How to piggyback on institutional buying:

Phase One  - apply my “Permission to Buy” filters to the broad market indexes.  If I get a green light there continue;
Phase Two - ascertain which of the nine S&P sectors is outperforming the market.  
Phase Three  - focus on the top industries that comprise the leading sector.  Once I have identified the top two industries, 
Phase Four -  identify the individual stocks that are the leaders within those industries.  These are the equities that institutional money managers have identified as “great ideas” and where they are committing their investable dollars.

You Can Be A Stock Market Genius - Joel Greenblat
Chp 1.

• Hunt For Bargains in places people are not looking.  Lower liquidity, smaller cap stocks
• Only invest in those situations where you are knowledgeable and confident, and only those situations. ( similar to Buffett quote of 'swing at only one of twenty pitches').  Stick to your ping-pong 'net serves'
• Look at downside risk rather than upside potential.  Upside will take care of itself, but the way to create an attractive risk/reward situation is to limit downside risk severely by investing in situations that have a large margin of safety.
• Relying on objective measures like a company's book value and historical earnings to determine value may help eliminate some of the emotional and institutional biases likely to be found in more future-based valuation methods.  Buffett adds to this that investing in fundamentally good businesses, as opposed to stocks priced cheaply in statistical terms is probably why Buffett has become Graham's most successful disciple.
• Buffett focuses on well-managed companies, that have a strong franchise, brand name, or market niche.
• His investments are concentrated in businesses he understands well and possess attractive underlying economic (meaning they generate lots of cash) and competitive characteristics.
• Finding these stocks is still a hard task, because many things can go wrong and Peter Lynch of Buffett are exceptionally good at making tough calls
• Corporate events offer another area where you can make money:
• Spinoffs, mergers, restructurings, rights offerings, bankruptcies, liquidations, asset sales, distributions

Ch 2.

• If pre-select investment areas that put you ahead of the game before you start, the most important work is already done.  You'll be picking and choosing from an already outstanding menu, and your choices are less likely to result in indigestion
• Spinoffs:
• Stocks of spinoff companies, and shares of the parent companies significantly and consistently outperform market averages
• Spinoffs in SP500 companies often will be subject to a huge amount of indiscriminate selling because the funds that own the new companies are too large to be concerned with the new smaller company
• The largest stock gains occurred in the 2nd year after the spinoff
• Reasons to own a spinoff:
1. Institutions don't want it (and the reasons don't involve investment merits)
• Host Mariott would be spun off with huge debt and unpopular real-estate assets(hotel market was terrible at the time).  Because the situation looked terrible, most people would be discouraged from additional research on the new stock
• Host Mariott would be 15% of the 2B market cap of its parent company, which would make it too small for most of the original shareholders to want to own
2. Insiders want it
• Are the managers of the new spinoff incentivized along the same lines as shareholders
• Will they receive a large part of their potential compensation in stock, restricted stock, or options?  Is there a plan for them to acquire more?  When all public documents have been filed, look in this area first
• Host Mariott new CEO would be Stephen Bollenbach, who was the architect of the spinoff and had successfully helped Donald Trump turn around his failng hotel / gambling businesses
3. A previously Hidden investment opportunity is created or revealed
• Typically a great business or statistically cheap stock is uncovered as a result of of the spinoff.  In the Host case, tremendous leverage was the result.
• The tremendous leverage would magnify returns on equity if it turned out to be more attractive than it initially appeared.
• Digging for research involves reading multi-hundred page corporate documents and mountains of SEC filings, like Form 10
1. Identify where you think you will find opportunity in the documents
2. After you've identified a spot that has opportunity, then start digging
3. It takes between 6 - 9 months after the initial disclosure of a spinoff to occur.  In the Host case it took over 1 year
• Form 10
• Look through table of contents to identify areas you actually want to review
• Pro forma statements - show what the company would be making if it was a separate entity
• Economic interests of insiders
• 'Business of the company' - Strattec 10F 'based upon current product commitments, the company believes ford will become its second-largest customer during fiscal 1996'  The companies statements did not include any business related to Ford.  Since the current 2nd largest customer did about 16% of business, Ford would be responsible for about 16% more.
• A spinoff that involves a parent company divesting a highly regulated industry may provide a prelude to a takeover because it makes the target a more attractive takeover
• Partial Spinoff
• Only sell a partial amount of a division
• If shares are distributed to current parent company shareholders, it is generally better than an public offering
• By knowing the parent company market cap, and after the spinoff is complete, the child company market cap, you can figure out what the rest of the businesses in the parent company are worth
• After analyzing the parent company there may be opportunities to purchase the existing business cheaply.  
• Sears needed to spinoff AllState and Dean Witter.  After their spinoff, Sears $27B in sales was worth only $1.5B in market cap
• Right's offering
• Gives you the right to buy shares in a newly spun off company, usually when the parent company needs additional capital
• Look for oversubscription privileges and the motives of the insiders
• 
  

