TraderPsychology

Farewell

noreply@blogger.com (Dr Bruce Hong) — Sat, 22 Nov 2008 17:00:00 +0000

Last winter, I reported that I had some medical problems. I had to take a break and undergo treatment. Sadly, the therapy has worked a little bit. But not completely. I must face the facts - my condition is terminal. (Yes, even doctors can experience denial.) I have reached the point where walking or a severe coughing spell can leave me breathless and cyanotic. (My lips and fingers turn blue.) This is really distressing to a man who used to run marathons and could bench press over 300 lbs!

So now, I must make the decision to spend my remaining time with my family. I can no longer devote time to this blog. I honestly don't know what will happen when I finally go off-line. Perhaps someone with greater knowledge than I can suggest a way to keep it "alive." Or, someone could assent to hosting this blog so that others might be able to benefit from it.

For those who feel that this blog has been of benefit, may I ask if you could make a modest donation in my name to:

Christ United Methodist Church 1639 Keeaumoku St.
Honolulu, HI 96822-4399

This is the church that my grandfather, Rev. Hong Chi-Pum founded in 1912.

Aloha and Mahalo.

Can We Decide to Stop Being Morons?

noreply@blogger.com (Dr Bruce Hong) — Fri, 21 Nov 2008 13:18:00 +0000

Wall Street and Business in general is frequently accused of being short-sighted. Namely, that they focus too much on quarter-over-quarter performance and not on the long-term strategic vision. The Japanese are felt to have an advantage in this respect. Perhaps, and perhaps not. Name-calling and finger-pointing is not the issue here. That's looking backwards. Let's commit to looking forwards, instead. Let's commit to looking at a future in which there is increasing population and therefore, increasing pressure upon resources. What should our strategy be in that case?

Here, we must look at what "Green" means. To me, that does not mean committing to greater use of biofuels. Diverting land from food to biofuels is not a solution. We are just now starting to see what that implies and what future pain that could result in. No. I am talking about true green businesses which do not steal from the already famished and impoverished in order to fuel our consumption. Here, we are talking about high-tech, to some extent, but not YouTube, I-Pods and Electronic Games. Now, we must liik at high-tech or alternative ways of energy production. And, of investing in those companies that are already ahead of the curve in terms of energy conservation.

So now I'm going to suggest a green investment basket of stocks. I'll start it off with Toyota and Honda as leaders in automotive economy. I'll add MEMC Electronics. MEMC is the leading producer of silicon wafers that are used in solar energy production. I'll add Florida Power and Light (FPL) which is making substantial investments in wind and solar power. Consider adding GE, which is also investing in wind power generation. AeroVironment (AVAV) and Otter Tail (OTTR) are pure wind generation plays. And here, I'll ask for input. Many of the leaders in alternative, renewable energy sources are not here in the USA, but in Europe. Perhaps some of the readers of this blog from Europe, Asia and Australia can suggest some other renewable energy plays. Here's one site that I'm looking at: Renewable Energy World.com

Let's see if we, as a cummunity, can come up with a forward-looking investment plan that looks not just at next quarter's results, but at the next decades' and the next energy crisis' performance. Let's see if we can do better in the vision deartment than the Big Three and President Bush and Rep. John Dingle.

The Face of Fear

noreply@blogger.com (Dr Bruce Hong) — Thu, 20 Nov 2008 21:29:00 +0000

This is what fear looks like. Bond yields have plummeted. Even a paltry 3.69% 30 year Bond yield is preferable to the uncertainty that traders are seeing in the market. And it doesn't look as if there's any way to turn the herd. The Big Money wants the safety of US Treasuries and is busily buying them, and bidding them up. Just look at what happened to the broader market, the last time bond prices reached this level in September.

Breaking News!

noreply@blogger.com (Dr Bruce Hong) — Thu, 20 Nov 2008 17:49:00 +0000

Rep. Waxman new head of House Energy and Commerce Committee

"Rep. Henry Waxman of California has been elected the new chairman of the powerful House Energy and Commerce Committee, replacing veteran lawmaker and Detroit-ally Rep. John Dingell. The 137 to 122 vote by Democratic lawmakers on Thursday marks a significant shift in congressional leadership, and opens the door to stronger environmental standards for the auto industry. Dingell, a staunch supporter of the U.S. auto industry, has successfully blocked tighter regulations for carbon emmission standards" from MarketWatch

Maybe they read my blog? :-)

More on Morons, Imbeciles and Idiots.

noreply@blogger.com (Dr Bruce Hong) — Thu, 20 Nov 2008 12:34:00 +0000

Yesterday, I discussed Piaget's famous Conservation Experiment. Children usually grow out of it and, above age five or so, can recognize that the volume of water in the two glasses are equal. But only after they are shown to be equal. But this primitive heuristic still remains with us. Manufacturers know this and know that they can charge the same amount for a taller, thinner, 12 ounce glass of a beverage as they can for a short, squat 14 ounce beverage. When they downsize a box of cereal, they don't make the box smaller, they make it taller! Then, they just put less cereal into it. As much as we can intellectually know certain things, we are still caught by the glamor of the bigger, taller package.

Remember the nurse I talked about yesterday? She knew that her Ford Explorer was impractical for a singe woman. She knew that it handled like a pig and wasted gas. But she loved the height and later, the massiveness of the SUV. And I've already mentioned how many times I've seen women behind the wheels of these behemoths. Usually running single-occupant errands to the grocery store. And I've never seen them buy so much that it all couldn't be placed into the trunk of your standard Honda or Toyota. No, they all had to have the largest, tallest, most massive cars ever made. What does that say about the status of women in our society? But that's another discussion, isn't it? I would sometimes tease some of them that I could gas up for $20 a week while they took $70 to $100 a week. And then the gas crisis hit. When I had to carry around $50 bills to gas up, what were they spending?

