Db,
I thought some of those who read your thread might be interested in this response to Whitepine's question to me on another thread. Of course, some will not be interested at all.
Kb
To: whitepine who wrote (22892) 3/12/2005 11:25:48 AM
From: kodiak_bull of 22895
WP,
This is a very interesting and vital discussion; I think it contains the key points for understanding how we know what we know, and how we fool ourselves, with our own permission, that we know something that, not only do we not know, but that we cannot know. By definition.
First of all, we often forget just what it is we are trying to do in the Market. We are trying to do something that is extremely simple (note, I did not say "easy," just simple): we want to make a profit off the changes in price, over time, in financial instruments (stocks, options, futures). It is absolutely KEY to keep one's focus on this seemingly self-evident goal, because so many traders/investors lose sight of it. If you are not making a profit off the changes in price of the instrument, you are failing; if you are making a profit, you are succeeding, at least within an initial time frame. If you want to be successful in the Market, you will need not only to make a profit off the changes in price, but to figure out a system to, over time, repeat this action of taking profits out of the bazaar.
1. "as I originally noted, my perspective on Fundamentals is different"
Yes, everybody has a different take on FA and, frankly, there are so many data bits out there which fall under the rubric of FA that a discussion of it is impossible in a forum like this; it would take volumes and volumes of definitions and stipulations as to data to even get started, and none of us has the time for that. In my surfing analogy, it's as if you needed to know all of the fluid dynamics of surfboard design, and the molecular structure of all possible synthetic surfboard material, and the chemical structure of sea water and the phases of the moon, before you could paddle out and try out a wave.
But I'm glad you offered up the following example:
"If a company increases earnings by 100%/yr, I would argue there would be strong pressures for the price of the stock to increase. Yes, other issues can skew the actual price action, but in the main, I make the case. Now, if earnings rise 10-20-50 or just 1%, the scale by which a stock's price will change is not linear. Still, are earnings/profits/revenue growth, etc., useful? Yes, I think so."
Maybe that is true, but can you make a profit (the only goal, remember) trading off this "information"? Well, yes, but maybe you only think you are making a profit trading off this information. If a company shows that its net earnings have increased by 100% over the course of year, how current is that information? As I noted previously, it is (a year's sales and expense data) by definition 12 to 64 weeks' stale. How likely is that information to already be priced into the stock on the day the earnings are announced ("Google announces record earnings")??? Very. So, any purchase of GOOG stock or options on the release of that data is, by definition, an action based on faith that, somehow, when the next earnings are released, the numbers will be better and the rising stock price trend will continue. Will that happen? Or has the Market in discovering the price (a Market's sole function, after all) discovered temporarily an unsustainable price for GOOG? An unsustainable price for GOOG will result in losses for those who've ingested the stale data point and made assumptions as to what the meaning of that stale data point is.
Yes, I understand that when people who don't want to think about the absolute chaos of the Market (in the newer, scientific definition of "chaos," see Bill Williams' writings generally for an excellent introduction to financial chaos) they will grab onto anything, in particular anything that appears to carry some sort of solidity. Your earnings release fits the bill. The fact (and it is a fact) that it has no real impact on the future price of the stock, or any prognostications as to future trend or slope in that price, is overlooked by those desperate for something, ANYTHING, to hang onto.
And in hindsight, the collapse of stocks (GE, SUNW, CSCO) with stellar earnings releases over the years, can be explained in FA-speak with the perfect vision that hindsight provides. But return once again to the main question: will the use of this data point, or any FA data point, help you to accomplish the main goal of a market participant? That is, to regularly, and with some taming of the risk, take profits out of the Market?
The answer, to me, is clearly no. Look at GOOG's chart. Have their earnings and earnings projections changed between February 2, 2005 (high price $216.80) and yesterday ($177.59) so that a 20% selloff in price is, not reasonable, but predictable?
2. "I have trouble with your analogy with waves. I think I understand what you're saying as it relates to ST trades"
People like to use timeframes as if they made a difference. The short and simple answer is that a timeframe makes no difference in trading financial instruments. There is no ST, MT or LT in trading, or more properly said, there is no difference in any of the three arbitrary delineations of time. If you take a signal to establish a position off a one-minute chart and ride it, either to a small loss (stop loss) or a large gain (hooray) 37 minutes later, that is no different than doing the same on an hourly stock (cashing out 37 hours later) or a daily, weekly, monthly.
The fractal nature (again, see Williams) of the Market tells us that when we say "trade technicals for the short term, trade FA for the long term" it is a purely nonsensical division. Trade neither FA nor TA (traditional) for any time period; both will skewer you, eventually.
3. "How do you determine if a wave is wave........or the first liter of a Tsunami?"
Well, the surfing analogy is a tiny bit problematic in the use of the term "waves" since it calls to mind Elliot Wave theory, or fibonacci rises and retracements.
Your question, just for clarity, is: how do you determine if a trend is a trend? And, actually, the question is, how can you know in advance whether a trend will continue or will simply chop up? It is, in the end, the only real question in trading. How to identify a trend, versus a chop? How to be in Weinstein's Stage 1 or Stage 3 (uptrending or downtrending) instruments and avoid Stage 2 and Stage 4 (consolidating) instruments. You find the key to this and you find the key to the treasure chest.
And yet, the answer is marvelously simple. A trend is a series of higher highs and higher lows (uptrend) or a series of lower highs and lower lows (downtrend).
Can we predetermine when and where a trend will stop? No, never. Those who call bottoms and tops in charts are doing nothing more than guessing. When, for whatever reason the Market turns just when they've guessed it will ("See, I called the %$#in' top!!!") they receive reinforcement of the worst possible kind. It's like that kid on my youthsports team who throws up a 3-point shot every time he gets the basketball; when he makes one, especially near the buzzer, it reinforces his poor judgment as good judgment.
Eventually guessing will get you to wrong, and expensive, guesses and it will put you out of the markets. Victor Niederhoffer blew himself up by guessing, as did Julian Robertson (a famous FA guy, a guy who thought he got it right because of FA for years only to find himself wrong at the worst time). But of course, armed with a myriad of data points (earnings releases, p/e ratios, job reports, commodity price reports, FOMC reports) those who practice the black art of FA are convinced, as true believers can be, that their data points made the difference, and worse, that their data points can light the way into the future.
Kb |
