Tharp's Thoughts Weekly Newsletter
: Is There a Genius Trading State? by Van K. Tharp, Ph.D.
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: Market Breadth Really Stinks – When Will it Finally Matter? by D. R. Barton, Jr.
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What is Genius?
Is There a Genius Trading State?
by Van K. Tharp, Ph.D.
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Think about what Sir John Templeton did in 1999 at the heart of the dot.com stock bubble. He took his entire personal fortune and shorted various dot.com stocks. At the time, that behavior might have sounded insane. After all, those stocks could move 10% each day in that period … and usually the big move days were to the upside. But John Templeton shorted and stayed with those shorts through the dot.com crash. You might consider that to be a stroke of genius.
Let’s consider what John Paulson did in 2007. He concluded that home prices had gone up over 7% per year for the last five years and would have to drop by 40% just to return to their historic trend line. He also noted that when housing prices dropped, they usually went through the trend line. What did he do? He basically made a bet that the housing market would collapse and invested almost everything in his company on cheap credit default swaps—which would rise in value if housing collapsed. He also bet against CDOs (collateralized debt obligations) by buying insurance against them. His fund took about a $5 billion position in these two categories of instruments. John Paulson’s firm made nearly $15 billion in 2007 and his personal cut was about $4 billion. Was this also financial genius?
And what about Ed Seykota in the 1960s? Ed understood basic trend following principles but he also understood position sizing strategies. In addition, Ed was one of the first automated trend followers. I was at his house in the early 1990s where all of his systems were computerized and written in assembly language. You might say that Ed was the first computerized trend follower who truly understood the power of position sizing strategies just as the inflationary trends in commodities took off. I was told that Ed opened a number of $5,000 positions in the futures market — losing them all until eventually he caught a trend. After that, he had an edge that few others have ever had and his returns are legendary. Was he lucky or a genius?
There are many more such examples in the history of the financial market. Did these people have something special? Were they financial geniuses?
Many years back, I was lucky enough to attend a rather famous NLP workshop that was only given once by Robert Dilts and John Grinder. Robert took the position that mental strategies were the key to everything while John took the position that states were the key to everything. Later, Robert wrote three books entitled strategies of genius in which he profiled the thinking processes of Walt Disney, Albert Einstein, Leonardo DaVinci, Nikola Tesla, Sigmund Freud, Aristotle, Mozart, and even the fictional character Sherlock Holmes. I’ve read all three books several times and watched Dilts’ video series, Strategies of Genius. Dilts basically said that a lot of these people’s genius was a function of how rich their internal maps of reality were. Remember that NLP adopted Alfred Korzybski’s famous postulate that says “the map is not the territory.” In other words, we have no idea what reality is. Instead, we just have a map of reality. Dilts basically says that the richer the internal map that a person has, the more likely such a person is to be a genius.
Let me share with you a few of Dilts’ conclusions from his books about how genius’s maps become so rich and about their strategies in general: (view list on-line)
1) Geniuses have very strong visualization skills, perhaps even photographic memories.
2) Everyone has five sensory modes but geniuses have developed numerous links between their various sense modes.
3) Geniuses appreciate that there are an infinite number of perspectives. For example, a politician might wonder how different people would interpret his stance on a particular topic. He might consider his stance on the topic from the perspective of a farmer, a blue collar worker, a small business own, a billion dollar company CEO and a mother. Geniuses are great and shifting between multiple perspectives.
4) Similarly, there are three core perceptual positions:
(a) your perspective);
(b) the other person’s perspective; and
(c) and an observer’s perspective.
Geniuses can easily switch between perceptual positions between an associated perspective (1st person) to a dissociated perspective (2nd position) to an observer perspective (3rd position).
5) Geniuses can easily move from the big picture to extreme detail and all along the spectrum between in various degrees (or “chunk size” in NLP terms). They can also perceive different logical levels such as spiritual vs. environmental.
6) Geniuses can easily maintain a feedback loop between the abstract and the concrete (i.e., sensory specific detail).
7) Disney’s classic creative strategy involved moving between different personalities: the dreamer, the realist and the critic. Most geniuses do something like this.
8) A genius will ask many basic questions. They emphasize questions over answers being bold in their questions and humble about their answers.
