“Old Rules…but Very Good Rules”

1. The first and most important rule is – in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I’ll do it again at some point in the future. Thus, we’ve not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
2. Buy that which is showing strength – sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher”. Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don’t enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
7. Be patient. The old adage that “you never go broke taking a profit” is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
11. Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”
12. Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial “hay” when the sun does shine.
15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don’t need to fight at all.
17. Markets form their tops in violence; markets form their lows in quiet conditions.
18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

There is no “genius” in these rules. They are common sense and nothing else, but as Voltaire said, “Common sense is uncommon.” Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.

BigPic  - “Here is the best free advice you will ever get:
The easiest, simplest, least risky thing you can do with your money is to dollar cost average on a monthly basis into a few indices – SPX, QQQ, Emerging Markets, Small Cap. If you can add a risk management component – get out of stocks when they break their 10 month moving average – that’s even better.

SPY 50M shares in 1 hour, good indication of bottom / turning point.

Exponential 20MA in 1hour ticks for SPY at 25M good indication of bottom / turning point

TPC - Niels Jensen - Absolute Returns Partners excerpt
Let me provide you with one example. As you can see from chart 1 below, emerging markets have offered the best equity returns in six of the last eight years. The majority of investors expect emerging markets to offer the best returns going forward. They will argue that the superior earnings outlook justifies their bullish expectations. In reality, or so behavioural finance theory goes, their judgement is coloured by their knowledge of recent performance patterns.

Chart 1:  Annual Returns for Various Equity Indices
Source: http://www.callan.com/research/download/?file=periodic%2ffree%2f457.pdf
We have been structurally bearish on equities since Absolute Return Partners was established in 2002. ‘Structurally bearish’ does not imply that we, or our clients, have had no exposure to equities throughout this period. Neither does it mean that we have been expecting equities to post a loss every year for the past nine years. No, ‘structurally bearish’ is a term we (and others) use to express our view on multiple trends. In a structural bear market, price/earnings (P/E) ratios decline; i.e. corporate earnings need to outgrow the decline in valuations for equities to post positive returns. Equity investors are swimming against the tide, so to speak.
The opposite is the case in structural bull markets where P/E ratios expand, sometimes dramatically so. In the last structural bull market, lasting from 1982 to 2000, P/E expansion was the single largest contributor to stock market performance, dwarfing the contribution from dividends and corporate earnings.

Chart 2: The Link between Valuation and Returns
Source: Crestmont Research
That said, our decision to turn structurally bearish on equities back in 2002 was a function of P/E multiples at the time. Following an 18 year bull market, valuations had reached dizzying levels which we considered unsustainable. It is a well documented fact that long-term equity returns correlate negatively with valuation levels at the point of entry. As you can see from chart 2, 20-year returns have averaged 13.4% per annum, assuming you bought into the market when P/E levels were rock bottom (decile 10) as opposed to 3.2% per annum if you made your investment when P/E levels were at their highest (decile 1).
Our call has been broadly correct, although it has worked better in some markets than others. It is also fair to say that since we first made our call, market gyrations have been a great deal more spectacular than we would have expected, providing plenty of trading opportunities within a market that has offered only modest returns for buy-and-hold investors.
Now, nine years after having made that call, we begin to spot real value again with European equities trading at 9.4 times trailing 12-month earnings and 7.6 times next year’s earnings (see chart 3). A price-to-
book value just below 1 and a dividend yield of 5.3% does not exactly make the value story any less compelling.
Chart 3:  European vs. US Valuation Metrics

Source: Bloomberg. Based on valuations as at 6^th October, 2011.
At first glance, European equities look a great deal more attractive than US equities; however, comparing P/E and other multiples across borders can be misleading due to the fact that the underlying economies can be at different stages in the economic cycle. Professor Shiller has addressed that problem by developing the so-called Shiller P/E (also known as the cyclically adjusted P/E orCAPE). Shiller evens out the impact from the economic cycle by calculating the P/E ratio as a 10-year average and inflation-adjusting it.
The results can be seen in charts 4 and 5. On a cyclically adjusted basis, the divergence in valuations is even more pronounced. While Germany and France are back to 1981-82 levels (chart 4), the Shiller P/E ratio for the S&P500 at almost 20 is still well above its long term average of 15-16 (chart 5).
Chart 4:  Shiller P/E Ratios for France and Germany

Source: SocGen
The ability to buy European equities at 1981-82 valuations ought to make everyone sit up and listen. I remember the dark days of the early 1980s when nobody wanted equities in their portfolios. 18 years later, when earnings multiples were 50-60, everyone did. Guess who had the last laugh.
Chart 5:  The Shiller P/E Ratio for the US

Having said that, there is no question that valuation levels are attractive for a reason.Europe’s outlook is murky to say the least. It could very well be that earnings estimates for 2012 are wildly optimistic and that earnings will actually fall from this year to next. It is also possible that we could be entering an extended period of subdued economic growth. However, we must remind ourselves that it is not a question of what happens next but to what extent such calamity has already been priced in.
Bloomberg publishes a quarterly survey of global investors. The most recent one was published on the 26^th September. The results reveal an astonishing amount of gloom directed atEurope:

• 88% say the eurozone economy is deteriorating while 75% expect it to fall into recession within the next 12 months.
• 40% predict the eurozone will lose at least one member in the next year and 72% expect at least one country to abandon the eurozone within 2-5 years.
• 51% say the euro zone will collapse eventually but only 8% expect it to happen within a year.
• 93% sayGreecewill eventually default while 56% expectPortugalto face the same fate.
• 67% believeUSofficials have handled their economic challenges the best; only 11% believe European officials have done the best job.
• Less than 20% expect the EU’s markets to offer the best investment opportunities over the next 12 months whereas 53% suggest that they actually offer the worst opportunities in the world.

Source: Bloomberg.
Frank Veneroso kindly pointed me towards this study, stating that “this is simply enormous pessimism.” The Bloomberg survey confirms to me what I already suspected. I believe a Greek default is now fully discounted. So is a eurozone recession within the next year. The one risk factor which is probably not fully discounted yet is the systemic risk associated with Greece defaulting on its debt. If the authorities cannot contain the domino effect, European equities could fall further.
The extreme level of pessimism is further documented in Citibank’s euphoria/panic model which shows that investors are currently extremely bearish (see chart 6). While Citi’s model is US centric, it goes to show that even if the drawdown in US equities has been less dramatic than losses on this side of the Atlantic, pessimism is widespread.
According to the model’s originator, Citigroup strategist Tobias Levkovitch, the current reading indicates a roughly 90% probability that equity prices will be higher in six months and a 97% chance of gains in 12 months.
Chart 6:  Citibank’s Euphoria/Panic Model

