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Project Marathon: The Paradox
The Jefferson Paradox
Recently, I finished a biography of Thomas Jefferson that focused on the 50+ years he spent as an architect/builder at Monticello and on other projects as a sideline to his primary profession in law and politics. The book dealt frankly with several paradoxical aspects of Jefferson.
He authored much of the American Declaration of Independence and helped write the US Constitution, yet he was a lifelong slave owner. Jefferson was also opposed to borrowing money; however, he died very heavily indebted. His debt is all the stranger because he was a compulsive man who kept record of every single cent he spent in his adult life. As it turns out, however, he never seemed to once actually tally the amount he was in debt. He never viewed the “big picture” of his financial position and died hugely in debt, strapping his family with a great burden.
It was about this time, when I was downloading the last few monthly statements from my broker, that I thought I ought to create an equity curve. An equity curve is pretty much standard practice for traders, right?
I regularly track all of my trades in a spreadsheet. I keep track of every single R-multiple and each individual trade gain and loss, as well as cumulative figures. However, I had never visually tracked my equity curve over a year or two. When I graphed it, the equity curve was what you might call sobering. Although it was no real surprise to me, it was certainly unimpressive. It's been basically a flat line for some time now.
That graph spoke frankly to me, and while I could provide a number of explanations for it, no editorializing would change its shape.
The Stockdale Paradox
Shortly after that “flat line” experience, I listened to the audio version of the business book, Good to Great, by Jim Collins. Collins wrote the book about his research into what business practices took a number of companies from mediocre performance to great performance. One chapter in the book, The Stockdale Paradox, really got my attention.
Adm. Jim Stockdale was the ranking US military officer in a Vietnamese prisoner-of-war camp for eight years. While he never lost faith that he would ultimately be released from the prisoner camp and rejoin his family, he confronted the most brutal facts about his existence. In the audio book, Collins really likes to stress the words "brutal facts" with perhaps a bit of drama but also perhaps a bit of understanding.
At one point some years back, Collins spoke with Stockdale about his experiences and asked him specifically who didn't make it out of the prison camp. Stockdale replied "The optimists." By that he meant the people who were thinking they were going to get out very soon or by a certain holiday. As those days came and went, the optimists eventually lost hope and faith. While Stockdale, on the other hand, never lost faith in his ultimate return home, he lived under and acknowledged the harsh conditions of his current existence.
Stockdale’s point about optimists struck me as I tend to think of myself as one. I don't think I'll give that up as a result of reading Collin's book, but I also believe facing the brutal facts has its place in a trading business. Here are some of the facts I have faced in the last two weeks:
- I have been working hard and not making money. That was a badge of honor when I first started trading again but that’s not so anymore.
- After delivering the trading mistakes presentation at the Peak 101 workshop last week, I became aware that I prefer to be right rather than follow the rules of several of my systems. That’s news to me! I didn’t think my desire to be right was so strong. Apparently, however, I like being right a lot more than I had previously thought or acknowledged.
- My relationship with and commitment to my annual goals has grown weak.
- Discipline in certain parts of my trading is noticeably lacking.
- While I completed the Super Trader program more than two years back, I still have yet to graduate.
All that and I thought I’d be “there” by now.
It’s funny how I can now hear Byron Katie’s voice paraphrasing some of her words from A Thousand Names for Joy saying something like “How else could you have done it? You had to do it like that because there was no other way. You were only doing your best.”
Let’s be clear, there are also other facts that I could keep in mind:
- I am blessed with a dream life already in many, many respects and am grateful to God for all the gifts in my life.
- I have maintained my life priorities and will continue to keep several areas more important over trading performance.
- There are aspects of my trading that have been working quite well for quite a long time (e.g., my overall risk controls and my discipline to not take trades without a defined system). Also, several trading systems have performed very well recently.
- I have zero doubts about ultimately being a great trader.
So What Now?
The short answer? More work! It’s back to Van’s reinvention process of asking “What happened? What’s missing? What’s next?”
My initial sense is that my top-down discipline process needs the most attention tying my dream life statement to my annual goals, monthly goals and daily activities. I’ll have to put some time into those three questions and let you know what I have come up with in the next update.
