock market.
The chart says the stock went all the way up to about $37 per share — much worse than I thought. There were, however, two 25% drops on the way up to $37 so I probably would have been stopped out at $15 with a decent 25% trailing stop. And I certainly would have been stopped out during the drop from $32 to about $22 in late 1968. Still, there were huge percentage gains over that period.
If I bought it again at $4, it had to have been around the end of 1973. At that time, I was in graduate school and I was trading, but not thinking about Poloron. I remember buying it again when it reached $2, which would have been at the end of 1974. That’s while I was still in grad school and about the time of my first big losses in the market—but not related to Poloron.
Even then, the stock recovered as high as $5 around 1976 before going bankrupt in 1981.
Furthermore, I don’t remember ever having Poloron shares in my possession, they were bought for me in my mother’s name and she held the certificates. I certainly didn’t have them in college or graduate school. So, my memory of this is beginning to look very strange.
Lastly, there are NASDAQ data for the stock from 1987 through 1991, as shown in the following graph.
(to see this chart larger, click here)
If you had asked me a year ago about my first trades and Poloron, I would have been 100% confident that my memory of it was totally accurate. I bought 100 shares at $8 when I was 16. It went to $20 and then fell. I bought more shares at $4 and then at $2 and then the stock went bankrupt a year or so later. That the whole process took about 4 to 5 years. I would have been willing to admit the possibility that I was off by a year or so in some of my estimates, but that’s it. I was 100% sure that I was right about what had happened.
In any case, my trading in this stock was much worse than I thought because 1) it went as high as $37 and 2) it was still around in 1981.
Now, if these are split-adjusted prices and I had actually bought them in 1962 like I remember, then we are talking about a missed gain of about 3,600% at the eventual high.
After looking at all of this information, I have come to the conclusion that my entire past is probably a fabrication of my brain. I’ll admit that for me, but it’s probably the same for everyone. There are probably things in your past that you confidently believe happened a certain way, but they probably didn’t happen that way at all. Then again, A Course in Miracles says that time is not real and that the only thing that exists is now. The rest is just illusion. And now I’m beginning to understand.
Many of you sent me useful information about Poloron. Thank you to everyone who sent in material.
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Give and Take in the Housing Sector
Like in many markets, there are currently two broad schools of thought on the future of housing pricing in the U.S. (okay, there’s a third “I don’t care” contingent, but we’ll leave them alone today). I’m going to avoid digging too deeply into the data today (though you know I have to do a little; data digging is in my blood), but rather try to capture some of the most passionate opinions on the two sides of the analysis. Mind you—there are smart and considered people in both the bull and bear camps…
The Housing Bulls Day In The Sun
This week’s Case-Schiller 20-City Index came in with rousing numbers—the year-over-year growth was almost one percent higher than the consensus estimates. A couple of weeks before that, housing permits took a huge upward leap, although the jump was mostly all in multi-family structures, which was +37.5%, while permits for single family homes rose only +3%.
Housing bulls will point to the fact that housing is more “affordable” than ever, with interest rates down and house prices still recovering from the housing bubble beat-down. On top of that, the folks at the Fed have promised to keep those rates down for the foreseeable future (…or until unemployment drops, or the printing press breaks…).
And there is no denying that homebuilder stocks have outpaced the market. Since the November 2012 swoon, homebuilders as a group have performed quite well:
Most importantly, the bulls will point to the fact that there are very few homes out there to buy. New home sales and inventories of available properties have plummeted.
The Housing Bears Fight Back
The housing bears will quickly shoot back that many of the homes being snatched from the market are being gobbled up by hedge funds. These funds are taking houses in big blocks (borrowing money at those tasty interest rates) and renting them out as a cash flow / yield replacement strategy (We’ll take a more in-depth look at this strategy in a future article).
Besides the hedge funds actions in residential market, there is another big reason that home supplies have been drying up recently. The LA Times reported on May 19th that three of the nation’s largest banks have nearly halted foreclosure sales. The following is an excerpt from that article:
Sales of homes in foreclosure by Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. ground nearly to a halt after regulators revised their orders on treatment of troubled borrowers during the 60 days before they lose their homes.
The banks said they paused the sales on May 6 to make sure that their late-stage foreclosure procedures were in accordance with the guidelines. The banks wouldn't say exactly which issues had been under scrutiny.
So behind-the-scene shenanigans are still alive and well in the housing market!
Adding to the bears’ case, Tyler Durden at Zero Hedge (somewhat of a perma-bear) argues against the “housing is affordable” chant of the bulls using, of all things—data. Let’s take a look:
In essence, this chart shows that median home prices are now the highest they have ever been in relation to real disposable income. Okay — that one’s pretty compelling.
The last point for today’s “point/counterpoint” comes from the commodity world, where lumber prices have been in absolute free-fall. If we compare the drop in lumber prices (top portion of chart below) to the run-up in homebuilder stocks (bottom portion of the chart below), it raises a simple question…
That question is this: What are the homebuilders using to build all those new houses? Perhaps that precipitous drop in housing starts presented a couple of weeks ago was not just an aberration…
While it’s fun to pit one side against the other, what conclusions can we draw?
- For now, the Fed is still buying $85 billion in mortgage-backed securities each month. That kind of liquidity has been glossing over - and will continue to gloss over - a host of other housing market shortcomings. Until the Fed starts any type of cutback in QE (I don’t like the “taper” euphemism much), I find it hard to bet against the housing sector.
- Meanwhile, economic fundamentals continue to erode and one day, the hedgies will stop buying every block of houses that shows up in the market.
- Lastly, since we have never gotten to anything that even resembles a market clearing price for houses, my best guess is that we have another hard landing coming — but that’s in the relatively distant future.
As always, your comments and feedback are welcome! Please send them to drbarton “at” vantharp.com
Ken Long on Edges
We recorded this short video at our recent Swing Trading Workshop in which Ken Long answers a question about edges for traders. He lists several of the top technical, statistical, and psychological edges that help traders succeed.
Click the image below to watch.
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