One further piece of ‘evidence’ for those who are still doubtful: Professor Richard Sylla of New York University’s Stern School of Business has researched US equity returns over the past 200 years and found some remarkably consistent patterns. Using 10-year average inflation-adjusted returns, Professor Sylla found that when returns drop below 5%, markets are likely to bottom out and begin a recovery. Years later, at the end of the secular bull market when average returns exceed 15%, the cycle peaks and a new downturn commences (see chart 7).
Drawing upon behavioural finance, such consistency in equity return patterns can be explained by investor over- and under-confidence (or greed and fear as some prefer to call it). Not surprisingly, 10-year average returns are now below 5%, both in the US and in Europe, suggesting that now may not be a bad time to begin accumulating equities again if you are a long term investor.
Chart 7:  Professor Sylla’s Return Forecasting Model
One final note on the valuation gap between Europe and the US: Less than two decades ago, European valuations were higher than they were in the US. The balance shifted with the dot.com bubble and has never reversed. It begs the questions – why? In my opinion, the Greenspan
(now Bernanke) put plays a big part. In the US, for years, it has been a widely held belief that the Fed will not allow a wholesale fall in asset prices – a perception which provides an invisible hand under US financial markets. Such views do not prevail in Europe, exposing European equity markets to the full force of the current bear market dynamics.
Secondly, financial markets have a curious inability to focus on more than one problem at the time. For this reason the undeniably large problems facing the US economy have received limited attention when compared to the massive coverage of the eurozone crisis. At some point the markets’ focus will change and the Bernanke put will be seriously tested.
For precisely this reason, a relative value trade – long Eurostoxx 50 and short S&P500 – may not be a bad idea (easy to do with ETFs these days) as opposed to an outright long position in European equities. I feel pretty strongly that whether markets fall further or rebound from here, the valuation discount currently on offer inEuropeis likely to shrink once Europe gets itself sorted out (and it will).
One note of caution: Financials account for 24% of the Eurostoxx 50 and only 14% of the S&P500. If the eurozone crisis worsens and more banks require bailouts, the European index could be badly impacted.
Despite the storm clouds, we have recently begun to add to our European equity exposure again for the first time in years (we are avoiding financials). Please note that this is not a trading call. One cannot predict near term performance with a value approach. I could easily look foolish a year from now. However, I vividly remember the darks days of early 2009. The world was coming to an end, or so we all thought. By early March of that year the probability of bumping into a bull in the streets o fLondon was on par with Gordon Brown winning Strictly Come Dancing. Yet we were reminded shortly afterwards that the darkest hour is often just before sunrise. Within weeks, global equity markets had shaken off the misery of the previous six months and we went on to register one of the greatest bull runs of all times.
I shall be the first to admit that the current situation is different on several accounts (it always is); however, investor behaviour rarely changes, and there is no reason to believe that they haven’t fallen victim to the same behavioural patterns they have been subjected to in the past.
Buy while the opportunity is there, but buy only if you can afford to see through the short term volatility that I fully expect to plague markets for some time to come. I am convinced you will be amply rewarded. Eventually.
PS. Hedge the euro. Not so sure about that one…

Weekend Millionare's Secrets to Investing in Real Estate - Mike Summey Roger Dawson
Ch 1  - Get Rich Slowly

• Real Estate is lucrative because:
• 9:1 Leverage, 10% down 90% loan
• Tax benefits:
• rent not subject to social security or self employment taxes like money you earn from working
• passive loss deduction (expenses, interest, depreciation)
• tax deferral - defer income on sale of property by reinvesting by a certain period
• tax free sale - avoid taxes if you lived there 2 out 5 years before selling
• long term capital gains

Ch 2. - Wealth as an income stream

• Goal is to get cash flows not property apprecation
• 15 houses at $1k rent / month  = $15k / month = $180k / year which is equivalent to $3.6M at 5% in a CD

Ch 3 - Income to Value Ratio

• Annual Gross Multiplier  - if you see an 8.2x in an ad for the following 16 units, 8 2s, 6 1s, 2 furn. studios...8.2x, $787,200.  The rent / year = $787200/8.2
• bad because there is not account for: how/who pays for utilities, property taxes, vacancies, management costs,insurance (fire, liability, flood), maintenance, cost or purchase

Ch 4 - Small rent increase snowball your net worth

• Raise rent every year by a small amount
• apartment buildings compound the effect

Ch 5 - What makes property a good buy

• Buy at wholesale price ( distressed sales ), but expect that only 5 - 10% offers will be accepted
• Only buy properties with a positive cash flow
• Best buys often come w/ the most problems

 Ch 6/7 - Finding a property manager

• Familiarize yourself w/ neighborhoods before you buy.  Want to find places where people will always be renting
•  Call property management firms and ask them :
• Are you or do you have a division, exclusively engaged in property management or do you primarily list and sell properties?
•  Do you deal primarily w/ residential or commercial properties?
• In what geographic areas or the market are most of the properties you manage located?
• When you meet determine how they advertise vacancies, show properties, screen tenants, procedures for collecting past due rent, supervise evictions, control maintenance costs, deal w/ after hours emergencies, accounting they provide owners, fee structure, if they are licensed.  => should be between 6% - 12% of rents collected
• when you sign agreement, insert a clause that gives you the right to cancel immediately within 30 or 60 days for any reason or immediately, w/o notice if any representations of the agreement are breached => won't be a problem w/ a reputable firm
•  Find out if they will be willing to look at new properties w/ you because it allows you to get professional advice from ppl who know the market

 Chapter 8 - bread / butter properties

• 2 / 4 bedroom, w/ 1 - 2 baths, about 800 to 1400 sq feet
• Beware of good deals on expensive properties, they may sit vacant for many months
• don't go for cheap properties that you're not comfortable being in yourself

Ch 9 - Learn your market

• map your area ( 10 miles around your house ), every week new properties come up
• talk w/ the neighbors at different properties, find out problems in their neighborhood, give them your business card

Ch 10 -  Asking prices

• Usually house is 2%- 20% lower than asking price
• When you offer, use your ROI to determine your upper limit

Ch 11 -  Seller Types

• Sellers have moved - someone else in the house and the property looks like crap.  Make sure house will be in good condition after painting / cleaning / carpeting
• Sellers divorced - try to find out as much info about each party as possible such as previous offers, how long it has been on the market, 
• you can draw up separate agreement w/ each party if necessary
• Ask for lots of extras you don't care about so you have room to negotiate what you actually want
• Home equity to retirement => offer 0% or very low interest for steady stream of payments to retired person.  When you do this financing, these are some things to consider:  
• don't use a standard bank-type note that contains a due-on-sale clause
• if you ever did sell / trade the property, having an assumable no-interest mortgage would be a big advantage
• include a clause giving you the right to substitute collateral, because even if you sell the property, you may want to keep the loan and secure it with another property
• buy house from person, but let them rent from you

Ch 17  - Profit is made when you buy

• scarcity - home prices rise when the number of people wanting to live in an area is increasing and regulations or terrain in that area restricts new building
• inflation - during times of inflation you want to own as much real estate as possible.  when inflation is low you want the cash flows of the property to be sustainable

