ParkTwain's Parlor

[ParkTwain]

Research results from this weekend, Aug 20th

Quite a few nice new long candidates involving new all-time high (ATH) breakout possibilities. All the "best candidates" have the most positive technicals (RSI, ADX +DI and -DI, and volume trends) for producing good near-term gains. These are not pure momentum plays, but rather "strength" plays with support. See my most recent posts on this thread for explanations.

Best candidates:

BBV - (Spain, banking) recent ATH breakout; gets 40% of $20B business of worker remittances from U.S. to Mexico; owns the No. 1 bank in Mexico.

http://iblnews.com/story_en.php?id=15703

BRS - (oil serv helicopters) CAVEAT: new pref stock sale pending
CPRT - (salvage auto sales, etc.)
CVG - (sw) high headroom to next resis, nice technicals right now
GEO - (oil serv)
HURN - (biz consulting)
MON - (chemicals, genetic mod crops)
SAIA - (trucking) relatively new issue
SJR - (Canada, cable TV) recent pullback from ATH, time to buy
SNH - (REIT) 6.7% div, just added to S&P mid-cap 400
TDY - (defense, etc.) undervalued based on earnings momentum
TRMB - (GPS sys)
UIL - (elec util) shedding crummy businesses, 4.9% div, but low avg daily vol


The "almost" list; watch these for imminent breakout but with pullbacks. These are pre-ATH breakout stocks that tend to have either extended ADX +DI measures or declining ADX -DI measures (which is good) that haven't based yet.

AXS - (Bermuda, insurance)
AYI - (lighting, etc.)
BGC - (cable wire)
EPR - (REIT)
EXR - (REIT)
FPO - (REIT)
JBX - (retail fast food) undervalued, low PEG, restaurant count growth
LDG - (retail drug stores)
LTR - (conglomerate)
NRF - (REIT) 10.0% div (NOT a misprint!)
PBNY - (bank) probable buyout target?
SBS - (Brazil water util)
SNA - (tools)
SPSX - (wire manufacturer)
TROW - (mutual funds)
WRI - (REIT)


Given both lists shown above:
Mon, 8/21 close - 14 up, 15 down, on the day
Tues, 8/22 close - 19 up, 10 down, on the day
Wed, 8/23 close - 4 up, 25 down, on the day
Thurs 8/24 close - 12 up, 17 down, on the day
Fri 8/25 close - 13 up, 1 unchanged, 15 down, on the day

Totally blah week for the entire bunch.
For the entire week ending Aug 25, Fri close vs Mon open (12 up, 17 down):

S&P 500 -0.5%
Russell 2000 -1.7%
Naz composite -0.5%

BBV -2.0%
BRS -0.5%
CPRT -1.8%
CVG +0.2%
GEO -1.7%
HURN -1.5%
MON +0.5%
SAIA -3.7%
SJR +1.2%
SNH +1.0%
TDY -3.7%
TRMB -3.1%
UIL +1.7%

AXS -2.8%
AYI -5.3%
BGC -0.8%
EPR +1.0%
EXR +2.0%
FPO -0.3%
JBX -2.8%
LDG -4.1% ($0.14 div Aug 25)
LTR +1.9%
NRF -0.3%
PBNY +0.1%
SBS -1.5%
SNA +0.3%
SPSX +0.8%
TROW -3.1%
WRI +1.4%

Avg gain of 12 gainers +1.0%
Avg loss of 17 losers -2.3%

[ParkTwain]

Wikipedia entry on Nicolas Darvas

http://en.wikipedia.org/wiki/Nicolas_Darvas

This entry includes an interesting list of stock market books that Darvas supposedly read:

//
During his off hours as a dancer, he had read some 200 books on the market and the great speculators. He began his studies by reading:

* ABC of Investing, by R. C. Effinger [publ. 1947].
* The Stock Market, by Dice & Eiteman [publ. 1941].
* The Securities Market: And How It Works, by B [Birl]. E. Schultz [publ. 1942].
* Your Investments, by Leo Barnes [publ. 1959, pb].
* Profit In The Stock Market, by H. M. Gartley [publ. 1935].
* Consistent Profits In The Stock Market, by Curtis Dahl [publ. 1951].
* You Can Make Money In The Stock Market, by E. J. Mann [publ. 1955].

