There are two rules from this book by which I now live during these later stages of my constitution. First is the tenet “The trend is your friend,” which is repeated often – but not often enough. You sill simply never make any money unless you begin and end every trading thought with that in mind. Second is the old adage actually popularized in the 1880s, as I learned in your annotations: “Sell down to the sleeping point.”
– Paul Tudor Jones
Reminiscences of a Stock Operator Annotated Edition is a new and highly acclaimed book. The original, based on the life of Jesse Livermore, was first published in 1923 and is a favorite, if not the favorite, of just about every trader I know. The new version is annotated with comments and insights about the life and times of Livermore. It also includes an interview with super-trader Paul Tudor Jones. The above quote is from that interview.
Jones has been around about as long as I have. And it’s interesting to me that after all those years of tremendous success and riches it all gets down to two very old fundamental truths: “The trend is your friend” and “Sell down to the sleeping point.”
I have the book on order and I’ll give a review of it after I’ve had a chance to read it. But it’s my understanding that the annotations and the interview with Jones really brings life and great insight to a timeless classic.
Let’s look at what’s going on with the markets and our strategies.
ATR Trading Strategy
Fortunately ATR Trading is 100% in cash and has been for a week. GLD was exited on 12/7/09 at 111.51. It’s now at 105.96 as of Friday’s close. GDX was sold on 12/8/09 at 48.04. It’s now at 40.72. GDXJ was sold twice. The first time on 12/8/09 at 25.72 and the second time on 1/21/10 at 25.66. It’s now at 22.17. AGQ was sold on 1/22/10 at 57.50. It’s now at 51.32. And DGP was also sold on 1/22/10 at 26.23. It’s at 25.68.
With every position we were going with the trend (“The trend is your friend”). But going with the trend doesn’t guarantee a profit. It just makes a profit far more likely. Also, with every position we sized our positions to reduce risk and exited when the intermediate trend signaled a change (“Sell down to the sleeping point”).
The ATR Trading Strategy hasn’t made much money yet. But it has done something just as important. Instead of wondering about what to do with positions that would be under water, we’re in cash and ready for the next trend to develop. And we’ll continue to probe by entering positions that may develop into trends that last weeks or months and, at the same time, getting out with small losses when potential trends turn out to be a false signals. In doing so, we’re going to be wrong a lot. But being right is not what makes money. It’s what you do when you’re wrong that makes money over time.
COT Strategy
Only 30% invested, the COT portfolio is also in good shape during this downturn. But if the markets continue to be in the doldrums, commercial traders will get more bullish in their hedge positions and we’ll get some buy signals.
I would absolutely love to get a buy signal for gold and silver. They are two of the most reliable markets for this strategy. But with a Blees rating of 24 for gold and 25 for silver we’re a long way from that happening. However, if they continue to go down, or even trade sideways for awhile, the smart money will start getting bullish and it will be reflected in the Commitment of Traders reports.
Since I mentioned Jesse Livermore and Reminiscences of a Stock Operator, I’m reminded of another Livermore quote: “Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting.”
So we’ll wait.
Magic Formula Strategy
After EXBD and USMO are sold on Monday, this portfolio will only be about 25% invested. We’ve been selling positions since mid-December.
Sold JTX at 4.50. Now at 2.74
Sold IPHS at 23.08. Now at 19.56
Sold FIX at 12.25. Now at 11.73
Sold EGY at 4.40. Now at 4.23
Sold GNI at 89.84. Now at 90.75
Sold GHM at 18.81. Now at 15.88
Sold FRX at 31.07. Now at 29.64
Sold ELNK at 8.16. Now at 8.11
Sold DECK at 102.00. Now at 98.17
Sold INT at 25.58. Now at 24.03
Sold TSRA at 24.32. Now at 17.17
Sold TRA at 34.47. Now at 31.60
Sold PPD at 40.15. Now at 39.87
Sold EME at 25.88. Now at 24.06
Sold CTCM at 14.09. Now at 13.50
As you can see, this portfolio would not have done as well as it has without our exit strategy. And it’s 75% in cash, waiting for me to add new MF stocks. I’m going to do that, but I’m going to do it a little at a time. Right now I don’t see anything that I’m in a rush to buy.
RSI Reversal Strategy
When markets sell off is when this strategy gets active. It’s currently 90% invested. It probably won’t stay that way for more than two or three days, but it is now.
What if there are two or more new signals while the portfolio is 90% invested? We’ll have to pick and choose because we don’t want to go over 100%, which would require using margin. I’ll probably try to choose one that’s a little different from the positions that are already in the portfolio, like real estate (DRN) for example. But we’ll just have to cross that bridge if and when we come to it.
Long Term Timing Strategy
The month ended on Friday and we got a couple of sell signals. GDX and DBA closed below the 10-month moving average. They will be sold on Monday’s open. After they’re liquidated the portfolio will be about 30% in cash. I’ll look at the portfolio and decide what I want to replace them with.
Gold/XAU Ratio
The ratio is now at 7.31. Just remember it closed over 5 on 3/13/07. XAU was at 128.54. Since then the ratio has soared to over 11 during the asset meltdown of 2008 and is still well over 5. However, XAU is at 147.93. So even after going through the worst imaginable times for this ratio, XAU is above where it was had one bought it when it went over 5 in March of 2007. So the mining stocks remain cheap and I’ll continue to look for opportunities to buy them.
Just so you know, I’ll be traveling for the next two weeks. I’ll be in three or four time zones , so posting will be inconsistent. If I’m a day late getting information posted, that’s why.
Larry