Ch 18 - Negotiating pressure points

• time pressure - when ppl are under time pressure its much easier to get terrific buys
• things to look for:
• behind on mortgage payments and don't see how they can catch up
• in foreclosure and in danger of losing the property unless they can find a buer
• need money to pay off mounting debts
• contracted to buy another home and can't close on it until they sell this one
• need money for college, have to pay for wedding, large medical bills
• need capital to acquire / expand business
• lost lawsuit and don't have money to settle it
• retiring and want to move to Arizona
• make your own checklist from your observations
• acceptance time - people need time to digest the fact they aren't getting what they expected for their property.  never close the door by saying 'this is my final offer'
• instead say 'I'm not saying I'll be in a position to buy later, but we can always talk some more'
• Spend lots of time w/ the seller
• longer you keep sellers involved in negotiations, the better chance you have of getting what you want
• take lots of time inspecting the property, ask as many questions as you can think.  Discuss things you have in common (sports, ect.), measure some of the rooms and write it down, pace off the backyard...
• you are doing this to build trust and mentally this makes people think they have invested something in you and don't want to walk away w/ nothing for their time.  this will help w/ flexibility on price, terms, ect
• note that this also works against you because you will not want to walk away w/ nothing either.
• work out all the details, so you're not surprised by anything (ie: appliances cost)
• Questions to ask sellers/find out in other ways: - don't be timid, be upfront about the questions.   don't ask yes/no questions ask who, what, where, when, why, how questions
• how long have they owned
• how long has the property been for sale
• how many offers have been made
• what does the seller plan to do w/  the money from the sale
• how much does the seller owe on the property
• is the seller under any pressure to sell
• what are the reasons for wanting to sell.  are these the real reasons?
• will the seller carry back any financing
• if listed w/ real estate agent, when does the listing expire
• hidden problems w/ the property
• any nearby problems that affect value of the property
• Project that you're prepared to walk away
• You can do this easily, if you have multiple properties that you're interested at that time

Chapter 20 - Negotiating Gambits

• Ask for more than you expect to get (lower price, lower interest rate for financing, seller pays attorney fees, termite inspection, home inspection, survey deed preparation, title insurance, later closing date if seller wants to close quickly, personal property like furniture, rugs, appliances)
• Go even more conservative w/ strangers because they may be willing to go for even less, it's easy to build rapport if you make concessions
• Minimum plausible position - make offers that are very low, yet will be taken seriously.  you will be surprised at how low this is
• imply flexibility w/ this offer
• Letting the sellers negotiate up from your MPP will make them feel like they won
• Bracket the seller's asking price ( what they asked for, vs lowest they will go before saying no)
• No is just the beginning of negotiation
• Never say yes to the first proposal because it makes the seller think they could have done better
• Flinch when they first tell you the price like you're slightly shocked
• Play reluctant buyer => 'i hate you had to spend so much time for nothing, but to be fair, what is the lowest price you would take for this property'
• Vise technique - 'i'm sorry you'll have to do better' then don't say anything until they speak again

Chapter 27 -  No down deals that work

• Pay one house off completely, take a mortgage out against your house and then pay all cash deals for another house
• ie: Your house is 100k, and it is completely paid off
• You go to the bank, and get a loan (typically 90% - 95%) for the worth of your house
• You find another 100k house, but only offer 60k - 80k for it
• Since this house will also be fully paid of, you rent it and then a loan out against the new property (typically 90% - 95%)
• Do this about 6 times (6 new houses + 1 original house), until the mortgage money from each house minus the amount you paid cash for it = final value to buy a new house
• All the rental streams pay for the houses and you keep the rest

TPC

• Bernanke says there are significant risks to the economic outlook, including strains in the global financial markets
• TPC says operation twist won't do anything because this doesn't target rates so it won't  put downward pressure on longer-term interest rates and shouldn't help make broader financial conditions more accomodative
• MBS purchases won't help growth, but they will help fend off credit fears

Bespoke

• Building permits showing good strength
  

Ray Dalio interview
1. reality works in a certain way, can we describe how it works(ie: inflation is a certain amount, if it goes down x%, the price of the bond should go up by that amount.  there is a structure to all asset classes)
2.  what is the principle for dealing with reality (principle = getting outcome we want)

• if you have 15+ good, uncorrelated revenue streams, you will risk to return will be 5x greater (80% less risk).  Goal in constructing a portfolio is getting these 15 uncorrelated streams
• 60% correlated, 1000 revenue streams, risk only reduced by 20%!
• in constructing your portfolio, 
• you must figure out what is the risk neutral portfolio (mix of dollars / gold?)
• stocks / bonds example
• they can either be positively or negatively correlated, depending on whether you know what determines the pricing of that asset class
• economic uncertainty and volatility => negatively correlated, inflation uncertainty and volatility => positively correlated.
• Each behaves logically within its own structure

http://www.hedgefundletters.com/wp-content/uploads/2011/03/a-template-for-understanding.pdf

Michael Covel - Trend Following

Chapter 1

• Let's put change and Trend following in perspective.  Markets behave the same as they did 300 years ago.  In other words, markets are the same today because they always change.  This is a philosophical underpinning of Trend Following.
• Follow the trend - don't try to guess how far a trend will go.  You can't.   "Price makes news, not the other way around.  A market is going to go where a market is going to go" =>(this guy is stating that you should follow the market, while i believe i must anticipate it...)
• Let's say you saw a stock go from 5 to 100.  When it was at 5, you didn't know it was going to go to 100.  And trend followers didn't know it was going to go to 100 either.  But they were buying all along, knowing that it could go to 100 even though it might not.  You can't time the trade.  No one can pick a top or bottom
• A wise trend follower once told me a story with a new trader who wanted to learn the secrets.  The experienced trader took the newbie out to the beach.  They stood there watching the waves break against the shoreline.  The neophyte asked, 'what's your point?'  The trader said, 'go down to the shoreline where the waves break.  Now begin to time them.  Run out with the waves as they recede and run in as the waves come in.  Can you see how you could get into rhythm with the waves?  You follow the waves out and you follow them in.  You just follow their lead.'

Chapter 2 - Great Trend Followers

• Bill Dunn - Only 2 systems.  The first he made in 1974, 2nd in 1989.  The major strategic elements - how and when to trade, how much to buy and sell - have never changed in almost 30 years.  We expect change.  None of the things that have happened in the development of new markets over the past 30 years strike us as making the marketplace different in any essential way.
• His economic / political opinions do not form the basis of his buys and sells
• John Henry - No one consistently can predict the future.  Prices, not investors, predict the future.  We rely on the fact that other investors are convinced that they can predict the future, and i believe that's where our profits come from
• He studied 18th and 18th century price data to prove to himself that there was only one successful way to approach trading
• Long term trend identitifcation
• Methodology is designed to keep discretionary decision making to a minimum
• Risk management - strict formulaic risk management system that includes market exposure weightings, stop loss provision, and capital commitment guidelines that attempt to preserve capital during trendless or volatile periods.
• Global diversification - participates in 70 markets in many countries
• long term - 'There is an overwhelming desire to act in the face of adverse market moves.  Usually it is termed 'avoiding volatility' with the assumption that volatility is bad.  However, I found avoiding volatility really inhibits the ability to stay with the long-term trend.  The desire  to have close stops to preserve open trade equity has tremendous costs over decades.
• stocks - the current thinking is that stocks have outperformed everything else for 200 years.  But there is no one in the year 2000 that you can convince to jettison the belief that 200 years of performance will not cause stocks to grow to the sky.   What will be new to them is an inevitable bear market.
• On his system:
• time frame is long term, with the majority of profitable tardes lasting longer than 6 weeks, some lasting several months
• the system is neutral in markets until a signal to take a position is generated
• it is not uncommon for markets to stay neutral for months at a time, waiting for prices to reach a level that warrants a long or short position
• predefined levels of initial trade risk.  if a new trade turns unprofitable, risk parameters will force a liquidation when a preset level is reached.  A trade can last for as little as one day in this situation.
• The changing world is not going to hurt if you have principles designed to adapt.  So the markets Have changed.  But that's to be expected and it's good.