Ch 4. - Risk Arbitrage and Merger securities

• Generally involves buying stock after a deal is announced
• Company A announces it will buy B (currently at $25) for $40.  Company B then jumps to $38.
• Risks are the deal doesn't not complete and the stock price returns to $25, or lower or that the deal takes a very long time to complete (typically deals close in 1 to 18 months)
• This may happen because of regulatory issues, financing, extraordinary change in a company's business, discoveries during the due diligence process, or management personality problems
• Ex: HBJ goes to buy Cypress Garden
• HBJ @ 51.87, CG at $4.50, it then moves to $7.50
• The deal is .16 shares of HBJ for CG which can be locked in at $8.30 by shorting HBJ and buying CG in the appropriate amounts
• The deal makes sense from a business perspective
• No financing since it's all stock
• Very small so there are no regulatory issues
• The only vote required was by CG shareholders
• Author believes competition is too high now in Risk Arb.  Spreads are tighter and too many things need to go right.  A bad streak of luck or macro event will destroy a portfolio.
• Merger Securities are actually very lucrative
• Instead of stock or cash, bonds, preferred stock, warrants, and rights are used as sweeteners
• As a general rule, nobody wants these securities and they typically are undervalued as a result
• Ex: Super Rite Foods
• Management wanted to take the company private but they ended up getting a competing bid, so they had to include some other things
• The winning bid ended being:
•  $25.25 in cash, 
• $2 face-amount new issued preferred stock yielding 15% annually(this was a small amount and would probably be disregarded by the current investors)
• warrants to buy 10% interest in the new company (warrant is right to buy stock at a specified price) set at $0. 1 warrant for every 21.44 shares which was worth between 25c and 50c / share. (since this was also a tiny amount it would be disregarded as well).  They ended up trading for $6
• According to the projections, in 3 years the new entity would be earning $5 / share in free cash flow.  So a modest projection would be each new share being worth $50.
• Super Rite traded at $25.5 to $26 before the merger closed, which would equate to 75c for the preferred stock and warrants, but it might return to $17 if the deal collapsed.  In the end, buying preferred stock and warrants in the open market seemed like the best idea
• Warrants were worth $40 in 2 years, and preferred stock, which sold for 55% of face value went up to 100%
• Viacom / Paramount
• Also many merger securities
• There were CVR (essentially put option w/ capped payout) which guaranteed $48 selling price if Viacom stock > $25.  
• 5 Year warrants at $70, Viacom current at $32.  Entitled the holder to 1 share of Viacom stock for $70 cash or $70 face-value worth of subordinated debt.  This debt was trading at 60% of face value = $42.  So, the 5 year warrant could be purchased and then be paid with the subordinated debt, which means you could buy a option at $42 good for 5 years.

Ch. 5 - Bankruptcy

• Common stock is almost always a terrible investment in bankrupt companies
• Bonds
• All types of bonds
• Bank Debt
• Trade claims - claims from the companies suppliers who didn't get paid for goods, materials, or services provided before the bankruptcy
• Typically these holders get securities in the new company after it emerges from bankruptcy, bonds or common stock
• The opportunity comes from analyzing the new common stock by reading the disclosure statement.  This filing is made with the bankruptcy court and can be obtained directly from the company or SEC filing 'registration statement'.  Disclosure statement is better because it provides management's future projections and past complications.
• A study showed that these new distributed stocks outperformed the market by 20% during the 1st 200 days of trading.  However, it was the stocks with the lowest market value that performed the best
• Only buy good businesses - strong market niche, brand name, franchise or industry position
• Buy companies that were overleveraged due to a takeover or LBO
• Product liability lawsuits from a discontinued or isolated product line
• Slumming - cheap compared to similar companies because analyst dont' cover it, nobody knows about it, or bad stigma
• Ex: Charter Medical still pretty leveraged after bankruptcy but management were trying new things to make up for lost revenue.  It ended up working and stock tripled, but then didn't go any higher.
• Knowing when to sell:
• Trade the bad ones, invest in the good ones.  
• If you bought because of a corporate event, once it is widely known, it is time to sell.  
• If the business is still difficult, but lots of analysts start speaking positively of the stock, sell it.
• Corporate Restructuring: Selling or shutting an entire division that is materially relevant to the entire company
• Companies close or sell major division to stanch losses, pay off debt, or focus on more promising business lines
• Often times, the division being sold was masking the company's other businesses.
• Two ways to profit, 1. after it is announced, often there is time to see what will happen.  2. Finding a company ripe for restructering

