The Van Tharp Institute

September 13, 2006 — Issue #288

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In this Issue:

Workshops

Many Upcoming Workshops Include Dinner at Van Tharp's Home! 

Feature Article

Efficiency Portfolio Update, by Van Tharp

Trading Education

Peak Performance for Traders and Investors

Trading Tip

A Review of Market Models: Macroeconomics, by D. R. Barton, Jr.

Listening In...

Thoughts on Regret, by Ken Long

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Professional Tactics of Day Trading   September 16-18 Cary, NC
Peak Performance and Systems Development  September 23-29 Sydney, AU
17 Steps to Becoming a Great Trader* October 23, 24, 25 Cary, NC
How to Trade Mutual and Exchange Traded Funds* October 27, 28, 29 Cary, NC
Peak Performance 101* November 3, 4, 5 Cary, NC
Peak Performance 202* November 7,8,9 Cary, NC

* These October and November back-to-back workshops include a dinner at Van Tharp's Home. 

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Feature

Tharp’s Thoughts

Market Efficiency Portfolio

Two Months Later

By
Van K. Tharp

Efficiencies have continued their downward trend since we started the portfolio.  In February of this year the market was amazingly strong in terms of efficiency.  We had 406 stocks with ratings above 10 and only 11 stocks with rating below minus 10.  It was very hard to find a good short candidate.  Now look at the chart below and you’ll see how things have changed.  The market moved as low as having 26 stocks above +10 to its current value of +39.  Stocks below minus 10 moved from only 11, to as many as 91, and there are now 32 at that level.

There is another way to measure the efficiency of the market.  What percentage of stocks have an efficiency rating above zero? This information has been charted in the second chart below.  In February of this year, 80% of all stocks showed a positive efficiency.  As of September 8th, this number was 53% and has been as low as 37% in mid July.  It hasn’t been a good time for efficient portfolios, positive or negative.  The market is pretty neutral right now, based upon efficiency. 

 

My ideal trading for this system would be to perhaps change one stock each month.  That would probably mean that we were making lots of money in the others.  Changing the stop from 10% to 20% meant that we didn’t get out of anything.  However, there is another reason to get out of a position when it no longer meets the criteria that caused you to buy it.  For example, if you buy a stock with a positive efficiency above 10 and that efficiency drops below 5, then it is hardly one of the top efficiency stocks in the market.  This happened with all of our positive efficiency stocks during August.  So much for a great up market. 

Similarly, when you buy a negative efficiency stock with a rating below minus 10, then that rating moves to above minus five, it certainly is no longer one of the best negative efficiency stocks.  So why hold them when they no longer meet the criteria by which you’d expect to make money?

For this reason, I have eliminated the positive efficiency stocks, AYE, CG, and OGE, that we purchased last month – all at losses.  In addition, I have eliminated three of our negative efficiency stocks, WPI, EBAY, and PFCB.  PF Chang’s, although we had not been stopped out, has actually become a positive efficiency stock, now rated at 4.43.  We exited all of our positions as of the close on September 8th.

Table 1 shows all of our closed out positions.

Stock

Profit/Loss

R-multiple

FAL

($2.28)

-0.01

BSX

($182.82)

-0.46

DLX

($183.56)

-0.46

AETH

($132.00)

-0.33

AYE

($56.95)

-0.14

CG

($66.72)

-0.17

OGE

($51.06)

-0.13

WPI

($315.08)

-0.79

EBAY

($381.78)

-0.95

 

($1,425.05)

-0.36

We now have nine losses, totally $1425.05, including commissions.  Our active positions, prior to the new buys are shown in Table 2.