9) A genius can easily use metaphors and analogies as ways of thinking.
10) And most importantly, geniuses all seem to have a mission beyond their individual identity.
I could spend a lot of time and words explaining each of these aspects of genius but I can distill all of Dilts’ conclusions down to his main point – genius is based on mental strategies. Mental strategies focus on the structure of our thinking. (If you want to learn more about mental strategies and their application to trading, review Volume V of the Peak Performance Course or consider attending my newest workshop, Peak 204, Modeling Great Traders through Mental Strategies).
For all of the value of understanding mental strategies, there is another approach to genius — via mental states or genius states. In the Dilts and Grinder workshop I mentioned, John Grinder basically said that genius was all about states. Since Grinder’s original work in the area, Dr. Michael Hall has really become the champion of mental states and he won a prize in the early 1990s for the most innovative NLP technique - the introduction of metastates.
Metastates are states “on top of” or “about” your primary state. Here’s a simple example of a metastate. First, you start with a primary state - you respond to the external environment with your primary states. Fear is a primary state. With that primary state, you then bring in another state (i.e. being mad about being scared) which is known as a metastate. In other words, you use another state to “texture” the primary state. Metastates change everything.
Here’s a short exercise to experience a metastate. Remember a time when you felt fearful and notice what that was like, feel the feeling of fear for a moment. Then welcome that fear. You can even open your arms in welcoming the fear. What’s it like welcoming fear? This is actually a Sedona Method feeling release process. In the process, you bring a metastate of welcoming to whatever primary state you are in.
You could also do something similar with a metastate of acceptance. This might sound like, “Oh, I notice that I have some fear and I accept that. Well, that’s simply what I am experiencing and I accept the feeling of being scared right now.”
Those are two useful ways to metastate but what if you reacted differently to your fear? Suppose you said, “I don’t ever want to feel scared again. But what if I do and feel even more scared than I do now? What will happen then?” This brings fear or worry as a metastate about your fear. And what does that do? It makes the initial fear much worse.
You could also get angry at the fact that you got fearful saying something like, “I’m tough. Tough people should never feel scared and I’m really angry that I got afraid.” Would that help or make the primary state worse?
Are you beginning to get the idea of meta-stating? Dr. Hall has invented hundreds of new NLP patterns that all involve some form of meta-stating— including ones used by geniuses. Genius comes in when you incorporate states like optimism, resilience, self-efficacy, self-esteem, developing your personal power, the ability to find value and opportunity and take advance of it, etc.
Dr. Hall has written numerous books or manuals with “Genius” in the title and they include:
• Accessing Personal Genius
• Living Genius
• Writing Genius
• Wealth Genius
Most genius states come from meta-stating where you texture one state with another. For example, you might have a focused state which you texture with extreme pleasure. Imagine what that would be like.
Let’s apply this approach to reading. What if you could get into a focused state that promoted a very high retention for information that was textured with extreme enjoyment? That might be a genius reading state. In addition, suppose that you could add any other resourceful state you might want (such as being able to truly get the essence of the material) in order to make the metastate more valuable to you. Actually, incorporating dozens of additional states might make your reading amazingly powerful. Not only would that be a genius state (a metastate really) for reading ... but your combination of states would be unique for you.
Now let's add to that metastate one more capability — the ability to step into it and out of it at will. Say you are on a crowded train but you have some time so you step into the genius reading state and read for 20 minutes. You may have enough 20 minute periods like that to be able to read 3 hours each day. Does that sound hard or boring perhaps? Remember, however, that you also textured the state with extreme pleasure so while you are very focused in your reading genius state, you are also experiencing intense pleasure.
What if someone were to disrupt your reading by asking you a question? You can immediately step out of your state and be present with that person. And then when you have time, just step back into the state again and read. That's a flavor for reading genius.
Certainly, there is something to be said for Dr. Hall’s genius states. He uses them himself quite successfully. One of Dr. Hall’s goals was to be a prolific writer but he found it very difficult to write anywhere near as much material as he wanted. He created a genius state for writing and applied it to himself - which he can step into and out of at any time. The net result? Now each year, he writes three books, 52 articles and usually 3-4 new workshop manuals - so the production volume is there. Besides his writing, he also reads three books each week – and he isn’t speed reading. He takes notes on each book and indexes all of his notes. As a result, Dr. Hall has developed a tremendous knowledge base inside his head.