Chapter 10 - Trading Systems

• Risk management is to direct and control the possibility of loss
• Clarify trading / risk rules until they can be translated into computer code
• Include diversification and instrument selection into back testing
• Optimize parameters for back testing / stress testing
• Trading systems - how does the system determine:
• what market to buy / sell at any time? 
• currency, interest rates, stocks, metals, energy, crops, livestock
• how much of a market to buy or sell? 
• Position sizing < 5% assets / trade (initially 1-2%)
• Adjust positions based on current equity
• when to buy / sell?
• after a trend has begun.  the goal is to ride the trend
• technical indicators are a part of the system not the system.  And only about 10% (MACD, %R ect...)
• you will probably have more losses then gains because you don't know which trend will be the big winner.  You accumulate many small losses trying to find it.
• when you get out of a losing position?
•  before you get in the position, set your stops at 1 - 2% of equity
• when you get out of a winning position?
•  you can't spot reversals until they happen
• you get out after the trend peaks and is on the way down
• Trading system you design for one asset must be able to work in different asset classes.
• If you design it for T-bonds, when you apply to Euro, corn, gold or anything else it should also work reasonably well.
• Design parameters should also work well.  If CCI at 20 works very well, but 19 and 21 don't, it is not a robust model.
• You should be able to describe the strategy in relatively simple terms.  (ie: CCI anticipates lows and highs in the market based on the frequency of previous lows and highs)

Appendix - Trend following research

• Tested stocks 1983 to 2004, includes delisted issues, adjusted for dividends, volume / $15 min price filter, $250K minimum traded / day in 1983(inflation adjusted for future periods)
• Entry at all time high
• Exit at previous high  - 10*ATR(14 of previous high) [for volatile stocks could be 55%, non-volatile, could be 20%]
• 15% return, had some years where loss was much greater than stop loss because of a gap down or something else.  1987 was almost 5% of trades.  However, there were regular periods were avg $ gain / stop loss in $ was 60% of trades.
• Russell 3000 statistics
• 50% of all stocks significantly underperformed the index
• 25% of all stocks that have ever been in the index are responsible for ALL the gains
• Most of the big winners spent a disproportionate amount of time making multi-year highs (from $20 -> $200 happens in increments)

Analyst estimate growth rates or on average 100% too high
Usually they estimate 10% - 12%, however in reality they only see about 6%

Decision fatigue - http://www.nytimes.com/2011/08/21/magazine/do-you-suffer-from-decision-fatigue.html?_r=1&pagewanted=all

• You have a finite amount of energy to make decisions.  After you use it up, you will not have the willpower to carefully consider the choices to make a GOOD decision.  
• You will most likely choose the default option, the short term quick payoff option, or decide to eat Cinnabons after shopping all day.
• Ego depletion manifests itself not as one feeling but rather as a propensity to experience everything more intensely. When the brain’s regulatory powers weaken, frustrations seem more irritating than usual. Impulses to eat, drink, spend and say stupid things feel more powerful
• To restore your willpower you need to glucose for your brain.  A small shot of glucose will enable you to temporarily increase your will-power to make good decisions
• “Good decision making is not a trait of the person, in the sense that it’s always there,” Baumeister says. “It’s a state that fluctuates.” His studies show that people with the best self-control are the ones who structure their lives so as to conserve willpower. They don’t schedule endless back-to-back meetings. They avoid temptations like all-you-can-eat buffets, and they establish habits that eliminate the mental effort of making choices. Instead of deciding every morning whether or not to force themselves to exercise, they set up regular appointments to work out with a friend. Instead of counting on willpower to remain robust all day, they conserve it so that it’s available for emergencies and important decisions

Psychological Cycle

SP500 Recessions

Stock High Date	Stock High	Months (Recession Start)	Recession Start %	Months (High to Low)	Stock Low %	Months Recession End	Recession End %	Notes
1/1/1953	26.66	6.00	-8.4	8.00	-14.8	16.00	7.5	Post Korean War inflationary period Rapid decrease on defense spending High interest rates
7/15/1957	49.13	0.00	-4.5	3.00	-20.7	8.00	-13.1	Decrease in government spending Large production decline Increase in unemployment
8/3/1959	60.71	7.00	-7.1	14.00	-14.0	17.00	1.3	Steel strike: industrial production fall-off Decrease in foreign dependence on US goods High unemployment
12/2/1968	109.37	11.00	-17.4	17.00	-37.3	22.00	-24.4	High inflation Decline in government spending Oppressive interest rates and scarcity of credit
1/8/1973	121.74	9.00	-13.5	20.00	-49.9	25.00	-30.8	Oil Crisis:  A quadrupling of oil prices by OPEC Watergate scandal Vietnam War
10/1/1979	112.16	3.00	-2.0	5.00	-16.0	9.00	5.1	1979 energy crisis Tight monetary policy in the United States to control inflation
11/24/1980	141.96	7.00	-8.6	20.00	-28.0	23.00	0.1	1979 energy crisis Tight monetary policy in the United States to control inflation
7/7/1990	369.68	0.00	-0.6	3.00	-20.3	7.00	1.4	Industrial production and manufacturing trade sales decreased Savings and loan scandals
3/20/2000	1552.87	11.00	-20.6	17.00	-39.2	20.00	-27.9	The collase of the dot com bubble Sept 11 attacks Corporate accounting scandals
1/7/2002	1176.97	4.00	-9.3	9.00	-34.7	18.00	-17.0	The collapse of the dotcom bubble
10/11/2007	1576.09	6.00	-10.0	16.00	-57.7	19.00	-40.2	Liquidity shortfall in US banking system Collapse of housing market and their MBS
	Averages	5.82	-9.29	12.00	-30.23	16.73	-12.54

Avg Strategist Estimate from Bloomberg picture

When market is crashing and FED (FOMC Rate decision) is going to speak, wait until the day they speak to buy / sell.
Gold Silver Ratio crossing from below its 50 month lower standard deviation usually leads to a sell off

Support for Resistance: Technical Analysis and Intraday Exchange Rates - Carol Osler

• Definition
• Support is a prediction of where demand exists that can temporarily halt a decline and Resistance is a prediction of where excess supply exists that can temporarily halt an advance
• How to find
• Support is usually defined by a previous reaction low and resistance is usually defined by a previous peak.
• A major market move will be reverse by about 50% in the 1st correction
• Fibonacci series predict re-tracements of 38.2% and 61.8%
• On newsletters support / resistance levels
• Over 70% of support / resistance ended in 0, and 96% ended in 0 or 5
• On times to use support
• When volatility is lower (lowest 50% of samples taken), support / resistance has a greater ability to forecast bounces.  When volatility is higher (highest 50% of samples taken) there was no statistical significance at the 5% level.