Now we can blame Detroit for their stupidity and lack of foresight. They went through the energy crisis of the 70's and learned nothing from it. As soon as gas prices drifted back downwards, they dropped all their fuel-efficient lines and concentrated all their energies on the big, truck-based, wasteful and gas-guzzling SUV's. When I saw Chrysler bringing out their Magnum V-8 and the Hemi engines, and when the bulk of auto advertising was on the Ford, Chevy, GMC and Dodge trucks, of all things, then I knew, even before the energy crisis hit, that Detroit was in for a disaster. Even the prototype energy efficient cars and electric hybrid vehicles that they had in development were scrapped in their single-minded pursuit of profits from the most fuel-wasteful class of cars ever produced.

And now, here's the truly nasty, dirty little secret. Detroit didn't produce these wasteful cars in a vacuum. They had help! They had a ready market, a source of demand for these behemoths. As much as I would like to dump on the Detroit executive suites, I have to hold back. We, the
American public, responded like Piaget's five-year olds. We chose bigger over better. We chose the tall 12 ounce glass over the shorter 14 ounce glass. Even worse, when we stopped to think about it, many of us recognized that we were making impractical choices. But we just couldn't silence and outgrow that little five-year old!

And worst of all, we had legislators, led by Representative John Dingle of Detroit, who blocked every attempt at reform of the auto industry. They voted against seat belts, air bags, roll-over and crash safety standards. They voted against raising fuel mileage standards (CAFE standards have not been raised in almost 20 years!) These legislators, mostly from Michigan and Ohio, fueled by lobbyist money for their campaign war-chests, have come from both political parties. Indeed, John Dingle, a 27 term Congressman from Detroit has been called "a one man speed bump" in Congress. And guess who heads the House Energy Committee? Who's Who In The Battle Over Auto Efficiency standards?

And so, as much as I would like to blame and punish Detroit, I have to admit, there's just too much blame to pass around. We have all acted in short-sighted, self-serving ways. We have all failed to consider the future in which limited resources shall play and ever increasing role and will demand an ever increasing price to pay. And that is the topic of the next article in this series.

30 Year Bond Yield Drops Below 4%!

noreply@blogger.com (Dr Bruce Hong) — Wed, 19 Nov 2008 18:28:00 +0000

This has happened twice before since October. And each time, this was followed by a steep sell-off. Not a prediction. Just an observation. Past performance is no guarantee of future performance, yada, yada, yada.

A Lesson From Piaget.

noreply@blogger.com (Dr Bruce Hong) — Wed, 19 Nov 2008 13:00:00 +0000

This illustration shows a famous experiment performed by the Swiss Philosopher and Child Developmental Psychologist, Jean Piaget. In the 1950's, he performed his famous Conservation experiment. Here, two equal amounts of water are presented to a child. Then, the contents of one glass is poured into a tall, thin glass. The child is asked which glass holds more water. If the child is five-years old or less, it will typically point to the taller glass.. It will do this consistently, even as you pour the water back and forth to demonstrate that it is absolutely equal. Here, the child is basing its judgment solely on the height of the water in the glass.

And now, a story. I've always driven small, responsive, sporty and economical sports coupes and sports sedans. Over the years, I've owned VW Rabbits, Mazdas, Nissans, Subarus, BMW's and Infiniti G20's. Then, in the late 80's, a nurse I know enthused about her new Ford Explorer. This five foot-three inch, 104 pounder said she loved the height and improved visibility that it gave her. I gave it a test drive and I was appalled at its sluggish handling, poor road feel and the feeling that I was about to tip over with every turn. This, by the way, was to become a frequent problem with this class of SUV's. So I stayed with my small, responsive and economical automobiles.

But this nurse, who was single and did not need to buy tons of groceries or ferry dozens of children around, stayed with her SUV's. And, I noticed that many of the people driving these huge behemoths around, were women! Later, when crash data came out, this nurse gleefully stated that if she ever got into a crash, it would be the other person who died - not her! Imagine that! A nurse; caring, nurturing, and a caregiver openly gloating that it would be the other person who would die!

Now yesterday I talked about the Morons, Imbeciles and Idiots occupying the seats of upper management in Detroit. (I know that it's not politically correct to use these terms any more. But in these days of economic turmoil, these terms are just sooo emotionally satisfying.) And now, in my next article, I'm going to talk about a truly nasty and dirty little secret. See you tomorrow.

Of Morons, Imbeciles and Idiots.

noreply@blogger.com (Dr Bruce Hong) — Tue, 18 Nov 2008 12:44:00 +0000

When I was in high school, I took a psychology class. This shows how old I am. In those days, the terms "moron, imbecile and idiot" were legitimate psychological terms. Later, because school children would tease and taunt each other, it became politically incorrect to use such terms and they were replaced with the more innocuous terms," mildly, moderately or severely impaired."
Means the same thing, but without the name-calling. Well, I suppose you could call a classmate moderately impaired, but it lacks the sting of the old moron, imbecile and idiot.

Here's their definitions. In old terminology, a moron had an IQ between 50 to 75. They were mildly impaired in that they could be taught simple skills like language, basic arithmetic and socially correct behavior (don't bite or hit others, etc.) Imbeciles were moderately impaired with an IQ between 25 to 50. They could not be taught social behavior, language or how to play within the context of rules. But they could be trained in the activities of daily living. Such activities as how to dress (but not always how to button clothes or tie shoelaces), feed themselves and to toilet themselves. Idiots had IQ's less than 25 and were severely impaired. They could not even be trained in these basic survival skills but were totally dependent on others for their survival. Many a time, we would disparagingly dismiss the truly geeky and socially inept as "trainable, but not teachable." The worst was to say. "Tsk, tsk. Not even trainable."

And now, we come to the Big Three US Automobile makers. And sadly, I have to revert to some of this old terminology. But there is one caveat. As stupidly and as incompetently as they mismanaged their businesses, I am dreadfully afraid that they might still be trainable, even if not teachable. My real fear is that if Congress bails them out, that they will be trained to seek further bailouts and to not address the real problem(s) that face the US Automobile industry. Namely, that of their own incompetence. On that point, I am certain that they are not even remotely teachable.

