#806 October 12, 2016
Tharp's Thoughts
Weekly Newsletter
  • Feature: Albert Einstein on the Markets, by Van K. Tharp, Ph.D.
  • Workshops: Get a Sneak Peek at January 2017 Schedule
  • Trading Tip: Danger in Dividend & Defensive Stocks, Part 2, by D. R. Barton, Jr.
  • FREE BOOK!: Trading Beyond the Matrix
This October Learn Two Robust Day Trading Systems

Day and Live Trading Workshops
This powerful three day workshop teaches you two distinct day trading systems, The Frog and the RLCO (Regression Line Cross Over). Below Ken explains why he combines The Frog with RLCO For This Workshop:
  • Each system is standalone and independently tradeable.

  • For traders who want to minimize complexity and embrace simplicity, the Frog system is best. It reduces the entry and exit decisions to the simplest distinction between signal and noise in price action and combines that with clear simple rules. There are enough optional decision points to fine tune the system to suit your taste.

  • For traders who are interested in trading a conceptual framework and apply some level of discretion, the RLCO fits better. RLCO requires some interpretation of price action, volatility, time, time of day, and seeks to find critical moments when price is prepared to move sharply. RLCO can incorporate the previous day’s price levels as well as a number of additional indicators to suit each trader’s taste.

  • Operated together, Frog and RLCO reinforce each other. The Frog number can help fine tune RLCO entries as well as inform decisions on when to exit after a particularly good run based on the range stat. The RLCO framework can provide additional decision points at various times in the day for a Frog trader to apply that system’s simple analysis of signal versus noise.

You'll see example trades from both systems as you follow our series of trades from the chatroom over the next few weeks.

About the Chatroom

Inspired by the powerful networking Ken has seen develop over the years at VTI, both through the Super Trader program and workshop attendees, he created and leads a group of traders with a shared interest in swing trading and intraday trading which he calls the Chatroom.

As an attendee of this Day workshop, you will get free membership and access to this chatroom forum. The value of this ongoing interaction and learning is likely as valuable the workshop itself!
To Follow Ken's Market Commentary and Trade Recaps, CLICK HERE
Two Days of Live Trading
If the Day Trading Workshop is the classroom training course, then the Live Day Trading Workshop is the in-the-field learning experience where students have a master trading coach by their side and have the chance to apply their newfound trading knowledge in the real world.

This is not a sit-back-and-listen kind of workshop—it’s hands-on.
In this workshop, you will craft your own daily trading plan based on Ken Long’s Frog, RLCO, or swing system signals and trade your own platform with your own money—all under the guidance of Ken, who will offer thorough direction and individualized feedback.
Learn More
Register Now

Ken's Daily Trades!

Feature Article

Albert Einstein on the Markets

By Van K. Tharp, Ph.D.

Van Tharp

Click here to resolve formatting problems

Note from Van: I am particularly indebted to the insights of Robert Dilts in producing this article. Robert is one of my favorite NeuroLinguistic Programming (NLP) teachers and he is also the author of a series of books entitled Strategies of Genius. The second book of the series (out of print right now) is entirely devoted to Einstein so Dilts did much of the hard work for me in being able to delve into this fascinating topic. In fact, he makes Einstein’s thinking accessible to the average human being. Most people might guess that Einstein thought in complicated mathematical formulas but that’s not the case at all. Instead, he thought in terms of simple visual images—a process he called combinatory play with concepts

How would a genius like Albert Einstein approach the task of making money in the markets? Let’s explore the answer to that question and hopefully, you’ll learn both about Einstein and about the markets in the process.
Einstein’s Beliefs

To really jump into how Einstein might think about the markets, it’s important to explore his fundamental beliefs—those beliefs that shaped his reality. Remember that beliefs are not reality. Instead, they are just your filters to reality. In fact, one of Einstein’s most famous quotes was: “The real nature of things, we shall never know, never.”

Our main criterion for evaluating beliefs is “how useful are they?” with “useful” meaning how useful are they to adopt. In fact, adopting some of Einstein’s beliefs will totally change the way most people think about the universe, life, and the markets. While this article cannot begin to explore all of Einstein’s key beliefs, we can make a start with some of the most significant. My goal here is to explore five of Einstein’s most useful and interesting beliefs and then to show how they apply to the markets.