Reminiscences of a Stock Operator - Edwin Leveree

Chapter 2

• There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.  
• No man can always have adequate reason for buying or selling stocks daily or sufficient knowledge to make his plan an intelligent play.

Chapter 5

• The average ticker hound goes wrong as much from over-specialization as anything else.  After all, the game of speculation isn't all mathematics or set rules.
• If a stock doesn't act right don't touch it; because being unable to tell precisely what is wrong, you cannot tell which way it is going.
• All a man needs to know to make money is to appraise conditions
• They say you never grow poor taking profits.  No, you don't.  But neither do you grow rich taking a four-point profit in a bull market.
• I made up my mind to be wise and play carefully, conservatively.  Everybody knew that the way to do that was to take profits and buy back your stocks on reactions.  And that is precisely what I did, or rather what I tried to do; for I often took profits and waited for a reaction that never came.  And I saw my stock go kiting up ten points more and I sitting there with my four-point profit safe in my conservative pocket. 
• That is when I discovered that suckers differ among themselves according  to the degree of experience.
• This semisucker is the type that thinks he has cut his wisdom teeth because he loves to buy on declines.  He waits for them.  In big bull markets the plain unadultered sucker buys blindly because he hopes blindly.  He makes money until one of the healthy reactions takes it away from him at one fell swoop.  But the Careful Mike sucker does what I did when I thought I was playing the game intelligently according to the intelligence of others.
• The big money was not in the individual fluctuation but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend
• After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:  It was never my thinking that made the big money for me /  It was always the sitting.  My sitting tight!  It is not trick at all to be right on the market.  You always find lots of early bulls in bull markets and early bears in bear markets.  I've known many men who were right at exactly the right time time, and began buying or selling stocks when prices were at the very level which should show the greatest profit.  And their experience invariably matched mine yet they made no real money out of it.  
• Men who can both be right and sit tight are uncommon.  I found it one of the hardest things to learn.  It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.
• The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do.  The market does not beat them.  They beat themselves because though they have brains they cannot sit tight.
• Disregarding the big swing and trying to jump in and out was fatal to me.  Nobody can catch all the fluctuations.  In a bull market your game is to buy and hold until you believe that hte bull market is near its end.  
• To do this you must study general conditions and not tips or special factors affecting individual stocks.  Then get out of all your stocks!  Wait until you see or until you think you see the turn of the market; the beginning of reversal of general conditions.

Chapter 7

• You can't expect a market to absorb 50k shares of one stock as easily as it does 100.  He will have to wait until he has a market there to take it.  There comes the time when he thinks the requisite buying power is there.  When that opportunity comes he must seize it.  He has to sell when he can, not when he wants to.  To learn the time to sell , he has to watch and test.
• But after the initial transaction, don't make a second unless the first shows you a profit.  Wait and watch.  That is where your tape reading comes in to enable you to decide as to the proper time for beginning.  It took me years to realize the importance of this.
• Suppose a man's line is 500 shares of stock.  I say that he ought not to buy it all at once.  Suppose he buys his first hundred, and that promptly shows him  a loss.  He ought to see at once that he is in wrong; at least temporarily.

Chapter 8

• When I am long stocks it is because my reading of conditions has made me bullish.  But you find many people, reputed to be intelligent, who are bullish because they have stocks.  I do not allow my pre-possessions or my prepossessions either to do any thinking for me.  That is why i repeat that I never argue with the tape.  To be angry at the market because it unexpectedly or even illogically goes against you is like getting made at your lungs because you have pneumonia.
• summary of shorting into a bear market
• he was the first man who could see a big pile of gold, so he started running towards it with a shovel and wagon.  then a big gust of wind came and knocked him over and he lost his shovel and wagon.  he got up dusted himself and kept on running towards that big pile of gold.  he tripped and lost his shirt, but got up and kept on running until he couldn't run anymore.  then he realized he should have been walking to that big pile of gold, not running.
• every time he shorted, the market would rally hard until he had lost almost all his money.  he should have waited until the conditions were exactly right for him to place his short.  
• When the market was ready to weaken:  This came when he saw a printed advertisement for some stock in a newspaper.  It was for an IPO for some stock just ahead of two other IPO issues which had been announced earlier.  The later issue was trying to beat the other two railroad IPO to whatever little money was there floating around Wall Street. This is why Cramer says pay attention to the IPO market.

Chapter 9

• When stocks cross the 100, 200, 300...ect.. threshold, they tend to run up.  However, during this bear market, when the tape suggested a stock that had just crossed 300, when to about 302 and started falling, when it should have gone up to 310.  He sold the shares at a small loss, and began shorting lots of other stocks.
• Bear market rallies 
• Call money rates will keep going higher and higher (rates banks lend to brokers)
• When the bottom comes, there will need to be some injection of liquidity.  In his example it was provided by bank reserves by JP Morgan, ect.  There was also no bids for particular stocks that usually are bellwethers for the economy,

Chapter 10

• In a narrow market, when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be up or down.  The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.
• Pat Hearne system - professional gamblers don't chase big wins.  they want highly probable moderate wins.  
• Pat's system was based on buying 100 shares at a particular price, if the stock moved up 1%, he'd buy 100 more shares and set a stop at -1% for 200 shares.  If it moved up another 1% he'd buy 100 more shares and reset his stop at -1% for 300 shares.
• The successful trader has to fight their two depp-seatd instincts.  He has to reverse what you might call his natural impulse.  Instead of hoping he must fear; instead of fearing he must hope.  He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. 
• The conclusion that I have reached after nearly their years of constant trading, both on a shoestring and with millions of dollars is this: A man may beat a stock or a group at a certain time, but no man living can beat the stock market!  A man may beat a horse race, but he cannot beat horse racing.

Chapter 12

• Percy Thomas - he was a brilliant salesman who sold some books to Livingston. he had a 'magnetic' personality and was very intelligent
• They became friends and would talk stocks / commodities.  One day Thomas came up with a bullish pitch for cotton and Livingston had a small bearish position.  He began to accept Thomas's facts and figures and began to feel he had been basing his previous position on misinformation.
• Once he had covered, he had to go long cotton because he had become convinced.
• More than once I was warned against placing too much reliance on Percy Thomas' brilliant analyses.  It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when expressed by a brilliant mind.