Let's look at the facts. GM, Ford and Chrysler management is made up almost exclusively of Harvard MBA's. I once joked that you should never invest in a company run by Harvard MBA's. Now, after looking at GM, Ford, Chrysler, Enron, etc, I'm not so sure that it's such a great joke as much as a reflection of reality. Here's in interesting list of Harvard MBA's: Jeff Skilling, Paul Bilzerian, Henry Paulson, Stan O'Neal, and of course, George W. Bush. (Naked Capitalism; The Ethics of Harvard MNA's and Wall Street's Problems Are Because of Harvard MBA's.) As I said, I'm no longer sure that it's such a great joke.

And here's the dilemma for anyone who wants to "rescue" the automobile industry and all those crucial jobs. How do you rescue the industry and keep those jobs, but not the incompetent management?

What Do The Range Bars Tell Us?

noreply@blogger.com (Dr Bruce Hong) — Mon, 17 Nov 2008 20:56:00 +0000

I see a story in the range bars here. This shows the weekly Light Crude Oil prices over the past two years. Initially, you see tight range bars that are showing and trend upwards. Then, in 2008, as speculative fever hit, you see an expansion in the range bars. Remember all those headlines about the role of speculators and hedge funds in the run-up of crude oil prices? By summer, the rise was parabolic and, as I wrote, looked unsustainable. (A Look At The Charts)

It was. The oil market reached a crescendo, peaked at over $140 a barrel as speculative fever just could not be contained, and then, in a matter of months, has given it all back. And this is where the range bars tell their story. The story is one of massive destruction of wealth. Those who came to the party late, and fueled the final spike up are now desperately trying to exit their positions. The buying pressure of the last few months is nothing compared to the selling pressure now. The selling pressure is enormous; look at how often the bars are closing at their lows.

The US Congress was having an orgy of hearings this past summer on the evils of speculation and on the need for regulation of the hedge funds and the speculators in order "to protect the consumers from their rampant greed." I don't suppose that any Congress, any set of regulations or any set of laws could do a better job at punishing the speculators than what we're seeing right now.

And don't bet that the speculators are getting it right to the short side either. A look at the Commitment of Traders shows that there is relative parity between long and short positions. (http://futures.tradingcharts.com/cotcharts/CL) The producers are losing, as witnessed by the recent OPEC Summit. The hedgers and speculators are, at best, having difficulty in this market. And, as long as the range bars are this distorted, I suspect they will continue to do so. When the range bars contract back to historical norms, then we should see a more orderly (i.e. predictable) market. But for now, I think that we're seeing a lot of hedges in the process of unwinding.

Cortisol And The Brain

noreply@blogger.com (Dr Bruce Hong) — Fri, 14 Nov 2008 12:59:00 +0000

The catabolic steroids have some fascinating effects on the brain and cognition. Let's start with two previous observations that I had introduced before. First, that cortisol, in the presence of adrenalin, augments the process of LTP'ing. This leads to the phenomenon of "flashbulb memory." This has clear evolutionary advantages because whatever caused that acute stress response is now indelibly encoded in the brain.

The second observation that I had introduced before is that, with chronic stress and in the presence of persistently elevated cortisol, the process of memory formation and of learning is inhibited. As anyone who has attended a "cram session" for mid-term or final exams can attest, all that effort can get things into short-term or working memory, but not into long-term memory. Recall that, with a lot of repetitions, the nerve endings undergo a permanent change to their synapses called Long Term Potentiation, or LTP. This requires energy and protein to physically remodel the nerve synapse, synthesize new nerve receptacles and to make this particular synapse permanently partially turned on and receptive to stimuli. This process is interfered with by cortisol, possibly due to its catabolic effects.

The end result is that people under stress have a greater amount of difficulty learning new tasks and new facts, focusing on old tasks, and performing on complex tasks that require them to focus, analyze and to make decisions. Tasks like, for instance, trading in a difficult market environment. Not only that, but persistent exposure to elevated levels of catabolic steroids, and this is particularly true when dealing with pharmacologic levels and not just physiologic levels, a form of dementia called steroid-induced dementia can occur. With withdrawal of the excess levels of steroids, this might reverse. But in cases of severe or long-standing steroid exposure, it may not reverse! The patient may be left with a permanent form of dementia, similar to Alzheimer's disease.

Chronically elevated levels of cortisol may also be associated with the development of psychosis. Again, this is more common in the case of the use of steroid drugs. But it has been described in chronic stress, as well. It may be that cortisol has an effect on the amygdala. The amygdala is that structure in the limbic system that is tasked with remembering the emotional tone of a memory. Cortisol may augment this emotional tone up to and beyond the level of the frightening, unpleasant, or painful and into the realm of the terrifying, disgusting, or to the unbearably unbearably painful. It may thus be an element in the formation of Post Traumatic Stress Disorder (PTSD.)

As I noted above, cortisol can interfere with our ability to perform complex tasks, with our reaction times, and our judgment. I am told that, during the trench warfare of WW1, sometimes soldiers would just get up and advance woodenly, on their own, towards the enemy lines. It was as if their bodies had just had too much stress, and made its own decision to end it! We see less dramatic systemic errors of judgment under less severe levels of stress. Just think of the Rodney King beatings where all it took was one trigger, and every cop who was present forgot all his training and jumped in. There are other reports of other policemen or soldiers, under conditions of stress, participating in actions that they would not do under normal conditions. I'm thinking of the Haditha incident here. Under stress, our PFC may not be able to operate at peak efficiency ans so we are more likely to engage in impulsive, emotional behavior.

And this, to finish this series, is one reason why I decided to write about stress. The world's markets have been undergoing a period of severe stress for all the participants. And stress is not benign. In certain cases, it can severely undermine our performance in complex tasks that require refined judgment - as with trading. At its most extreme, it can lead to a breakdown in health. It can even kill you. So during another stressful period - the big religious holidays of Christmas and Hannukah, let's all keep this in mind and do our stress reduction exercises.

Wow! A 900 point Range Today!

noreply@blogger.com (Dr Bruce Hong) — Thu, 13 Nov 2008 21:25:00 +0000

I think the chart speaks for itself.

