Monday, April 30, 2007

A Unique Financial Blog Site and Data Source

I greatly enjoy exploring new trading resources; so much new is developed all the time. One excellent blog site that I've been visiting is Between the Hedges. This site does a great job of wrapping up the market at the end of a day/week and preparing for the coming day. Gary also tracks the performance of his own portfolio and combs through interesting sources of financial data that may not be familiar to traders. His exhaustive collection of links includes sources of economic and market data, as well as news from around the world. He also provides links to a variety of screening tools and sources of information on individual stocks.

Some of the more interesting data sources linked by Between the Hedges are Hot Spots, Chart Toppers, Option Dragon, Market Gauges, and a heatmap of style performance.

Hats off to Gary for an excellent resource.

When Large Cap Stocks Outperform Small Caps

Over the last ten trading sessions, we've seen solid gains in the Dow Jones Industrial Average (DIA; up over 4%), but more muted gains in the small-cap Russell 2000 Index (IWM; up about 1.3%).

I went back to 2004 (N = 825 trading days) and found 81 occasions in which the Dow was up more than 2.5% in a 10-day period. When the Dow was up strongly and outperformed the Russell (N = 29), the next five days in the Russell (IWM) were up by an average of .66% (21 up, 8 down). On the other hand, when the Dow has been strong but the Russell has been stronger (N = 52), the next five days in the Russell (IWM) averaged a gain of only .05% (27 up, 25 down).

It thus appears that, when the Russell has underperformed a strong large cap Dow over a 10-day period, it has tended to play catchup over the following week. As I'm writing this (9:13 AM Monday morning), the Russell is continuing to underperform the large caps. I'll need to see some signs of selling drying up (rising NYSE TICK lows and negative TICK unable to push IWM to new lows) to act on this pattern.

It's when real-time action confirms historical patterns that particularly good things can happen.

Free Interactive Webinar on Trader Performance

Steven Buss, a member of the NeoTicker forum, has kindly offered to host me for a free two-hour online presentation and discussion of issues related to the enhancement of trading performance. Please make note of the date Sunday, May 6th and the time: 8:00 AM EST; 7:00 AM CST. Yes, it's early in the morning, but this is to make the session accessible for our colleagues in Europe and Asia.

During the Webinar, I will summarize and elaborate basic ideas from my book and also introduce new ideas developed and applied since the book's publication. A unique feature of the session will be a participant Q&A moderated by Steve.

Registration is required; your information will not be used for any commercial purposes. My hope is that the session can help you identify your own strengths and weaknesses, so that you can become more intentional in your own development as a trader. Please note that this is a completely non-commercial presentation; there will be no advertisements, solicitations, or infomercial content.

Here are a few readings relevant to the Webinar topic:

Trader Performance: What Contributes to Profitability

Three Trading Psychology Myths

Resilience and the Courage of Your Convictions

Six Keys to Trading Success

Hope to see you there! Thanks for the interest--


Sunday, April 29, 2007

XLK and Money Flows for Technology Stocks

Our last look at the Technology sector found that it held up well in the face of the late February/early March market weakness, with waning 10-day adjusted relative dollar volume flows preceding the decline. Since that time, we've had a rebound in flows (pink line) to above average levels (red line), powering the Technology ETF (XLK; blue line) to fresh bull highs.

The five highly weighted stocks within XLK that I use to compute the flows are MSFT, INTC, IBM, CSCO, and VZ. Together, these issues comprise about 40% of the index.

Of the five stocks, we see slightly negative 10-day flows (i.e., slight outflow of dollars) in CSCO. CSCO is also showing 10-day flows below its 200-day moving average. VZ is displaying positive flows, but rather well below its 200-day average. MSFT is the only stock that has shown outflows over the 200-day period, but--over the past ten sessions--has been attracting dollars. That's worth keeping an eye on.

Overall, the dollar volume flows within the Technology sector are positive, but not overly impressive. If we continue to see a tailing off of the 10-day levels, I'd expect to see some consolidation among these stocks.

XLF and Money Flows for Financial Stocks

The last time we visited the Financial sector, we found waning adjusted relative dollar volume flows leading up to the late February/early March decline. Since that time, we can see that 10-day flows (pink line) have returned to above average (red line), but that the sector price (XLF; blue line) has yet to register fresh bull market highs.

The five highly weighted stocks within XLF that I use to compute the dollar flows are C, AIG, BAC, WFC, and JPM. Together, they account for about 36% of the index.

Of these five, only BAC is showing a 10-day level of flows below its 200-day moving average. Those flows are still quite positive, however. The strongest inflows are occurring within AIG, which seems to be attracting significant institutional interest. There is absolutely no sign of money fleeing this sector, as flows for all the stocks are strong.

As long as we have expanding dollar inflows to the Financial stocks, I expect price to continue higher. We normally see some tailing off of those flows prior to any significant correction. While XLF has been underperforming other S&P sectors of late, it has still been quietly accumulating institutional assets.

XLV and Money Flows For Healthcare Stocks

Our last visit to the Healthcare sector found waning adjusted relative dollar volume flows leading to the late February/early March market decline. The Healthcare ETF (XLV; blue line) has moved sharply higher since that time, making fresh bull market highs. Flows (pink line) moved above average (red line), but not by as much as the price rise might suggest.

The five stocks highly weighted within XLV that I monitor for money flows are PFE, JNJ, MRK, LLY, and AMGN. Together, they account for over 45% of the index.

Over the past ten days, average dollar volume flows have been positive for all five stocks. There is no evidence of money systematically abandoning the Healthcare sector. Of the stocks, only AMGN is slightly below its 200-day moving average for flows; all the rest are displaying above average institutional interest over the past 10 days. MRK is the clear leader in dollar volume flows, with notable recent interest.

While the price rise in XLV is impressive, I'm not convinced that the recent rise has been attracting significant fresh capital. I will be watching carefully to see if this leads to some price consolidation among these issues.

XLE and Money Flows for Energy Stocks

Our last visit to the Energy sector within the S&P 500 index found some price consolidation and waning adjusted relative dollar volume flows. Since that time, we can see that the 10-day average flows (pink line) have moved well above the 200-day average (red line), supporting higher prices in XLE (blue line).

The five stocks highly weighted within XLE that I use for the flow calculations are XOM, CVX, COP, SLB, and OXY. As a group, those five stocks account for about half of the XLE index as a whole.

Of the group, only XOM is currently showing flows below its 200-day average. Those flows, however, still are quite positive. There is absolutely no evidence of dollars exiting this sector.

We're currently seeing unusually strong dollar inflows into CVX and SLB, but all four remaining stocks are showing 10-day flows well above their 200-day averages. It appears that institutions are putting fresh capital to work in Energy stocks. This is contributing to new bull market highs for the sector.

As mentioned before, I generally expect trends to continue when money flows are expanding, and there is a tendency for 10-day flows to peak ahead of price. For those reasons, it would not surprise me to see further price strength ahead for the Energy sector.

XLP and Money Flows for Consumer Staples Stocks

Our last look at the Consumer Staples sector of the S&P 500 stock universe found a solid runup in price on above-average adjusted relative dollar volume flows. Even during the market weakness of late February/early March, money flows for the Staples stocks remained average or above.

In the chart above, we can see that the sector ETF (XLP; blue line) has since risen to new highs, with the 10-day average of adjusted flows (pink line) moving smartly above the 200-day moving average (red line). During the recent run to new highs, there has been a deceleration of money flows into the sector, but these have remained above average nonetheless.

