PERMANENT OPEN MARKET OPERATIONS (POMO)

The Fed influences short term interest rates by controlling the interbank lending rate known as the Fed funds rate.  Through its Open Market Operations (OMO), it purchases (adds reserves) and sells (drains reserves) short term repurchase agreements (RPs) with dealers in Treasuries by the Trading Desk of the Federal Reserve Bank of New York to maintain just enough reserves to the banking system to meet the target rate demand.

Permanent Fed reserve additions/drains (POMO) is just one of three tools used by the Federal Reserve to implement monetary policy.  The other two are the discount rate and reserve requirements. Open market operations are conducted by the Federal Open Market Committee (FOMC), while the discount rate and reserve requirements are set by the Federal Reserve's board of governors.

SECULAR TREND IMPACT BY BABY BOOMERS

A baby boomer is a person born during the 19 year post-World War II baby boom period between the years 1946 and 1964.  This generation of baby boomers began celebrating 65+ years during 2010, and over the next 15 years, as a group, they are the wealthiest, most active, and most physically fit generation.  They were also the generation that received peak levels of income, therefore they could reap the benefits of abundant levels of food, apparel, retirement programs, and sometimes even "midlife crisis" products.

It is important for investors to Identify secular trends, over a long-term time frame, usually at least 10 years, not just short-term trends, if they want to succeed.

Examples of secular trends include Bull and Bear Market Cycles, an aging population (which will tend to have different spending and savings habits than a younger population), the expansion of a particular technology (such as the Internet) and heavy reliance on certain commodities (like oil).

Consumer spending makes up over 70% of Gross Domestic Product (GDP) which is a broad measure of U.S. economic activity.  The aging generation of baby boomers has started to influence GDP spending habits and will impact the growth of specific sectors of GDP over the next 15 years.

 

SMALL CAP MONTHLY PERFORMANCE

Below represents Small Caps average monthly performance the past 84 years

AVERAGE MONTHLY S&P 500 RETURNS

source:
 http://www.moneychimp.com/features/monthly_returns.htm

TRADING CURBS, HALTS, AND PAUSES

A trading curb also known as a circuit breaker, is a point at which a stock market will stop trading for a period of time in response to substantial drops in value.

At the start of each quarter, the NYSE sets three circuit breaker levels at levels of 10%, 20%, and 30% of the average closing price of the Dow Jones Industrial Average for the month preceding the start of the quarter, rounded to the nearest 50-point interval. As of the fourth quarter of 2012, these levels are 1,350 points, 2,700 points, and 4,050 points respectively. Depending on the point drop that happens and the time of day when it happens, different actions occur automatically. A one hour halt is triggered at 10%, two hour halt at 20%, and market closes at 30%.

Trading halts usually occur when a publicly traded company is going to release significant news about itself. The halt in trading for the affected security gives investors time to review the news and assess its impact. Another situation in which a trading halt might occur is when the exchange is uncertain "whether the security continues to meet the market’s listing standards."

Also, there are "trading pauses", which are defined as, under NASDAQ, "if a security is subject to a Trading Pause, the Pause Threshold Price field will contain the reference threshold price that deviates 10% from a print on the Consolidated Tape that is last sale eligible as compared to every print in that security on a rolling five (5) minute basis".

 

 

http://www.nasdaqtrader.com/Trader.aspx?id=TradeHalts 

 

 

TEN THOUSAND HOURS RULE

In essence, the 10,000 hour principle is a confirmation of the maxim made famous by Edison: genius is 1% inspiration, 99% perspiration. 

Outliers by Malcolm Gladwell repeatedly mentions the "10,000-Hour Rule", claiming that the key to achieving world class success in any field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours.
 

To find your success zone in trading at 5 hours per trading session equates to 8 years.  During the practicing process, there are no failures, only feedback.