Ch 6

• Recapitalization
• company repurchases a large portion of common stock in exchange for cash and/or securities
• The left over stock is called a stub stock and many have returned 5x to 10x
• Ex: $36 dollar stock, company recaps by giving $30 in bonds to common stock holders that carry 10% interest.  Earnings before were $3.  Pre-tax earnings were $5.  After recap, earnings are still $5, but $3 is paid out as interest.  Remaining $2 is taxed at 40% = .80c and remaining $1.20 is distributed to shareholders.  Stock was trading at P/E of 12 pre recap, and will trade at about 8 after.
• Assumed growth of 20% before recap.  Growth of 20% in eps = $6.  EPS = $1.80 * P/E 8 = $14 from about $9.60
• Recaps rarely happen now, they were more popular in the 80s.  However, you can emulate the leverage by buying LEAPS and warrants
• Options market tends to be undervalued during these special situation events.
• During a spinoff, a call option can be split into 1 share of each of the two companies.  Since after a spinoff shares generally rise, this is not always taken into account with options models.

Ch 7 

• Look in the WSJ, IBD, Outsanding Investors Digest(LEAPS candidates), Turnaround LEtter(orphan stocks from bankruptcy and restructuring stocks), value oriented funds (look up their picks that are related to special situations)
• SEC filings for the most interesting stocks from above: 10K, 10Q, Schedule 14A (executive stock ownership, sock options, overall compensation)
• Extraordinary Events filings:
• 8K - acquisition, asset sale, bankruptcy or change in control
• S1, S2, S3, S4 - S1 -> S3 are registration statements for companies issuing new securities, S4 is for securities being distributed through merger or bother business combinations, exchange offer, recapitalization, or restructuring.  S4 sometimes combined w/ a proxy statement where shareholder vote is required
• Form 10 - spinoff distribution
• Form 13D - owner of 5% or more must disclose holdings and their intentions regarding the stake is for investment purposes.  If the purpose is for exerting control or influence, this filing may be a sign of an extraordinary corporate change
• 13G is if institutional holder only is holding for investment purposes
• Schedule 14D-1 - tender offer statement.  provides useful background info on a proposed acquisition.  You can get these from the information agent listed on the ad announcing the offer.
• Schedule 13E-3, 13E-4 -E-3 is a going private transaction, E-4 is the tender offer statement when a company is buying back its own shares and disclosures are more extensive than usual, so read these carefully.

3/31/1960 - 12/31/2011
Y/Y% Change in Real GDP

Y/Y % Change in Real GDP	SP500 Annualized Gain
> 6.0	-4.60%
.5 - 6.0	7%
< 0.5	10.50%

Liz Ann Sonders Analysis of when to buy stocks vs GDP.  

Leading Indicators are:

Avg Workweek

Initial Unemployment Claims

ISM New Orders Index

New Orders: Non-defense Capital goods excl aircraft

Leading Credit Index

Interest Rate Spread

Avg Consumer Expectations for Business & Economic Conditions

IV of VIX goes from > 100% to < 100% means safe to buy?

Don't mix up facts and opinions
The Reformed Broker:
This business is not about making calls and sticking with them for the sake of being able to say you were right all along, it is about processing new information that will make a difference and dropping the opinions that have been invalidated.  I come to work every day hoping I’ll be able to do that.  It’s easier to write about than to actually do.  Is your decision making process flexible?  Are you hung up on what “should happen” rather than what is likely to happen?