The five highly weighted stocks within XLP that are included in the flow calculations are PG, MO, WMT, KO, and WAG. All five show net dollar inflows over the past 10 trading sessions and all but MO are displaying flows above the 200-day average. WMT, interestingly, is showing particular recent inflows relative to the average. Although the 10-day flows for MO are below the 200-day average, they are still solidly positive.

As long as flows remain above average for the Consumer Staples stocks, I expect further price gains. This sector has been a major beneficiary of recent strength in the S&P 500 Index. With further deceleration of flows, it would not be surprising to see some price consolidation. This is something I'll be watching carefully.

Saturday, April 28, 2007

XLY and Money Flows for Consumer Discretionary Stocks

Our last visit to the Consumer Discretionary sector of the S&P 500 stocks found a sharp rise in adjusted relative dollar volume flows, followed by a tailing off of money flow and eventual participation in the market drop of late February/early March.

We can see from the chart above that, since then, money flows into the Consumer Discretionary stocks have been quite modest. Indeed, we see that the sector ETF (XLY; blue line) has not made a new high during the recent rally. Similarly, adjusted relative dollar volume flows (pink line) have barely budged above the 200 day moving average (red line), despite strong flows in other sectors (such as Industrials).

The five highly weighted stocks within XLY that I use to calculate the flow data are CMCSK, TWX, HD, DIS, and MCD. Of the group, we have outright negative flows over the past ten trading sessions in CMCSK and DIS. Both also display flows below their 200-day moving average. The only stock in the group with strong inflows is MCD, which has shown consistently positive flows over the past month.

The inability of the Consumer Discretionary stocks to attract greater interest during a strong market period leads me to question how the sector will hold up during an eventual market correction. DIS, in particular, strikes me as undergoing institutional distribution: six of its last ten trading sessions have displayed net dollar outflows.

XLI and Money Flows for Industrial Stocks

Our last look at the industrial stock sector of the S&P 500 universe found a steady decline in adjusted relative dollar volume flows leading up to the late February/early March market weakness. Since that time, we've seen a solid rebound in money flows, with recent readings well above the sector's 200-day moving average.

The above chart shows that we've hit fresh price highs in the industrial sector ETF (XLI; blue line) and that dollar volume flows (pink line) are expanding and well above the average level (red line).

The five highly weighted stocks in XLI that I use to calculate the flows are GE, UPS, BA, UTX, and MMM. Each of the five is showing very positive relative dollar volume flows, and each is showing flows well above their 200-day moving average. MMM and UPS are showing the strongest inflows of the group; none are weak.

As long as institutions continue to put money to work in this sector, I'd expect to see higher prices in the near term. As a rule, we see a waning of inflows prior to significant sector tops.

XLB and Money Flows for Materials Stocks

The last time we visited the Materials stocks within the S&P 500 Index, we found that--despite the sharp market drop--adjusted relative dollar volume flows into the sector remained positive.

The chart above updates adjusted relative flows (pink line) vs. the XLB sector ETF. What we see is that the sector has made new price highs following the market decline, but that flows among the materials stocks have been waning.

Note that the pink line is derived from cumulating the adjusted relative dollar volume flows from five stocks very highly weighted within XLB: DD, DOW, AA, IP, and WY.

The horizontal red line represents the level of flow equivalent to the 200-day moving average. We can see that, while money flows have decelerated for the sector, they have not moved significantly below average. There is still money flowing into the Materials stocks, just not at as swift a rate as earlier.

Given the decelerating flows as prices have risen, I would not be surprised to see a modest correction in the sector. Rallies tend to be sustained when higher prices attract more, not less, capital.

Within the five stocks, DD and IP show the strongest relative flows overall; WY the weakest. All, however, are positive, indicating that money is not leaving the sector. On an adjusted basis (i.e., comparing the recent 10 days to the prior 200 sessions), DD is strongest and DOW is the only one below its average.

If the economy were headed toward recession, one would think that demand for raw materials would decline and that this would be reflected in dollar flows into the sector. Thus far, the materials sector shows no such weakness, though it may consolidate its gains from here.

Overview of the Relative Dollar Volume Flow Indicator

Before I post a sector-by-sector analysis of relative dollar volume flows into the various segments of the S&P 500 Index, I want to head off questions by reviewing the logic behind the relative dollar volume flow indicator. For background, here is my initial post on the topic; here is a nice illustration of the pattern of flows that preceded the big market drop in late February/early March; and here is a post that illustrates flow patterns at market bottoms. An illustration of flow in the S&P stocks also illustrates trading patterns.

Here is how I compute relative dollar volume flow for a particular stock:

1) The indicator begins with a calculation of money flow (net dollar volume). Money flow is calculated by multiplying the price of the stock times the volume traded for each trade during the day. If the price occurred on an uptick, the dollar volume is added to a cumulative total. If the price occurred on a downtick, the dollar volume is subtracted from the total. At the end of the day, you have the net dollar volume for that day.

2) I then adjust money flow for the volume traded that day. Because actively traded stocks would be expected to generate larger net dollar volume flows than less active, smaller ones, I create a more apples-to-apples comparison by dividing the money flow (net dollar volume) by the total share volume traded on that day. Hence the term relative dollar volume flow. If a large portion of a stock's daily volume occurs on upticks, for example, relative dollar volume will be very high--even for a low volume stock.

3) Then I see how recent relative flows compare to past flows. My research suggests that it is the acceleration and deceleration of relative dollar volume flows that are important to track for determining short/intermediate-term market strength or weakness. As a result, I subtract from each day's relative dollar volume flow the average relative dollar volume flow for the prior 200 trading sessions. This tells us whether we have above- or below-average levels of flow, with zero representing a level of flow equivalent to that of the past 200 days.

4) I track a short-term moving average of adjusted relative flows. My charts display a 10-day average of this adjusted relative dollar volume flow for purposes of smoothing. We're thus seeing how relative flows over the past 10 days compare with those over the prior 200 days.

I have received many requests from traders to help them set this up themselves, adapt the indicators in various ways, etc. Unfortunately, my time demands don't permit me to fulfill these requests. What I can tell you is that I receive raw money flow data from Townsend Analytics' RealTick platform, transfer the data to Excel, and conduct all calculations and assemble all charts in Excel.

For those sane individuals not inclined to gather all this information themselves, I report the adjusted relative dollar volume for the 30 Dow stocks every day in the Trading Psychology Weblog. I also periodically summarize the flows into and out of the S&P sectors on this site.

Finally, on a personal note that I will be expanding upon in this weekend's entry into my Trader Performance page, I am finding the patterns in the strength (new high/low); momentum (Demand/Supply); sentiment (Adjusted TICK); and relative dollar volume flow indicators to be so strong that I am making major changes in my own trading. I hope to share the results of these changes in future posts. I will also be taking a future look at intraday readings of flows--a much more ambitious research undertaking.

Friday, April 27, 2007

Money Flows Into the Dow Jones Industrial Stocks

Here's an update of relative dollar volume flows into the 30 Dow stocks as of the close of Friday, April 27th. Recall that we're assessing the dollar volume on upticks minus that on downticks each day for each stock and then expressing that dollar volume as a proportion of the total volume traded that day. The blue line represents the Dow Jones Industrial Average (DIA); the pink line is a 10-day moving average of relative dollar volume flows (current flows minus the average flow over the past 200 trading sessions). The red horizontal line at the zero level thus represents the average level of dollar volume flow over the past 200 days.

You can see that, overall, we've had above average relative flows into the Dow stocks, supporting the recent rally. Note how dollar volume flows tailed off prior to the late February-March drop; that, so far, has not occurred in the present market. Accordingly, I'm not looking for any significant, extended corrections at this point in time.

The individual Dow stocks with outright negative flows during the month of April so far are DIS and JNJ. We're seeing relatively low positive flows in GM, MSFT, T, VZ, and XOM. The latter is interesting, because oil prices (and stock prices of oil companies) have been high.

