Process

  • Posted by
  • on December 29th, 2012

That is the common thread of anything I choose to read. Through the 90s, I NEVER missed my weekend Barrons read, yet the only piece I really recall was the interview with Paul Desmond of Lowry’s Research circa 1996. It built upon the seeds planted by Jesse Livermore and William O’Neil, and pointed me towards a path of quantifying market behavior.

As reading sources became more digital, it was The Street.com(read of its greatness here if you weren’t around) followed by RSS feeds and then curators like Charles Kirk and Tadas Viskanta that became my personal editors. I reluctantly joined Twitter in 2009 only because two of my favorite bloggers(and fellow process addicts), Dr. Steenbarger and Meb Faber, had done so.

Then StockTwits came along, and the ease of studying real-time process was multiplied. I realize that opens up a vast supply of trading ideas, but that’s secondary to the opportunity to sharpen my process. Sometimes it’s finding a better way to measure something. Sometimes it’s finding a faster way. Sometimes it’s a short phrase that crystallizes a thought that’s been stuck on my whiteboard. And sometimes it’s just the daily routine of a few early morning thoughts from RedDog, deBrink, Trading Points, Ritholtz, Tom Keene. It’s my pre-game stretch as I prepare to do my own analysis.

Other than uncertainty, process is the only constant we can expect in this game. I share nothing with David Merkel in terms of timeframe and strategy, but respect his process, and the words regular, incremental improvements remind me that doing the little things over time adds up to a big thing. Joe Fahmy trades high growth stocks while I focus on ETFs, but has a great feel for market climate. Better yet, because his process is so consistent, I get a market reality check by comparing his present message with his past ones. HCPG magically shows up in my stream when extreme moves slam into key support and resistance areas; the tactics are short/sweet and act as a good check on unbridled trend following. Josh Brown isn’t sharing trade ideas per se, but who doesn’t remember “the best way beat a high frequency trader is to be a low frequency trader.” Perspective, duh.

So what is my process? I’ve written more than anyone cares to read on my breadth work, but I’ll try to summarize a few beliefs as follows:

1) Without a marketwide appetite for risk, company signals go mostly unexploited

2) Market moves start inward and spread outward, so studying the “market of stocks” makes more sense to me than studying $SPX

3) Fear(of loss and/or missing out) dominates market activity at the margin, and when enough people are “at the margin” we have a great opportunity to trade

4) I have no way to “outknow” the information on any stock, sector, or asset class; time spent trying is time taken away from honing my true edge

5) Determined trends unfold very deliberately, with regret acting as a powerful catalyst for continuation 

6) Distinguishing between a positive feedback loop(trend) and negative feedback loop(range) is the most critical factor in market speculation

I probably have another 94 for a Top 100 list, but those 6 address 80% of my beliefs so why dilute the list? Now, as Tom Brakke points out, beliefs are not process. What is my process?

I measure relentlessly and objectively…from 15 minutes to monthly, from balanced to extreme, from expanding to contracting, from high to low, by speed and magnitude, etc. I’m looking for very specific market conditions that, in some timeframe, indicate the presence of a determined trend. I care not only about the % of stocks that are “healthy”, but how that number compares to prior readings. Level, direction, and momentum of these readings are all factors in spotting the right climate for speculation. My own organization of data, but building on the concepts shared by my pals Alphatrends and Daytrend.

When Dynamic Hedge wrote his list of 10 tips recently, I highlighted “only add when there is nothing left to take away”. Great thought, but a 2nd read led me to “does the information allow me to believe, or does it force me to believe?” He was talking about management chatter, but I like the way it applies to my own breadth information. In every sustainable market swing since I’ve collected data, my mosaic of market breadth has been at worst a coincident indicator, and at times a leading one. And each time, I allow(force) myself to shed a little more of anything that distracts me from my process.

Thanks for sharing with me in 2012; I’ve found innumerable ways to improve in your tweets, blogs, and comments and look forward to more in 2013.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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