Barry Ritholtz
I know my job is to look out over the world and assess where opportunity and risk lay. I can critique people’s analytical errata all I want on the blog all I want but that is merely a mental exercise — not what I actually get paid for. Clients do not give their hard earned cash to managers who are the most acerbic critics of fill in the blank; rather, they go to money managers who know how to navigate around whatever it is that is driving asset prices. And these days, that is the FOMC. “Critique the Fed but manage your assets” is the monetary policy equivalent of “Praise the Lord and Pass the Ammo.”

Twitter and Google trends is mostly search related to retail traders.  Since the majority of retail traders do not short, they typically only buy.  It has been proven that a spike in interest w/ retail traders will cause them to buy those stocks.  However, after the interest dies down, the stocks typically fall about 5% / year on average.

After a show like mad money recommends a stock to buy, especially a small cap stock, if it is mostly uninformed buying, the stock will go down after.  This is a lucrative shorting entry point.

One Good Trade - Mike Bellafonte

1. Only trade setups you recognize, that are statistically in your favor, that have high payout when correct
   
2. P/L doesn't matter, just make sure you follow your rules.  Profits flow from discipline.
   
3. Review your trades constantly.  Video reviews are the best
   
4. Only trade stocks in play - high volume, big intraday moves, low spread
   
5. Get used to being wrong, 30 - 40% of the time you will be wrong.  Get out of trades when you're wrong, close to the price that you realize you are wrong
   
6. Use visualization exercises to help your trading.  Ie:  imagine a trade hitting your exit price, and exiting immediately.  Then, imagine not exiting immediately and it going against you.  Recognize your emotions (ie: anger, frustration, denial) and how they can affect your mindset in future trades.
   
7. Use a training simulator to go over trades, u can learn up to 10x faster.
   
8. Trading is not investing, you have no clue where things will end up tomorrow, just over the next couple minutes.
   
9. Returns of 100% - 500% are possible.
   
10. Learn how to read the tape (level II), buying / selling much more obvious
    
11. Open, mid-day, and Close have different strategies to profit from.
1. Open  - use the tape
2. midday low volume,
3. Close go with the trend
12. Set your max loss to 1/2 your average trading gain, try to be profitable 7/10 days
13. Make if-then statement for all your trading setups
1. If the 30 bid is tested, with significant volume on the bid, and holds, then...get long
2. if the 30 holds, who is the buyer?
3. if the 30 holds and slows, then sell if the buyer is not near or thick offer near
4. if 30 holds and the bids step up, then consider another lot
5. if 30 holds and a ton of volume is done on the bid, then do not sell until a reason to sell
6. ...+ 30 more things
14. 
    

Temporary Help as UI indicator: as a supplement to BLS NFP figure

TPC
Sell side analysts are more bearish than ever.  There is a fiscal cliff in 2012 - 2013, Europe Defaults, China GDP slow down, India inflation, PMI contractions all around the world.  However, this is a hugely contratrian measure

The Disciplined Trader - Mark Douglas

Chapter 5 - Prices are in Perpetual Motions with no Defined Beginning or Ending

• What are usually thought of as three simple decisions of enter, hold, or liquidate a trade become a perpetual process of deciding how much is enough from both a profit and a loss perspective. If you are in a profitable trade, is there ever enough? Greed stems from a belief that there is never enough or there won't be enough. In an unlimited environment that is in perpetual motion, isn't there always the possibility of getting more? The appetite of true greed can never be satisfied; it will always leave the greedy ones with a feeling of lacking regardless of how much they have acquired. If you are in a losing trade, you won't want it to exist because it represents failure, so you can just act as if it doesn't, by convincing yourself that you are in a winning trade that hasn't gone in your favor yet.
• Your last trade obviously has nothing to do with the potential that exists in the market at any given moment. When you feel compelled to get back, it puts you in an adversary relationship with the market.