We're seeing very strong April flows into INTC, HON, JPM, KO, WMT, and HD. I find the latter especially interesting, given the housing weakness story.

I continue to hear from many traders, most of whom make the bear case. I agree with most of what they say regarding politics, the economy, etc. The fact remains, however, that institutions are putting funds to work in stocks. That's a tide I'm not willing to swim against.

Tomorrow we'll look at the flows in the various sectors within the S&P 500 Index and what those might be telling us about his market.

New Highs and New Lows in the Stock Market

You know, when you've been in the business long enough, you become quite a skeptic. When it looks as though the world is going to hell in a handbasket (as in late February and early March) and put/call ratios are going through the roof, you start to wonder if things are really as bad as they seem. Similarly, when all the financial publications are mesmerized by round numbers and trumpeting Dow 13000 and S&P 1500, you begin to reflect if things are actually all that good.

To be sure, my money flow figures for the Dow, summarized daily on the Weblog, have been looking strong. Still, as the chart above notes, there's an unsettling piece of divergence in the new high/new low data that is worth keeping an eye on.

We're looking at the number of stocks in the broad market (NYSE, AMEX, NASDAQ) that are making fresh 20 day highs (pink line) and those making 20 day lows (yellow line). Normally, you'd expect new highs to rise when the S&P 500 Index (SPY; blue line) goes up and new lows to decline. This doesn't always happen, however. The S&P Index is a weighted index of blue chips. It can rise or fall to new price extremes without taking the broad market with it. It's during those periods of divergence that we frequently see reversals of trend.

Notice, for example, that new highs tailed off and new lows moved higher, even as SPY hit new highs in late February. New lows also dried up during mid March prior to the market rally.

Of late, we've seen continued price highs in SPY, but over the past two weeks the new highs have not participated and new lows have crept higher. For now, I'm considering that a yellow light. Should we start to see continued divergence in the new highs/lows accompanied by subnormal dollar volume flows into institutional favorites, I would be more inclined to look for a significant market correction.

In my next post, I'll take a sector by sector look at dollar volume flows and see what they're saying about the current market.

Thursday, April 26, 2007

Amazon: Should You Buy When the Stock is High?

Responding to my recent Stockfest post, a reader has asked about Amazon (AMZN).

One of the lines of research I'm pursuing is a combination of the Relative Dollar Volume flow data for individual stocks and the historical trading patterns associated with those stocks. The idea is that you would buy (or sell) when you have a historical edge *and* when dollar volume flows support that edge.

Money flow has absolutely exploded in AMZN during its recent rise. Even prior to the strength of the last two sessions, flows were positive during 11 out of 13 sessions. The current strength represents multiyear highs and a break out of a price range going back to the beginning of 2005.

Since 2004, however, (N = 814 trading days) strength in AMZN has not led to further strength. When AMZN has been up more than 8% over a 20-day period (N = 182), the next 20 days in AMZN have averaged a loss of -4.02% (60 up, 122 down). By contrast, across all other occasions (N = 632), AMZN has averaged a 20-day gain of 1.41% (339 up, 293 down).

This time could indeed be different, as AMZN may have begun a meaningful trending move. My preference, however, is to wait to see how volume and money flows behave on pullbacks before chasing highs against recent historical odds.

My Favorite Techniques for Overcoming Performance Anxiety in Trading

A little while back I made the observation that performance anxiety is the most common psychological problem that I encounter among traders. It occurs in many forms--during slumps, at times when traders attempt to raise their size/risk, when life's financial needs add pressure to trading outcomes--but the common element is that a concern with the results of trading interferes with the process of trading itself.

I thought that both the comments of readers and their emailed suggestions offered very useful ideas regarding the handling of performance pressures in trading. In this post, I'll add two suggestions of my own.

* Self-hypnosis - This builds on the ideas from my first trading book, The Psychology of Trading. When a trader is responding to a trading situation with anxiety, I ask the trader to close his eyes, breathe deeply and slowly, fix his attention on a musical selection, and hold his hands in front of him with palms facing each other a couple feet apart. The music, taken from Philip Glass' early works, has a highly repetitive structure and serves as an object of focus. After an extended period of the slow, rhythmical breathing and focus on the music, I then suggest to the trader to imagine that there is a magnet between his hands, pulling them slowly and steadily together. As his hands are drawn closer and closer, I suggest, he will find himself feeling more and more relaxed, calm, and confident. The exercise is brought to a close when the palms finally touch. Altogether the exercise lasts at least 15 minutes.

The exercise becomes a self-hypnosis routine when traders give themselves suggestions during the time that the hands are moving together. For example, they might suggest to themselves (internally or even via a self-made audio tape) that, as their hands move together, they will feel increasingly accepting of a recent loss and able to put it behind them. The key is to enter a highly focused and relaxed state prior to the self-suggestions and to perform the exercise thoroughly and regularly on a daily basis. Over time, traders find it easier to enter the focused state of relaxation and invoke their own suggestions. Eventually it's possible to get back to that state (and activate the suggestions) by merely taking a couple of deep breaths and bringing one's hands together. This makes the technique very practical for real-time trading situations, when all you have time for is perhaps a few deep breaths and a simple gesture. Repetition is essential to such mastery.

* Reprogramming Anxiety Through Biofeedback - Regular readers know that I consider biofeedback to be a best practice in trading, with broad application to a variety of emotional situations that affect performance. Of late, I've been making use of heart rate variability feedback through the Freeze-Framer program, which offers a nice graphical interface to help users track their progress and visually determine whether or not they're in "the zone". In the first step of biofeedback training, I simply teach traders how to enter the zone, as above, by regulating their breathing and sustaining a tight cognitive focus. This, by itself, is a very useful skill that can serve as a preventive measure regarding performance stress.

Once the trader becomes adept at this, I then add a second component to the exercise: The trader must vividly visualize a mildly anxiety-producing trading situation while hooked up to the biofeedback and maintaining the calm focus. Once the trader can repeatedly visualize this low-anxiety situation and sustain "the zone" on the biofeedback readout, we then move to a second, higher-level anxiety scenario. Often it's helpful to vividly imagine variations of the same scenario in separate biofeedback sessions. Eventually we move to the most anxiety-producing situations, repeating them over and over in variations, until the trader can sustain the calm focus even in the worst case scenarios. The added benefit of this method is that it teaches traders what they need to do to get their minds and bodies under control. This awareness can then filter down to real time, when all the trader needs to do is focus attention and regulate breathing during stressful market periods. A variation of the biofeedback work that is quite effective involves practicing constructive self-talk while staying in the zone.

Notice that both of these methods involve shifting one's state--physically, cognitively, and emotionally--as a way of dealing with performance pressure. By enhancing our control over our states, we can place ourselves in modes of thinking and feeling that are incompatible with performance anxiety. My experience is that traders can learn this competency on their own or with only a minimum of coaching intervention. With steady practice, one develops a degree of self-mastery that carries over to other areas of life. I believe I'm much more able to deal with life's various stresses as a result of what I've learned from managing my trades--and my reactions to those trades!

Wednesday, April 25, 2007

A Solution Focused Linkfest

Among the most promising of the short-term approaches to behavior change are solution-focused techniques. These emphasize the ways in which becoming mired in problems help to maintain those problems in a self-reinforcing cycle. Instead of "diagnosing" problems and offering help for these, solution-focused practitioners search for the *exceptions* to these problem patterns. It's what people are doing when they're *not* having problems that often leads the way to solutions. Best of all, these are the individual's solutions, not ones arbitrarily determined by a coach or counselor.