In the meantime, take care and trade well.
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We Can't Go Sideways Forever, Part 2: Seasonality
Last week, I pointed out that the S&P 500 had been traveling sideways in a trading range for the past 30+ trading days. Now it has traveled sideways for about 38 days. By just about any measure, this sideways market has not been quiet or well-behaved. Huge daily ranges and monster weekly swings have made these past two months difficult to navigate for even the most sophisticated traders.
When we step back and take a look at the bigger picture, the trading range for these 38 trading days remains at 129 S&P points—greater than the trading range for the first seven months of the year. See the chart below.
Traders and investors who have tried to ride a trend over the past couple of months have been frustrated repeatedly. We will, of course, break out of this range.
In last week’s article, we looked at a bond-to-stock ratio that points toward a renewed flow of investment dollars back into the equities markets. (And that ratio spiked temporarily much higher when the FOMC announced the new “Twist” program designed to drive down longer-term interest rates). This week, we’ll look at some seasonal factors: two pointing to higher stock prices over the intermediate time frame and the other pointing lower in the short term.
The Halloween Indicator: A Simple Seasonality Trend with a Great Track Record
There’s an old trader’s adage that says, “Sell in May and go away.” The other half of that story is to buy on Halloween. Some people call this the “Best Six Months” indicator. And there is some compelling data, going back to post-WWII that shows this seasonality pattern to be very consistent. Here’s a graphic from the folks at Chart of the Day that shows the gains made in November through April compared to those made in May through October.
As you can see, the faint line on the top represents the total returns of the market since 1950. The dark blue line below it shows returns made just in the Nov – April time frame. This seasonality doesn’t work every single time. But over 60+ cycles, it has proven to be extremely robust. And it certainly has been spot-on for the last couple of cycles, as we can see on this monthly chart.
The last bit of cyclicality working in our favor is the presidential cycle. We are in the 3rd year of this cycle, traditionally the most bullish year. That fact alone has many pundits looking for a strong finish to the year. (With the Fed’s “Twist” capital injection program, we’ve already seen the start of the government intervention that is typical of the third year of a presidential cycle).
So to sum up we have three fairly strong indicators pointing us toward an up direction as the most probable break of this trading range:
- Bonds are overpriced relative to stocks.
- The best six months seasonality period starts in about four weeks.
- We are in the third year of a presidential cycle.
But in the Short Term . . .
Another old Wall Street adage is “Sell ‘em on Rosh Hashanah and buy ‘em on Yom Kippur.” Rabbi Michael Katz suggests that the adage is an adaptation of Lord Rothschild’s admonition to buy at the sound of the cannons and sell at the sound of the trumpets since Rosh Hashanah is a joyful new year celebration and Yom Kippur is a more somber Day of Atonement. Generally, this saying suggests that one should set aside his or her investment concerns and, instead, take on a more introspective focus during the holiday period.
Regardless of your spiritual practices, beware of the very short-term, seasonally-weak period from the start of Rosh Hashanah this Wednesday night until Yom Kippur on October 7th because the adage seems to hold water. In a study done by Birinyi Associates using the Dow Index dating back to 1915, selling on Rosh Hashanah and buying back on Yom Kippur averaged a gain of 0.62% (not bad for a holding period of only 7 days on average). In contrast, buying on Yom Kippur and holding on until year-end produced an average return of 1.99% when using the Dow over the same span of years.
As with any positive expectancy method, always remember that seasonal strategies don’t work every year. But it makes sense to pay attention when seasonal tendencies have provided a proven edge over long periods of time.
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 guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".
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An email from a client to Ken Long:
Even though I can’t be an active participant in the chatroom due to time differences here in Australia, I find reading the transcripts of the day's events a constant source of inspiration. I like reading about the trading ideas and new hypotheses for systems that come along to people. I have gained valuable insights on position sizing™ strategies and portfolio heat. I have also learned about the possibilities trading in different time frames can provide.
Most valuable is reading about the day-to-day trials and tribulations people have. Many of the issues are very similar to the ones I have, and it helps to know that I am not alone in working towards making the move from novice to competent trader. For that I am very grateful.
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