Chapter 6 - The Market is an Unstructured Environment

• In an unstructured and unlimited environment, it is essential that you establish rules to guide your behavior. You will need to create definition and give yourself direction. Otherwise, you will feel overwhelmed with too many possibilities. Without these rules one of the most likely possibilities is that you will create devastating losses for yourself. The big psychological problem here is, if you make up and have to play by your own rules, you also have to take total and complete responsibility for your actions as well as the outcome of your actions
• Most outside people would be shocked to learn that except for a small minority of successful traders, the rest fall into a group that, at any given moment, have no idea about what they are going to do next or know why they are 
• even doing what they are doing. If you asked them to tell you specifically how they make money or lose money, they couldn't tell you
• If you don't know what you did to win the last time, you obviously don't know what to do to keep from losing this time. The end result is intense anxiety, frustration, confusion, and fear. You feel out of control, experiencing a sense of powerlessness as you are swept along by the ensuing events and wondering what is the market going to do to you today.
• Taking responsibility is a function of self-acceptance. You can measure this degree of self-acceptance by how positively or negatively you think of yourself when you make what you perceive as a mistake. The more negatively you think of yourself, the greater your tendency to avoid taking responsibility, so you can avoid the pain of your harsh thoughts, thus generating a fear of making mistakes. However, the greater the degree of self-acceptance you have for yourself, the more positive your thoughts will be and the greater the degree of insight you will be able to extract from an experience, instead of generating fear. The more self-accepting you are, the easier it is to learn because you are not trying to avoid certain information. 

Chapter 7 - In the Market Environment Reasons are Irrelevant

• The reasons traders would give for their actions are irrelevant. Most traders don't know why they did what they did because most traders don't plan their trades, thus eliminating any connection between themselves and the results of their trades. Most traders act spontaneously and impulsively and then ascribe the rationale for their behavior after the fact. Most of these after-the fact reasons are either justifications for what traders did or excuses for what traders didn't do
• If you want to learn to predict price movement, you don't need to pay attention to reasons. What you need to do is determine how the majority of traders perceive the external conditions in relationship to either their fear of scarcity, or their fear of missing out, or both

Chapter 8 - The 3 stages to becoming a successful trader

• In an unlimited environment, if you can't confront the reality of a loss, then the possibility exists for you to lose everything, in each and every trade. If you believe trading is like gambling, it isn't. In any gambling game you have to actively participate to lose and do nothing to stop losing. In the market environment, you have to actively participate to get into a trade and actively participate to end your losses. If you do nothing, the potential exists to lose everything you own. When you participate in gambling games, you know exactly what your risk is and the event always ends. With the markets you don't ultimately know what your risk is, even if you are disciplined enough to use stops, because the market could gap through your stops. Also because the event never ends and is in constant motion, there is always the possibility of getting back what you are losing in any trade. You won't need to actively participate to get back what you are losing; you just have to stay in your trade and let the market give it to you
• So even though you can't actually control the market's movement, you can learn how to control your perception of the market's movement in a way that allows you the maximum objectivity. Learning to perceive objectively will increase your ability to let the market tell you when to get in and when to get out. You can learn how to trade where you won't be using information to justify your beliefs but rather to perceive the most likely possibilities in any given moment.

Part III - Building a framework for understanding ourselves

• We will thoroughly explore the nature of fear and how it compels all of us to act without a perception of choice. The predominate underlying force behind most traders' actions causing prices to move is fear—the fear of missing out (competing for the supply) and the fear of loss.

Chapter 10 - How Memories, Associations, and Beliefs Manage Environmental Information

• The implications are that much of what we experience of the outside environment is shaped from the inside, not from the outside as most people would assume. In other words, our first-time experiences shape the meaning, as well as determine the quality of energy connected with that meaning, and then once the meaning exists inside of us, it shapes our experience of the outside by the way we pick and choose information and how we feel about that information.
• What you have just been given is an example of why the vast majority of traders cut their profits short and let their losses run. In a winning trade, the fear of losing will cause us to focus our attention on information that the market is going to take our profits away, compelling us to get out early. In a losing trade we will focus our attention on just the opposite information— anything other than that which would indicate the trade is a loser. Fear causes us to act without a perception of choice. When we are afraid to confront certain categories of market information, it drastically limits the choices that we perceive as available. Cutting a loss isn't a choice if we systematically block from our awareness any information that would indicate that we are in a losing trade. Staying in a winner isn't a choice if we are consumed with the fear that the market is going to take away our money.
• To prevent these blind spots in our perception, we have to learn to trade without fear. And to trade without fear we need to completely trust ourselves to confront and accept whatever information the market is offering about itself, and we need to be able to trust ourselves to know that we will always act in our best interests without hesitation, regardless of the conditions. Any endeavor will require some degree of trust

Chapter 13 - Managing Mental energy

• In other words, we pass on our ignorance, as well as our wisdom, without knowing at the time the difference between the two. And what was passed on that was dysfunctional will be regarded as the truth just the same as the wisdom.
• You can wish and hope that the market will come back, or you can cut your loss and make yourself ready to take the next opportunity. To be able to cut your loss and be ready to take the next opportunity requires that you change anything in your mental environment that would cause you to avoid confrontation and consequently wish and hope. The less cause you have for wishing and hoping that something will happen, the more you will know that when you get that certain feeling, it is a true intuitive impulse, and the more confidence you will have to follow it.