Whither Now?

noreply@blogger.com (Dr Bruce Hong) — Thu, 13 Nov 2008 16:20:00 +0000

Today's and Friday's actions will be very instructive. Are we forming a triple bottom base, or are we about to plunge on a further downwards leg? Here are the technical arguments pro and con.

Pro:

The Keltner Channel is starting to turn sideways. At least, the bottom channel is starting to do so.
The Chaiken Money Flow is tentatively in the green.
Volume during this sell-off has declined.
The bond market is indecisive. I don't see any serious flight to quality.

Con:

The Keltner Channel is still pointing downwards.
The 34 EMA is still pointing downwards.
The CCI ias crossed the minus 100 line.
Volume has declined during this sell-off. That suggests an orderly decline - not a panic.

Not much to work with, but my guess is that the broader market is turning sideways within a broad range of 850 at the bottom to 1000 - 1050 at the top of the range.

Other Things That Affect Cortisol

noreply@blogger.com (Dr Bruce Hong) — Thu, 13 Nov 2008 13:32:00 +0000

I had talked before about the conditions under which cortisol is secreted normally and appropriately - namely the acute stress response. Now lets look at some other scenarios. Here, I going to look at conditions whereby cortisol levels can be kept artificially elevated. The most obvious condition is one in which the individual perceives himself or herself to be under constant threat, or is indeed under constant threat. Our military serving in war zones, is one obvious example that comes to mind. But our police, postal workers and social workers who have to deliver the mail or their services in "dangerous neighborhoods" and ER doctors and nurses who are under constant stress worrying about the "train wreck" multiple casualty or catastrophic individual case are also placed in conditions in which their cortisol levels may be elevated for long periods of time.

Cortisol secretion has a certain diurnal rhythm. It begins to rise in the morning before we awaken, peaks in early morning, and then declines during the rest of the day, reaching its nadir at midnight. Shift workers, especially night-shift workers, suffer from a serious perturbation of this natural diurnal rhythm with cortisol levels remaining elevated throughout the night. This is why night shift worker suffer more health-related conditions than do day shift workers. Cortisol at night is far more liable to cause central adiposity. That is, fat that accumulates in the abdomen. This pool of fat is much more readily accessible than fat stored in the hips and buttocks. That is why people with apple-shaped bodies have higher levels of cardiovascular disease and diabetes than pear-shaped bodies. I am reminded of a black woman who, when I told her this, remembered that her grandmother always said, "The closer you carry fat to the heart, the worse it is for you." Pretty good folk wisdom, wouldn't you say?

Changed or elevated patterns of cortisol secretion have also been seen in clinical depression, states of fear or chronic anxiety; fever, trauma or surgery; hypoglycemia; states of pain (liike chronic pain syndromes or of neuropathy); extreme exertion or exposure to exptremes of temperature.

The diurnal rhythm of cortisol secretion is triggered or mediated by light exposure in the retina. Thus blindness can cause a disordered diurnal rhythm. So can keeping the lights on at night while watching TV. It is thought that part of our modern exposure to bright lights may be contributing to our higher illness levels, despite a supposedly healthier and safer environment. Seasonal Affective Disorder also seems to be tied to light exposure and, perhaps to perturbations in our normal cortisol diurnal rhythms. Thus, it appears that Benjamin Franklin knew more than he realized when he wrote, "Early to bed and early to rise, keeps a man healthy, wealthy and wise."

Well, I don't know about the wealthy part. but healthy and wise I'll agree to. You'll see why in my next article when I talk about the psychological and cognitive effects of elevated cortisol levels.

Cortisol and Lipids

noreply@blogger.com (Dr Bruce Hong) — Wed, 12 Nov 2008 13:20:00 +0000

Cortisol has striking effects on where fat is stored. One feature of disease states where cortisol levels remain elevated, or of medical conditions requiring the use of exogenous steroids, is central fat accumulation. Here, I'm talking about axial, as opposed to appendicular fat storage. Another way is to talk about intra-abdominal versus subcutaneous fat.

As many women can attest, the fat in the "saddlebags" or hip and buttocks region, is very difficult to control. This is a pool of fat that is relatively stable and is not readily available to meet the bodies energy needs. It is there for long-term storage, to meet our needs only in the event of a severe famine.

Central fat, on the other hand, is readily available and can be released into the blood stream at a moment's notice. This type of fat differs from subcutaneous fat in that it has a higher amount of triglycerides. When released, these low density fat molecules become solubilized by transport proteins and, along with cholesterol, become low-density lipoproteins or the "bad cholesterol." That is why fat carried in the abdominal and chest fat storage areas is so often associated with cardiac disease. This central fat is also associated with diabetes and "insulin resistance" in that it is less responsive to the effects of insulin. Insulin is needed to drive glucose into intracellular storage. Elevated glucose levels bind to proteins and cell walls, instead of going into the cells (glycation). The net effect is to make the cell walls "stiffer." If these cell walls are in your arteries, you start to get a cascade of events that, along with those elevated lipid levels, can lead to atherosclerosis.

This combination of central adiposity, hyperglycemia due to insulin resistance, and elevated circulating levels of triglycerides and low-density lipoproteins (LDL, as opposed to high density lipoproteins or HDL) is referred to as "the Metabolic Syndrome" and is becoming an increasingly recognized risk factor for cardiovascular disease. Metabolic Syndrome can exist by it self in the form of overeating, inadequate exercise, and the subsequent development of obesity. Add chronic stress to the package, as well as smoking, hypertension, male sex and a positive family history of cardiovascular disease, and you have all the ingredients needed for disaster.

And that is the mechanism behind Holmes' and Rahe's empirical observation that highly elevated chronic stress levels can lead to subsequent physical or mental helath breakdowns.

The Adverse Effects of Cortisol

noreply@blogger.com (Dr Bruce Hong) — Tue, 11 Nov 2008 13:30:00 +0000

In my last article, I talked about the important and beneficial role that Cortisol plays during an acute stress response. Now, as I begin to talk about the adverse effects of cortisol, I need to emphasize that here I'm talking about long-term and chronic exposure to cortisol as a part of the chronic stress response. I am adding here also the research about the semi-synthetic and synthetic corticosteroid hormones like Cortisone, Prednisone and Methylprednisolone (Medrol.)

