The master trader birinyis secrets to understanding the market

Contents Cover Series Title Page Copyright Dedication Acknowledgments Preface Chapter 1: Technical Analysis: Fuhgeddaboudit INDICATORS: PICK ONE, ANY ONE 1990: ANOTHER OPPORTUNITY MISSED NOTES Chapter 2: The Failure of Technical Efforts A LACK OF ANALYSIS (AGAIN) THE ADVANCE/DECLINE LINE: A FAVORITE TOOL, BUT WHY? VOLUME? ANOTHER IMPORTANT INDICATOR? REALLY? NEWSLETTERS—ONCE UPON A TIME PREDICTING RAIN DOESN'T COUNT; BUILDING ARKS DOES TECHNICAL ANALYSIS FAILS A RIGOROUS TEST NOTES Chapter 3: Technicals: The Last Word TOPICAL STUDIES: AN INTRODUCTION NOTES Chapter 4: Wall Street: Games People Play A BROKERAGE FIRM CAN'T CALCULATE PERFORMANCE? MR PRECHTER NOTES Chapter 5: Money Flows: The Ultimate Indicator PLAYING WITH BLOCKS IT IS NOT HOW OFTEN; IT IS HOW MUCH THE SEC'S STUDY ON THE INFORMATION FROM LARGE TRADES WALL STREET WEEK: THE RECORD APPLE IS A BUY AT $3? MR MARKET'S VOICE NOTES Chapter 6: Anecdotal Data MAGAZINES AND NEWSPAPERS ARE DATABASES IN DISGUISE DOW THEORY IN REAL TIME MAGAZINE COVERS—OVERRATED NOTE Chapter 7: Always Cut the Cards STRATEGISTS: MORE MARKETING THAN MARKETS STOCK MARKET RESEARCH: AN OXYMORON THE ISSUE OF CAPE: CYCLICALLY ADJUSTED PRICEEARNINGS RATIO STRATEGISTS: ONE MORE THING WHAT DO STOCKS REALLY RETURN? A SUCCESSFUL MODEL EXCEPT FOR “IRRATIONAL” INVESTORS THE PRESS SHOULD BE IN THE REPORTING, NOT FORECASTING, BUSINESS NOTES Chapter 8: DOW: 19,792? CITIBANK (THE COMPANY) VERSUS CITI (THE STOCK) WORLD WAR I: THE MARKET SWOONS, OOPS, RALLIES THE DOW TRADES ABOVE 1,000 NOTES Chapter 9: That's Easy for You to Say! BUSINESSWEEK: 1998, 1999, AND AMERICA ONLINE BEST: REAL TIME, REAL MONEY, REAL RESULTS NOTES Chapter 10: Playing the Game MR BUFFETT BUYS AND SELLS SILVER BONDS CAN GO DOWN MR ELLIS: THE LOSER'S GAME WALL STREET WEEK: WE WERE LUCKY (FOR EIGHT YEARS) MONEY MANAGERS DON'T GET IT? NOTES Chapter 11: Have It Your Way WEASEL WORDS: NOT OUR CHOICE, BUT KNOW AND RECOGNIZE Chapter 12: The Market: Yesterday, Today, and Tomorrow? COMMISSIONS GO DOWN; ERISA CHANGES THE RULES LONDON'S BIG BANG: A FAILURE THERE, A GOOD IDEA HERE? THE PUBLIC VERSUS “ALL OTHERS” HIGH-FREQUENCY TRADERS GET BILLIONS, BROKERS PROSPER, BUT ARE YOU BENEFITING? THE DEMISE OF THE JAPANESE MARKET WAS STRUCTURAL NOTES Chapter 13: Get Ready, Get Set TRACKING SENTIMENT, OR, KEEPING SCORE OF THE PLAYERS NOTE Chapter 14: Market Cycles and Rotation HOW TO TELL WHETHER WE ARE IN THE EIGHTH OR NINTH INNING GROUP ROTATION EXISTS; IT IS RANDOM BUT WORTH UNDERSTANDING SMALL STOCKS: ON AVERAGE, YES, BUT GROWTH VERSUS VALUE: ADVANTAGE GROWTH, BUT NOTES Chapter 15: The Economy and the Federal Reserve Board GDP AND THE MARKET, NO SURPRISES HERE THE FED TIGHTENS: IT HURTS ONLY FOR A LITTLE WHILE 1994: A LITTLE PERSPECTIVE, IF YOU PLEASE 1995: ECONOMISTS PREDICT BECAUSE THEY ARE ASKED, BUT WHY? NOTE Chapter 16: Picking Stocks SEEDS: IDEAS TO GET YOU STARTED, PLANTING, AND HARVESTING COME LATER SPRAINED WRISTS EVENTUALLY HEAL (AND PROSPER) CAPITULATION: ANOTHER EXAMPLE OF THE ANECDOTAL PROCESS TREND CHARTS: LATE IN, EARLY OUT, BUT PROFITABLE AND COMFORTABLE NOTE Chapter 17: The Trading Day THE MORNING AFTER A BIG DAY WHAT DO FUTURES TELL US? IT'S 10:00 A.M.: DO YOU KNOW WHERE YOUR STOCKS ARE GOING? Chapter 18: “Mind the Gap” AFTER THE POST-MARKET FALL OR RALLY GAPS PROVIDE OPPORTUNITIES AND HAVE SOME TENDENCIES, BUT NONE WRITTEN IN STONE GAPS SQUARED OLD RULE: LARGE GAPS HAVE TO BE CLOSED—NEW RULE: ABOUT 25 PERCENT Chapter 19: You Must Remember This IT'S SMART TO BE BEARISH, BUT NOT NECESSARILY PROFITABLE YOU CAN NEVER KNOW TOO MUCH ABOUT TOO MANY THINGS ON WALL STREET NOTES Chapter 20: Wall Street Week and Other Adventures SALOMON BROTHERS: THE BAR WAS HIGH, EVEN FOR THE CHEF NOTES Appendix A: Expansions/Recessions and Bull/Bear Markets Appendix B: Cost of Timing the Market DOW JONES RETURN Appendix C: History of Regulation Glossary About the Author About the Website Index Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers' professional and personal knowledge and understanding The Wiley Trading series features books by traders who have survived the market's ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future For a list of available titles, visit our Web site at www.WileyFinance.com Cover image: top and bottom © iStockphoto.com / ksana-gribakina; middle © iStockphoto.com / penfold Cover design: Wiley Copyright © 2013 by Laszlo Birinyi All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-ondemand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data: Birinyi, Laszlo The master trader : Birinyi's secrets to understanding the market / Laszlo Birinyi pages cm.