12/14/05 Difference of Opinions

A Difference Of Opinion Is What Makes Markets
...And my morning reading uncovers two very different opinions from two guys whose opinions I respect. MarketWatch's Mike Ashbaugh writes that the basically sideways price action of the markets over the past three weeks suggests a consolidation of the market's November gains, and is bullish. Remember also that in last week's MarketMail, Louis Navellier suggested that the current market environment was about as good as it gets.
...But there is always another side to the story, or I guess there wouldn't be a market. Up against those two bullish opinions from two market pros you may have heard of, let's hear from another precinct, from somebody you've likely never heard of, and in fact I don't know who he is either. He is a poster on the ClearStation bulletin boards who only goes by the handle 'dcb'. Dcb claims to be a hedge fund manager - I don't know if he is or not. That is one of the good and bad things about bulletin boards. The opinions are all out there, and you don't know who you are talking to, or whether they know anything or not. There are even people out there who use multiple aliases and hold entire conversations with themselves for their own nefarious reasons. But over the course of time you get to feel like you know certain personalities on the boards and whether they know what they are talking about or not. And dcb has shown himself to be very knowledgeable, IMO. I would not be surprised if he is indeed a fund manager. But that does not mean that I follow his or anybody else's advice blindly. I take opinions from people I have come to respect as one more data point when I am making my decisions. One of the biggest things that I had to learn as a trader was that I own my trading decisions. They don't belong to anyone else. If I lose on a trade that I went into because some expert said it was the thing to do, shame on me. The money is coming out of my account. And who knows? Depending on his reasons for making the recommendation, the money might even be going into his account. This is a tough game. Once I realized that the other big players at the table had a knife up one sleeve and an ace up the other, it actually made things fall into place for me and made me feel better. Things that had mystified me suddenly made sense. Now I could understand that there was really valid reasons behind strange and manipulated market action. Now that I could see the game in a different light, sharks controlling and manipulating everything from information to prices to extract money from us little fish, my choices were clear. Either walk away, or accept it for what it is, deal with it, and learn to profit from it. And that's what I have done from that point until now, though the roads still get very bumpy from time to time.
...Anyway, back to dcb. He looks at the exact same chart patterns as Mr. Ashbaugh and comes to a very different conclusion. He sees professional distribution. Dcb sees strong divergences between prices and the market internals, and to him, that is the sharks dealing out their holdings little by little to the little guys, but in a quiet manner so as not to spook them. And making soothing bullish pronouncements all the while.
...A couple of more comments on biases and opinions. One of the reasons that I read dcb's opinions, I suppose, is that they closely reflect my own. I tend to have a permabear mentality when it comes to the markets. It is easier for me to see the storm clouds than the silver linings. But the skittishness that comes from that mentality comes in handy sometimes, too. It enabled me to trade a $2k account actively for years without going under, something that at the time I had no concept of how difficult that is to do. Dcb believes that we are in a primary bear market, and the upswings we have seen since mid-2002 are actually just countertrend rallies occurring within the context of the primary bear market. Prices do not go straight up or straight down, although it seems they do sometimes when you are on the wrong side of a trade. The SPX is still about 200 points from its highs. Until it takes out those highs, we are still in a primary bear market - at least that's what we permabears think.
...While dcb and I tend to agree regarding major market themes, i find that we are often on the opposite sides on individual trades. But that is another concept of trading that seems to escape some people. Whether a particular chart pattern looks good to you or not can depend on what time frame you are trading. For example, some folks use weekly charts, some daily, some hourly, and daytraders even use one minute charts, maybe even less than that by now, I don't know. I remember the first time years ago I heard someone talking about the moving averages on the three minute charts, I thought he was kidding. But he was not. Charts are fractal in nature, and the same patterns can occur over and over again regardless of the time frame you are looking at. Someone trading on the basis of a weekly chart may see a bullish pattern, but an hourly trader knows that there can be wild peaks and valleys occurring within that same time frame.
...And there are differences in what kind of stocks to trade, and when to trade them. It's a big market. The realm of shorting stocks is another area that dcb and I almost always disagree on, it seems. I check his picks to see what he is doing. But almost always, what he regards as a short I wouldn't touch with a ten foot pole. He tends to short excessive strength that he believes cannot be maintained. When I am looking to go short, I look for weakness, not strength. There is an old saying that the market can remain insane longer than you can remain solvent, and I believe that one.
...For example, dcb shorted Google (GOOG) six times unsuccessfully before finally cashing in on the seventh time. But he is looking to get in on the exact turn and profit to the maximum when he gets it right. On the other hand, I usually look for stocks that are trading below their 200 day moving average when trolling for short candidates. Even though someone like dcb would say that stock such as that has already been trashed and the profit potential isn't there, I feel better shorting something that people have proved they don't want to buy.
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