This Is A Hard Business

Mark Hulbert published a very interesting article today on CBS Marketwatch. As you may know, Mr. Hulbert tracks about 300 advisory newsletters and services with his monthly publication, "The Hulbert Financial Digest". I subscribed to the HFD for a while and it was very enlightening to learn that almost none of the paid subscription advisory services make money for their clients. While I have no way of proving this, I would not be surprised to find that most brokers that provide stock and market recommendations to their clients realize the same pitiful results.

Many years ago in late December, 2002 I was on the phone with my broker late at night requesting reports for my tax preparation, and we got to talking about active traders. I told him what a horrible year I had, and I was trying to decide if it was worth it to continue. I said it would be really helpful if I knew where I stood in relation to the firm's other clients. In particular, could he tell me what percentage of the firm's active traders made money that year. There was silence on the other end of the phone for a few seconds, and then he responded that they just don't give out that kind of data to the public. I pressed the issue and said that surely he had some idea. I needed to know how much effort it was going to take to become successful. He began whispering into the phone and told me he shouldn't be telling me this, but only about 3% had made money in 2002. I thanked him for the information and did not let on how elated I was. Perhaps that seems weird, but deep down I knew then that it wasn't me. Well, of course it was me, but the fact was that 3% of traders knew something that the rest of us didn't. I had done poorly because I had followed the herd. I just needed to learn what those 3% of profitable traders knew. At that moment, I committed myself fully to becoming a successful trader.

A few years later, I read in books and heard in forums various estimates on what percentage of traders were successful, and the numbers ranged anywhere from 5% to 15%. Today, Mr. Hulbert revealed that only 7% of the advisory services that he tracks have made money in both the bear market that began in October 2007 and the "bull" market that began in March, a number that validates all of the prior estimates. Now, when you consider that among active traders the turnover rate is very high, perhaps as high as 80%, then it becomes clear that over time, the actual percentage of successful traders is very much lower than the estimate of 5% to 15% because the successful traders are going to stick around. In other words, over the long term, say 10 to 20 years, probably only 1% to 3% are consistently profitable.

To become successful in this business, you must treat it like a business, be fully committed to it as a career, or as a serious second business. If you are successful, you are in an elite group of professionals. If you are one of the 7% that made money in both the bear market and the current rally, you are in an elite group. But never forget that it will take ongoing effort to keep you in that group. Don't rest on your laurels. If you are not one of the 7%, don't despair. If you are committed, you can become successful. Trade small until you have that eureka moment. Trade small until you don't react emotionally to big gains or losses. Trade small until you see consistent results, and then increase your size. If you stick with it, you will succeed.

Up Day As Expected, But Somewhat Disappointing

Markets were up across the board except for gold and the dollar (interesting). While the broader indexes finished higher, the action seemed to be fairly restrained. The Qs appear to have completed 5 waves up from the Sept 3 bottom. The question is, is this wave i of 5 of (C) or just part of a larger sideways correction that will take up most of September? Rejection at the August high, the high of the rally, would setup a retest of the September low of last week. This would still not be too bearish as long as the August low holds.

Because of the early morning selling on what I expected would be a more bullish day given the 3 day weekend, I unloaded 3 laggards this morning. There's no need to carry dead weight around if we are not seriously heading higher. I will continue to cull the laggards as September progresses, unless some definite follow-through occurs.

Taking A Needed Break

This was an exciting week all around. I know many are questioning how much farther this rally can go. There are so many potentially ominous signs: weak volume, rising wedges, gold breaking out, the extent of the rally, etc. But over and over again, I am learning that it doesn't usually make since to lean against the trend, and so far, the uptrend in the stock indexes has not been violated.

I do expect that next week will continue to be volatile. Past history suggests that the probability that Tuesday will be a big up day is around 80%, but this past September 1 was down against the odds, so perhaps Tuesday will be too. In any case, whether the trend continues to weaken or reasserts itself, I continue to believe that the top will be in October not September.

Today, a number of leading stocks advanced nicely. As long as that continues I will stay with the trend. Given this I may add one or two more positions next week before putting on the brakes. Of course these will have closer targets than earlier positions.

I am looking for a chance to add to my long gold position, but so far it hasn't appeared. Conversely, I am short oil again with the DTO and looking to add to that position. I am looking for a retest of the July low and an opportunity to go long again on the back of gold's advance.

This has been a long week for me - several 16 hour days to finish a project, so my next post will be Tuesday evening. Have a great labor day weekend.

Gold Target

While there have been many factors leading to the conclusion that gold would correct to below the October 08 lows, the breakout in price today was undeniable. That, coupled with the clearly bullish seasonal pattern in gold, argues that the bearish argument was wrong. But trading is not about being right or wrong, at least successful trading. It is about evaluating the trend and using any number of methods to position oneself with it.

Over the past few months, I have used my price based rules coupled with gold sentiment and dollar analysis to position myself for a downside breakout. At first it was not clear that a triangle would develop, so there was no reason to abandon the trade. Later, as the triangle came clearly into focus, the only question was which way it would breakout. Since there was no way of knowing, I maintained my position. Today that stance was proven incorrect. So I immediately sold my remaining short gold position in the DZZ and reversed to go long in the DGP.

That was all there was to it. I hope gold continues to climb to its projected target, but if it doesn't, if it breaks down below the wave E low, then there will only be one action to take.

The only thing that is bothering me is whether or not the DGP will still be in existence by the time gold hits its target, which should take about 4 months. For those who are not aware, Deutsche Bank will close the DXO ETN as of September 9 and buy back all outstanding shares. Surely, there are more such changes to come.

Gold Breaks Out - Finally

Gold has moved above the critical 972 level, confirming the bullish triangle formation that has been building since February. I am stopped out of DZZ, and have taken a half-long position in the DGP. By using appropriate position sizing and stop management, I was able to keep my loss on the DZZ position to less than 2% of my account. I can live with that. The only thing there is to do now is to go with the confirmed trend, which is up. I will be looking to add to this position on any valid pivot setups below the previous all-time high.

The measured move target for gold is around 1260, with a range of 1138 to 1454.

For those following Marketclub's signals, a three week buy signal triggered today at 963.40.

Market Sells Off To Support - Will It Hold?

While September is known as a bad month for stocks, September 1 is usually an up day, but stocks sold off hard. The question is how much more downside can we expect. Today's action brought the SP500 down to two levels of support: 1) the major median line, and 2) lower trendline of the minor median line. Below the 50dema and the 200dema are also strong support.

The bears were out in force today on CNBC. A bullish sign?

The McClellan Oscillator closed below -200 at almost the same level as the mid-August low, another possible indication that the pullback is nearing completion.

We are still are a long way from calling an intermediate term top, so patience is paramount.

Good News & Bad News

The markets did not make a new low for the pullback this morning, but rallied in the 3 waves instead leaving a 3 wave - 3 wave -?? pattern. The bad news is it looks like the pullback has further to run, but the good news is that it doesn't look impulsive. At the moment it looks like a zigzag abc correction, which may bottom soon. Of course, these things can extend, but it doesn't look like a start of a significant downtrend yet.