The state of the blogosphere / Watches for Friday Nov 21

The sign of a mature blogosphere is that different blogs each find their own niche so that they all work together to make the collective more informative and interesting. 

In that regard, my niche may involve picking highly likely stocks to short that aren't based on recent strength, like Muddy and Timothy Sykes like to do. That is a great strategy that I like to follow as well, but if we all post the same watchlists then we aren't really working in symbiosis. In these market conditions, I find it somewhat astounding that traders would routinely ignore stocks that are steadily in decline, since that is where the majority of the market is. However, groupthink is easily created and difficult to break, especially when the groupthink involves a legitimately good idea.

Perhaps my ultimate role in the stock blogosphere may be to help devise simple calculators to help traders make more informed decisions about the trades they are making. The goal is to use the available information to the trader's advantage without getting too bogged down in statistical theory and the misguided notions of automated trading, which is part of the reason Avery Horton Jr. is so unpopular in certain trading circles, besides his personality flaws. I believe strongly that there is valuable information buried in the charts that is helpful to traders but is too sophisticated for the brain to analyze quantitatively, whereas once the trader has access to that information explicitly he/she may decide upon another course of action or at least verify the intuitive feelings they have about the trade. Technical indicators are an attempt to provide this information, but they all fall short somehow, leaving the serious trader wanting for a more reliable source for their upcoming decision making. Maybe stats can help in that regard; hopefully the idea of using stats in trading decisions hasn't been tainted by the unpleasant internet presence of "The Rumpled One".

That being said, simply listing the stats for my watchlist is useful but occasionally I should add some analysis as well.

AA EMC XLF LUV AMD C UYD BAC SSO

AA 81/31

EMC 81/26

XLF 81/37

LUV 81/26

AMD 84/53

C 74/47

UYG 71/37

BAC 74/32

SSO 77/16

So far I have discovered that the 80% mark is a meaningful threshold for solid performance as expected on a $DJI red day. Even stats as high as the 70's are not reliable as can be gleaned from an analysis of my previous watch lists. As you can see from the second part of the stat, most of these picks should be abandoned on a strong market rally day. That is the reason these stats were created in the first place. Change your strategy or stick with stocks that have a 'reliable' record of failure in the face of a strong headwind. In this regard, these kinds of stocks should be watched carefully when the overall market reverses intraday. An intraday reversal should be viewed in some ways as a market 'up' day. I will have much more to say about this situation in future posts. Also in the future I will post long watches on market rally days as well. Without running extensive scans I will say that LCC AMR UAUA are poised for a rally on the next strong day.

** UPDATE

I don't know how to say this any plainer folks. When the market flips, use the opposite indicator as your guide for shorts- or even better, use the lower number as your guide for longs, since the opposite action is inferred in the second statistic. Let's go through this again.

AA 81/31

EMC 81/26

XLF 81/37

LUV 81/26

AMD 84/53

C 74/47

UYG 71/37

BAC 74/32

SSO 77/16

AMD and C were the best probability shorts going into a market rally. The numbers reflect that. Let's look at other play options.

The bold number is the probability of shorting success on a $DJI green day- the inferred statistic is the opposite number, namely the probability of success long on a $DJI green day.

Those numbers are:

AA    69

EMC  74

XLF   63

LUV   74

AMD  47

C       53

UYG  63

BAC   68

SSO   84

Based on these numbers alone, I would have gone long on SSO.  AA was a surprise gain and you can never really predict those, but the SSO return was solid based on the stats.