His top 2 books which he had read almost every week were:

* The Battle for Investment Survival, by Gerald M. Loeb. Published in 1935.
* Tape Reading and Market Tactics, by Humphrey Bancroft Neill. Published in 1931.
//

Loeb's book is well known. I have read it and reported on it in earlier in this thread. The other books listed above are unknown to me. Stay tuned.

[ParkTwain]

1st edition by Darvas

"How I Made $2 Million in the Stock Market"

My copy (list price on jacket of $4.95 in hardcover, publ. 1960, 1st ed., 4th printing w/ all 4 printings in June 1960) arrived a few days ago. It has a great dust jacket graphic, like a 1950s horror movie poster. I'm looking for an image of it on the WWW, but haven't found it yet. I will post a photo of it if I can't otherwise find one.

[ParkTwain]

Very cool article about Nassim Taleb, the anti-Neiderhoffer

http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm

//
How Nassim Taleb turned the inevitability of disaster into an investment strategy

... The truest thing about [George] Soros seemed to be what his son Robert had once said:

"My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it's his early warning sign."

For Taleb, then, the question why someone was a success in the financial marketplace was vexing. Taleb could do the arithmetic in his head. Suppose that there were ten thousand investment managers out there, which is not an outlandish number, and that every year half of them, entirely by chance, made money and half of them, entirely by chance, lost money. And suppose that every year the losers were tossed out, and the game replayed with those who remained. At the end of five years, there would be three hundred and thirteen people who had made money in every one of those years, and after ten years there would be nine people who had made money every single year in a row, all out of pure luck. [Victor] Niederhoffer, like Buffett and Soros, was a brilliant man. He had a Ph.D. in economics from the University of Chicago. He had pioneered the idea that through close mathematical analysis of patterns in the market an investor could identify profitable anomalies. But who was to say that he wasn't one of those lucky nine? And who was to say that in the eleventh year Niederhoffer would be one of the unlucky ones, who suddenly lost it all, who suddenly, as they say on Wall Street, "blew up"?

... Nassim Taleb and his team at Empirica are quants. But they reject the quant orthodoxy, because they don't believe that things like the stock market behave in the way that physical phenomena like mortality statistics do. Physical events, whether death rates or poker games, are the predictable function of a limited and stable set of factors, and tend to follow what statisticians call a "normal distribution," a bell curve. But do the ups and downs of the market follow a bell curve? The economist Eugene Fama once studied stock prices and pointed out that if they followed a normal distribution you'd expect a really big jump, what he specified as a movement five standard deviations from the mean, once every seven thousand years. In fact, jumps of that magnitude happen in the stock market every three or four years, because investors don't behave with any kind of statistical orderliness. They change their mind. They do stupid things. They copy each other. They panic. Fama concluded that if you charted the ups and downs of the stock market the graph would have a "fat tail,"meaning that at the upper and lower ends of the distribution there would be many more outlying events than statisticians used to modelling the physical world would have imagined.

In the summer of 1997, Taleb predicted that hedge funds like Long Term Capital Management were headed for trouble, because they did not understand this notion of fat tails. Just a year later, L.T.C.M. sold an extraordinary number of options, because its computer models told it that the markets ought to be calming down. And what happened? The Russian government defaulted on its bonds; the markets went crazy; and in a matter of weeks L.T.C.M. was finished.

... Taleb, by contrast, has constructed a trading philosophy predicated entirely on the existence of black swans. on the possibility of some random, unexpected event sweeping the markets. He never sells options, then. He only buys them. He's never the one who can lose a great deal of money if G.M. stock suddenly plunges. Nor does he ever bet on the market moving in one direction or another. That would require Taleb to assume that he understands the market, and he doesn't. He hasn't Warren Buffett's confidence. So he buys options on both sides, on the possibility of the market moving both up and down. And he doesn't bet on minor fluctuations in the market. Why bother? If everyone else is vastly underestimating the possibility of rare events, then an option on G.M. at, say, forty dollars is going to be undervalued. So Taleb buys out-of-the-money options by the truckload. He buys them for hundreds of different stocks, and if they expire before he gets to use them he simply buys more. Taleb doesn't even invest in stocks, not for Empirica and not for his own personal account. Buying a stock, unlike buying an option, is a gamble that the future will represent an improved version of the past. And who knows whether that will be true? So all of Taleb's personal wealth, and the hundreds of millions that Empirica has in reserve, is in Treasury bills. Few on Wall Street have taken the practice of buying options to such extremes. But if anything completely out of the ordinary happens to the stock market, if some random event sends a jolt through all of Wall Street and pushes G.M. to, say, twenty dollars, Nassim Taleb will not end up in a dowdy apartment in Athens. He will be rich.