First, a few definitions. There are a number of hormones that are based on the steroid ring. This is a basic chemical structure that is synthesized in the body from cholesterol building blocks. (See image.) Not all cholesterol is bad. That's why the body, in the absence of dietary cholesterol, can synthesize its own cholesterol in the liver. Cholesterol, whether exogenous (that juicy steak) or endogenous (from the liver) can be used to build our sex hormones like estrogen and testosterone, and the stress hormone, cortisol. Some of these, like testosterone and its synthetic counterparts are associated with greater protein synthesis and growth and are called anabolic steroids. Others, like cortisone, are associated with the inhibition of protein synthesis and even the release of amino acids from the skin and muscles and calcium from the bones. This can lead to muscle weakness, muscle and skin atrophy and osteoporosis. Because of the catabolic effects (from the Greek meaning to throw down), they are called catabolic steroids. Catabolic steroids include cortisol, as well as all the potent anti-inflammatory steroids synthesized by the drug industry.

OK. So much for definitions. Now let's look at the effects of the catabolic steroids on the body. Here, I'm going to divide those effects into two sections: effects on the physical body, and the effects on neurocognitive funtioning. This will help to explain why the Holmes and Rahe SRRS was able to predict both physical and mental breakdowns when stress levels crossed a certain threshold.

One of the most striking effects of cortisol is its effects on glucose metabolism. It both increases the release of glucose, primarily from storage as glycogen in the liver, and stimulates the new synthesis of glucose. Amino acids that are released can also be diverted into gluconeogenesis. It produces elevated levels of lipids (lypolysis) and together, this elevated amount of glucose and lipid should theoretically supply a rapidly available source of energy. This, plus the increased amount of amino acids, calcium and other building blocks, will provide you with the ability to heal the wounds that the lion supposedly gave you.

But, as you know, we no longer live on the plains of Africa. Nor do we frequently sustain such a level of injury. Thus, the supposed beneficial effect of having lots of building blocks and energy available instead becomes detrimental in the form of elevated glucose and lipids circulating in the blood and leading to diabetes and hyperlipidemia. Thus, we have the foundation for some of the adverse physical heath effects of stress: diabetes, high blood pressure, heart attack, and stroke.

In its role as a potent anti--inflammatory mediator, it may also reduce the body's immune surveillance system. This can lead not only to increased susceptibility to communicable infectious diseases, but also to cancer. We are becoming increasingly aware of our body's own ability to monitor and kill cancer cells, a process that could be derailed by chronic stress.

Now I want to caution you that this is a very brief summary of a complex biological interaction. And I don't want you to think that cortisol is bad. It has a very essential and beneficial role to play in our bodies, under the correct circumstances. In my next article, I'll detail some of the ways that this can go awry.

Explaining the Role of Cortisol

noreply@blogger.com (Dr Bruce Hong) — Mon, 10 Nov 2008 13:20:00 +0000

In this series of articles, I'm going to give a very brief summary of Cortisol's actions. As with many hormones, it's actions are varied depending on the level of circulating hormone, its phasicity or rhythms, and its relationship to other circulating hormones. Cortisol is the natural, circulating form of the hormone. Its more stable, semi-synthetic form is Cortisone. It was first discovered by Edward Calvin Kendall, a chemist at the Mayo Clinic. In 1950, he was awarded the Nobel Prize in Physiology and Medicine, along with Phillip Hench and Tadeus Reichstein for working out the structure and function of Cortisone. It was first produced commercially by Merck.

Initially, it was hailed as a wonder drug for its anti-inflammatory properties, especially with Rheumatoid Arthritis. It was used widely and it soon became evident that there were some very serious disadvantages with its use. This, by the way, is not the first drug that was revealed to have adverse consequences. Just look at the COX-2 inhibitors like Vioxx, and Baycol, a cholesterol-lowering drug.

Cortisol and Adrenalin are the two acute stress response hormones. (for review, see: The Effects Of Chronic Stress.) When you look at animals (and humans) in the wild, stress is a short-lived event. It lasts for a few minutes and you either survived the stress - or you didn't. So for purposes of definition, acute stress lasts for a few minutes, like up to five minutes. When the stressful situation lasts for greater than 30 minutes, it is called chronic stress.

Now let's look at the mechanism of action here. adrenalin is the "fight-or-flight" hormone. It raises the heart rate and blood pressure, shunts blood away from the brain and digestive organs (no need to worry about digesting that meal or solving calculus equations if you are about to be eaten by a lion!) and shunts blood to the muscles so that you can run or fight better. Its release is instantaneous and it has a short half-life; it only lasts for five minutes, or so.

Cortisol, on the other hand, is the slower released and more slowly acting hormone. Its most important function is to reduce the effects of damage and any secondary inflammation that may result from that damage. And, it prepares the body for the task of repairing that damage. That's why it has such a potent anti-inflammatory effect on the body.

In the presence of Adrenalin, it significantly augments our ability to form memories; to learn. This is the phenomenon known as "flash bulb memory." After all, how many times do you need to have an encounter with a lion before you learn to avoid lions. You can substitute many modern threats like fast and hostile driving, facing a drunk or aggressive individual, etc.

But it is in preparing the body for the process of healing that we find its most important evolutionary role. In its role as preparing the body for repair and healing, it releases glucose and reduces the effectiveness of Insulin so that that glucose can be used for the energy intensive task of healing. It also releases amino acids from the muscles, and inhibits collagen and protein synthesis. That increases the available pool of amino acids that can be available to rebuild the muscles, skin and other structures that may have been damaged by that lion. It does the same thing with new bone formation and thus increases the available amount of calcium. Thus, it prepares the body by halting several processes and building up a pool of readily available nutrients for later use when the crisis has passed and cortisol levels fall back to normal levels.

And that is the crucial point. As I said, several million, or even several thousands or hundreds of years ago, stress was a relatively short-lived event. Now, it is not.Stress is perpetuated by a number of mechanisms. This includes our consciousness and our ability to perpetuate our own stress by our thoughts, our rapid pace of life, overcrowding, competition for resources, and even our tendency to not obey the seasons and our diurnal rhythms.