PSYCHOLOGICAL FORCES

THE TRADER

Nothing matches the opportunities, excitement, joy, fear, and defeats, associated with trading.  To become successful in this market, merely sound knowledge about the market does not suffice. It requires out of the box psychological traits to emerge out as a winner. If you go by the rumors and follow what others are doing, chances are there that you may lose out in the end.  Correctly gauging the market psychology will result in success. The more our minds model the market, the more in synch we get. If what you are doing is not working, re-evaluate your strategies and increase the level of our awareness rather than the intensity of trading.   Our internal process dictates the action.  The markets are messy, our information is imperfect, our systems will fail and we can still make money.  Seek the practice rather than the result.  There is no failure, just feedback.

The greatest fault of traders is being bullish at high prices and bearish at low prices.  Fear, greed, hope and despair continue to be key elements in everything that we do including stock market trading.  Overtrading causes anxiety, and following the market beyond a reasonable climax is unprofitable.  Try to catch the trend of a sentiment even if against the fundamentals.  Keep the mind clear and balanced so as to avoid acting hastily on sensational information, acting solely on your own judgment and common sense rather than emotions.  The best approach would to be unbiased to all the stocks.

Social proof is human nature to look to others to determine the best course of action for ourselves.  If we see others getting rich by buying stocks, then it must be a good time to buy. Likewise, the same goes for when everyone else is selling.

Competition is the cornerstone of the stock market.   Scarcity is a natural tendency to want things in limited supply; we rush in and buy stocks at $5 because we are afraid that in a short time they will only be available for $7, $10, or much more. We must buy it now, because this price may not be available for much longer.  We appreciate something most after losing it.  That’s why when there is a large drop in the stock market and we have lost a lot of money, we are timid about buying more. Once we have lost, we want to hold on to what we have for fear of losing more. This influences us to buy when prices are high and sell when prices are low. 

When you are engulfed by the powerful forces of scarcity, you can fall back on your strategy. Before making a stock trade, simply ask yourself this - Does this trade fit into my long-term stock trading strategy and have I heard the best arguments against it?

THE MARKET

A stock chart is nothing more than a graph of human emotions in the market place; printed on price and time axis are the emotions of greed, fear, hope, and euphoria. As a disciplined trader, you capitalize on the psychological demons that plague other traders.

• Should I buy?
• Should I sell?
• Should I take profits?
• Should I take a loss?

These are some of the questions that empty trading accounts because the novice traders asking these questions do not have a plan. So what ends up happening?  They get excited and buy at the worst possible time. Then the stock reverses. Fear creeps in and then the stock goes lower... and lower... and lower. Finally the pain becomes too much to bear so they sell taking a huge loss.

Likewise, when a stock does go in the desired direction:  Excitement! Euphoria! I'm making money! "I had better sell to lock in these profits since I have had several losing trades in a row." The trader then ends up selling too soon!

"Keep your losses small and let your winners run.”  The un-disciplined trader has just done the opposite! They have let their losses get big and they have limited their winners!

This mental anguish can be eliminated by having a trading strategy and the mental discipline to stick with it. Write down a plan for the trade before you trade the stock. Then trade it according to the plan that you have written. Remember that you have devised a plan before you got into the trade when your emotions were stable. Now you can trade your plan with confidence.

Learning to trade stocks and applying technical analysis to charts is mostly about human psychology - not chart patterns and candlestick patterns themselves. You must understand the psychology behind these patterns.

Here is a breakdown of what happens:

 

Breakout Traders - These traders bought the breakout. They operate under the "greater fool theory". They are just praying that other traders come along and buy higher than they did.

Novice Traders - These traders just have no idea what they are doing. They are buying shares of stock that the breakout traders are now selling to them.

Momentum Traders - These traders are buying the pullback and tend to buy near the 10 MA. They are likely going to put their stop below the low of the hammer.

Swing Traders - This is where we come in. The stock falls below that hammer and the momentum traders get stopped out. By now most of the novice traders and momentum traders have sold. See how the volume has tapered off? Previous resistance now becomes support.

Novice Traders - Once again, the novice traders are buying at the worst possible time. We need these traders so that we can sell our shares to them and make a profit.