My daughter tells me that investing is like gambling in the casino, the house has tremondous advantage. She always tells me, dad, you should pick up a few good mutual funds, don't try to pick up your own stocks, you have no idea how the big guys trade against you and put you in the lossing position.
Well, I am not a gambler, but when I go to Las Vegas, I only play the BlackJack. That's because it's the only game you can actually beat the house. An MIT professor used computer to study the statistics of the game and published a set of rules called "Basic Strategy". If you follow these, lossing edge for you is about (I forgot exactly) 3% (now, it's confirmed 0.5%, check on this: Basic Stratety" ), that's probably better than any game in the casino. But if you are very smart, do the card-counting, you can actually gain a winning edge of up to maybe 5%!! That's why every casino has a list of people they don't want them in, if you are a good mathematician and on their list, they will politely ask you to leave, if you don't they will arrest you.
The whole strategy is based on the ability of looking at the dealer's card facing up.
Imaging, just imaging for a moment now (I am excited now, like Cramer, ), if you can peek into all the dealer's cards, face up or face down!!! Do you like to play the game?
What's the game where you can see all the dealer's cards, you may ask? That's the stock market!!!!
What happened is that there are various reporting requirements from the SEC, one of them is that the insiders (CEO, corporation officers, 10% winners) need to file a form called form-4 to disclose what they buy or sell within 2 business days of the actual transaction!
It drove Warren Buffett nuts, he always apply for exceptions, because he is such an investing guru and his portfolio is the most emulated one in the world. A little while ago when the stock market started going south, I was looking for a short, I noticed PTR -- a Chinese Oil company was overbought. I closed my eye and pulled the trigger (it was a difficult decision because I knew Buffett owns it), the next day, the news broke out that Warren Buffett reduced his holding of PTR (don't try to look for this one, he actually sold on Hong Kong market) and the stock got a nose dive from 150s down to 120s. I got a nice ride.
Smart money chase is not limited to form-4 which you can find them on EDGAR database. There are several other filing requirements for the big guys. For instance, the big guys are always heavily betting on the futures market. SEC also separate them into several categories such as "Commercials", "Large traders" and "small speculators", they need to report their positions every Friday. People organize them into various forms and if you are interested in you can click on the following links:
BuyTheBottom.com Nasdaq
Are you surprised when we are all panic and selling, the commercials spiked up to buy the NASD future? Are they out of their mind or they knew something we don't?
Another example:
ALL-INDEX COMMERCIAL TRADERS POSITION
This is what they called COT chart, Commitment Of Trade, from which we can see that the commercial bought heavily on SPX (25 billion! Oh, such a pig! They ask Cramer to do the show of crying, so they can be benefited from the whole situation, come on!!!).
Have fun everybody,
Mkt Swimmer
Saturday, August 18, 2007
The Poker Game
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6 comments:
Hi Swimmer,
I just found your blog from Pradeep's one. Very interesting your article abut the smart-money. From the graphics of the Commercials seems clear this is just a correction and not the end of bull market. I wish I had knew that a week before, and would not have made silly moves with my ETFs and funds and lost less money.
A question. What do you think is the best indicator/s to know the bottom of the correction?. This graphics of Commercials/Large Traders look quite interesting, but probably there is out there even better indicators.
Thanks.
Another question,
when you say you are a long term investor, what do you mean by long term?. You hold your stocks for years?.
semsons,
Thank you for your comments.
There is no "one" indicator you can look for that can give you exactly where the bottom is. But the more indicators you look, the better your chance to have a more reliable prediction. I would look at what IBD say, what Pradeep say and I would look at how the commercial traders bet their money. Remember, that can still be wrong sometimes. Similar to if you are able to see all the dealers cards, you make your bet accordingly. Can you win the game every single time? No, but you probably can beat the house by 10%, that's the hell better than play by hunch.
Monitor smart money is important, I don't understand why people don't look at that, if you check my blog once a while, I will put up more.
I am not a long term buy and hold investor. Funny thing is Buffett is my idol, and he is and I tried to be, but I can't. I guess that's why he is much richer than me.
Best regards,
Mkt Swimmer
Hi again,
thanks for the comments.
I've been looking at the COT graphics, and I'm having problems to interpret them. For instance the Dow Jones curves for Commercials and Large traders
http://www.buythebottom.com/cot_charts/indu.html
are just a mirror, so no information here.
The graph for the SP500
http://www.buythebottom.com/cot_charts/spx.html
is a little bit more complex, but the curves are basically also a mirror.
This remembers me to the Put/Call ratios, no real information on the evolution of the market. They are just a reflect of the market.
The curves for the Nasdaq look more interesting
http://www.buythebottom.com/cot_charts/ndx.html
but not sure how to interpret them, because Commercials have been long since March and now they are longer.
The curves of sentimentrader seem quite promising
http://www.sentimentrader.com/subscriber/charts/WEEKLY/COT_52WEEK_SP.htm
but I simply don't undestand them. One can see as the Commercials become much longer before! the correction, thus they have been losing much money during last weeks. That was their purpose?.
I don't see clear signals here. All looks puzzling to me. What I'm missing here?.
Best.
semsons,
We have to be careful on how to interpret COT, they actually have information there, not a mirror. I will post something later. Just put simple for now, as for future contract, there are sellers and buyers, totally they are zero because the number of sold should equals to the number of contract bought. It's a gambler's market, you have to decide which one to believe they are right. I usaully go with commercial. Large traders are trend followers. Well, nothing is bullet proof. It's more complicated that that. I just put up a few to make my point. But the real case is very complicated.
Thanks.
Poker games encompass all the varied types of card games in which players bet that they hold the highest-ranking hand. Also known as vying games, the players of this game make wagers into a central pot with fully or partially secret cards, after which the pot is granted to the remaining players with the best combination of cards.
5 card stud
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