Okay it’s the name of this blog and a term we banter about but what do we mean? In short, we mean the power of an entire human psyche – intellect, thought, senses, feelings, emotions and energy. Each factor weighs in on the judgment, decisions and performance a trader (or investor) delivers and hence, elevating the whole (psychological capital) and leveraging the dimensions (thought, feeling etc) maximizes the performance a trader can deliver.

Underlying our zealotry for this topic is the reality that so much of our judgment and decisions is based on our senses, feelings and emotions despite society’s general reluctance to believe this. Neuroeconomics knows it. In fact the most highly respected neuroeconomists in the world say “it is not enough to know what one should do, one must feel it.” (Camerer, Lowenstein and Prelec, 2005).

Learning to read internal data – the ping pong between thought and feelings – helps one make better risk decisions. Understanding one’s emotions helps one make better investment decisions (Seo & Barrett,2007)…. so psych cap, simply put, is about using our brains (and psyches) in the way they are designed and to our fullest advantage.

Is there any good reason NOT to do this?

I have been wondering since mid-October when they were going to give in and do the basic thing one needs to do to stabilize a market – provide a deep-pocketed bid!

In fact, I said it on the Cavuto show and have said many times since, until the Treasury starts bidding for some of these so called toxic assets, the banks would be stuck. It isn’t that I am SO smart – it is just the basic way auction markets work. Buyers bid up and sellers sell – if one of the other is lacking the price just keeping moving into the vacuum left by the lack of buyers or sellers.

It really doesn’t matter if it is on a one minute timeframe in the ES futures or for homes in Las Vegas…. auction markets need bids in order for the prices to stabilize.

Were you listening to the S&P pit this afternoon? or, just watching the ES trade…. now THAT is the movie of chop and slop. Typical for rollover time – days better spent doing something more productive than trying to catch a decent intra-day trend!

Remember that nasty term from the internet bubble – day trading?

Hushhhhh! NO ONE wanted to be called a “day-trader”. All of those horrid types drove the market up and then drove it down and made everyone go broke…. right? … and they were stupid to boot.

Well day-trading is back …..but is has another name. HIGH FREQUENCY.

…and everyone is doing it. Well, at least everyone with money to trade? – which means hedge funds. Yep it is the dirty little secret of the already secretive world of money runners that one way to make back monies lost on big global macro type events is to trade intra-day.

People stand around newsrooms scratching their heads over these intra-day swings and here is their simple answer. Everyone is a day-trader. In fact if you want to get really technical, minute-trader is a better term.

(… oh yeah, under the full-disclosure rules – I started day trading in 1994. Over the past two days I did 7.82 trades with an average hold time of 3.4 minutes…. )

Last night I turned on the 7pm CNBC show and listened to not one but two money managers make the case that October 10th was the low.

It would make me wonder if they have ever heard of momentum but in reality, what they are doing is finding confirming data in positions they already have. Our brains trick us this way and in order to not be tricked we have to know that we WANT the market to go up….but alas that is for another post. (check the emotions and decisions thread).

…which brings me to the point of this post – the old saying “the trend is your friend“. Can anyone anywhere make a credible case that we are not in a long-term downtrend? From a year ago October until just a few minutes ago we have continued to make lower lows….. so… why try to buy the bottom?

Sure there are bear market and snap back rallies but bear markets mean sell the rallies … not buy the dips! It ain’t pretty but it is what it is… don’t let your brain fool you. (and oh btw a good intraday tip – compare what the cash equity market is doing to what the futures markets are doing…. for the last year at least they have usually been ahead of “us”).

UPDATE 3:57 PM … at least for the short term, we have the definition of a reversal day (trade lower, close higher)… guess I only needed to send out that news note! … now, I hope no one fell into the trap that our brains are also vulnerable too – “listening to an expert”. I am fairly certain my note marked the bottom… guess that makes me an expert of some sort

Treasury Acts Ridiculously _____________________? …. fill in the blank.

If the markets are based on confidence (or lack thereof) then where are we in the spectrum between panic and overconfidence? We are certainly on the left-end of this tug of rope. The panicked selling seems to be gone but now we are in a market rhythm where it is just relentless. In other words, there may not be panic but there surely isn’t any confidence that the government funding banks, insurance companies and now apparently the auto-industry is going to work.