A classic example of someone who could benefit from solution-focused work would be a married couple who is having arguments and relationship problems. A solution-focused approach would be to assess what each member of the couple is doing when their relationship is going well--and then build that out as a template for tackling situations that have been difficult.

Similarly, when I work in a solution-focused mode, I realize that traders often are all too aware of their foibles and problems. Indeed, they can be so caught up in what they're doing wrong that they've lost sight of their strengths. In the solution-focused mode, I review a trader's results with that trader. Together, we figure out what he/she does best and how we can apply that to challenging situations.

In short, solution-focused methods build on strengths. They don't try to remedy problems.

Here are some readings on solution-focused work that you might find useful:

* This is a chapter from my book The Psychology of Trading that describes a solution-based perspective.

* Here is a blog post introducing the solution framework;

* Here is a personal example of how I've used the solution-focused approach;

* This is a nice overview of the solution work;

* This offers a bit more detail about the how-to aspects;

* Here's a review of outcome studies that's a few years old, but relevant.

People tend to view psychologists as "shrinks" who analyze and treat problems. The goal of solution-focused work, however, is to expand competencies. Most important of all, people can learn to apply these approaches to themselves in all areas of life. More on that soon to come.

Tuesday, April 24, 2007

Is Intel a Bellwether for Computer Technology?

You know, asking the right questions is half the battle when it comes to trading. That's why it's so important to not be isolated as a trader. When traders act as sounding boards for each other, they start to ask new questions. And that can sometimes yield fresh answers.

Case in point: One hedge fund trader I work with, noting my earlier post on INTC and my recent post on money flows into the semiconductor stocks, pushed me to think through my findings. He even gave me permission to pass along our conversation.

"So what does it mean?" he prodded.

"Investors are going after growth; they're bullish on the economy," I offered.

"Yeah, yeah," he said, not quite uttering the words, "Tell me something I don't already know."

"I guess if the market for chips is hot, it might spell good things for all the electronics that use chips," I tried again.


That's all he said.

So, after we discussed our other business and finished our call, I decided to put electronic pencil to paper. Noting that Intel has been up over 14% in the past three weeks (15 trading sessions), I decided to examine what happens next in computer technology, using the Amex sector index $XCI as my measure.

Going back to 2004 (N = 817 trading days), we've had 142 occasions in which INTC has been up more than 5% over a 15-day period. Ten days later, the Computer Technology Index (XCI) averaged a gain of 1.07% (92 up, 50 down). By contrast, across all other occasions in the sample (N = 675), XCI has averaged a 10-day loss of -.09% (341 up, 334 down).

A strong Intel stock may say something about investors' attitudes toward technology in general. That strength appears to have persisted in the short run, making INTC a bellwether of sorts. I'll be watching this carefully over the next couple of weeks to see if, indeed, we can say, "Bingo!"

Counting the Chips in Semiconductors

I recently posted a look at ETFs that showed that small cap stocks are outpacing large caps and growth has been trumping value. Among the possible beneficiaries of this trend are the semiconductor stocks, as noted with my earlier post on INTC.

In the chart above, I've gone back to 2006 and tracked the semiconductor ETF (SMH; blue line) vs. the relative dollar volume flow indicator (pink line) for five top-weighted stocks within SMH: TXN, INTC, AMAT, ADI, and MXIM. Recall that the zero level for relative dollar volume flow represents that level of inflows equal to the 200 day moving average for those stocks. When we see positive values, that means that the sector is enjoying above average sector inflows.

Note that, even with the sharp selloff of late February/early March, we never saw relative money flows for the sector decline to below average. Since that time, we've seen higher highs and higher lows in money flow, with a consistent positive bias. The price of SMH of late has responded to this trend of inflows, breaking out of a consolidation area that goes back to the fourth quarter of 2006.

The ability of semiconductor stocks to maintain inflows during a market decline; a rise in inflows following the decline; a price breakout from a long-term range; a shift in investment themes toward growth: It does appear that someone is putting their chips on the semis.

Making a Friend of the Sentiment Trend

A number of my posts have drawn upon the NYSE TICK as a measure of sentiment among large market participants. Recall that the TICK represents the number of NYSE stocks trading at their offer price minus those trading at their bid prices. When we see sharp rises or drops in TICK, it means that a large number of stocks are simultaneously trading at offer or bid. This most often happens because institutions are buying or selling baskets of stocks.

My most recent trading has greatly benefited from looking at the trend in the NYSE TICK and trading in that direction. For example, I showed how an emerging average of the TICK--assessing how current TICK values compare to the average level up to that point in the day--can help keep us on the right side of large trader sentiment. We can also gauge the TICK vs. its own regression line to track the trend of sentiment.

In the chart above, I've taken a relatively simple strategy. I'm charting a 10-minute moving average of the TICK (pink line) vs. the ES futures (blue line). The red horizontal line represents the average NYSE TICK level over the past 20 trading days.

One thing I look at as the day unfolds is how much time we're spending above or below that horizontal line. That tells me if we have above average or below average buying sentiment during the day.

The second thing I look for is whether, over time, the area above the horizontal line is expanding or contracting. That tells me something about the trend of sentiment. We can see above, for example, that the trend of the TICK was down through much of the morning. That had me leaning to the sell side.

Third, I look at the bounces and dips in the 10 minute average of the TICK. If we get lower high and lower lows, I view that as a trend in sentiment, and I'll use those TICK bounces to sell the market. Conversely, if I see a drying up of the 10 minute average TICK following a meaningful decline--such as happened in mid-afternoon above--I'll use that as a possible occasion to buy.

Finally, the moving average of the TICK also nicely alerts us to those inefficiency patterns I've mentioned in past posts. Those occur when we get readings in the TICK that are above the horizontal red line, but that cannot push price to higher levels. Such inefficiency dominated the morning trade and was a nice tell for a selling strategy.

The last couple of weeks I've focused on refining my morning trading around trends in the NYSE TICK. So far it's been quite promising. Ken Wood of Woodie's CCI Club jokes that, "We don't need no stinkin' prices". He simply trades off patterns in the indicator itself. While I'm not quite to that point vis a vis TICK, I'm pretty close. If we get a bounce that can't push price higher, I'll sell and cover and the next TICK thrust downward and vice versa. Such a strategy does not lead to huge gains per trade--holding times are short--but my win percentage has risen as a result and losses are quite contained. The key is being patient enough to establish an unfolding trend in the TICK and then trading within that larger trend.

Monday, April 23, 2007

A View From The Style Box: What's Performing Best And What That Tells Us

A while back we looked at the style box and found that value was handily outperforming growth. If we take a fresh look at investment styles and performance, however, a different picture emerges. In this look, we're using the Vanguard ETFs: VUG (large cap growth; dark blue line); VTV (large cap value; pink line); VBK (small cap growth; yellow line); and VBR (small cap value; light blue line).

What we find is that, since the start of 2007, growth has been outperforming value. Indeed, small cap growth is beating the pants off the other investment styles.

Investor preference for small caps is not exactly what I'd expect if the market were expecting recession. Nor would I expect a preference for growth stocks.

But then, again, there are numerous indications that the market is not pointing toward recession:

* Breadth Strength - Remember how beat up the advance-decline stats were during the late February and early March drop? They have recovered that ground and then some, rising steadily to bull market highs.

* Dollar Volume Flows - Twelve of the last fifteen trading sessions have shown above average money flows into Dow stocks. Institutions are putting money to work in the market, not taking funds away.

* All Time Price Highs - It's not just the Dow making all-time highs. The broad NYSE Composite is doing the same. Over 86% of S&P 500 stocks are trading above their 50-day moving averages--and that proportion has been rising. That's not exactly the weakness we'd expect to see in a topping market.