... A year after Nassim Taleb came to visit him, Victor Niederhoffer blew up. He sold a very large number of options on the S. & P. index, taking millions of dollars from other traders in exchange for promising to buy a basket of stocks from them at current prices, if the market ever fell. It was an unhedged bet, or what was called on Wall Street a "naked put," meaning that he bet everyone on one outcome: he bet in favor of the large probability of making a small amount of money, and against the small probability of losing a large amount of money-and he lost. On October 27, 1997, the market plummeted eight per cent, and all of the many, many people who had bought those options from Niederhoffer came calling all at once, demanding that he buy back their stocks at pre-crash prices. He ran through a hundred and thirty million dollars -- his cash reserves, his savings, his other stocks -- and when his broker came and asked for still more he didn't have it. In a day, one of the most successful hedge funds in America was wiped out.
//

[ParkTwain]

Nassim Taleb is the author of Fooled by Randomness

Read the very good reader commentary on the book at Amazon.com:

http://tinyurl.com/ltxl4

Such as this comment:
//
1) There is good advice on avoiding some common mistakes that lead to "blowing up", which will prove useful to inexperienced market practitioners.

2) Taleb's own (claimed) trading methodology (buying OTM options) could easily fall victim to the "black swan" problem. A regime change to persistently higher implied than actual volatility would result in extended losses for his fund (unless he is bluffing us about its methodology).

3) Taleb only focuses on cases where volatility is underpriced - but some of the best opportunities come when it is overpriced, during market panics. Yet according to what he says in the book, one should continue buying such overpriced volatility! As someone whose bread and butter trade is fading market panics, I can confirm that premium selling can be highly profitable - the trick is to sell at the right time, and to employ risk control. Just because some practitioners are incapable of this, does not invalidate the method, any more than OTM options buying is invalidated because many naive speculators buy in a panic just before the VIX is about to collapse.

4) Taleb lumps MBA and businessmen types into the "fool" category. This misses the point. 99% of business is not about risk-assessment, dazzling insight, or grand strategic thought, but about successful *execution* of obvious ideas, and hard work. How many eggheads have had great ideas, but never done anything to put them into action? There is no point knowing that a beach bar in the Bahamas might be destroyed every 10 years by a hurricane, if you aren't even capable of raising capital, employing people, or working 16 hour days getting it off the ground. Good MBAs and CEOs will in any case employ people like Taleb to assess risk for them.

5) Taleb ignores the possiblity of using praxeological analysis (i.e. taking a set of demonstrable a priori truths, then using a logical train of deduction to discover what those truths necessarily imply about reality) to avoid the survivorship bias & noise problems. E.g. you can predict the effect of supply and demand on price without having to test it in the real world. This technique has been used by Murray Rothbard in economics (which has an even greater "non-falsifiability" problem than trading), and Warren Buffett in investing. As an example, you *can* judge if a good track record is "skill" or "luck", by examining the methodology of the trader/investor. If they operated solely during a period favourable to their style, it is probably luck e.g. if they made money buying emerging market bonds from 1994-1998. If they made a bucketload trading a style that was *against* the market regime, then it is almost certainly skill e.g. someone who made good returns as a shortseller of tech stocks from 1997-2000; or someone who has successfully sold premium during market panics. Since Taleb is a follower of Popper, and a hardened quant, it should come as no surprise that he is ignorant of praxeology, but it is a huge oversight all the same.

6) Taleb's scorning of Buffett as a lucky fool is ignorant in the extreme. Buffett clearly did *not* use naive analysis of past data to make his investment decisions, or rely on luck (he did well from 1969-82, a terrible period for equities). Rather he deduced highly probably consequences from demonstrable truths about investment (i.e. firms with pricing power, high barriers to entry, and low working capital requirements are likely to perform very well), and then saw that the market was not pricing these factors efficiently. Anyone reading his writings can see this. And Buffett's approach is ironically more rigorous and less dependent on luck than Taleb's professed trading methods. To elaborate - Taleb is relying on "black swan" events happening more often than people think. Therefore EITHER a reduction in the frequency of these events, OR an increase in people's expectation of them, would be enough to invalidate Taleb's approach - clearly neither can be ruled out. Taleb thinks he is betting on black swan events occuring, whilst ignoring the possibility of the "black swan" of major regime change making his own system unprofitable. Whereas with Buffet, the laws of supply and demand, and basic investment/economics, ensure that certain business methods will *always* work better than others.