—(Wiley trading series) Includes bibliographical references and index ISBN 978-1-118-77473-1 (cloth); ISBN 978-1-118-77486-1 (ebk); ISBN 978-1-118-77478-6 (ebk) Investment analysis Technical analysis (Investment analysis) Speculation Investments I Title HG4529.B55 2014 Charting See also Technical analysis Chipotle Citi Citibank Citron Research Client-broker relationship CNBC: “Sunday Night Special Report” Coincidence Commissions Confession of an Advertising Man (Ogilvey) Confusion de Confusiones (De La Vega) Cooperman, Leon Corrections and anecdotal data and the Cyrano Principle defined and market cycles table of and technical analysis Costs, trading Crash of 1987 Craters “Cutting to the Quick” (New York Times) Cycle theories Cyrano Principle D Darvas, Nicolas Data gathering See also Anecdotal data Data reliability historical background and psychology of significant numbers S&P index stock buybacks World War I era trading data Decimal trading Deckers Outdoor De La Vega, Joseph Derivatives Discounting of fundamental developments Disney DJIA: 1000 mark significance annual changes, 1900-2012 and data reliability Dow Theory non-block money flow performance post-1980 invasion of Kuwait performance post-1987 Crash “Does the Stock-Market Data Really Go Back 200 Years?” (Zwieg) Dollar Tree Donaldson, Lufkin, and Jenerette (DLJ) Dow 1000 Dow Jones Industrial Average See DJIA Dow Theory Dreman, David Drucker, Peter E Earnings reports Economy determining status of FRB policy forecasting GDP effects and interest rate changes sector performance Egghead.com Electronic trading See also High-frequency trading (HFT) Elliott Wave Ellis, Charlie Elves Index Elwes Committee Employee Retirement Income Security Act See ERISA changes ERISA changes ETFs “Exchanges Fault Complexity” Exchanges' liquidity payments Exchange stocks Exchange traded funds (ETFs) Expansion/recession data Expansions See also Expansion/recession data Expedia Exxon F Failure of technical analysis advance/decline line lack of analysis newsletters speculation volume Federal Reserve Board (FRB) and data reliability and interest rate changes policy forecasting Fees See also Commissions mutual funds transaction costs Financial academics Hulbert, Mark Jeremy Siegel Financial advisors See also Advisors/analysts Financial Analysts Journal Financial sector market cycles Financial Times First Solar Fixed-fee system Forecasting: cycle theories economic (see also Economy) environments vs events FRB policy Jeremy Siegel Laszlo Birinyi Mark Hulbert the media and Robert Shiller Value Line fundamental analysts Fortune magazine Front running Fundamental developments, discounting of Fundamentals Futures G The Gap Gaps closing market behavior following opportunities from spans Starbucks (SBUX) Garmin Gauging the market GDP effects on market growth growth, vs market and sector performance Generac Holdings General Motors General Theory (Keynes) GMO Goldman Sachs Google Grantham, Jeremy Granville, Joe Greek elections Grimaldi, Mark Grimm, Roland Gross Domestic Product See GDP Group rotation Group Rotation Forecaster Growth/value stocks GTE H Hedge funds Heilbroner, Robert Heinz Hermès International Hewlett Packard High-frequency trading (HFT) abuses and failures of articles/opinions on subject of revenue from transaction costs Hindenburg Omen Historical background of trading See also Investing, history of after-hours trading block trades commissions decimal trading high-frequency trading (see High-frequency trading (HFT)) increased involvement of individuals questionable trading practices tickers trading