Social Media and the Creation of Better Traders

Mozart has long been considered a musical genius that is born once in a 100 years. His amazing talent was recognized when he was still 5 years old. Today, there are hundreds of 3-4 year old kids that are 10 times better than the 5-year old Mozart. Today we know much more about the creation of geniuses and how to leverage that knowledge. This is why I am an optimist about the future.

Robert Fischer became a grand master before he turned 16. He was considered a chess legend at the age of 13. Today, there are hundreds of 10-11 year old kids that would kick the ass of the 13 year old Fischer. We  know much more about how to learn efficiently and how to achieve expertise in any area of life. The existence of computer simulations significantly accelerates the creation of chess geniuses.

Today we know that the grand chess players don’t really think, they react. They derive their next move from their long-term memory, which has archived millions of combinations as opposed to lesser developed players, who have to apply conscious mental effort to take a decision. The best chess players think like computers. I would argue the same for the best traders, even if some of them don’t realize it. The trading wars will be won by computers, but there will always be enough fish for the skilled fisherman.

Social media can do for traders what simulated computer programs do for wanna-be chess masters. In the 1990s, Jack Swager said that he had troubles finding true investment superstars for his Market Wizards books. Social media did not exist then. Social media is important not only in terms of its discovery function, but also in terms of faster development of talent. It accelerated the learning curve and it produced hundreds of new great traders. This process has only just begun.

Social media overcomes the geographic limits of time and space and the psychological and cultural limits of perceived status, and opens a whole new world of collaboration. Some people say that social media is noise for the real traders, who have to rely only on themselves to be successful, but as with all tools – something can be very dangerous in one’s hands and extremetly useful in another’s. You just have to learn how to use it.

The Zen-Nippon Chick Sexing School and Technical Analysis

I am currently reading ‘Moonwalking with Einstein – The Art and Science of Remembering Everything” by Joshua Foer and the book offers very good explanation of the importance of building procedural memory for pattern recognition. See some modified quotes  from the book:

  • The Zen-Nippon Chick Sexing School was based in Japan in the 1920s and offered a two-year program, which single goal was to teach how to recognize the female chicks from the cockerels. For the poultry farmers, male chickens are useless. They can’t lay eggs their meat is stingy. The sooner they can be disposed of – the better, but a costly problem has vexed egg farmers for millennia: It is virtually impossible to tell the difference between male and female chickens until they’re four to six weeks old. Until then they are indistinguishable and have to be housed and fed at considerable expense.
  • In the 1920s, the Japanese figured out a way to distinguish between male and female chicks immediately after their birth, which helped to lower the price of eggs worldwide. The professional chicken sexer, equipped with a skill that took years to master, became one of the most valuable workers in agriculture.
  • Chicken sexing is a delicate art, requiring Zen-like concentration and a brain surgeon’s dexterity. The gender of the young chick is recognized by the shape of their vent. By some estimates there are as many as a thousand vent configurations that a sexer has to learn to become competent. The job is made even more difficult by the fact that the sexer has to diagnose the bird with just a glance. There is no time for conscious reasoning.
  • What makes chicken sexing such a captivating subject and the reason my own research into memory has brought me to this arcane skill – is that even the best professional sexers can’t describe how they determine gender in the toughest, most ambiguous cases. Their art is inexplicable. They say that within three seconds they just “know” whether the bird is a boy or a girl, but they can’t say how they know. What they have, they say is intution. In some fundamental sense, the expert chicken sexer perceives the world – at least the world of chickens – in a way that is completely different from you or me. When they look at a chick’s bottom, they see things that a normal person simply does not see.

The best technical analysis experts are the modern chicks sexers. By looking at millions of charts at different time frames, they have attained the skill to recognize great technical setups from not so great ones. Their eyes see what most don’t and often they can’t even explain why they like certain chart. They just do, based on experience.

 

Industry Momentum Review

The number of distribution days in the major market indexes continues to grow as the names that led the rally over the past 7 months, took quite a beating over the past week – semiconductors, oil, basic material, small caps. I noticed a lot of shake-outs on different time frames: a stock breaks out from a range, only to reverse quickly and go below the bottom of the range, essentially shaking out a large number of shareholders. And just when the setup looks broken, the stock rallies back and makes a huge move. You have to observe and adapt quickly. Every setup has a different success rate in the different market environment. If you are not flexible enough and would like to stick to the one setup that you know well, you are better off to stay on the sidelines and wait for the fat pitch.