To conclude - Taleb thinks he has a great idea, but it was already well known by most experienced market practitioners (see the Market Wizards books etc where multiple traders continually bang on about rare event risk and fat tailed probability distributions). He then goes on as if this idea is the only important thing, which is clearly not the case. Finally, he critiques some people, such as Buffett, who use totally rigorous methodologies, whilst himself employing a strategy that is by no means foolproof, and relies largely on past observation (data-mining!) to form its conclusions. All I can say is that he better watch out for the black swan of long-term declining volatility over the next decade!
//

[billyjoe]

Park,
That's some interesting stuff. Especially the theory that many winners are just getting the "lucky coin flip" year after year. I've always believed that the greatest successes in the market are unusual individuals that think differently than the crowd. This could also lead to the greatest failures . Something inborn sets them apart. A way of thinking that might be possessed by one in billion . Testing Buffet I'm sure would show more than a person who studies the market more hours than anyone else. The guy is eccentric in many ways having nothing to do with business.

------------billyjoe

[ParkTwain]

Well, I would recommend reading the whole article. It develops the idea of the correlation between the whole person and trading philosophy. Neiderhoffer had become successful at everything he attempted in life. Taleb had grown up in Lebanon, also had gone through an unexpected bout of throat cancer. So he was already sensitive to the idea of "black swans" in his own non-trading experience.

Actually, Taleb's approach is like that of the lead character in a book about playing roulette ("Thirteen Against the Bank") that I read years ago. This was about a team who covered every roulette wheel in a given casino (England, then later in Nice, France) at the same time. There were six team members per table, and each bet only on one of the even-money bets (black, red, high, low, even, odd). They used a particular progressive betting scheme that was based on the idea that at some point in a given extended span of time (say, 12 to 24 hrs) there would be a run of results that, combined with the betting scheme, would result in a big win ($>100K). The betting on the other spots would basically cancel each other out (the betting scheme would direct the player having a losing streak to revert back to making minimum bets, while the winning player was steadily increasing the bet) and therefore, when no one even-money bet developed a good winning run, to a minimal overall loss for the team. They wanted to have all the bases covered so that they could take advantage of any extended run of luck on any of the even-money bets. It's a decent story, and many believe it is entirely fictitious. Of course, they did win some good money in the story. I did the numbers and in each case one of the bets had to go on a winning tear of at least 65% winners. So yeah, it was luck, but the question is, what are the odds of at least a 65% winning streak on an even-money bet for, say, 6 hrs straight?

The story took place at a time and in casinos with no maximum roulette bet. So to combat this approach, the casinos use a maximum bet rule (such as $2K on any number and maybe $1K on any even-money bet) on all roulette wheels. You could say that this tells you the team idea has merit.

[ParkTwain]

Park,
I've always believed that the greatest successes in the market are unusual individuals that think differently than the crowd. This could also lead to the greatest failures . Something inborn sets them apart. A way of thinking that might be possessed by one in billion . Testing Buffet I'm sure would show more than a person who studies the market more hours than anyone else. The guy is eccentric in many ways having nothing to do with business.

------------billyjoe

Regarding Buffett, I think this little interview with a value investing guy sums it up pretty well.

http://www.fool.com/news/commentary/2004/commentary04080902.htm

//
So I think of value investing as three things. A search strategy, which we talked about, which is where the low P/E, low market to book comes in. But it's not all of it, by any means, even of the search strategy. A valuation strategy. And a discipline approach to taking advantage of the information that your valuation is telling you about and having a default strategy when it's telling you it doesn't look like there's anything there.
//

Googling on "valuation methodology" can be an eye-opener.

[ParkTwain]

New research for week of 8/28/06

Here are my best-looking setups for all-time high (ATH) breakouts (with an exception or two) for the coming week. The daily volume situation for individual stocks in August (vacation month for many on Wall St) complicates the outlook for this week and going into September. Are the stocks that are today near new highs but had declining vol during August setting up as having better near-term upside than those whose volume held steady during the month as their own PPSs rose?