Our look at the investment styles suggests that we have transitioned from a more defensive market (in which value leads growth and large caps lead small caps) to a more speculative one (in which we see the reverse). At this juncture, institutions are committing funds to equities. And that is benefiting the most entrepreneurial segments of the market.

Finding Gain Where There's Been Pain

Here we see major world stock market averages during 2007. Representing the U.S., we have SPY (dark blue); Asia is represented by the Vanguard Pacific ETF (VPL; yellow); Europe is the Vanguard European ETF (VGK; pink); and emerging markets are the Vanguard Emerging Market ETF (VWO; light blue).

Notice that Europe and the emerging markets were hammered the worst during the late February/early March selloff. Note also that they have become the performance leaders since that time. Indeed, at present, the U.S.--despite all-time Dow highs--is the world performance laggard.

During the market debacle of late February and early March, I noted the extreme negative sentiment, with put/call ratios more bearish than we had seen even during the 2000-2002 crash. In retrospect we can see that this was an overreaction to fears at the time regarding the demise of housing and the Yen carry trade. What we've seen since then is a repricing of world equity assets reflecting an unwinding of that overreaction.

Panic takes everything down with it; the good with the bad. A powerful market strategy is to find good assets caught in the panicky downdraft and invest for the return of rational repricing. While it's true that markets can stay irrational longer than traders can stay solvent, it's also the case that prudent investors who wait for irrational pricings can put their solvency to good use by making longer-term bets on eventual market sanity.

Toshiba: A Stock That's Powering Higher

Let's connect the dots:

* Here's a stock that broke significantly higher on a surge of volume in late 2005. Note that it has continued that surge recently, with a break out from consolidation on high volume. The stock is Toshiba.

* Here's the early 2006 announcement of Toshiba's major entry into the nuclear power market via its purchase of Westinghouse.

* Here's one view of the case for nuclear power in the search for alternatives to fossil fuels.

* It isn't just India, Iran, and North Korea clamoring to join the nuclear club; it's also Saudi Arabia, Jordan, Turkey, Egypt, and other countries in the Persian Gulf.

* In the wake of record uranium prices, the NYMEX is listing a new uranium contract to help operators of nuclear plants hedge against further rises.

Assembling these dots, one might get the impression that a variety of forces--concerns over emissions, desires for energy independence, peak oil fears--have converged to provide a shot in the arm for the nuclear industry.

Maybe, just maybe, smart money has been buying Toshiba--and not just for their electronics.

Sunday, April 22, 2007

Bloggers and Readers: A Call For Links

The only way to keep a blog like this fresh is to bring in as many valuable perspectives as possible. That's an important reason why I periodically solicit reader input into best practices, ways of handling trading challenges, etc.

Each day I try to find valuable blog and website links on trading and markets. These are posted to the Trading Psychology Weblog. There's no way, however, that I can hope to read all the blogs that are out there. For that reason, I welcome link suggestions emailed to me or offered as blog comments when bloggers or readers come across something special.

The links should offer fresh insight, unique analysis, and/or practical aids to trading. If it's something that hits you between the eyes and gets you looking at trading or markets differently and usefully, by all means forward the URL so that I can share with readers.

Bloggers should not be shy about submitting their own best work. I'm only too happy to provide recognition to those who make a special effort to educate traders. I also enjoy posting items of unusual creative interest, such as the eco-project in New Mexico.

What I'm not looking for are posts that promote products or services; self-congratulatory posts that boast about all the great calls made during the past; or articles that describe frankly mystical approaches to the markets. I'm also not looking for journal entries that emote about one's trading, unless those make larger points that would enlighten readers.

But if you're providing unique analysis and insight to traders and investors, I welcome getting URLs to the best of your efforts and passing those along. My email address is at the end of the "About Me" section at the right of the blog home page and is also at the end of my bio.

Thanks again for all your input--


Trading Psychology and Stock Market Psychology Resources for Traders

I received an interesting phone call a little while back. Someone from a major trading firm contacted me regarding this blog and my personal site. His question did not begin with the phrase "Why the hell?", but the tone of his question certainly implied it. He simply asked why I would possibly "give away" so much content on the sites.

The question reveals a lack of understanding of the academic culture. Say what you will about the ivory tower--and there's plenty to find fault with--but the fact remains that it is an incredible generator of research and knowledge. Why do researchers at my medical school so freely share their data? They realize that advances in medicine are only possible when ideas build on ideas. If you're trying to generate and refine understandings, nothing beats open source.

Whatever I have shared on the sites has more than returned to me through the resulting interactions with professional traders and firms. You would be surprised how open many of the best traders are when they understand that they will receive openness and privacy in return.

The best traders don't owe their edge to this or that idea. Their edge comes from their ongoing ability to cultivate ideas. When you're competent at cultivating ideas, you don't have to hoard the ones you've developed to that point.

The best medical researchers are the ones with the best world-wide research networks. They give away the most and receive the most in return.

I find that giving love in the same way works best in raising a family. Not because you're altruistic, but because giving the best within you inspires others to do the same.

I've updated my articles page of trading psychology and market psychology resources for traders. You'll find links to more than 3 years worth of articles, as well as links to hundreds of other blog posts.

I've also been asked how I manage to write so much and have so many ideas. Maybe it's because others, finding the best within them, have been equally willing to educate and enrich me. My deepest thanks to readers and traders who have also chosen to be contributors.


Handling Performance Anxiety: More Views From Readers

I recently posted comments from readers regarding ways of handling performance anxiety. In this post, I'll summarize emailed ideas from readers and also add a few thoughts of my own. Because these readers opted to email me rather than comment publicly, I am not mentioning them by name to preserve their anonymity.

* Trader O recommends a book by Terry Orlick entitled In Pursuit of Excellence: How to Win in Sport and Life Through Mental Training. Orlick is a former Olympic athlete and coach and has worked with many Olympians on mental training. His methods include focused goal setting, visualization, relaxation, and methods to block out distraction. Recall that performance anxiety occurs when concerns about the outcomes of performances interfere with the actual act of performing. By learning how to direct awareness and achieve a state of focused concentration, a performer can become immersed in the act of performing. For instance, during my best trades I focus intensely on what various sectors are doing and how volume is behaving. My thoughts are on how the market is trading, not on whether my trade will make money. As Trader O and the book suggest, one can train oneself to sustain such focus as a positive habit pattern.

* Trader M observes that "The most effective technique I use for dealing with anxiety is to remember that anxiety is missing the letter ‘d’. There is no entry in any English dictionary entered as “andxiety”." His excellent point is that we tend to lapse into thought patterns where we see ourselves as either all good or all bad. Anxiety can be seen as a form of justice, pushing us toward a more balanced perspective. The word "and" itself adds a balancing element, reminding us that we are subject to both good and bad: winning and losing. This simple reminder--by turning "anxiety" into "andxiety"--helps a trader think and feel with "and". That's a balanced perspective that doesn't put pressure on the performer.

* Trader S recommends the book Emotional Intelligence and its description of methods to resolve problematic emotional patterns. He particularly mentions becoming aware of your own breathing, especially when it becomes short and shallow. By purposely elongating those breaths, he is able to slow himself down both mentally and physically. He has used the Journey to the Wild Divine biofeedback software to help him learn to control his body's arousal. Finally, after undergoing some traumatic losses, Trader S. has limited himself to trading one contract and losing only $100 per trade. This takes the possibility of large losses entirely off the table and enables him to regain confidence. In my next post, I will outline some of my own uses of biofeedback to deal with performance pressures. This can be a very useful tool for self control.

