Wednesday, December 31, 2008

Power of the Fool




Back in the good ole days, about 10 years ago, making money off popular momentum was easy as pie. One of my favorite plays was simply watching Wall Street Week with Lou Rukeyser on Friday nights. The show was PBS's longest running and most successful offering. Lou always had a group of fund managers on the show whom he called the Elves and each week they would recommend a few stocks that they felt would outperform the market. The standing joke was that Lou never met a stock he didn't like and, like Mr. Micawber in Dickens' David Copperfield, he was always waiting for things to turn up.
The easy money here was simply buying the basket of stocks that were recommended Friday night on Monday morning's open and holding 2 days, closing the positions at Tuesday's close. This little no-brainer system which only required you to watch TV Friday nights was a consistent winner with over 80% profitable returns for several years.
As the electronic marketplace became more sophisticated and available, and other folks recognized this easy money trade, the rush to get in on Monday's open made the trade a bit more problematic.
Just a little history there. . . .
Skip forward to present day and a follow up to the Wall Street Week format. Enter the Motley Fool, a widely syndicated company that seeks to "educate, amuse and enrich". . . kind of like Lou in a clown's suit. The Fool is bit more participatory though and has a thing they call the CAPS service wherein members rate stocks. Current top rated stock with 5 stars is KFT with 93% of CAPS members expecting it to outperform the market. Even in a recession, people gotta eat.
With KFT currentlty at 26.45 the ATM is actually a $1 OTM as we are trying to capture that gain in the play also.

12 comments:

Jeff Pietsch CFA Esq said...

Or, to build a long-short strategy, you can additionally watch Cramer and short his picks. What a super-sized combo!

bzbtrader said...

Jeff,
Shorting Cramer has become something of a national pasttime, but with this year's down market, just shorting every rally pretty much worked out. I've got a friend that worked at a Bejing based 1000 man prop shop that specialized in shorting Cramer back in 06-08. . .they made a killing.

tgoudie000 said...

BZB,

Do you have a list of recommended books to read?

bzbtrader said...

tgoudie,
Having read several hundred trading books I'd really need to know your area of interest before suggesting anything. The book that I recommend to my students is The Logical Trader by Mark Fisher because he uses momentum and pivots in a systematic manner similar to my methodology. Alexander Elder's Come Into My Trading Room is also a great primer for active traders IMHO.

tgoudie000 said...

BZB,

My interests lie in swing trading using, mechanical systems 1st and then using technical analysis 2nd. (RSI2, 6-10 day lows, ETFs only etc.) Backtesting methodologies, similar to many of your posts recently. I am chewing through a number of books these days, but I have not found many that focus on mechanical systems vs technical analysis.

bzbtrader said...

tgoudie,
That info helps a lot. I studied systems trading early on with Joe Krutsinger who holds TradeStation license #1!. If you go to AMAZON and type in Joe's name you'll find several of his books. I grew up with the Trader's Toolkit and Secrets of the Master's. These are specifically TradeStation oriented, so if you use another platform you've go to be prepared to rewrite the coding. Tushar Chande's How to Develop and Implement a Winning Trading System is also good, although a bit overpriced IMHO.
Another great resource is www.futurestruth.com, a site I've mentioned many times in the blog.
This is where serious systems traders handout. You can subscribe to their magazine, or just check out some of the free articles and system performance records to get a reality check about what systems can and cannot do for your equity curve.
Hope that helps narrow your search a little bit.

tgoudie000 said...

Thanks! I've not read his material yet as it is not avail from the library and that is where I get most of my material. And I primarily use stockfetcher for backtesting since I dont have a tradestation account. But the conversion is not that difficult. Thanks for the recommendation!

Quentin said...

I liked the book Trade Like a Hedge Fund by James Altucher. I havent read the other books you mentioned in the previous posts , but I'll check them out now.

Thanks

bzbtrader said...

Quentin,
Good recommendation! I like Altucher's work a lot as Larry Connors How Markets Really Work, which I have in a pdf file for anyone that wants it. I was trying to address tg's specific mechanical/technical needs with my suggestions. There are many other credible trading authors that come to mind if we were to develop a more definitive list.
Thanks for chiming in.

dealwithme said...

I've been looking for a good review online of tradestation. Can you recommend any?

bzbtrader said...

deal,
TASC profiled the FX version of TS8.3 in Oct 07 (8.4 is current ver).
Link is;
http://traderscom.stores.yahoo.net/stcov257prre7.html
and it will cost you $ 2.95
unless you've got the back issue.
Really depends on your specific needs as to whther TS is the best choice. It is the gold standard for systems traders and developers, with good reason. Learning curve can be a bit steep if you really want to utilize the many, many features of the platform.
Hope that helps. TS was running a no fee promitonal last Fall if you opened a $5000 account. Call 'em up and tell them you missed out because (insert good excuse) and you want the platform for free for a month. . .odds are they'll set you up.

dealwithme said...

Thanks for the info. So I need to read up alot before deciding.