Sunday, June 29, 2008

The Book of Five Rings; Celebrating Old Wisdom as a Guide for New Experience

Levitating Sphere
Fine Art Print
by Marlene Healey

I was looking for one of my The Art of War translations. I found instead The Book of Five Rings (BOFR) by Miyamoto Musashi (translated by Thomas Cleary).

If you are not familiar with these books they are immensely enjoyable in their simplicity. But this simplicity belies the extraordinary wisdom--wisdom that is applicable to every aspect of life. If you are an active trader, you would welcome these books into your arsenal. The market is surely every bit as dangerous as the battlefield for those traders putting their capital at risk each day. So preparatory mental and physical wisdom for the warrior would benefit the trader, I think!

BOFR was written in 1643. The translator's preface (xiii) notes that there are

two essential elements of ancient martial and strategic traditions:

  • The first of these basic principles is keeping inwardly calm and clear even in the midst of violent chaos;
  • The second is not forgetting about the possibility of disorder in times order.

Seems to have some applicability to current times.

There are many quotables in this book. But there was something from p. 16 (from the author, not the translator's preface as before) that I wanted to share with you:

  1. Think of what is right and true.
  2. Practice and cultivate the science.
  3. Become acquainted with the arts.
  4. Know the principles of the crafts.
  5. Understand the harm and benefit in everything.
  6. Learn to see everything accurately.
  7. Become aware of what is not obvious.
  8. Be careful even in small matters.
  9. Do not do anything useless.

I'll post more of these in the future. There is rarely any new wisdom in the world--merely new experience that can be guided and informed by old wisdom. Unfortunately, I sometimes think that many believe that old wisdom is obsolete. I'm not in that camp.


nice said...

Leisa /2nd

2nd, thanks for the link to the Todd Harrison Video
Sounds like he has been out of the market for a while.

Brinker – still bullish I believe – blaming oil and politics – rather than acknowledging his bad timing.

Uberbulls Ken Fisher Don Hays etc… - still bullish as usual – though their recent tone appears to indicate that they are now beginning to accept that fact that they have been wrong the past year on market direction.

And Cramer yelling – SELL everything.

I see market psychology as such that rather than a case of fear, we have the situation where: ‘everyone is out’ or ‘everyone just wants out and has had enough’

This is the stuff of downtrends, with various calls for a bounce and attempts to buy the dip (oddly more bears calling for a bounce lately) and various attempts to call 11000 dow before 10000 dow or 11000 dow before 13000 dow.

However I haven’t changed my view – that the market will be weak until OCT – that we will have 2 corrections this year (one was in Jan/Mar – second is into Oct) – with each one a W bottom – and that based upon cycles/seasonality we will have a bounce/consolidation in the July to August timeframe (recall the market crashed last August – so a repeat this year of last years August action would be surprising)

But I have been surprised by the recent strength of the Selling pressure the past 10 days.
And continued strong selling combined with continued price declines could portend something ‘extraordinary’ happening that will trump all market indications, all cycles and confound all attempts by the insiders to have the market do otherwise.

IMO there appears to have been some kind of coordinated media onslaught last week – to announce and print in all the business papers this weekend that ‘We Are now In a Bear Market’ – with pied piper Cramer leading the way.

This has been further advanced by Goldman Sachs waiting until the day after the FOMC and slamming the market will all kinds of downgrades and Sell recommendations.

So the market has been prepared for the worst - either it gets it - or it doesn't.

My stance is to remain short in the few index positions I have that I have not taken profits on (respect the downtrend).
BUT I DO NOT want to short anything else or add to anything short at this point given all the negative hype last week.

For position trading I continue to scale in LONG positions on weakness in areas of support (including some on Friday) – but I stop out quickly if it doesn’t work (Like the S&P 1322 failure last week).

For positions that work I then quickly double/triple up on them if we turn up in all time frames - to generate some activedollars as the crowd jumps in from the sidelines.

To be honest what I think the market is really focusing on other than the continued capital dilution in the financials --- is the Middle East/Oil situation:

Here's 2 headlines that just came out this Sunday:

"U.S. Chairman of the U.S. Joint Chiefs of Staff flew to Israel this weekend - 1st trip United States military chief has made to Israel in over 10-years"

"Iranian military commander warns if attacked Iran will lockdown The Strait of Hormuz-Revolutionary Guards Commander In Chief Mohammad Ali Jafari stated to papers Saturday that if Iran is attacked"

2nd you’ve been fairly bullish the past weeks – I was wondering what has changed in the market in your opinion such that you may now ‘move to the sidelines’?