* Trader A mentions a technique from a book that helped him greatly when he started a new trading position with a firm. He kept a daily journal and wrote down the time of day whenever he experienced feelings of panic regarding his trading. He then wrote down the time of day when that anxiety subsided. Although it seemed as though the nervousness was lasting a long time, he could see that, in fact, it only lasted a few minutes at most. Each time he repeated the exercise, the duration of the anxiety period lessened. This is an excellent method, because it reinforces for the trader the sense of "This, too, shall pass." It is one easy way to deal with secondary anxiety: the fear of becoming anxious.

* Trader F recently went through a harrowing loss and dealt with it by shedding half his position and protecting his remaining capital. He notes that such a loss can spiral, taking a trader out of his discipline and interfering with subsequent opportunities. I believe his basic point is so important : we should always have loss limits in place that we can live with. This takes much of the pressure off of losing. I personally try to ensure that no single loss in a day's trade could prevent me from having a green week; no single losing week could prevent me from being up on the month. The key is to have control over one's losses, rather than letting them control you.

Once again, I thank readers for sharing their experiences and life lessons. One great advantage of a blog is that it can become a two-way vehicle for communication, in which we learn from each other's experiences. In the last post and this one, readers have written a virtual manual regarding how to overcome performance pressure. My next post in this series will offer a few perspectives of my own and attempt to contribute to that manual.

Saturday, April 21, 2007

The Most Important Question To Ask When You're In A Slump

Slumps happen. The trader who has a respectable 60% win rate has a 2.5% chance of losing four times in a row simply as a matter of chance. That doesn't sound like high odds, until you realize that, over the course of regular trading, such strings of losers are virtually guaranteed to happen. When traders encounter one of these losing streaks, they often interpret the outcome as a "slump". They may even become fearful of the slump--having seen other traders go through harrowing drawdowns or firings--and develop performance anxiety. This only adds to trading woes, making the "slump" a self-fulfilling prophecy.

The question traders naturally ask when they're in the "slump" mentality is: What am I doing wrong? Of course, they have good intentions. They want to identify their problem so that they can effect a possible solution.

But sometimes that question is the problem. The trader is so caught in a problem mindset that he or she loses sight of strengths and what brought success to that point.

For that reason, the most important questions to ask when you're in a slump are: What are you really good at? What are your distinctive strengths as a trader? What has brought you success to this point?

Too often, traders after a hot streak will stop working on their game. Conversely, after a losing streak, they become mired in problem thinking. It's far better to focus on improvements you want to make when you're making money and get back to basics--your distinctive strengths--when you're down. That way, you always avoid overconfidence and underconfidence that can result from mere chance runs of winners and losers.

Here are a few questions that I find helpful in focusing on strengths:

* What markets do you trade most successfully?
* What time frames (holding periods) are most successful for you?
* What times of day represent your greatest trading strengths?
* What are your most successful trade setups?
* Do you tend to trade better from the long or short side?
* What position sizes and stops work best for you?
* How do you prepare for trading when you're at your best?
* How do you handle losses when you're trading well?

The idea is to handle drawdowns by building on what you do best. It also means that it's important to keep tabs on your results and identify your trading niche. If you're not sure of your niche--that area of trading that best maximizes your talents, skills, interests, and opportunities--this chapter from my book might be of help.

It's difficult to stay modest and hardworking when things are going well, but it's just as hard to stay solution-focused when problems abound. If, however, you ask problem questions when you're mired in problems, you may just be compounding your difficulties. Slumps are only permanent if you lose sight of the best within you.

Handling The Performance Pressures Of Trading: Perspectives From Reader Comments

I recently proposed that performance anxiety is the most common psychological problem faced by traders. In the comments section of that post and in private emails to me, readers have weighed in with their successful approaches to dealing with performance pressures. This post will summarize reader comments; tomorrow's posts will synthesize perspectives from reader emails and add a few views of my own.

Let's start with views from the comments section:

* Reader Charles talks about an approach that is common among proprietary traders I've worked with. When he hits a slump, he temporarily reduces his size, takes pressure off, and then raises his size once he gets back into the groove. I will do something somewhat similar: I will temporarily limit my trading to my highest probability setups and get a winning day or two under my belt during a slump period. The reason this strategy can work is that it takes an important element in stress--perceived control--and puts it squarely in the trader's hands. Often, performance anxiety occurs when we feel out of control of a situation. By creating an enhanced degree of control, we can regain our sense of mastery and minimize stress. The one caveat in this approach is that position sizing is crucial. If you risk too much of your portfolio on individual positions and then hit a losing patch, you could dig too deep a hole for yourself--particularly if you reduce your size in order to recover psychologically. Not betting the farm on any single idea is one great preventive measure for performance pressures.

* Trader David offers a fascinating analogy between trading and skeet shooting. He also provides a link to an Olympic shooting coach who helps his students with performance pressures. He suggests visualization techniques to occupy the conscious mind, enabling the subconscious (i.e., our automatized skills) to take over. Most performance anxiety occurs when a task that normally occurs automatically is disrupted by our conscious focus on the outcomes of that task. Any exercise that absorbs our awareness and directs our focus away from the performance itself will be helpful in that regard. As I will indicate in tomorrow's post, enhancing our state of concentration and directing that concentration toward the process of performing (not the outcome) can form the foundation for an effective self-hypnosis routine. David's approach is much more than simple positive self-talk: it is a redirection of attention and hence a redirection of regional cerebral blood flows.

* Dr. Bruce, who has offered so many fine comments on this blog, puts his training to good use and recommends the use of beta blockers in combating performance anxiety. I cannot agree more. When I ran the counseling program for medical students in Syracuse, I encountered performance anxiety problems all the time: test anxiety, public speaking stress, etc. My first line of assistance was the use of specific behavioral exercises that research has found to be effective in dealing with anxiety. (More on those tomorrow.) There were times, however, when even those exercises were not sufficient to gain self control. The beta blockers were very helpful in reducing physiological reactivity, reducing the secondary anxiety that I mentioned in the prior article. Instead of becoming anxious about their own anxiety, performers notice their reduced arousal and focus on that. Here's a nice summary of the use of beta blockers for professional musicians. Note that these are to be used as temporary measures before major performances and must be prescribed and supervised by a physician.

* Dr. Bruce also recommends relaxation and biofeedback. At present, a combination of these, along with directed behavioral exercises, is my favorite intervention for performance anxiety. Here you're training the body to remain calm--and training the mind to stay focused--under varying emotional conditions. Much of my post tomorrow will deal with this combination. As Dr. Bruce notes, the techniques work much like the beta blockers: by reducing autonomic arousal.

* Finally Dr. Bruce emphasizes the role of preparation in preventing performance anxieties from taking over. Making skills automatic is the best way to enable performances to flow. When I have a public speaking engagement, I will always prepare the opening of my talk most extensively. I'll also use overheads to cue me through the opening. I know that if performance pressures are going to be present, they'll get to me early in a talk. By being super prepared with the first portion of the presentation with plenty of cues, I get into the rhythm of the speech and the automatic skills take over. Similarly, I will intensively mentally rehearse the entry of a trade and what I'll do if it goes against me. This preparation takes the scariness out of a situation and, as noted before, enhances the sense of personal control. Please also take a look at Dr. Bruce's point about running wind sprints (increasing your physiological arousal) when you're anxious; it's an excellent point. By exercising vigorously when you're anxious, you override your body's nervousness with normal pumped-up arousal, which no longer plays into the secondary anxiety. Indeed, as the good doctor notes, you can actually use your awareness of your pumped-up state to aid your performance.