Chapter 15 - The Pyschology of Price Movement

• If, for example, a market has been making consistently higher highs and higher lows, to determine what is likely to happen next, ask yourself the following questions: 1. What kind of price action will sustain the buyers' beliefs that they can make more money? 2. When are sellers likely to come into the market in force? 3. Where are old buyers likely to take profits? Where are old sellers likely to lose faith in their positions and bail out? 4. What would have to happen for buyers to lose faith? What would have to happen to draw new buyers into the market? You can answer all these questions by identifying certain significant reference points where buyers' and or sellers' expectations are likely to be raised and where they are likely to be disappointed if they don't get their way.

Chapter 16 - Steps to Success

• First and foremost, you may need to change your perspective or the focus of your trading. Until now your focus may have been to make money. If this is so, you will need to change your perspective to "What do I need to learn or how will I have to adapt myself to interact more successfully?" You need to stay focused on mastering the steps to achieving your goal and not the end result, knowing that the end result, money, will be a by-product of what you know and how well you can act on what you know. There is a tremendous difference between focusing on money and focusing on using your trading as an exercise to identify what you need to learn. The first will cause you to focus on what the markets are giving you or are taking away from you. The second perspective causes you to focus your attention on your ability to to give yourself money. With the first perspective, you are placing some of the responsibility onto the markets to do something for you. With the second perspective, you assume all the responsibility.
• Predefine what a loss is in every potential trade. By "predefine," I mean determine what the market has to look like or do, to tell you that the trade no longer represents an opportunity, at least not an opportunity in the time frame in which you trade.
• Execute your losing trades immediately upon perception that they exist. When losses are predefined and executed without hesitation, there is nothing to consider, weigh, or judge and consequently nothing to tempt yourself with. There will be no threat of allowing yourself the possibility of ultimate disaster.
• To help you learn how to be with the flow of the market, I pose a series of questions that are designed to keep you focused in the "now moment" to determine what is true about the market. 
• 1. What is the market telling me at this moment? 
• 2. Who is paying up to get in or get out? 
• 3. How much strength is there? 
• 4. Is momentum building? 
• 5. Can it be measured relative to something? 
• 6. What would have to happen to indicate the momentum is changing? 
• 7. Is the trend weakening or is this a normal retracement? 
• 8. What would show that? If the market has displayed a fairly symmetrical type of pattern and that pattern has been disturbed, then it is a good indication the balance of forces has shifted. 
• 9. Are there any places where one side will definitely gain dominance over the other? If that point is reached, it still may take sometime for the other side to be convinced they are losers. How long are you willing to give them to stampede out of their positions? 
• 10. If they don't stampede out of their positions, what will that tell you? 
• 11. What did traders have to believe to form the current pattern relative to the past? Remember that people's beliefs don't change easily unless they are extremely disappointed. People are disappointed when their expectations aren't fulfilled. 
• 12. What will disappoint the predominate force? 
• 13. What is the likelihood of that happening? 
• 14. What is the risk of finding out in a trade? 
• 15. Is there enough potential for movement to make the trade worth the risk?
• If you can't determine the significance of any particular high or low or any other significant reference point for that matter, then you have to ask yourself if it is worth the risk of finding out? How much room will you have to give the market to define itself before it is evident that the flow of the market is not in the direction of that trade?
• Keep in mind that since the market is in perpetual motion, it puts you in a position of having to make never-ending assessments of the current risk in relationship to the current possibilities for reward. To do this effectively, you will have to learn to observe the market as if you were not in a position. This perspective will free you to take whatever action is appropriate for the situation instead of hesitating, hoping, and wishing that the market will make you right.
• Which, of course, is always going to be less than what is possible from the market's perspective. If we are perceiving much less than what is available, then we are out of touch with what is possible from the market's perspective and setting ourselves up for a painful forced awareness. To be objective you have to make "uncommitted assessments of the probabilities." Which simply means that you have no commitment to any particular outcome. You just observe what is happening in each moment as an indication of what will probably happen next. Here is what objectivity feels like, so that you can recognize when you have achieved it. 
• You feel no pressure to do anything 
• You have no feeling of fear 
• You feel no sense of rejection 
• There is no right or wrong 
• You recognize that this is what the market is telling me, this is what I do 
• You can observe the market from the perspective as if you were not in a position, even when you are 
• You are not focused on money but on the structure of the market