abuses Historical returns How I Made $2,000,000 (Darvas) “How the Quest for Efficiency Corroded the Market” (Harvard Business Review) Hulbert, Mark I IBM Indexing Indicators See also Technical analysis; Technical indicators historical background Individual investing data gathering education and processes indexing return objectives stock picking (see Stock picking) taxable vs tax-preferenced accounts terminology Inktomi Institutional Investor Study (SEC) Institutionalization of market Interest rate cycle Interest rates Intuitive Surgical Investing, history of after-hours trading Big Bang broker-client relationships commissions decimal trading ERISA changes high-frequency trading (see High-frequency trading (HFT)) increased involvement of individuals Japanes stock market market institutionalization pension plans personal responsibility of managers questionable trading practices regulation trading abuses trading glitches transaction costs Investing, realities of: bonds comparisons for two investors fund manager arrogance mutual funds portfolio management questions to ask taxes Wall Street always wins Investing rules See Market rules Investment self-management See Individual investing Investors Business Daily Investors Intelligence Irrational Exuberance (Shiller) J Japanes stock market J.Crew Group Jones, Paul Tudor JP Morgan K Kaufman, Henry Key investing rules See Market rules Keynes, John Maynard Keynes and the Market (Walsh) “Keynes The Stock Market Investor” (Chambers and Dimson) Knight Securities Kondratieff wave Kraus, Alan L LaBranche and Company Late trading Lewis, Michael Liar's Poker (Lewis) Liberty Square Syndrome Liquidity London Stock Exchange (LSE) “The Loser's Game” (Ellis) Lowenstein, Roger Lululemon Lynch, Peter M Madoff, Bernard Magazines, as data source Management competence Mangan, Jay Market correction, defined Market cycles: financial sector small stocks technology sector theories on value/growth stocks Market rules The bearish case is always more compelling, rational, and articulate Cyrano Principle Discriminate between coincidental and causal Forecast environments and not events Investing should be a profession; educate yourself Most indicators are descriptive, not indicative Predicting rain doesn't count; building arks does There is nothing more dangerous in business than an articulate incompetent Markets: determining state of gauging institutionalization of tracking sentiment of Market timing, cost of Market Vectors Retail ETF MasterCard MCI Communications McLuhan, Marshall Mecane, Joe Media: accountability of market reaction to news (see also Gaps) newspapers and magazines praise of investors/commentators and public's consciousness of markets reporting vs advising Microsoft Miscalculation of performance Mitchell Hutchins Money flows DJIA non-block money flow as fundamental input and interest-sensitive stocks international oils and market direction and stock selection The Money Game (Smith) Morningstar Advisor Munger, Charlie Mutual funds charges and fees concerns with empty promises from N National Bureau of Economic Research National Market System (NMS) News, market reactions to See also Gaps; Media News Corp Newsletters Newspapers, as data source The New Yorker New York Times The Next Crash (Birinyi) 90 percent up or down day Noise traders Norfolk Southern NVR “NYSE Says Regulation Hits Retail Investors” (Financial Times) O Ogilvey, David Oil markets On-Balance volume Opportunities, through market discounting Oracle Order flow abuses Orman, Suze Oversold/overbought conditions P Pacific Gas and Electric “Participate, don't initiate” Pasternack, Kenneth “The Patterns Hidden In Market Swings” (New York Times) Pension plan data Pension plan management Performance: miscalculations return objectives Philip Morris Portfolio management See also Individual investing Portfolio managers See Advisors/analysts Positioning Prechter, Robert Press See Media Priceline Price to earnings ratio Procter & Gamble Psychology and the Stock Market (Dreman) Psychology of significant numbers Publications See Media; Required reading Q Questionable trading practices R Ralph Lauren