I will post later today some stats on the DOW going back to 1920 - and on how the market historically behaves after a -10% month - I'll also post some potential bullish market indications I see...


nice said...

Market Indications…
The DOW…
Things worth Watching..


.. First off, most indications are bearish…

In particular, the heavy selling pressure we had the last 2 weeks seems to be related to large commercial banking interests taking 50,000 long contracts of the S&P large contract off the table – that’s quite a large move in a short period of time!

Obviously those banks wanted out – and in a hurry before end of quarter. Not a good sign.

(1)OEX option Traders:
This is starting to turn bullish. These are traders which behave in a ‘revert to mean’ fashion.

They are building a large open interest in calls – meaning they are beginning to see value emerging in the S&P 100 stocks.

These traders are usually early (but not always right) – but their change in stance is opposite to what it has been for over a year – so this has bullish indications months ahead from now IMO.

(2)New Highs/Lows:
So far the market has been going lower – but the number of new lows versus new highs has not been.
This divergence is a slight positive.

(3) Asset Allocations:
Looking into the different fund families…
Nearly 40% allocated to energy
Nearly 25% allocated to materials
Hardly any allocated to growth/financials.

This has longer term bullish indications for growth/financials and longer term bearish indications for commodity stocks.



There is only 1 instance of a double digit monthly decline in the DOW in June (1930) and the market traded marginally up the next 2 months before further declines in the Fall.

16 out of 28 times we had a DOW monthly decline greater than 10% (in any month) - we were down again the next month.
These are slightly bad odds. (Though on the positive note – most back to back month large DOW declines did not happen in the summer).

Almost all back to back monthly declines in the DOW which exceeded -10% happened in the 1930’s and 1940’s and did not happen in the summer.

Of the 7 instances of a monthly Dow decline in the range of - 5% to -6% - the market was higher 5 out of seven times in next month.
Those are good odds – though most of these happened pre 1960.
(So pray we rally 3% tomorrow LOL)

Summarizing this… I conclude:
(1)A large monthly decline in the DOW is a harbinger of possible further declines ahead

(2)A large monthly back to back decline in the DOW during the summer is rare

(3)Odds favor some kind of consolidation this summer before moving lower…



The main thing besides oil/gold/US dollar I am watching is:


Last week we had all kinds of rumors that many Cerberus investments were in trouble – including Chrysler which could be nearing possible bankruptcy.

If one thinks about this – this has major implications… because…

If the smartest money around has screwed up… Then something has happened in the markets that NO ONE has accounted for – not even the insiders.

If these rumors prove true – then this is a very very very bad sign for the markets…. Very Bad.

Possibly the worst indication one could think of IMO.

But rumors are often that- just rumors - but IMO CERBERUS bears watching to see if the insiders have lost control of things - and have also become 'dumb' money.



Anonymous said...

nice- i'm thinking of moving to the sidelines because i have gains to protect, and at what point do i concede that i'd be happier if i had sidelined earlier? trading is never own instances of throwing in the towel have more than once indicated a bottom (were you well aware the day i called it quits on QID jump-started a rapid 3-4 point advance over the next few days LOL)->so i am also looking over my own shoulder here...


nice said...


We are indeed in a situation which is totally unique - never happened before - a simultaneous doubling of energy prices and a credit crunch - there is no precedent for this... so I can understand protecting capital - having it ready when the entries are more obvious.

Personally I don't have high confidence in any market indications at this point - even the seasonals - we are in uncharted territory so to speak.

All I have high confidence in is - volatility.

The one thing that has worked for me very well the past few years is that when major yearly cycles top or bottom and/or converge with the weekly cycles - and if we are very oversold and the air is thick with pessimism/fear - this is a great buying point.

Happened in 2006 - when every bearish blog was running one way - while the cycles pointed to something else.

--> Many yearly/weekly cycles are converging around the 1st week of August this year - I'm really leaning to August to being some kind of turning point this year - at least internally for the market.

Hope the helps... and good luck


Anonymous said...

nice- august...wouldn't that be something...six consecutive 10% limit up days in shanghai takes the index from 2800 to 5000 just in time for opening ceremonies!

good luck to you as well