Without confidence for the future, we will continue to look towards the lows of October and maybe beyond… is there any reason to do anything else?

and furthermore “Decided that purchasing illiquid assets wouldn’t help” …since when does bringing in a solid bid in a falling market NOT stabilize the market. Paulson may be from one of the great trading houses in the world but he doesn’t get that. The underlying problem in all of this is there was and is no market for the complex debt instruments that are for sale. If someone could make a market then the price would stabilize… and once that happened then the mark-downs on the books of banks would stop and once that stopped, they may be more willing to lend.

…. Can we get a trader in there? Can someone from the Chicago floor environment teach them something about making a market?

PS Thursday the 13th – okay there is the m-t-m accounting issue but they could solve that if they wanted to. I predict that in some way shape or form the new Treasury and Administration in DC will sooner or later end up buying some of these assets. Who else is ever going to make a market in them?

well they asked…. and yes we are in a bear market i.e. sell the rallies and buy the dips.

I hated to sound like a downer but hey, Roubini I am not (although so far…. )

MONEY MATTERS on ABC NEWS NOW

Having said that, 900 in the S&P futures held like a rock.

Talking about that on TV was probably a bit too much but to me trading is all about finding the levels that the crowd sees as the proverbial “support” or “resistance” . Then, watch what happens there. How much time do we trade around these levels? Where are people putting their short-term stops above and below? (In other words it is a range around the levels and depending on recent volatility, that range can be wide.)

In fact speaking of stops, part of the reason these levels work is in fact the stop placements entered around key levels. It becomes self-reinforcing (particularly when the time element is added in). High volume nodes on a Market Profile (forgive me CME but I have no way to put an R sign in with this wordpress) work the same way – the volume shows that many traders are involved at that price and very well may defend it – or bail if it goes through.

At Schonfeld I learned that support is meant to be broken so I am always kind of looking for signals that it will be – the trend of the TICK and “Breadth” … both of these cash market indicators can give you a clear heads-up.

well they asked…. and yes we are in a bear market i.e. sell the rallies and buy the dips.

I hated to sound like a downer but hey, Roubini I am not (although so far…. )

MONEY MATTERS on ABC NEWS NOW

Having said that, 900 in the S&P futures held like a rock.

Talking about that on TV was probably a bit too much but to me trading is all about finding the levels that the crowd sees as the proverbial “support” or “resistance” . Then, watch what happens there. How much time do we trade around these levels? Where are people putting their short-term stops above and below? (In other words it is a range around the levels and depending on recent volatility, that range can be wide.)

In fact speaking of stops, part of the reason these levels work is in fact the stop placements entered around key levels. It becomes self-reinforcing (particularly when the time element is added in). High volume nodes on a Market Profile (forgive me CME but I have no way to put an R sign in with this wordpress) work the same way – the volume shows that many traders are involved at that price and very well may defend it – or bail if it goes through.

At Schonfeld I learned that support is meant to be broken so I am always kind of looking for signals that it will be – the trend of the TICK and “Breadth” … both of these cash market indicators can give you a clear heads-up.

After Sept. 11th when the markets were closed for a week I pointed out to a WSJ reporter I know that this makes it clear that we should never have all electronic markets – the risk is too great. People have to be able to meet and make trades.

This market sell-off is bolstering that viewpoint. I can’t say I thought of it myself this time as I heard it from Dennis Gartman on FAST MONEY (CNBC) but he is right – and it made me think of Sept. 11. When there is no human to make a bid, the markets go south.

btw… this isn’t far from the argument I made a few weeks ago about how if the mortgage-related products (CDO’s and CDS’) had been exchange traded – even pit traded – then we would never be in this kind of mess to begin with. (- did you notice that the CME and Citadel are setting out to do just exactly that!)

Markets are made up of humans – and human methods of interacting. Markets are nothing more than beliefs and feelings about the future. Computers don’t have beliefs and feelings. They just do what the humans tell them – and if they do exactly what we tell them, which they do, just like in a pseudo-Matrix like event, they can take over.

Last week the markets, as measured by the e-mini S&P contract, moved in ways (and for reasons) that we have not seen in our lifetimes. When you judge your performance for the week, judge it against that backdrop – good or bad. Or, should I say, bad or good?

It is easy in such environments to make lots of money – or to make lots of mistakes. If perchance the latter is where you think your performance falls, go back to the first mistake that you can remember and ask yourself, what did you do about/with/for the psychological capital side of the equation?

If the answer is you didn’t really take that into account then in reality you made only one mistake – not the series you think you made.