http://econviz.org/macroeconomic-balance-sheet-visualizer/

Visual how money works in the economy.  Shows the balance sheets of the Fed, Treasury, Households, Banks, and Companies.  It shows how the treasury spends, Fed controls monetary policy, treasury taxes, household / banks get loans, companies get loans.

Prospect Theory - based on the way a problem is framed ( make X amount vs I will loose X amount), different outcomes are chosen.

Since people are loss averse, a loss the same size as a gain has a much greater affect (Prospect Theory).  Also the prospect of a small loss vs a large gain is undesirable (myopic loss aversion).  So if presented an opportunity that was favorable, it would not be taken because of this (Equity premium puzzle - stocks have outperformed bonds but standard economic theory says that .  However framing the question differently may lead to taking that risk (ie: thinking in another language led to better results because less emotional bias was used in deliberation)

how much equity to invest during a decline, if you want to be fully invested after a 50% sell off

decline	equity to invest	start equity	equity after decline	% of original equity invested
2.5	2	100.0	98.0	2%
7.5	10	97.9	88.1	10%
12.5	17	87.6	72.7	15%
20	28	71.4	51.4	20%
35	42	47.2	27.4	20%
50	100	21.1	0	21%

Since 1928 there have been 294 pullbacks of at least 5%.  

94  (>10%)

43  (>15%) 

25 (>20%) bear market

So in a statistical sense once you hit the 5% threshold your chances of a 10%, 15%, and 20%+ drop are as follows:

10%: 32.0%

15%:  14.6%

20%+: 8.5%

According to TPC expansion contraction model, no recession 2012, but risks increase in 2013 greatly.

• Deficit according to CBO estimate will decline from $1.08T to $585B = domestic private surplus will shrink 2% assuming current account remains at $400B (currently at 5%)
• Private sector household debt accumulation is at 2.9% yoy.  This is good, but consumer credit, and total loans at commercial banks need to improve
• Policy makers have extended bush taxcuts until to 1/2013, and enactment of mandatory spending cuts on 1/2013.  These could be changed which will increase deficit
• If everything stays the same 12Q3 will start showing economic contraction, leveling off at -1.5% in 2013.

Japanese Candle Stick Charting

Main point is:  Know where you are in the trend.   This provides context to the pattern
Reversal Patterns - Only means trend is at risk of not continuing
Ch 4. - Reversal Patterns

Hammer and Hanging Man
1. Real body is at the upper end of the trading range, the color is not important
2. Long lower shadow is greater than 2x height of body
3. No, or very short upper shadow
Must wait for confirmation with the hanging man (the market top).  The larger the gap between close of hanging man and open of the next day the better.

Engulfing Pattern
1. Real body must engulf prior real body
2. Opposite color, unless almost a doji

Dark Cloud Cover
1. After uptrend
2. Strong white day, which opens on its low, closes on it high.  The next day has a long black body, opens on its high, closes on its low
3. Closes well within (about 50%) in the white body
4. Black body (2nd day) opens above a major resistance level and then fails.  Old support can be used as a resistance level

Piercing Pattern - same as above except opposite (also less reliable)

Ch 5. - Stars - Small real body that gaps away from the large real body preceding it.  As long as the star body does not overlap the previous body it is considered a star.  Color not important

Morning Star and Evening Star (opposite)
1. Tall black real body, followed by small real body which gaps lower, followed by white real body that moves well within first period black real body.
2. Gap on 3rd day is not always necessary
3. Volume on 3rd day > volume on 1st day

Shooting Star and Inverted Hammer (opposite of hammer / hanging man)
1. Small real body at the lower end of its daily range and a long upper shadow, color not important
2. Real body that gaps away from previous real body
3. Wait for verification that a reversal is taking place by looking for a gap in the reversal direction outside the real body
4. 
   