Reading, required Realities of investing: bonds comparisons for two investors fund manager arrogance mutual funds portfolio management questions to ask taxes Wall Street always wins Recession/expansion data Recessions Recommendations, actionable “Reflections: Economic Predictions” (Heilbroner) Regulation timeline of events Required reading Research: block trades (SEC) historical returns The Institutional Investor Study (SEC) stock markets topical studies Value Line Geometric Composite index Return objectives Returns, historical Risk measures Rogue trades Rotation Rukeyser, Louis Rules for investing See Market rules Russell, Dick Russian default crisis S S&P, composition of S&P 750: The Bottom (Birinyi) S&P Retail ETF Salomon Brothers Schoenleber, Gregg Schulz, John Sears Seasonal indicators SEC Sectors: consumer discretionary defense energy financial services health care industrials manufacturing materials pre-expansion performance pre-recession performance technology Securities and Exchange Commission See SEC Self-management of assets See individual investing Sentiment Sherwin-Williams Shiller, Robert Siegel, Jeremy The Signal and the Noise (Silver) Silver Silver, Nate Simon, Bill Skepticism Sloan, Alfred Small stock market cycles SmartMoney Smith, Adam Spans Speculation “A Speed Limit for the Stock Market” (Lowenstein) Sprained-wrist theory Starbucks Stock buybacks Stock market advisors, requirements for Stock market research “Stock Markets That Flummox Masses ” (Butte) Stock picking analysis from different vantage points buying what you know capitulation ETFs fundamental information “sprained” vs broken stocks theme investing trend charts Stocks for the Long Run (Siegel) Stoll, Hans Strategists concerns/problems with Robert Shiller and stock market research Super Bowl indicator Surowiecki, James T Taxes Technical analysis See also Technical indicators concerns/problems with corrections and Dow Theory failure reasons (see also Failure of technical analysis) historical perspectives lack of missed opportunities due to topical studies types of Technical indicators See also Technical analysis 90 percent up or down day advance/decline line (A/D) Technology sector market cycles 10-day oscillator 10-year trailing P/E Terminology Theme investing Themis Trading “Time for a Reboot for Tech on the Street” (Wall Street Journal) “Time for SEC to Act and Put a Stop to Casino Markets” (Cooperman) Time magazine Topical studies Tracking sentiment Tradebot The Traders Handbook (Birinyi and Associates) Trade-through exemptions Tradeworx Trading: abuses and failures in decimal trading futures glitches in high-frequency trading (see High-frequency trading (HFT)) historical background (see also Investing, history of) after hours intraday key times late trading regulation and Trading calendar Trading costs Trading glitches “Trading in the Dark” (New York Times) Trading practices, questionable Transaction costs Travelers Trend charts Triumph of the Optimists (Dimson, Marsh, and Staunton) U United States Oil Fund Unweighted results V Value/growth stocks Value Line Geometric Composite index Vanity Fair Villere Balanced Fund VIX study Volatility Volker rally Volkswagen Volume VWAP (volume weighted at a price) W Walgreens Wall Street, historical background Wall Street Journal Wall Street Week Wal-Mart Walsh, Justyn Waste Management Weasel words Weekly survey of advisory services (Investors Intelligence) Weighted price Wired magazine The Wisdom of Crowds (Surowiecki) Woolworth World War I era trading data Z Zwieg, Jason ... At the beginning of 1979, investors were bearish as the S&P traded to 100 before staging a rally that was to take it to 130 But as the market rallied, so did investors We might also note that the. .. into the rally, which is also reflected in the fact that there were no especially large trades Traders were parceling stock into the market, but without completely satisfying the demand Had they... supposed to be a very bad sign for the stock market The word “crash” is frequently found in the Omen forecast A Wall Street Journal blog later reported “Yep, it was a dud”, and the market, rather