Stock

Entry

Cost

Shares

Trailing

Stop

Price

Now

Value

Profit

Loss

R-multiple

Shorts

 

 

 

 

 

 

 

 

LEE

26.29

1998.04

76

31.548

23.23

1765.48

$217.56

0.54

JRCC

22.06

1985.4

90

18.36

14.99

1349.1

$621.3

1.55

HOV

27.33

1980.09

73

32.796

26.17

1910.41

$54.68

0.14

JRC

7.15

2002.7

278

8.58

6.64

1845.92

$141.78

0.35

 

 

 

 

 

 

 

$1035.32

0.26

 

 

 

 

 

 

 

 

 

Thus, we have profits from our four open positions of $1035 against losses of our closed positions of $1425.05.  Our portfolio on Monday was worth $19,610 for a loss of $390 or about 2%.

The market is fairly neutral and I found eight good shorting candidates and eight good long candidates.  My bias is slightly negative because we’re going into a very strong negative cycle for the stock market.  Thus, we’ll add four long positions—CYP, SYX, LQU, and CXW— and two more short positions—GYI and CHS.

I looked at the most positive stocks and picked the four that looked the most efficient.  I also looked at the most negative stocks and picked the two that looked the most efficient from a shorting viewpoint.  Hopefully, next month there will be no changes to the portfolio, which means we will have done well.

With those changes in mind, let’s look at our portfolio.

The Portfolio on Tuesday’s Close

The new stocks were all purchased at the opening on September 11th.  We now have six shorts and four long positions.  The portfolio values shown are as of the close on Tuesday, September 12th.  Basically, as of the close, on Tuesday, we’re down about $600 or about 3% (that is our closed positions have a loss of $1425, while our open positions show a profit of $830.)

 

Stock

Entry

Cost

Shares

Trailing

Stop

Price

Value

Profit

R-multiple

Now

Loss

Longs

 

 

 

 

 

 

 

 

VTR

$39.95

$1,957.55

49

$31.96

$39.74

$1,947.26

($10.29)

(0.026)

SYX

$13.25

$1,961.00

148

$10.60

$13.78

$2,039.44

$78.44

0.196

LQU

$54.05

$1,945.80

36

$43.24

$52.97

$1,906.92

($38.88)

(0.097)

CXW

$63.50

$1,905.00

30

$50.80

$67.33

$2,019.90

$114.90

0.287

Shorts

 

 

 

 

 

 

 

 

LEE

$26.29

$1,998.04

76

$29.03

$23.85

$1,812.60

$170.44

0.426

JRCC

$22.06

$1,985.40

90

$18.36

$14.64

$1,317.60

$652.80

1.632

HOV

$27.33

$1,980.09

73

$32.71

$28.65

$2,091.45

($126.36)

(0.316)

JRC

$7.15

$2,002.70

278

$8.30

$6.53

$1,815.34

$172.36

0.431

GYI

$45.41

$1,952.63

43

$54.49

$45.59

$1,960.37

($22.74)

(0.057)

CHS

$18.45

$1,955.70

106

$22.14

$19.82

$2,100.92

($160.22)

(0.401)

 

 

 

 

 

 

 

$830.45 

0.21

Note: If you are calculating these numbers for yourself, please be aware that Dr. Tharp often rounds numbers up or down.

About Van Tharp: Trading coach, and author Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his 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.iitm.com.

Trading Education

Van Tharp's Peak Performance Home Study Course

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  • How to Use Risk 
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Contains the five books listed above, and four CDs. 

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“A few months ago I purchased your ‘Peak Performance Course.’ I can honestly say it’s the best investment I have ever made towards my career and aspiration to trade my own money from home.” —E. M. 

 

Trading Tip 

A Review of Market Models:  Macroeconomics

by

D.R. Barton

Last week, we went through an overview of fundamental analysis.  This week we’ll look at the first factor in fundamental analysis:  macroeconomics.

As the name implies, this is the big picture stuff.  What’s happening in the global economy and the national economy (and for some stocks regional economics are important – for example many of the home builders).

What factors are most often looked at?  In no particular order, here are some of the main items that are studied:

·        Exchange Rates:  how are currency valuations impacting a company’s business?  In today’s global economies, exchange rates effect material costs, revenues from foreign sales and other lesser known factors of business (foreign real estate holdings and plant valuations, etc.)