Ray Dalio portfolio construction and economic cycles
http://pragcap.com/more-from-ray-dalio

A Template for Understanding

Risk Parity is About Balance

Engineering Targeted Returns and Risks

Take whatever today's $VIX is. Divide it by 3.46. That's the market's view of the 1 stand dev range +/- for the next 30 days in %

What are the most important global economic indicators?  Well, according to Goldman’s Jim O’Neill they’re not exactly what you might have expected (via Business Insider):

“There are some indicators which are simply more powerful in their reliability than others, as well as having predictability in shores beyond their own. In my view, the Korean trade data, US job claims, the US ISM report and its new orders and inventory component, the Euro area business and consumer confidence surveys, especially the German IFO, are the key numbers I look for each month. I do find myself often wondering whether one misses something from the Growth Market world, but if you throw in a couple of key Chinese monthly statistics, their monetary data, PMI, trade and monthly retail sales numbers in particular, then you kind of have most of what you need.”

I would certainly throw in a few more indicators here.   Global industrial production figures are always important.  Japan’s Tankan Survey is helpful.  Out of all of these I’d argue that the Chinese monthly PMI is the strongest indicator of global economic growth.

Growth Upgrades/Downgrades

When stalking a growth stock awaiting better entries or looking for new growth stock ideas, one of the best things you can do is get a hold of Wall Street's Upgrades and Downgrades each morning.  TheStreet.com has a good one if I recall as do 24/7 Wall Street and Benzinga.  Look for something a bit more in-depth that will give you a sentence or two synopsis of each analyst ratings change.  Learn to spot the bullsh*t downgrades over time and start studying how the higher-growth stocks tend to react to them - both initially and over the intermediate term.  Typically a fast-growing company will stumble on a specious analyst downgrade and then the accumulation will resume as the institutional fans of the story get over it and come back with buy orders.

What constitutes a bullsh*t downgrade?  Anything that can be perceived as having a hidden agenda or that sounds like the analyst is just looking to be a bit more visible or justify his work.  This happens all the time.  So do bullsh*t upgrades when a big client of a brokerage firm needs someone to drum up enough buyers to make an exit from a particular stock.  You can see it in the tape, little buyers cleaning up a big seller.

But I digress...

Some examples of Bullsh*t Downgrades:

1.  Valuation - growth stocks don't trade on "valuation", they trade on sentiment and the expectation of future earnings, see the numerous valuation-based downgrades of lululemon and Whole Foods.

2.  Dropping Coverage - believe it or not there are institutions who will actually sell on the news that a brokerage firm is dropping or suspending coverage in a name due to an analyst leaving or something.

3.  Channel Checks - there is only one thing sell-side analysts suck more at than tackle football and that is "channel checking" - they literally cannot do it in such a way that there are actionable insights to be gleaned from it.  Think about how many times you heard about strength in non-Apple tablets (there never really was any) or weakness in the iPhone 2 (also, never really happened).  Channel checks are a money-loser in most cases - wait for the actual hard data, forget what people say they'll do or think they'll do.

4.  Short-Term Pressures - chances are if you are interested in a growth stock investment, what happens tomorrow or the next day has little to do with anything.  For example, I saw an analyst downgrade Buffalo Wild Wings, one of this moment's greatest growth stories, because of a rise in chicken wing costs in early February.  And while the analyst was correct in terms of those costs rising, it's really a trivial, short-term matter to anyone who intends to invest in the business.   $BWLD is being bought for the massive national footprint they'll be building out for the next ten years, not a penny or two in wing costs.  The stock is up like 20 points in the 3 weeks since that downgrade, btw - managers in the growth space simply have to own it.

5.  Strategic Direction - some people are meant to run businesses and others are meant to analyze and critique them. When a company announces a new strategic direction or goal, the knee-jerk Wall Street response is to cut it to neutral due to "uncertainty".  I have no interest in seeing sell-side analysts vote on the strategic decisions of a company - management often knows more about their market than the eggheads do.

Find undervalued companies, then wait and see when they start trending up.

On determining how to make a recession model using current(CEI) vs leading(LEI) indicators:.
1.Heading for the hills more than 5 months before recession is more likely counterproductive than productive

2. You need not isolate your decision points to LEI’s only 

a. LEI can be subject to false positives 

b. LEI only give you an extra 33% “edge” 

3. Couple or stage your actions with recession models using more accurate CEI’s to still capture 2/3 of the benefit 

It takes about 4 - 5 months for market to get over medium bad news from when it first starts.