I’m not asking you to accept any of these beliefs. Instead, just act like you are already a genius and try another perspective. Ask yourself, “Is it useful?” And, when you try on these beliefs, ask, “What are the implications for the markets?”

First we will summarize key beliefs of Einstein and then begin to look at what their implications might be for the markets.

This topic will span two articles over two weeks. In part one we will look at 3 beliefs and market implications and next week we’ll finish up with the remaining 2 beliefs plus an exercise for you to try.

Belief One: The Universe is a Friendly Place

I am fond of using an Einstein quote to illustrate how important beliefs are to us. Thanks to Robert Dilts, I can now present to you that entire quote which occurred when a reporter asked him, “What, in your opinion is the most important question facing humanity today?” Einstein replied:

“I think the most important question facing humanity is, ‘Is the universe a friendly place?’ This is the first and most basic question all people must answer for themselves.

“For if we decide that the universe is an unfriendly place, then we will use our technology, our scientific discoveries, and our natural resources to achieve safety and power by creating bigger walls to keep out the unfriendliness and bigger weapons to destroy all that which is unfriendly—and I believe that we are getting to a place where technology is powerful enough that we may either completely isolate or destroy ourselves as well in this process.

“If we decide that the universe is neither friendly nor unfriendly and that God is essentially playing dice with the universe, then we are simply victims to the random toss of the dice and our lives have no real purpose or meaning.

“But if we decide that the universe is a friendly place, then we will use our technology, our scientific discoveries and our natural resources to create tools and models for understanding that universe. Because power and safety will come through understanding its workings and its motives.”

As Einstein was so fond of saying: “God is subtle but he is not malicious and God does not play dice with the universe.”

Belief One Implications for the Markets: The Universe is a Friendly Place

One well-known joke is that Einstein would have never said that the universe is a friendly place if he had played golf or invested in the markets. Nevertheless, if Einstein’s logic is sound and the universe is basically a friendly place, then the markets must also be friendly. My belief is that the markets are a very friendly place. Whatever you want in life, the markets will find a way to give it to you. I’m not being facetious here.

Ed Seykota was fond of saying that people usually get whatever they want in the markets. They are very accommodating. Whatever you seem to be getting from the markets, that’s what you probably want from them. If you want excitement, the markets will give it to you. If you want to justify a lot of emotions such as fear or anger, the markets will find a way to help you do that. If you want to play silly emotional games with the market, then the markets will help you play those games. On the other hand, if you want to have discipline and are willing to commit yourself to making handsome profits, then the markets will be friendly in that way as well.

In the marvelous book by Neal Walsh entitled, Conversations with God, Book II , God says:

“Don’t you see what you’re doing here? You’re making up the rules as you go along!”

“And don’t you see something else? That’s perfectly okay. It’s what you’re supposed to be doing!All of life is a process of deciding Who You Are, and then experiencing that.” (p. 33)

Later, He goes on to say:

“No one comes to you by accident. There is no such thing as coincidence. Nothing occurs at random. Life is not a product of chance.” (p. 50)

When you realize the “truth” of how this applies to the market, the whole process of trading becomes entirely different. Yet I have no doubt that Einstein would be willing to begin his approach to the markets with this viewpoint in mind. But just think about it. What if the markets are just made up of people totally getting what they really want? What would this say about what the real force and rationale behind the markets is?

Remember that these are just beliefs, not reality. But also remember that your current beliefs are not reality either.

Belief Two: It’s Important to Learn God’s Thoughts

Einstein’s second key belief reflects what he considered to be his purpose in life—to learn God’s thoughts. As a result, Einstein has one primary goal driving his research and his work. He states that goal so eloquently in the following paragraph:

“I want to know how God created this world. I am not interested in this or that phenomenon, in this spectrum of this or that element; I want to know His thoughts; the rest are just details.”

Einstein goes on to say that,

“ . . .the scientist is possessed by the sense of universal causation. The future to him is every whit as necessary and determined as the past . . .His religious feeling that’s the form of a rapturous amazement at the harmony of natural law, which reveals an intelligence of such superiority that, compared with it, all the systematic thinking and acting of human beings is an utterly insignificant reflection. This feeling is the guiding principle of his life and work, in so far as he succeeds in keeping himself from the shackles of selfish desire.”

Begin to think about the implications of these spiritual beliefs for your perceptions of the market. What do they mean about purpose and what might be going on in the universe? And, what are the implications for trading?

