Secrets for Thrivingin a Hedge-Fund Dominated Market

Joe BellSenior Equity AnalystSchaeffer’s Investment Research, Inc.

September 11, 2012

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www.schaeffersresearch.com

What to Expect

• Our Trading Philosophy

• Herd Mentality

• Market Sentiment

• Sentiment Indicators

• Adapting to Market Environment

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Expectational Analysis ®

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FUNDAMENTAL TECHNICAL

SENTIMENT

The Ashe Experiment

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Fashion

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Herd Behavior

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Stock Market Crowds

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“The crowd is most enthusiastic and optimistic when it should be cautious

and prudent; and is most fearful when it should be bold.”

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Humphrey B. Neill

Four Stages of a Rally and Decline

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Euphoria (bearish)

Disbelief

Acceptance (bearish)

Despair (bullish)

Disbelief (bullish)

Acceptance (bullish)

Euphoria (bearish)

The Wisdom of the Great Sanhedrin

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Sentiment• Anecdotal

– Media, blogs, Twitter, friends & family, magazine covers

• Surveys/Forecasts

• Quantitative– Option activity, option open interest, put/call

ratios, implied volatility, short interest, analyst ratings, inflows/outflows

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Probably the Most Famous Contrarian

Magazine Cover

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Do Not Buy Commodity ETFs

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“If everyone is thinking alike,

then somebody isn’t thinking.”

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Potash (POT)

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Agriculture ETF

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Same Day as the Market Bottom in ‘09

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Within Hours of a Major Market Peak

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Sentiment Surveys

• AAII Poll

• NAAIM Poll

• Investors Intelligence Report

• Bloomberg Strategist Allocation

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Investors Intelligence Report

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NAAIM

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Wall Street Strategist Allocation

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41.50%

Analyst Buy Ratings

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Incorporating Bearish Analyst Ratings

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Incorporating Bullish Analyst Ratings

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Fading Option Speculators

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Stock TOL= $25.00

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$25$26$27$28

The Unwind

Trade Example – 6/18/12

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Sentiment on TOL

• Several analysts still doubt stock

• SI/Float = 9%

• June 26-strike put = 7,500 puts

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TOL August 22 call - $4.40

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$10.00

Contrarian Quote

“When someone yells ‘fire’ in a crowded theater, a contrarian is the person who first checks to see if there really is a fire before rushing to the door.”

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Short Interest

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Where is the Retail Trader?

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-$325 Billion

There They Are!

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+$911 Billion

Applying Ratios with Hedge Funds Involved

• Buy-to-Open Individual Equity P/C Ratios

• Puts on ETFs are popular hedges

• VIX calls are popular hedges

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10-Day Equity BTO P/C Ratio

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VIX BTO Call/Put ratio

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A Contrarian Technical Analyst?

• Be Aware of “Obvious” Set-Ups

• Popular Moving Averages

• Indicator Defaults– 95% don’t change them

• Confirm on Multiple Time Frames

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Think Like a “Sentimentician”• Don’t always follow the herd

• Look for stocks or ETFs that have low expectations

• Low expectations translate into potential buying power

• Success comes from buying low expectations, not “low prices”

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“If you don’t have time to do it right, when will you have time to do it over?”

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Follow Us on Twitter

@joebell_trader

@schaeffers

@ryandetrick

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