·        Global Economic Health:  If Southeast Asia is in a recession and many of your customers are there, it doesn’t matter if the U.S. or South American economies are fine.

·        National Economic Indicators – Inflation & Interest:  some products do better in inflationary environments than others.  And inflation that is perceived as out of control creates a negative drag on the economic outlook.  Interest rates are inter-related with inflation, and particularly impact capital intensive businesses.

·        GDP Growth: Gross Domestic Product (GDP) and its rate of growth are one of the key indicators of economic health.

·        Productivity:  How much product or service a unit of labor can provide has proven to be a key indicator of future economic health.

So what does a fundamental analyst do with this data?  This is the beginning of the “top down” analysis process.  Typically, an analyst will look at the broad economic picture to decide whether to invest or how much of a particular portfolio to commit to the markets at a given time.  This top down view then trickles down to sector and industry analysis and finally to the research on a particular company.  Top down analysts are necessarily very long term in their views since economics characteristics tend to influence the financial markets in a rather glacial time-frame.

But, despite this long-term outlook, many top traders keep close tabs on what’s happening in the macro world.  Through experience they have learned to gain a trading edge by capitalizing in the short term on upsets that occur in the big picture.

Next week we’ll take a look at microeconomic, or individual company analysis.  Until then,

Great Trading!

D. R. Barton, Jr. is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching, and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading.

D.R. presents the IITM Swing Trading Workshop and Professional Tactics for Day Traders Workshop. Each workshop is only held once each year. 

Listening in...  

Mastermind Forum

Thoughts on Regret 
Author: Ken Long

1. Was reflecting on the topic of Regret today. Thinking about past decisions with regret usually takes the form of “I wish I knew then what I know now” or “I wish I had chosen differently at the time knowing what I knew then”. We can’t go back to change the decision but we can learn from our reflections as we go forward to inform future decisions and also make changes to our decision making process to accommodate our growing wisdom.

2. Remember who you were at the time of the decision, and your values at the time. If that person made the best decision under uncertainty that was then possible, then it’s important to honor that person. When new facts later emerge; or your values change; or you have developed a more effective decision making process, it’s not fair to look back through time and evaluate that person against a changing standard. So, why do we do it? And what’s the cost of focusing on the unchangeable instead of using that energy on making adjustments in the present, which is the only place where we CAN make changes? Is it the emotional satisfaction of beating ourselves up and confirming the whispers of our weaker voice? Is it easier to dwell on what might have been instead of embracing the challenge of making the change on the present? There is certainty in regret but uncertainty in change, so maybe it’s easier to dwell on the pain we already know.

3. At some point we have to let the regret go and get on with it. In my capacity as an instructor at the Army Command and General Staff College I spend most of my time helping our military officers develop their problem solving and decision making skills under conditions of uncertainty; learning how to develop plans and operations that allow for in-stride adjustment as new data becomes available; to build in “insurance” and risk management techniques to accommodate uncertainty; to develop effective and efficient means of gathering the information critical to making informed decisions. The problem of the Information Age is not a lack of data or even information, but rather the skills to define the critical relevant information and employ efficient and comprehensive sensors to find the signals and conditions that allow us to act with certainty and confidence according to our plans. 

4. The feelings of regret are as natural and legitimate as any of our emotions, but until we get beyond it, and learn to apply the energy the emotion represents, we’ll stay in our ruts. This doesn’t have much to do with this week’s market assessment, but in many ways it’s one of the long term continuing issues that surround our trading and investing systems.

5.Hope this finds you all well at  the 5 year anniversary of 9/11. 

Ken Long will be presenting our upcoming "How to Trade Mutual Funds and Exchange Traded Funds" Workshop. Prior students rave about Ken's highly effective instruction.

Visit Van's new blog,  www.smarttraderblog.com

and, 

Participate on our Trading Forum,  a place for traders and investors to share ideas and learn from each other. 

 

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Copyright 2006 the International Institute of Trading Mastery, Inc.

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Workshop Schedule

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SYDNEY, AUSTRALIA
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