Chapter 17

• I have sometimes bought a stock during an undoubted bull market and found out that other stocks in the same group were not acting bullishly and I have sold out my stock.  Why?  Experience tells me that it is not wise to buck against what I may call the manifest group-tendency.  I cannot expect to play certainties only.  I must recon probabilities and anticipate them.

• Experiences had taught me to beware of buying a stock that refuses to follow the group-leader

Chapter 21 - Manipulating Imperial Steel

•  He had options at $100 and stock to go from $70 to $100.
• There wasn't much of a float and very low volume, but the the stock was undervalued at $70.
• He created demand by buying up all the stock at $70 and a little higher to attracted lots of traders who consequently took it higher.
• He sold most of the shares he had to the traders and they eventually stopped buying once they noticed his demand had stopped.  They subsequently sold the stock at which he bought at a point higher than $70.
• He did this until he marked up the stock to $100, and on balance only accumulated about 7000 shares.  For every share he bought, he expected the public to buy at least 1 share as well on balance.  But the big selling of your accumulated position is down on the way down.

Chapter 24

• The public always wants to be told.  That is what makes tip-giving and tip-taking universal practices.
• Brokers should not dwell too strongly on actual conditions because the course of the market is always 6 to 9 months ahead of actual conditoins 
• Today's earnings do not justify brokers in advising their customers to buy stock sunless there is some assurance that 6 to 9 months from today the business outlook will warrant the belief that the same rate of earning will be maintained. 
• The trader must look far ahead.  If on looking that far ahead you can see, reasonably clearly, that conditions are developing which will change the present actual power, the argument about stocks being cheap today will disappear.
• There is a law that punishes whoever originate or circulates rumors calculated to affect adversely the credit or business of individuals or corporations, that tend to depress the values of securities by influencing the public to sell.  Originally the chief intention may have been to reduce the danger of panic by punishing anyone who doubted aloud the solvency of banks in times of stress.  But it serves also to protect the public against selling stocks below their real value.  It punishes the dissemination of bearish items of that nature. 
• The nature of the game as it is played is such that the public should realize that the truth cannot be told by the few who know.

Nassim Nicholas Taleb - Fooled by Randomness

• Just because something hasn't happened in the past, doesn't mean it won't occur in the future.
• For this reason he buys options on unlikely events because their is no accurate model for determining its risk, so for the most part it will be underpriced
• Jamie Dimon of JPM said the crash was a 25 sigma event that means it shouldn't happen in millions of universes over billions of years.  Yet over the last 100 years, we have witnessed several of these 'unlikely' events.
• LTCM was based on this belief as well, took less than 5 years for a different model to break.  
• LTCM sold everything US and bought everything that yielded higher.
• CDS markets swamped the CDO markets leading to many financial institutions going bankrupt.
• Follow the debt to get the answer of who will get screwed.

Jim Cramer - Confession of a street addict

Chapter 3 - Money Man

• First time he started trading, he was down 9.9%, he had  a provision that if he went down 10% his funds would be returned back to his investors.  A legendary trader named Lattanzio told him to sell everything, start over, and learn to trade from Karen
• Karen (aka trading goddess) taught him difference between hedge funds and portfolio manager stuff.  Most PM talk about underweight / overweight sectors, but that doesn't matter in the hedge fund world.
• Analysts at were idiots and they can't make you money.  They know nothing.
• Never take a position unless you knew something that no one else knew, a legal edge.
• She tried to anticipate moves of analysts before they were made, and placing big bets on the direction that analysts were going to go.  That way you never owned anything idly, and always had an exit strategy.
• Karen's strategy
• make dozens of calls to brokers and analysts every day to ask them what they thought of stocks and look for situations where the analysts were growing more positive, and then you fed them positive info that you got from others.  Tell them someone else was going to upgrade.  If you caught them on the phone before they had told their sales forces that their earnings estimates were too high or low, you might have something.  You didn't move until you were fairly sure that you were about to catch the upgrade or downgrade
• The analyst game was a game of sponsorship because analysts like to get behind stocks and bull them.  You have to get in on the ground floor when they start their sponsorship campaign.
• You want to buy something and flip it into the sponsorship => that is the only sure way of making money
• Trading 'flow'
• When big accounts come in adn buy or sell stocks, they move the stocks in the direction of their trading.  If you sold two million shares of a stock it would move from $26 to $24.  Once the selling is finishe,d the stock would lift as the supply dries up.  The goal is to buy the lsat 200k shares and tarde out of it into other buyers who want ot take advantage of the decline.  
• If you do enough commission business that you know who was executing the portion of a big sell order, and also know whether any analyst might be on the verge of recommending that stock, by keeping track of all the buy recommendations at every firm.
• This is essentially a day trading strategy, however she also needed to know if the company was more positive in its outlook than the analyst network, then they could make a fortune anticipating upgrades and downgrades.
• Signs of 87 crash
• Many stocks were giving up gains they had put on the last 2 or 3 years.  Analyst recommendations weren't working.  Sellers frequently overwhelmed buyers by the end of the day, with the market ending considerably lower than it began.  
• Market went from 2800 to 2400 then 2200, Karen grew increasingly adamant that they market would crash, and they went to 100% cash.  The next monday the market crashed 500 points.

Chapter 4 - Building a Hedge Fund

• As Dow dropped from 3100 to 2300, Cramer grew very negative that the country wouldn't pull out of its tailspin.  I thought we had a recession and inflation problem, a banking system that was teetering, and a budget deficit that was mushrooming out of control.  When you overlay Iraq's destabilization of the world economy on top of that you had a market that might take out the lows of the 1987 crash
• Karen didn't care about theoretical underpinnings of the market, just about what made people buy and sell stocks.  Karen knew that big money was human.  It was a beat that if let loose by events would buy everything in sight.  They beat didn't care where stock shad been or how high they moved; it just wanted to buy.
• She said the US would win the war and that would change everything, despite the recession, unemployment, and teetering banking system.  All the technical charts were also ignored, despite them screaming downturn.
• Within a few weeks consumers came back with a vengence, feeling better about themselves.  Oil prices plummeted and stayed low.  The banks were able to use the Fed's lower interest rates to rebuild their balance sheets.
• Cramer and Jeff B's style
• make money every single hour.  also develop long-term capital gains
• style consists of figuring out what would be hot, and what would be the next big buzz.  
• They became merchants of the buzz, getting long stocks and then schmoozing with analysts about we saw and hear that was positive. Or short stocks and talk to analysts about the negatives.
• Analysts existed to promote stocks
• Cramer would read annual reports everyday and built up a network of analysts and CEOs he could talk with.
• They discovered the right CEOs would pull their stocks out of tailspins promptly.  They would zero in on the problems Cramer identified.  The CEOs who followed their stocks cared about their shareholders and took their stock personally.