Before I talk about a trading genius state, let me ask you a question. What would be the primary state you would want for great trading? Then with what other states would you want to texture that primary state? If you know, then you are not far away from that aspect of trading genius. Email your ideas for a trading genius state to me(van “at” vantharp.com). If enough people reply, I’ll design the next article in this series around the responses I get.
So is genius a mental state or a way of thinking? Well, I suspect that it’s both. Stay tuned as we’ll continue to explore these topics in some detail.
About the Author: Trading coach and author Van K. Tharp, Ph.D. is widely recognized for his best-selling books and outstanding Peak Performance Home Study Program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.vantharp.com. His new book, Trading Beyond The Matrix, is available now at matrix.vantharp.com.
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Market Breadth Really Stinks – When Will it Finally Matter?
by D. R. Barton, Jr.
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U.S. stock indexes refuse to leave the “top of the page”. While the Dow Industrials and especially the Russell 2000 are lagging a bit, both the S&P 500 and notably the Nasdaq 100 made new all-time highs less than two weeks ago.
And while there has been joy on the financial news channels, many analysts are less than joyful about this market. They portend the end of the bull market due to the lack of broad participation. On Friday, July 17 in particular, the S&P and Nasdaq had big up days but those rises came with some disturbing statistics:
• The S&P 500 had more losing stocks than winning stocks,
• The New York Stock Exchange breadth (# winners - #losers) was negative, and,
• While the Nasdaq made a new all-time high, more stocks hit 52 week LOWS than hit 52 week highs!
Some other key breadth/participation figures have been flashing warning signs as well. Let’s dig into a few of these signals and see if it’s time to start lightening the equity holdings in our portfolio.
The Scariest Ones First
Before we look at breadth numbers from the bulleted list above, let’s just jump to the scariest indicator first. Here’s a chart that shows Nasdaq 100 closing prices compared to the percentage of symbols in that index that are trading above their 50 day moving averages:
The black and red line shows the Nasdaq closes (scale on the right side) while the gold line shows the percent of stocks in the index trading above their 50 day moving averages.
As the bold red arrows in that chart show, the Nasdaq has been pushing higher while the number of stocks trading above the key intermediate-term moving average has been trending lower. This shows weaker broad participation at the new highs – fewer stocks are driving the index.
And now for something really disturbing...
On October 31, 2007 I published an article in this same space cautioning readers about the exact same breadth divergence. Notice that I even replicated the color scheme in the chart above so that you can see the similarities:
Later that very same day(!), the Nasdaq made the new high which was then followed by a 54.5% decline.
But before you get your undies in a bundle, there really are some things that are different this time.
Let’s look at why the breadth stats from the all-time aren’t that disturbing, and can be pretty easily explained away by a one-time event – Google’s second biggest up day in its history.
New Nasdaq Highs with Negative Breadth – Actually, Not That Rare
As I mentioned, the Nasdaq made a new all-time high not two weeks back on Friday July 17th. The Nasdaq Composite (a much broader index than the Nasdaq 100) also made a new high, with 500 more losing stock than winning ones. Many pundits pointed out that the last time a new high was made with so many more losers than winners was ominously (drum roll please) March of 2000!
What most of them fail to tell us, however, was that from 1987 until the ultimate peak in 2000, the Nasdaq composite made a new high with negative breadth more than 60 times! Here’s a dandy chart that shows this phenomenon from market analyst Ryan Detrick (who often has some interesting and useful insights):
See larger image
So where does all this put us?
I will say that narrower participation at new highs is definitely a yellow flag. Be prepared to start taking some long-term money off the table – but not until we see a drop. And by drop, I mean a real one - a 10% correction on a closing basis. Until such time, the global central banks will do what they can to keep this aging bull wheezing forward.
Please let me know your thoughts and opinions on the article. Send your comments to drbarton “at” vantharp.com – I always enjoy hearing from you!
About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured analyst on Fox Business’ Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch’s Money Life Show. He is also a frequent guest analyst on CNBC’s Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television — America and Canada’s Business News Network. His articles have appeared on SmartMoney.com MarketWatch.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
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