This week's A-team list:
ARD - oil and nat gas, steady vol in Aug
BGC - steady vol in Aug
CVG - not at ATH but significant headroom before next resis level, steady vol in Aug
EXR - REIT, declining vol in Aug
GISX - slow gainer, declining vol in Aug
HURN - sw consult, declining vol in Aug
ICUI - declining vol in Aug
MVL - declining vol in Aug
NRF - REIT, another slow gainer, steady vol in Aug
PETD - nat gas and oil, steady vol in Aug
SJR - Aug vol started low, then high, then low at end of month
SNX - not at ATH but bullish, declining vol in Aug
UIL - steady vol (>50K sh traded per day) in Aug
WLL - oil, steady vol in Aug
WRI - REIT, steady vol in Aug

A-team list this week:
Mon 8/28 - 10 up (avg gain 1.53%), 5 down (avg loss 0.94%), on the day


This week's B-team list, close but no cigar:
BBV and STD (move in lock-step w/ each other)
BMR
CPRT
EPR
FLSH
FRX
GEO
MON
OCN
OKE
SNA
SNH
STSA

B-team list this week:
Mon 8/28 - 11 up (avg gain 1.10%), 2 down (avg loss 0.33%), on the day


Going into this week, long SNX and CTCM in my trading account.

[billyjoe]

Park,
Nice call on GISX especially since I own it. Up about 3.5% volume +30%. I had no idea it was splitting until viewing my online statement.

-----------billyjoe

[ParkTwain]

New goodies from today's action

I'm still seeing a good number of "defensive" stocks making gains like tobacco (LTR, MO, BTI), comm. r.e., soft beverages (KO, PEP, PBG), and BREAKFAST CEREALS (GIS, K) for pete's sake!

The following morsels are showing post-ATH breakout moves, imminent ATH breakouts, passing near-term resis with a high ceiling to next resistance, or a climber w/ good-looking technicals up the right side of a nascent long-term cup.

ALSK
BCO, BRKR
CBS, CLHB, CMX
ENB
FISI, FRX
GIS
HGIC, HSIC
K, KO
MET
PBG
SFL, SKT, SNWL

Long-time gainers that appear on 52-wk highs list again today: AVB, LTR, VTS, WOOF. I never hear any mention of these wealth-builders around here!

[New-born baby]

I'm still seeing a good number of "defensive" stocks making gains like tobacco (LTR, MO, BTI), comm. r.e., soft beverages (KO, PEP, PBG), and BREAKFAST CEREALS (GIS, K) for pete's sake!

The following morsels are showing post-ATH breakout moves, imminent ATH breakouts, passing near-term resis with a high ceiling to next resistance, or a climber w/ good-looking technicals up the right side of a nascent long-term cup.

ALSK
BCO, BRKR
CBS, CLHB, CMX
ENB
FISI, FRX
GIS
HGIC, HSIC
K, KO
MET
PBG
SFL, SKT, SNWL

Long-time gainers that appear on 52-wk highs list again today: AVB, LTR, VTS, WOOF. I never hear any mention of these wealth-builders around here!

ALSK is Alaska Telephone, and I used to trade it a couple of years ago. Pays 6.80% divy with no option chain. I don't see it moving too much higher (I could be wrong); but probably will pull back to the breakout level of $12.75 again soon. And it was just downgraded Friday by Lehman Bros.; upgraded Wed by Banc of America . This is a defensive stock for sure.

SFL: another defensive stock that I used to trade, pays a 8.70 divy and finances oil tankers. Good stock. Overbought at this time, imho.

Thanks for the post, Park!

[ParkTwain]

Release of Fed minutes causes spike up

See MarketWatch news ticker items at 2pm today and just after.

http://tinyurl.com/zgpyf

Interesting to see this happen. Minutes show that all members expect inflation to abate going forward. Markets like to see that!

[Runner]

Sorry made a mistake

[Runner]

Little 10K sim port built off Parks list taken 15 days ago. Each position is slotted a 55.50 risk. Not bad for such a small port. I think I used 555.00 per position. Notice the 2 I sold because I thought the chart was topping…

Once R/1 is reached exit plan will kick in.. Awesome Job PARK...You da-man!!