Chapter 9 - the man with 2 careers

• I told him that I was buying everything in sight...I told him when I heard people advocating panic, as Biggs did the night before, or Grant did moments ago, I had to buy the panic because no one ever made a dime panicking.
• We put $200M to work in that first half hour, buying 25k shares every half point down of all our favorite tech names right into the weakness.  At 10am, when it started lifting, I jumped on my desk and screamed at everyone in the office to start buying something...Don't work about cash, Don't worry about margin.  I want stock, I want it now.
• By 2pm, I was able to trim back our holdings to where I was comfortable that we weren't borrowing too much money, and by 3pm I was off margin altogether.  We pulled in about 6% that day.

 Chapter 14 - Crisis part I

• We put our hundres of millions to work almost immediately, in the 1st hour of the first trading day of the new year.  We just piled right in at one level, rather than buying, 10k shares every half point, on the way down and legging into the positions ofver many days, as we would have when we were less certain of ourselves.
• That was hubris, we'd been so right for so long that we thought we knew the right levels instinctively
• Every few years, there would be some market that seemed impenetrable to all but a few funds that always thought they knew better.  One year it might be Mexico,  and Mexican telcos were hot, or Mexican banks had to be owned.  You would rush in, just when banks were ready w/ inflated stocks and bond offering that raise larges sums of money.  The Mexican 'blue chips' would then peak and crash.
• I had seen Brazilian markets be the 'only place to be' during one spring, the Argentine markets the 'net big thing' a few months after Brazil had been annihilated.
• Occasionally, the rush would be on to the banks in Singapore, or construction companies in Bangkok or casino and hotel concerns in Malaysia.
• In 1998, Russia had drawn everyone.  It would have been fine if LTCM had not because it was the largest hedge fund in the world.  They had attracted so much money because when they pitched you, it did so with a tone that made you feel that the moneymaking was automatic and riskless.
• I always figured that in the private these guys knew the truth: who the heck knows what your return is going to be in this game?  Luck trumped skill so often that unless you were humble about it and realized that things could go wrong, you were simply making a sales pitch for a vacuum cleaner that never broke down.
• When one firm commanded the respect of Wall Street, the brokers who entered its orders would tag along for the ride.  They all talk about what the big money is doing, and when the big money doubles down, by borrowing money from the brokers, the traders at the brokerage house do the trades themselves and tell every other client to do the trades too. 
• LTCM had gone long every piece of paper in the universe, from Mexican day put bonds to Russian government bonds, and shorted against US government bonds as a hedge. 
• One Russia started collapsing, all the traders started betting against LTCM.  LTCM had shopped themselves to all the brokers, so everyone knew their positions.  Collectively, this group began buying long-term paper that drove yields to absurd lows that created an inverted yield curve.
• An inverted yield curve makes S&Ls lose money.  Cramer was long many illiquid small S&Ls that would get killed in this environment because S&L borrow from depositors short term and lend money long term.  With short term rates higher than long term rates, there would be many losses.  Naturally everyone started dumping these stocks.
• With the final collapse of LTCM in Sept, Cramer started buying the dip.  The first day of October the Dow dropped 200 points, mostly in the financials.  They lost $30M in one day.  Hayes Modem dropped from $4 to $2 on bankruptcy rumors.  Not a single 1 of the 100 positions they had went up.

Chapter 15 - Crisis in 1998, Part II

• Cramer had opened his fund for redemptions because Eliot Spitzer needed money.  His fund was down almost 25%, and the market was doing poorly, so many people would be interested in the redemptions.  It totaled almost 1/3 of his fund.
• Cramer had to defend his positions because everyone knows from the quarterly report to the SEC what their biggest holdings are.  Just as the 'sharks' drove out LTCM, they would also kill Cramer's fund..
• He bought lots of call options well above the price of the stocks to make short sellers think he knew something good would happen short term.
• After first 5 days of October, they had lost $50M, they were down $100M for the year
• Cramer called up his S&Ls and told them if they didn't institute buy backs for their shares, he would dump all his holding in the market to drive the stock price down.  This would lead them to be taken over by other banks, so their jobs might be on the line.

Chapter 16 - Crisis in 1998, The Trading Goddess Returns

• On Oct 8, at 12:18PM Cramer lost it and capitualted.  He wrote an article entitled 'Get Out Now.'
• Nikkei was down 5.8%, Germany was down 4.5%, FTSE was down 4.1% despite a rate cut  by the BOE that morning.  The S&P futures were down 24 points the 'down limit' (fallen as far as they could go legally), the most he had ever seen.
• Prominent technicians and fundamental analysts were lowering their previous estimates saying we had much lower to go
• The S&P oscillator was very negative.  Decliners outpaced advancers by a 9 to 1 margin
• For months I had been arguing that this market had to bottom somewhere, but these declines, this news, these pressures, the dollar crash, the Japan reversal, Germany, no rally in Britain, the drug stocks rolling over, Abby Jo going negative, Acampora giving up, the impeachment, the goddamned redemptions, no hep from the Fed, it was all unraveling right before my eyes.  And here's my wife wanting to buy, acting as if nothing's going wrong, acting as if it just another day and there are bargains everywhere.
• That day there was a rumor about a possible rare between-meetings conference call by Greenspan.  The market lifted by 20 points on a possible Fed bailout.  At 12:34PM, the Fed was going to act 'relatively swiftly' because 'wealth destruciton was so noticeable'.  The Fed would provide the liquidity necessary to stop any decline.  The would cut rates by as much as half a point, and this would change everything.
• At this time Cramer's article to get out of the market was just published on his website, right when he found out that the bottom would not get any lower
•  The market ended up rallying the rest of the year

Chapter 17 - Inside the IPO

• Dotcom paper overwhelmed supply just as the Fed wanted to relieve the nation's credit crunch.  There was so much cash around by November of 1998, so furiously was the Fed printing money and lowering rates, that it began to seep into the private equity market.
• If alot of people were jazzed about an IPO story, they would try to get as much of the underwriting as possible hoping it would be hot.  They would flip it, taking delivery of the stock for about 30 seconds an dumping at the much higher price that it opened.  Usually it was hopeless overvalued or a real stinker that nobody wanted anyways.
• Marketwatch offered 2.75M shares at $17, it rose to $130 the first day..  theglobe.com opened $90 above where it was supposed to.  Two dotcom's doing this meant a trend was in place.  Marketwatch went up so much because of the tremendous advertising vehicle and terrific placement w/ AOL and Yahoo, but they had no subscription revenue.
• When theStreet.com went public, it was initially priced between $9 - $11.  However, because of who was controlling the IPO process, the later a stock went public the more 'demand' would be there and the stock would open even higher.  The way the made this demand was by batching market orders together that had been opened during the day and then opening the stock late.