Stress Reduction

noreply@blogger.com (Dr Bruce Hong) — Fri, 07 Nov 2008 12:55:00 +0000

"We have met the enemy and he is us" Pogo, a cartoon series by Walt Kelley.

Have you ever heard anyone say, during a time of stress and frustration say: "All this stress is just killing me!" Well there is evidently a bit of truth in that statement. Chronic stress, i.e. stress that lasts for longer than 30 minutes, can have serious adverse health effects. The key important fact is to recognize that that could be happening and to take some pro-active steps to ameliorate the deleterious effects of stress. Here, in no particular order, are some stress reducing strategies:

Find a hobby. Find something that you can truly enjoy; that you can immerse yourself in to the extent that the outside cares of the world vanish.
Engage in aerobic exercise regularly. As little as 15 to 30 minutes a day of low impact, low intensity exersize is beneficial. You don't have to get heart-poundingly sweaty.
Pets can have astounding effects on their owners stress levels, heart rate and blood pressure.
Enlarge your circle of acquaintances. Note that I did not say your circle of friends. That can create mutual obligations and thus increase stress levels. but just engaging in conversation with other people can be beneficial.
Keep your sleep habits regular. Make sure that you get adequate amounts of sleep.
Avoid overuse of alcohol.
Eat a healthy diet with lots of fruits and vegetables. Think Mediterranean diet. (I would also say Asian diet, but most people eat at restaurants, and that is not what a healthy Asian diet is all about.)
Do a random act of kindness from time to time.
Donate to charity. It doesn't have to be a fortune. Any donation that lets you feel good about yourself is sufficient.
Clean up the clutter. You will be surprised at how much that can do for you.
If you have debts, make a plan to tackle it. Just having that in writing will reduce the uncertainty and anxiety.
Get counseling if you are having recurrent relationship problems. Look at the SRRS and you will see how high those relationship difficulties score.

As you can see, this is just a short list. You can probably come up with some ideas on your own. The important thing here is to do something. Just the sense that you are moving forward, that you are doing something to help yourself can lift your spirits out of a morass of helplessness.

Using the SRRS

noreply@blogger.com (Dr Bruce Hong) — Thu, 06 Nov 2008 13:30:00 +0000

Now are you ready to apply the SRRS? OK. Here's how to do it. Count up all the life events that have occurred in the previous one year period. Then total all the numbers associated with each of those life events. Now prepare to be shocked.

150 points or less means a relatively low number of life events and, therefore, a low stress reading. That means that there is a low susceptibility to suffering a stress-related illness, either physical or mental.

150 points to 299 points means that there has been significant stress and that you have a 50% chance of suffering a major health breakdown in the next two years.

Greater than 300 points raises the likelihood of a major health breakdown to 80%!

Now notice that I've emphasized that the adverse health consequence can be either physical or mental. Everyone can recognize when stress leads to mental health problems, i.e the old "nervous breakdown." But physical problems like heart attacks, strokes, onset or worsening of diabetes; accidents at work; or at home or on the road; flare-ups of arthritis and other musculoskeletal conditions are all possible adverse physical health consequences.

As I said, this was an empirical list. Holmes and Rahe merely totaled up the life events score and correlated it with the subsequent health histories of their patients. It can be as simple as having an argument with a spouse or boss and, in a moment of inattentiveness, (while probably ruminating about that SOB), a work or automobile accident can occur. And it can be as subtle as a rise in the chronic stress-related hormone, cortisol. That can lead to diabetes or the worsening of diabetes, heart disease and stroke.

The important fact to consider is that any stress, whether we consider it to be "good" or "bad stress" and even chronic boredom, a sense of feeling unappreciated or underutilized, can lead to these adverse health consequences. This is something that is really important to keep in mind. Even "good stress" - things that we would consider to be beneficial - acts as a stressor because it changes the status quo and requires us to change. This element of a need to change, either anticipated or unanticipated is the actual source of the stress; it is the stimulus to Cortisol secretion. And it is long-term exposure to elevated Cortisol levels that carries with it the adverse health consequences.

I am raising this issue because with this recent bear market, I'm sure that stress levels have risen for many of us. We need to recognize and acknowledge that fact and take positive steps to reduce the adverse effects of that stress. More on how to do that in my next article. Meanwhile, for those who would like to read more on an updated version, go to: Wkikipedia Holmes and Rahe Stress Scale.

A Word About Stress

noreply@blogger.com (Dr Bruce Hong) — Wed, 05 Nov 2008 13:30:00 +0000

Let's start off by defining some terms. Not all stress is bad. Some kinds of stress are even welcomed - we call it stimulation, challenge, triumph, and progress. Sound confusing? OK, here are the definitions, courtesy of Braingle:

Eustress is a good type of stress. This is what you feel when you are watching a suspenseful movie, riding a rollercoaster or about to finish running a marathon. Eustress helps motivate us to finish projects that we are excited about and contributes positively to a creative mindset.
Distress refers to frustrations, unresolved anger, or fear. It causes anxiety and mental suffering. This is a bad stress and does a great job at blocking creativity.
Under-stress is the lack of any stress, and is similar to boredom and hopelessness. An unchallenging job can lead to under-stress. If people are not challenged then they are not motivated to be creative.
Over-stress is what you feel when you have pushed yourself too hard, are late for an important meeting, or have a big deadline that is looming. People who are in this condition do not have the time to think creatively. They are only worried about dealing with the issues immediately at hand and cannot step back to look at the big picture.

OK. Now those of you who have read this blog from its inception will recognize that these are somewhat arbitrary terms. They are holdovers from an earlier psychological literature and do not incorporate the newer knowledge of neurobiology and neuroendocrinology. but here's the fascinating point that I wish to make. Any situation, whether we consider t to be Eustres or Distress, and even Under-stress, can lead to physical consequenses.

The basis for this assertion is founded on empirical research that led to the Holmes and Rahe Social Readjustment Rating Scale or SRRS. This was first published in 1967 by Psychiatrists Thomas Holmes and Richard Rahe (pronounced "Ray.") It listed 43 life events and assigned them a value. This value was based upon empirical research about the consequent likelihood of an adverse health event, be it mental or physical.