Belief Three Direct Sensory Experience is the Key to God’s Thoughts

In the case of the fundamental laws of the universe, the closer we get to the actual patterns that created the universe, the further we get from anything that we can directly sense or experience. Consequently, many of the concepts we use such as “gravity,” “atoms,” “energy,” “electromagnetic force,” “time,” “space,” and even the notion of “cause and effect” are in many ways arbitrary concepts that we use to make sense of our sensory experience.

According to Einstein, our senses do not directly perceive things like “causes.” Instead, all our senses can perceive is that first one event happens and then another event happens. Thus, we are likely to perceive something like “first I type on my computer” and then “letters appear on the screen.” You may then assume that typing on the computer “causes” the letters to appear on the screen. However, you are really assuming the concept of causation.

Now, as a trader, start thinking of the implications of these beliefs on the market. What are the concepts you believe about the market? How much are those concepts related to direct sensory experience?

Beliefs Two and Three Implications for the Markets: It’s Important to Learn God’s Thoughts and Direct Sensory Experience is the Key to God’s Thoughts

By these statements Einstein is basically saying that most of our constructs and concepts are totally man-made. Through his thinking, Einstein concluded that concepts most of us consider quite basic such as time, space, causation, simultaneity, motion, gravity, etc., are merely concepts that we’ve made up to explain things. Furthermore, all of them are relative concepts.

Since most of these are concepts we take for granted as reality, think about what Einstein might say about time and price—two concepts that most people use to describe the markets in their entirety. Of course, he would say, both are man-made concepts and quite relative to the unique moment and situation. You probably can accept Einstein’s logic about time being relative since that’s part of relativity. In addition, all you need to do is compare the value of the dollar now with the value of the dollar twenty years ago (or the value of the dollar-yen relationship to its value thirty years ago) to realize that price is quite illusory and relative. And that means that most of us are just playing games in terms of our perceptions of the market.

So what would Einstein say the market is? The market is the direct sensory experience of all of the players immediately involved in the trading arena—especially those involved at the level of directly making the market. If you’ve ever been to a trading floor—be it the New York Stock Exchange or one of the futures pits in Chicago (when there were a lot of floor traders), you know that there is a lot of emotion in the air. You see expressions on people’s faces. You can hear the tone of their voices. You can also hear the overall volume of activity. Those direct sensory experiences are probably a much better representation of the overall market at any given moment. And the direct interchange of a product between two people (i.e., between a broker who must get your order off in the manner you have directed and a floor trader or specialist who is making that market) constitutes your market at any given instant. Most people don’t even think about the market in those terms—at least until now.

What about the sensory experiences of every individual who is holding a position in that market? Their beliefs about the market’s activity dictate their feelings which dictate their action or lack of action. Their actions influence the trading arena (with the quantity of influence a direct relation to the size of the position(s) that must be traded at any given moment in time) which influences other people both in and out of the arena. The strength of a trader’s beliefs about a market, combined with his position size relative to the market’s capacity, can have a dramatic influence on the price of the market. For example, if the biggest market player(s) decide that they must sell RIGHT NOW, the market’s violent reaction to those decisions will ripple through all of the minds of each participant, stimulating new feelings or actions based on their beliefs and the process continues on and on.

Profits tend to be made from the flow of the overall market (as I’ve described it) and numerous individual reactions to that flow. The closer you can get to being “here and now” observing that flow, the more likely you are to be able to become part of that flow and be successful in the market.

The more you are caught up in the emotions and memories of the past, the less likely you are to be able to go with the flow of the markets.

There are two other significant beliefs held by Einstein. Next week we will explore those and market implications.

Van’s note: While Volume Two of Strategies of Genius is out of print, Volumes One and Three are still available on Amazon. In them, Robert Dilts modeled the cognitive strategies of some of the great legends of the past. These include (in Volume 1) Aristotle, the fictional character of Sherlock Holmes, Walt Disney, and Wolfgang Mozart. Volume 2 is devoted to entirely to Einstein and Volume 3 covers Sigmund Freud, Leonardo da Vinci, and Nikola Tesla. I personally believe this work shows the genius behind NLP modeling. While these books are not about trading in any way, I think they are excellent and I recommend them to anyone inspired by great thinking.
About the Author: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program—a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp www.vantharp.com.