 Chapter 21 - Repositioning Cramer Berkowitz

• Needed to figure out a metric to grade the dotcom stocks by.  Earnings didn't matter, revenues didn't matter, valuations didn't matter.  We needed to measure heat, what was hot and what was not.  We needed to measure fashion, to try to figure out what would be popular with the buyers, not what we liked ourselves. 
• Part of our great strenght at hte compnay was the recognition that investing is almost all psychology and very little substance, despite what the multimillion dollar research staffs of Wall Street.
• I knew from my sell-side days that you could spin any story, fundamental, or otherwise to justify any investment
• It seemed that each year we were paying more and more for the same level of earnings
• I wasn't willing to short stocks that we all agreed were overvalued because shorting on overvaluation is a chowheader's game.  There is always some fund manager out there who can cliam a stock is undervalued on 2010 earnings and will buy it up seemingly forever or until his funds runs out of money
• MicroStrategy was the dotcom darling stocks, just as IBM, Intel, and MSFT were the tech darlings.  It was a company with real revenues, earnings, management and prospects.  Until all of those prospects were found to be strictly virtual in nature and nothing was real.  It made up revenues and earnings and fooled everyone.
• Companies have a clear idea in good times what they are going to earn.  The companies played the earnings beat rate game.
• The realization that it was at last over came hard, we had been making so much money on the long side we were extremely unwilling to switch direction.
• When April came, the Nasdaq was still at 4500, but Todd suggested we were on the verge of a collapse of titanic proportions.
• If you took out the props, the tight supply, and the better-than-expected ruse, and you loosened supply and disappointed in earnings, I argued that there was no end to where your stock could fall. => we sold almost everything tech by end of April.
• What a contrast Oct 8, 1998 was when I was so wrongly worried that a bear market loomed.  Then earnings were set to boom; now they looked ready to collapse.  The Net was imploding
• After the dead cat bounce we decided we were done with committing a lot of capital to stocks as long as they remained as precarious a they had become.  Now that the market had finally seen it spirit broken, we not longer feared the short side.
• 
  

S&P Futures Down Limit - max that the futures can go download before market opens (about 6%)
Tick => -1000 means extreme selling pressure
NYSE Advance Decline Ratio => 9:1 down to up is considered an extreme. MA(5) $NYDEC/$NADV > 2 time to buy?

Chapter 8 on "Spotting Bottoms in Stocks" is one of the best sections of Jim Cramer's Real Money (review). The chapter is filled with the type of insights you would expect to get from someone with 25 years of experience in the market.
The chapter does discuss spotting bottoms in individual stocks, but Jim spends most of his time on indicators he uses to spot market bottoms. These indicators (collected into three categories) have been shared by all four of the last big market bottoms (1987, 1990, 1998, and the "double bottom" in 2002-2003).
Note: All quotes are from Jim Cramer's Real Money unless otherwise noted. I've cited which page the quote comes from so readers with the book can follow along at home.

1. Market Sentiment

The first group is a collection of the following indicators. The theme here is that bearish sentiment implies that money has already been pulled out of the market and is itching to be reinvested.

• "The pain makes the front page of the New York Times" (page 212).
  During a downturn, there will tons of market pundits (and bloggers) writing about how terrible things are. Only when the news hits the front page of the major papers will we consider the market officially bottomed-out.
• The Investors Intelligence survey of money managers.
  You can get these numbers, which surveys fund managers and compares the % of bulls vs. bears, in Investor's Business Daily every Thursday, or Thursday nights at Market Harmonics. Cramer is watching for a majority of bears and less than 40% bulls. The idea is that people bearish about the market have already pulled their money out and thus can't pull the market lower. For more of this kind of discussion, check out the blog Trader's Narrative, which has an interesting analysis of the American Association of Individual Investors (AAII) bearish sentiment numbers.
• Mutual fund withdrawals.
  Cramer is looking for "consistent, repeated outflows of several of several months" (page 215).
• The Volatility Index (VIX).
  Is the market in a panic? Cramer is looking for readings above 40 in the VIX.
  VIX at Investopedia.
• Oscillators.
  There are a lot of oscillators out there. In general, they are used to indicate when a stock (or market) is overbought or oversold. Jim swears by Helene Meisler's oscillators over at RealMoney.com, but you're going to have to pay to see them. Phil Town uses the Fast Stochastics. While Bill Cara is a big fan of the Relative Strength Index (RSI).Once again, Investopedia is a great place to start for Getting to Know Oscillators.

2. Capitulation

This next set of indicators is all about finding a "crescendo" in the market, that last big sell off before the bulls move back into the game.

• "A dramatic imbalance in the amount of new highs to new lows".
  We're looking for a large number of new lows and not very many new highs. Cramer looks for "between four hundred and seven hundred new lows and only a handful of new highs" (page 217).
• Forced margin selling.
  Investors trading on margin (borrowing money from their broker) need a certain amount of money in their accounts to "maintain" their margin. In down-trending markets, these investors are going to lose so much money that their brokers will force them to sell their positions. Cramer depicts a scenario where the brokers try to get some more money out of the traders during the morning before laying down the hammer and forcing a sale of the trader's positions sometime between 1:30 and 2:30 in the afternoon. For this reason, Cramer watches for a spike in sell offs between 1:30 and 2:30PM. When the spikes stop coming for a few days, the margin sellers are shaken out and the market bottom is near. I found a surprising source in the SEC, while looking into this:http://www.sec.gov/investor/pubs/margin.htm.
• "A dramatic spike in volume on the exchanges" (page 219).
  Cramer gives an anecdote to explain this one. I won't re-tell it. So you'll have to pick up the book (the book!). The lesson: "Let this serve as a reminder to you not to sell into the big volume after a long decline. That's the time to buy, not sell" (page 220).
• Flow of underwriting.
  "You don't commit capital until the most recent underwritings have worked" (page 220). Cramer describes a cycle of IPO and underwriting activity. It goes something like this: IPO stock prices go up for no reason » IPO stocks are pretty level after the offering » IPO stocks are trashed after the offering » (again) IPO stocks are pretty level after the offering. You want to buy into the market when this last situation is prevalent.
• Order imbalances.
  "Repeated order imbalances sans news are sure signs that the capitulation has reached absurd levels and you have to make your move to buy" (page 222). You're only going to see this message if you're on the trading floor, but maybe someone will report/blog about it if they started showing up more often. Order imbalances at Investopedia.

3. Catalyst

Jim's stance is that all market bottoms are associated with a real world event. This catalyst brings on an "exquisite moment", where "you have to buy because the opportunity is so great" (page 222). Previous catalysts were surprise rate cuts by the Fed (1998) and the start of the Iraq war (2003). Amazon's poor earnings probably doesn't count. Israel waging war on Lebanon/Hezbollah is probably not going to cut it either, but further US involvement could lead to a catalyst. You can't necessarily predict the catalyst that will surge us into the next bull market, but you can try to be ready for it.
BONUS - How to tell if you've missed the bottom: Jim suggests watching the Bank Index (BKX), which has some typical behavior during, or just after, a big market bottom. "If you see a 10 percent move up in the Bank Index you are already well into the upswing, and it might pay to wait for a couple of profit-taking days to transpire before you commit capital" (page 224). Jim doesn't give a time frame for the jump. Here's a chart of BKX from Yahoo. There was a 10% jump last October, which did correspond with a large rally. Presumably, we'll see another jump at or after a market bottom.
We may not be near the market bottom right now, but a lot of people seem to think we're on the way. Keep these indicators in mind if things don't turn around. You'll want to be able to spot the bottom when it comes.