Here's the Scale:
1. Death of spouse 100
2. Divorce 73
3. Marital Separation from mate 65
4. Detention in jail or other institution 63
5. Death of a close family member 63
6. Major personal injury or illness 53
7. Marriage 50
8. Being fired at work 47
9. Marital reconciliation with mate 45
10. Retirement from work 45
11. Major change in the health or behavior of a family member 44
12. Pregnancy 40
13. Sexual Difficulties 39
14. Gaining a new family member (i.e.. birth, adoption, older adult moving in, etc) 39
15. Major business readjustment 39
16. Major change in financial state (i.e.. a lot worse or better off than usual) 38
17. Death of a close friend 37
18. Changing to a different line of work 36
19. Major change in the number of arguments w/spouse (i.e.. either a lot more or a lot less than
usual regarding child rearing, personal habits, etc.) 35
20. Taking on a mortgage (for home, business, etc..) 31
21. Foreclosure on a mortgage or loan 30
22. Major change in responsibilities at work (i.e. promotion, demotion, etc.) 29
23. Son or daughter leaving home (marriage, attending college, joined mil.) 29
24. In-law troubles 29
25. Outstanding personal achievement 28
26. Spouse beginning or ceasing work outside the home 26
27. Beginning or ceasing formal schooling 26
28. Major change in living condition (new home, remodeling, deterioration of neighborhood or
home etc.) 25
29. Revision of personal habits (dress manners, associations, quitting smoking) 24
30. Troubles with the boss 23
31. Major changes in working hours or conditions 20
32. Changes in residence 20
33. Changing to a new school 20
34. Major change in usual type and/or amount of recreation 19
35. Major change in church activity (i.e.. a lot more or less than usual) 19
36. Major change in social activities (clubs, movies,visiting, etc.) 18
37. Taking on a loan (car, tv,freezer,etc) 17
38. Major change in sleeping habits (a lot more or a lot less than usual) 16
39. Major change in number of family get-togethers ("i.e. an increase or decrease") 15
40. Major change in eating habits (a lot more or less food intake, or very different meal hours or
surroundings) 15
41. Vacation 13
42. Major holidays 12
43. Minor violations of the law (traffic tickets, jaywalking, disturbing the peace, etc) 11

Notice that after each description of a life event is a number. This number represents the empirically determined adverse effect of that life event. Notice that many things that we would consider to be good events or Eustress, are still counted. Furthermore, many of them like marriage or a pregnancy, retirement or even a major improvement in financial status (like a huge windfall inheritance or a winning lottery ticket) are associated with high stress numbers.

I'll let you look this over. In my next post, I'll show you how to interpret it.

So Close!

noreply@blogger.com (Dr Bruce Hong) — Tue, 04 Nov 2008 21:04:00 +0000

As you can see, despite today's rally, the US Treasuries failed in their attempts to establish new highs in their yields. The price of the 30 year bond rose substantially, indicating a flight to quality in a time of uncertainty. Resistance is still holding at 4.4% for the 30 year, and 4.0% for the 10 year bonds. The VIX is still elevated (albeit not as high as before) and there is still a great deal of fear and uncertainty in the markets. No indication here of a serious change in mood, or trend, thus far.

Meanwhile, the SPX is approaching mid-upper channel. This is a time where people who use Keltner Channels start to look for a reversal. In this case, it would be to look for an opportunity to go short and to resume the previous downtrend. Countering this is the fact that the CCI has crossed the midline and the +100 line (traditional interpretation would be to go long and hold until ir re-crosses the 100 line) and the Chaiken Money Flow indicator is flirting with a cross into positive territory.

Warning! This is not a prediction or investment advice. This is merely a look at the charts as they appear to me. But, as I've warned before, that picture can change in an instant. Don't be impatient. Further developments will clarify the situation.

Bonds And The Market

noreply@blogger.com (Dr Bruce Hong) — Tue, 04 Nov 2008 12:45:00 +0000

Those of you who could interpret the superimposed monthly 10 year bond price and SPX charts can see that they are complementary. That is, they move in opposite directions; when one rises, the other instrument declines. The timing relationship is not perfect, but it does appear, that bond moves tend to precede stock market moves. Remember that the professional money managers - the Big Money - must always try to balance the risk versus reward ratio. They are charged with trying to get the highest and best return on investment (ROI) at the safest possible risk level.

And when I'm talking about the Big Money, I'm not just talking about Mutual Funds or the isolated billionaire like Warren Buffett, with tons of disposable cash. Here, I'm talking about the pension funds, sovereign wealth funds, endowment funds and hedge funds. In the case of CalPERS, as of October 2008, it had $192.7 billion dollars of assets, making it the largest public pension fund in the United States. (Wikipedia) The Harvard endowment fund is the largest at over 29 billion, followed by Yale at 18 billion dollars in assets. (Investing Like the Harvard and Yale Endowment Funds) Hedge Funds, in aggregate, hold close to three trillion dollars in assets. (Hedge Fund Blogger.com) And Sovereign Wealth Funds hold over two trillion dollars. The United Arab Emirates hold over 800 billion just by themselves, followed by Norway at 380 billion. (Economist.com)

I would like to draw your attention to two facts. First, it is hard to move that kind of money around. Try to move too fast or too conspicuously and you cause market perturbations that are counter-productive to your intentions. So, if you do decide to make any kind of a move, it has to be done very slowly and very patiently. Second, Look at the article I posted: Investing like the Harvard and Yale Endowment Funds. It is an extremely informative and eye-opening article. The most important point is that with a 50/50 per cent allocation between bonds and stocks, they are able to achieve investment returns of close to 10% a year! As a matter of fact, if you check out the articles, you will see that all these large funds distribute their money around various asset classes, including commercial property and real-estate.