Sometimes stocks need more time to consolidate. In a strong “risk on” environment, most momentum stocks find buyers at their rising shorter-term moving averages – 5, 10 and 20. When the sentiment changes, the shorter MA become irrelevant. The market action is choppier and it takes more efforts to achieve less.

What was hot last week?

Drug manufacturers had a monstrous week: $CBST$VRUS$PTIE$KV-A

Airlines bounced from hell after crude oil stopped advancing (they are still in a downtrend)

Soda companies are holding well: $PRMW advanced more than 40% on Thursday and Friday as the $SPY lost 1% for the same period. $SODA is trading close to its all-time high.

The Earthquake in Japan will play the role of a catalyst for the world to review its energy policy. The overall short-term implications for oil, coal and natural gas are uncertain. What is clear is that Japan’s refineries are down and they will have to import gasoline from somewhere. The stocks of U.S. refiners might benefit: $WNR$ALJ$VLO$TSO$SUN$HOC among others.

In the st50 we noticed the number of apparel retailers on the list is growing as many of them managed to escape mostly unscathed from the recent sell-off.

Some of the best looking swing long setups in the latest edition of the St50 are: $LUK$TBL, VRX,$HYC$PAY$EL$WFMI$RL

 

10 St50 Swing Setups for This Week

Every Sunday I take a look at the latest edition of Stocktwits 50 and highlight 10 stocks that have the potential to outperform in the following trading week.  Last week choices and their respective returns were: $BHI (-2.5%), $MRO (+6.3%), $SFN (+6%), $ITMN (+18.5%), $AREX (-0.8%), $ARBA (+5.3%), $CAM (+3.8%), $BRKS (7.2%), $ROK (-1%), $FNSR (+5.2%).

Which industry groups worked best over the past week:

– Biotech ($ITMN, $JAZZ, $RPRX);

– Communication equipment ($EXFO, $JDSU, $ALU);

– Precious metals – gold and silver miners ($ANV, $EXK)

– Oil and gas explorarion ($ROYL, $HERO);

– Long-term care facilities ($SKH, $SRZ);

– Chinese hotel services ($HMIN, $HTHT, $SVN).

 

Some of the best looking swing setups in the St50 this week are:$EMC $JDSU $ALLT $DBLE $AREX $PXD $FNSR $TGA $ROK $SBGI. A setup is not considered for complete unless it is triggered.

 

 

Position Setups

A setup is a combination of factors that need to align in time and space in order to produce a buy or sell signal. Look at it as a checklist. I already stressed out on numerous occasions that when it comes to swing setups, the two main equity selection factors are price and industry group momentum. Everything else is secondary. The purpose is to find quick 5 – 30% moves in 2 to 10 trading days.

How are position setups different?

Their purpose is to enter and ride a trend for as long as possible and as bigger gain as possible. What are some of the most important factors that matter for the equity selection process of position trades? Price momentum, Earnings and sales growth momentum, earnings surprise momentum, guidance are among the most important ones. All of them take a central place in the Stocktwits 50 algorithm.

The best way to show what is a position setup and how it could be managed is through example. Let’s take a look at $CMG

Entry:

– Opening new position: One good entry point could be a 5%+ move to a new 6 month high on above the average 50-day volume. Better risk/reward entries typically take into account 3 month price growth. For example being under 30% signifies that the stock is not too extended.

In the case of $CMG, the stock made a 5.7% move to a new all-time high on September 1st 2010. The volume was more than 2 times the 50-day average. The 3-month return of $CMG before that move on September 1st, was 7%.

There are numerous other entry approaches: a 2% to 52-week high; a 2% move to new all-time high…

– When to add to a position: 3% bounces from the relevant moving average is a good risk/reward entry point. In the case of $CMG, the relevant MA since September 1st has been the 20sma.

Exit

– Partial Exit: Momentum stocks often go parabolic in the last 1/3 of their move; therefore it makes sense to take partial profits when they extend too far from their 50-day MA. For example $CMG was 25% above on Oct 22 and Nov 30th.

– Closing the whole position: when the stock closes below its relevant moving average or its50-day MA or if you are really long-term investor – the 100 day MA. Some people use a new 20-day low as an exit signal or some form of ATR (Average True Range).