Browsing articles from "November, 2013"

Why Profitly Traders Don’t Care If This Is A Market Top

Nov 29, 2013   //   by Profitly   //   Market, Profitly  //  Comments Off on Why Profitly Traders Don’t Care If This Is A Market Top

Every day it seems like we hear about the stock market hitting another all-time high. The major averages headed into the day after Thanksgiving poised for their 8th consecutive week of gains, which was the longest winning streak for the Dow in almost three years (since Jan. 21, 2011) and for the S&P 500 in almost 10 years, yes 10 years! (since a 9-week string of gains that ended Jan. 23, 2004). The NASDAQ Composite is on track for its third week of gains, with the Russell 2000 looking at four in a row.  The Dow Jones Industrial Average has closed at new record levels more than 40 times this year alone. The S&P 500 has also hit record levels, up more than 25% for the year. The Nasdaq recently hit 4000 for the first time since the tech bubble burst 13 years ago.

One post from David Merkel in 2004 elaborates on some of the signs of the market top, reposted from Josh Brown of

The first is when the investor base becomes momentum-driven. This is when absurd valuations, whether high or low, can become even more absurd if the expectations of market participants become momentum-based. Momentum investors do not care about valuation; they buy what is going up, and sell what is going down. You can also recognize when a market top is probably coming when:

a) The shorts already have been killed. You don’t hear about them anymore. There is general embarrassment over investments in short-only funds.

b) Long-only managers are getting butchered for their conservatism. In early 2000, we saw many eminent value investors give up around the same time.

c) Valuation-sensitive investors who aren’t total-return driven because of a need to justify fees to outside investors accumulate cash. Warren Buffett is an example of this.

d) The recent past performance of growth managers tends to beat that of value managers. In short, the future prospects of firms become the dominant means of setting market prices.

e) Momentum strategies are self-reinforcing due to an abundance of momentum investors. Once momentum strategies become dominant in a market, the market behaves differently. Actual price volatility increases. Trends tend to maintain themselves over longer periods. Selloffs tend to be short and sharp.

f) Markets driven by momentum favor inexperienced investors. The author says that his favorite way that this plays out is on CNBC. I gauge the age, experience and reasoning of the pundits. Near market tops, the pundits tend to be younger, newer and less rigorous. Experienced investors tend to have a greater regard for risk control, and believe in mean-reversion to a degree. Inexperienced investors tend to follow trends.

g) Defined benefit pension plans tend to be net sellers of stock. This happens as they rebalance their funds to their target weights.

Item 2: Corporate Behavior

Corporations respond to signals that market participants give. Near market tops, capital is inexpensive, so companies take the opportunity to raise capital.

Here are ways that corporate behaviors change near a market top:

a)  The quality of IPOs declines, and the dollar amount increases. By quality, I mean companies that have a sustainable competitive advantage, and that can generate ROE in excess of cost of capital within a reasonable period. Twitter isn’t even profitable yet, and it was one of the most talked about IPOs of the year.

b) Venture capitalists can do no wrong, so lots of money is attracted to venture capital.

c) Meeting the earnings number becomes paramount. What is ignored is balance sheet quality, cash flow from operations, etc.

d)  There is a high degree of visible and/or hidden leverage. Unusual securitization and financing techniques proliferate. Off balance sheet liabilities become very common.

e) Cash flow proves insufficient to finance some speculative enterprises and some financial speculators. This occurs late in the game. When some speculative enterprises begin to run out of cash and can’t find anyone to finance them, they become insolvent. This leads to greater scrutiny and a sea change in attitudes for financing of speculative companies.

f) Elements of accounting seem compromised. Large amounts of earnings stem from accruals rather than cash flow from operations.

g) Dividends become less common. Fewer companies pay dividends, and dividends make up a smaller fraction of earnings or free cash flow.

But you know what, traders on Profitly don’t need to worry about this. Most of them are not buy and hold investors, and they actually LOVE when momentum takes hold. They can make more in a shorter amount of time on the market’s irrational exuberance. Sure, the market may turn on them and swing the other direction, but again, most of them do not hold for long and likely have tight stop-loss orders (whether mental or actually in their trading systems) so they won’t lose a lot of money, if any.

For example, lx21 is currently the all-time top trader on Profitly, and if you look at his recent trades, you see that most of them are only one-day trades. He hardly ever holds his positions for multiple months, weeks, or even days. I guarantee he is very unconcerned about whether the market is getting “frothy.” Another example is that stock ticker OXBT is the most popular traded stock according to Profitly during the past 30 days. I looked through about 15 of the recently recorded trades in that stock, and the longest holding period I found was two days.

So in conclusion, when you hear everyone getting worried about their 401k’s and other long-term investments due to a potential market top, remember that Profitly traders are sitting back and enjoying the ride, raking in the profits on a daily basis.

Superman’s $700,000 win

Nov 17, 2013   //   by Profitly   //   Profitly  //  Comments Off on Superman’s $700,000 win

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