* Trader Dan mentions a technique that psychologists call cognitive reframing. Remember that performance anxiety occurs when we perceive a situation to be a threat. By reframing the situation, we take much of the threat out of it. His reframing is based on an analogy to the baseball player: The hitter can get on base less than half the time and still be an all-star player. It is not necessary to win on each trade to be a successful trader, and all successful traders have strings of losers simply as a function of chance. Making losing a normal, expectable part of the game--and making sure position sizes are reasonable in order to survive those losing streaks--is very helpful in taking the threat out of trading losses. My own approach, as readers know, is to view outcomes in two ways: trades that make me money and trades that teach me something about myself and/or the market. By embracing loss as a learning experience, I reduce the stress often associated with thoughts of losing.

* Reader AnaTrader, who has also graced this blog with many fine comments, offers several perspectives from her mentor. The essence of her mentor's approach is enhanced self-awareness: taking one's "emotional temperature" hourly to monitor stress levels and thought patterns associated with stress. AnaTrader passes along a key insight: the importance of staying focused in the present. It's when we become wrapped up in the past or future--worrying about past losses or possible future ones--that anxiety is most likely to appear. By using breathing techniques to stay grounded in the present and reduce physiological arousal, it is possible to regain a present-centered awareness. Citing Steidlmeyer, AnaTrader's mentor notes the value of immersing yourself in current market data as a way of staying focused on the present. Immersing oneself in meditation music and constructive self-talk, as AnaTrader notes, can also short-circuit the worry process that generally precedes performance pressures.

* Trader Jeff mentions returning to paper trading mode as a way of regaining one's rhythm. This is similar to the above-mentioned technique of reducing trading size, but now it takes money off the table altogether and just has the trader focus on the process of putting on trades and managing them. This approach is common in the area of sexual performance anxiety, where psychologists will help couples by telling them to *not* engage in intercourse and simply get comfortable with themselves and their partners in bed. By taking the performance pressure away from the sexual situation, couples can allow their natural feelings to take over. Similarly, the trader who goes back to paper trading temporarily can find his or her rhythm return relatively quickly, making it easy to return to putting money on the line. One caveat here is that you don't want to retreat to paper trading for too long a time; that could be an escape that would not enhance a trader's sense of master. As a temporary measure for getting away from money pressures and returning to sound trading practice, however, going into simulation mode can be very useful.

* KC Equity Trader makes a super-important point about making sure you can always survive losing trades. In my own position sizing, I always assume that I could have six consecutive losing trades. If my bets are so large that six consecutive losers would put me in an emotionally bad place (and a large P/L hole), then I know I'm trading too much size for my own risk tolerance. Because KC Equity Trader knows he's always going to survive to make another trade, no single loss is unduly threatening for him. KC's point about keeping things mechanical--carefully following planned entry and exit signals--also makes the trade automatic, reducing performance worries. By making losses planned and routine, the trader takes away their threat.

* Dinosaur Trader mentions how it's easy to become more focused on P/L when a new child enters the home and there are greater household expenses and perceived trading pressures. He also mentions reducing trading size as a way of reducing this pressure. Sound financial planning is also key: making sure that you always have cash reserves to handle unexpected expenses, loss of a spouse's income, etc. I'm a firm believer that one should not be trading one's household savings. There should be separate accounts: one for savings/investment that remains safe and secure and one for trading. If your trading account is also your savings and retirement capital, that is too much objective pressure for most traders. What that means in practice is that a portion of trading profits should always be devoted to rainy days, trading slumps, and future needs. It also means that new traders should have enough reserve capital not at risk (or secondary sources of income) to survive their learning curves. That having been said, I know many traders who have traded more cautiously (and smaller) immediately following a major life event (marriage, birth of a child, relationship break) until they're sure they have their equilibrium. The ounce of prevention in such cases is truly worth the pound of cure.

* Finally Trader M. mentions anxiety that comes from being unable to anticipate market trends. He engages in considerable market preparation to make such anticipations and feels pressure to incorporate new methods/information in order to not miss anything. The risk here is one of perfectionism: setting a standard of being able to predict trends that not even highly successful traders live up to. Many, many successful traders (trend followers, short-term traders) don't succeed by anticipating market trends. Rather, they identify shifts in trend as those are occurring or right after they've been confirmed. I know quite a few successful breakout traders who don't try to predict the breakout: they simply go with it once it's confirmed by volume and the participation of large traders. Trader M. perceptively notes that trading is like speed chess. In speed chess, however, you don't succeed by trying to predict your opponent's moves. Instead, you train yourself to respond to board configurations as they emerge. Moderating one's demands on oneself can be a powerful method for reducing performance pressure.

So there we have it! There are many more fine insights from commenters than you'll get in any high priced seminar or coaching session. Tomorrow, I'll summarize the equally astute insights of those who have emailed me with comments and then I'll post my own techniques for handling performance anxiety. Thanks to all who have participated in this exercise and shared their learning and experience!

Friday, April 20, 2007

Tracking Sentiment Shifts With An Emerging Average

You ever have a song stuck in your head? Anyway, I was humming my favorite version of Britney's song and, whoops, it happened again: I suddenly had the idea of creating a different kind of moving average.

The above chart from Wednesday, April 18th tracks what I call the emerging average for the NYSE TICK (pink line) vs. the ES futures. The emerging average takes the average value of the indicator from the start of the trading day to a specific point in time. Thus, the value for 10:00 AM would be the average TICK from the open to 10:00 AM. The value for 10:01 AM would be the average TICK from the open to 10:01 AM. As the day goes on, you're averaging more values.

The average TICK level over the prior 20 trading sessions was 300. We opened with far less buying interest than that on the 18th, but notice how the emerging average for the TICK stayed strong through the day--even as it remained below the 20-day average. This suggested to me that there was early selling interest, but that that interest was drying up through the day.

A rising or falling emerging average tells us something about shifts in the distribution of the TICK during the day. If the line rises, it means that current TICK values are above their average for the day to that point and vice versa.

By comparing the TICK to its 20-day average (Adjusted TICK), but also by comparing new TICK values to the prior distribution during the day, we can get a good idea for whether buying or selling interest is expanding, contracting, or remaining relatively constant. Ideally, we want to be a buyer when the emerging average is rising *and* the emerging average is greater than the 20-day average value for TICK. We want to think about selling when the emerging average is falling and the emerging average is less than the 20-day TICK.

All of this simply measures shifts in the willingness of traders to execute trades at the bid (bearish sentiment) or offer (bullish sentiment). By noticing the trend (tendency) of traders to hit bids or lift offers, we can get an early reading of directional tendencies in the market.

TraderFeed Stockfest

So far, the dollar volume flow data has provided a useful perspective on this market. It has also helped identify some worthwhile stocks and pointed the way to some useful trading patterns.

So now let's try something fun: not a linkfest, but a stockfest. If you're a trader/blogger or a frequent commenter on this blog, email me the symbol of a stock that you find promising (i.e., conduct your own screening) and I will conduct a dollar volume flow analysis and post here on the blog. All you have to do is put the stock symbol in the subject header of the email and write a couple of lines re: why this stock is worth looking at. My email address is at the bottom of the "About Me" section at the right side of the TraderFeed home page and is also at the end of my bio page.

I won't be able to include all submissions, but will focus on the ones that come with the best prescreening. (I especially welcome screening based on solid fundamentals and screening based on insider activity and activity among market pros). Let's see if, together, we can come up with some market winners!


Thursday, April 19, 2007

The Most Common Problem Traders Face

There's one problem that seems to be universal to traders, whether they're professionals trading in large banks or funds or part-timers trading from the home: performance anxiety.

Performance anxiety afflicts even accomplished individuals in sports, performing arts, and games of skill such as poker and chess. It occurs when awareness of the performance--and especially the outcome of the performance--interferes with the actual act of performing.