Presented by Ken Long
October 28-30
Presented by Ken Long
October 31-November 1
Exclusive Event for Super Traders
Dec 3-4 (Sat/Sun) SUMMIT
Dec 5 (Mon) Day Off
Dec 6-8 (Tu-Thr) Systems Thinking
Dec 9 (Thurs) Day Off
Dec 10-12 (Sat-M) Oneness Turbo
December 3-12
January 2017 Sneak Peek
These workshops are not yet confirmed and may change. But this is a likely schedule for January.
Presented by Van Tharp with co-presenter RJ Hixson
Presented by Van Tharp and RJ Hixson
More 2017 dates will be announced soon!
Other first quarter selections will likely include How to Develop Winning Trading Systems, Forex and Forex Live.

Trading Tip

Danger in Dividend & Defensive Stocks,
Part 2

by D. R. Barton, Jr.

Click here to resolve formatting problems

You will not be surprised to hear that the easy access to money and zero (or negative) interest rate policies of global central banks have altered the traditional movement of funds around the world. This long-term accommodative policy has pushed massive amounts of money out of “safe havens” like bonds and certificates of deposit (CDs) and into “risk asset” like stocks and real estate.

Said another way, your great aunt Alice can’t put her saved up retirement money into a CD or even into government bonds and hope to earn enough interest income to meet her expenses. Instead, she is forced to buy rental properties or much more likely, buy dividend paying stocks. As I have pointed out in several articles this year, the low interest environment made dividend paying stocks like utilities the top performers for the first half of 2016. Another area for high returns over this time frame was in the traditionally defensive sector, consumer staples.

The following chart shows just how well these two sectors performed from December, 2015 through July, 2016
Since July, however, consumer staples and utilities have lost their luster. In fact, for the third quarter of 2016, these two sectors went from first to worst in an abrupt performance turnaround:
Bargain Hunt Utilities or Consumer Staples? Not Yet . . .

Buying strong stocks (or sectors) on a pullback can be a good momentum strategy, however, some fundamental and sentiment indicators show that jumping into these sectors (or hanging onto positions) now may be an ill-fated exercise. Credit Suisse recently looked at high dividend yielding stocks relative to their non-dividend paying counterparts and reached some useful conclusions. One of Credit Suisse’s analysts put together a chart showing price-to-earnings ratio for high dividend yield stocks vs. no dividend stocks:

First, a few explanations: The orange line shows the ratio of high dividend yield stocks to stocks with no dividends based on “NTM P/E” — the “Next Twelve Month Price-to-Earnings ratio”.

So what does this chart tell us? Stocks that pay high dividends traditionally have a lower relative stock price vs. non-dividend paying stocks right now. Remember that part of the value of dividend stocks is returned to shareholders on a regular basis (quarterly usually) through dividend payments. Non-dividend stocks are held almost purely for the expectation of price appreciation.

So a “high” orange line on the chart shows that dividend-paying stocks are overpriced in relation to non-dividend paying stocks.

In the words of the Credit Suisse analyst Lori Calvasina, here are the conclusions from the chart:

Our main concerns on the defensive and high dividend yield trades include:
  1. Valuations for high dividend and defensive trades look overvalued, both in absolute terms and relative to non-dividend paying companies and cyclicals.
  2. Inflows into defensive/yield oriented sector funds and low volatility ETF’s are fading (low volatility ETF’s actually saw outflows starting in mid-August), while outflows from cyclical sector funds are becoming less onerous.
  3. Cyclicals now seem under owned by hedge funds, as equity long/short cyclical to defensive exposure is near five year lows in the Americas and at five year lows on a global basis, and
  4. Earnings revisions momentum for defensives has returned to its 2014 high and looks ripe for a shift lower.

Prudent thoughts from a well-respected analyst and her team.

Please send your thoughts and comments to drbarton “at” vantharp.com — I always appreciate hearing from you!

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured analyst on Fox Business’ Varney & Co. TV show (catch him most Thursdays between 12:30 and 12:45), on Bloomberg Radio Taking Stock and MarketWatch’s Money Life Show. He is also a frequent guest analyst on CNBC’s Closing Bell, WTOP News Radio in Washington, D.C., and has been a guest on China Central Television — America and Canada’s Business News Network. His articles have appeared on SmartMoney.com MarketWatch.com and Financial Advisor magazine. You may contact D.R. at "drbarton" at "vantharp.com".

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