Performance skills have generally been honed to the point of automaticity. This is especially true of performers in high-speed activities, such as race car drivers, fighter pilots, baseball batters, and short-term traders. When the performer becomes self-aware and focuses attention on the outcome of the performance, this leads to efforts at conscious control of the automatic activity. The result is a disruption of performance.

A great example is the basketball player who is shooting a free throw in the last seconds of a game with his team down by a point or the golfer who has a putt to win a tournament. Aware of the importance of his shot, he carefully aims the ball and does not deliver his natural stroke. In the financial world, a trader will overthink a trade, missing a great opportunity when it doesn't set up exactly right. Heightened awareness of risk interferes with the pursuit of reward.

What causes performance anxiety? Sometimes a single poor performance or set of performances create the view of a "slump" in the performer's mind, leading to efforts at correction that only exacerbate the problem. Other times, changed circumstances can generate the performance anxiety. Being hired by a new firm and wanting to impress everyone; having one's trading size raised considerably and becoming aware of the new risk; giving birth to a child and now feeling more pressure to bring in money--all of these can shift the mindset of the trader. The result frequently can be seen as a change in the trader's mood.

The traders' questionnaire I posted a while back is one way to assess a disruption of mood. Performance anxiety can become debilitating, not only because it inhibits performance, but because it affects global well-being and the accurate assessment of risk and reward.

One of the poorly recognized aspects of performance anxiety is known as secondary anxiety. This occurs when a person becomes aware of their own emotional arousal and becomes anxious about being anxious! It is a major dynamic behind panic disorder, but it also frequently plays an important role in sustaining performance anxiety. A trader can become threatened by even the normal fight-or-flight responses generated by activities that involve risk and uncertainty. Once those responses are perceived as threats, they generate further anxiety, which in turn becomes even more threatening. Many times, performance anxiety is the result of just such a downward spiral.

There are many effective psychological techniques for mastering performance anxiety. But before I offer some of these in my next post, I would like to ask readers to comment to this post or email me with their own favorite techniques, including links to relevant posts on trading blogs. Performance anxiety is one of those normal, developmental challenges that all traders face at some point in their careers. What has worked for you? How have you gotten past the jitters, self-doubts, and mental interference? I'll collate responses and then offer a few techniques from the research literature in psychology. My email address is at the end of the "About Me" section on the blog home page.

Wednesday, April 18, 2007

Investors Putting Some Chips on INTC?

We've had some recent strength in the semiconductor stocks. Intel (INTC) has been on my radar for the last few days due to a breakout in relative dollar volume flows. Not only are we seeing more investor dollars being put to work in INTC; these inflows are occurring with consistency. Indeed, we've now had 13 consecutive sessions in which dollar flows were above average (i.e., above the 200 day average; horizontal red line on chart) for INTC.

Recall that dollar volume flow looks at whether transactions occurred on upticks or downticks and weight those transactions by their dollar volume. As a result, it's an excellent indicator of institutional interest in companies and sectors. I will be continuing to watch INTC and the semis to see if large traders and investors continue to put their chips to work in the sector.

Volume and Opportunity in the Stock Market

A while back I posted a volume-based tool for identifying opportunity in the stock market. At the request of a couple of readers, I am updating that work.

I went back to the beginning of March (N = 33 trading days) and calculated the average volume for each 15-minute segment in the S&P emini futures market (ES). Here's how the data look (Eastern Time):

9:30 - 9:45 AM - 89,295
9:45 - 10:00 AM - 65,418
10:00 - 10:15 AM - 83,020
10:15 - 10:30 AM - 56,083
10:30 - 10:45 AM - 53,329
10:45 - 11:00 AM - 51,402
11:00 - 11:15 AM - 38,718
11:15 - 11:30 AM - 36,625
11:30 - 11:45 AM - 37,432
11:45 - 12:00 N - 36,176
12:00 - 12:15 PM - 35,816
12:15 - 12:30 PM - 32,387
12:30 - 12:45 PM - 28,597
12:45 - 1:00 PM - 22,768
1:00 - 1:15 PM - 26,359
1:15 - 1:30 PM - 25,091
1:30 - 1:45 PM - 33,799
1:45 - 2:00 PM - 27,099
2:00 - 2:15 PM - 37,832
2:15 - 2:30 PM - 40,125
2:30 - 2:45 PM - 38,464
2:45 - 3:00 PM - 32,324
3:00 - 3:15 PM - 35,541
3:15 - 3:30 PM - 34,831
3:30 - 3:45 PM - 37,462
3:45 - 4:00 PM - 59,943
4:00 - 4:15 PM - 62,491

You can clearly see the "smile" pattern of volume: highest at the beginning and at the end of the day. Recall that a relatively small proportion of trades account for a relatively large proportion of total volume due to the disproportionate influence of institutions and large locals in the electronic futures markets. What the above volume figures tell us is that these large participants are most active early and late in the day.

It is this participation of large traders that creates opportunity. When 15-minute volume has been above 150,000 contracts, the average high-low range in the ES futures has been .65%. When it has been between 100,000 and 150,000, the average range has been .41%. Between 75,000 and 100,000 contracts, we have a range of .31% and between 50 and 75 thousand, the range drops to .23%. At the lower end of volume, when we're between 25 and 50 thousand contracts, the average 15 minute range declines to .17%, and when we're less than 25 thousand, that average range contracts to .11%.

Indeed, the correlation between 15 minute volume and the price range of that same 15 minute period is a whopping .86. Volume brings volatility, which helps define the short-term trader's opportunity.

One of the great, unrecognized reasons so many daytraders fail is that they expect the same patterns and setups to produce the same results at different times of the day. Markets trade differently at different times of day, and they differ from day to day. The same profit targets and stops for a particular trade idea may lead to profit at one time of day and whipsaws at others. If you conduct your own performance review and notice significant P/L variation as a function of the time of day of your trades, this may well be a problem for you. You would need to either limit your trading to certain times of day (which is what I do) or adapt your setups to the anticipated volatility for the times that you are trading.

My hope is that you can print out the above breakdown of volume and use this as a guide to let you know when large traders are active and when markets are likely to be dead. Such volume information has kept me out of many bad trades and alerted me to promising breakout and trending moves.

Tuesday, April 17, 2007

The Most Dangerous Word in the Trader's Vocabulary

I'm convinced the most dangerous word in the trader's vocabulary is "should". Should can turn a winning day into a psychological loser, when a trader focuses on that move he or she should have traded. Should can make us miserable when we don't live up to our personal or financial expectations. Sometimes we focus so much on how we should trade or on how others tell us we should trade that we drift away from our own talents and interests.

But those sabotages are nothing compared to getting locked into views of how the market should be trading:

* The dollar is plunging, so we should get inflation and the market should drop!

* The market is in an uptrend, so we should rally today!

* We're in a growing deficit as a country; we're mired in Iraq; oil prices are skyrocketing, so we should have a bear market!

I can tell you this: I became a better trader when I started focusing on what the majority of stocks were doing rather than on what I thought the market should do.

On Monday, I thought we should get a higher market on Tuesday. When I saw that fewer stocks were making new highs in the morning even as the ES was moving to new price highs, however, I dropped the should and sold the open.

And, yes, I--like so many participants in the financial markets--lament the high debt, weak dollar, and rising commodity prices. But we have recovered from a steep decline, dollar flows into stocks are above average, and--as of Monday--well over 2000 stocks had made fresh 20-day highs. No matter how much I think the market should go down, it's not what the market data have been telling us.

"Should" puts my judgment ahead of the market's objective reality. And that's why it's the most dangerous word in the trader's vocabulary.