Now obviously, they have the size with which, like Warren Buffett, they can demand favorable trade terms. Commissions, Preferred Stock, and other sweetheart deals may be accessible to them and not to the rest of us. We don't have the benefits of economies of scale or seats on the NYSE and NASDAQ that would give us access to commission-free trading. But that is not the point that I'm trying to make. The point is that the stock market is not the only market and that, in relation to bonds, is actually much smaller. (And in the case of sub-prime mortgage-backed securities and Credit Debt Swaps, the stock market was a puny 90 pound weakling. At least until those two instruments had their supply of steroids cut off.)

So here's the take-home point that I've been increasingly appreciative of ever since I began this research project: Watch the bond market, and not just the stock market. And for those who have the assets, balance your allocations between bonds and stocks.

How Many of You Are Feeling Good About The Rally?

noreply@blogger.com (Dr Bruce Hong) — Mon, 03 Nov 2008 13:00:00 +0000

Last week's rally looked good, when you look at it on a day-by-day basis. However, when you step back and look at the bigger picture, there are still some things that need to be said.

The Keltner Channel is still pointing downwards.
The 34 EMA is still pointing downwards.
We are just now starting to challenge the mid line of the Keltner Channel.
One trading strategy is, after a trend has been established (down in this case), when the market moves to the midpoint of the opposing channel, then that is a good point to take a counter trade. That point would be about the level of the 34 EMA and a short trade would be entered.
The Chaiken Money Flow indicator is still solidly in the red.

Countering those observations is the fact that the CCI has crossed the zero line and that the bond market is starting to show some evidence of weakness. But I caution you that that could all change in an instant.

Some Follow-Up

noreply@blogger.com (Dr Bruce Hong) — Sat, 01 Nov 2008 17:53:00 +0000

My article: A Word of Warning created quite a stir. I received comments accusing me of paranoia and of over-reacting. That may be so, but I have the concerns that I have because I get so much unwanted e-mail. I certainly didn't offer my e-mail address to them. So they got it in some way - like data-mining. I get swamped by adware to the point where my computer slows down and I have to periodically clear my cache and even re-boot to regain my expected performance. And occasionally, I get some really nasty spyware that is a real pain to remove. So, in the face of these experiences, I don't feel that the accusation that I am paranoid is justified.

But here is the point. I have just been informed by Senator Russ Feingold that there is a new bill making its way through congress. Here is a part of his message:

"You may be interested to know that Rep. Edolphus Towns (D-NY) introduced H.R. 964, the Securely Protect Yourself Against Cyber Trespass Act, on February 8, 2007. The bill would make it illegal for anyone other than the owner or authorized user of a computer to collect personally identifiable information or remove anti-spyware or anti-virus technology from a computer. It would also require companies that distribute spyware to obtain permission from users through an easily understood licensing agreement before installing the programs on users' machines. Once downloaded, programs would have to provide computer users with a way to easily disable the software. The bill also preempts or otherwise limits state laws and regulations that target spyware. The FTC would enforce the legislation and would be able to levy a fine of as much as $3 million for the most severe violations. H.R. 964 passed the House of Representatives on June 6, 2007 by a vote of 368-48. The bill has been referred to the Senate Committee on Commerce, Science, and Transportation."

There it sits. For those of you who, like me, feel frustrated by this unwarranted intrusion, I have provided a list of the committee members and links to their websites. You can contact them there. I have already urged them to hasten the passage of this legislation. BTW. A quick search on Google shows that there are a lot of "business" lobbyists who are quite opposed to this bill. Your voice needs to be heard in order to counteract those lobbyists who are trying to water down the bill's provisions.

Sen. Daniel Inouye [D-HI] and Sen. Kay Hutchison [R-TX] are the ranking members. Other committee members are:
Sen. Barbara Boxer [D-CA],

Sen. Maria Cantwell [D-WA]
Sen. Thomas Carper [D-DE
Sen. Jim DeMint [R-SC]
Sen. Byron Dorgan [D-ND]
Sen. John Ensign [R-NV]
Sen. John Kerry [D-MA]
Sen. Amy Klobuchar [D-MN]
Sen. Frank Lautenberg [D-NJ]
Sen. John McCain [R-AZ]
Sen. Claire McCaskill [D-MO]
Sen. Bill Nelson [D-FL]
Sen. Mark Pryor [D-AR]
Sen. Gordon Smith [R-OR]
Sen. Olympia Snowe [R-ME]
Sen. John Sununu [R-NH]
Sen. John Thune [R-SD]
Sen. David Vitter [R-LA]
Sen. Roger Wicker [R-MS]
Sen. John Rockefeller [D-WV]

What Are Bonds Telling Us?

noreply@blogger.com (Dr Bruce Hong) — Fri, 31 Oct 2008 12:35:00 +0000

Just a cautionary note. I don't want to come off as someone who has all the answers. I'm not a market guru. But I have been doing some reading and research on the relationship between bonds and stocks.

Basically, they represent two sides of the same (investment) coin. As I pointed out in: Do Bonds Predict Market Bottoms? and DoesThe Bond Market Predict Market Bottoms?, money managers are under constant pressure to get the best and safest investment rate of return. When one asset class starts to under perform, or when there appears to be excess risk in that asset class, then they will shift assets away from that class and into the other one. The following monthly chart of the price of the 10 year bond is an illustration of this.
As you can see, the price of the 10 year bond plummeted in 1999 during the height of the tech bubble. Money was chasing the exorbitant rise in stocks and so bond prices declined and yields rose. Then, in 2000, as concern about the markets ability to sustain this growth arose, money started shifting back into bonds. Bond prices peaked in June of 2003, and started to decline. Thus, those who had shifted to bonds during the Bear Market of 2001 to 2003 would have experienced a significant preservation, of capital. Bonds increased 22% to 25% in value in addition to the interest that they were paying, while the SPX dropped close to 50% in value. Depending on what your allocation was, that would be a significant buffer for the bear market downturn.

During this recent Bull Market, money did not shift too significantly away from bonds. Instead, it remained at about its historical average level. But, as you can see, bond prices began to rise in the summer of 2007 and reached a peak in February of 2008. There was an interim low established in June of 2008.

Now, here's your homework assignment. Go and compare this chart to the SPX chart. I superimposed the two charts. It's a little busy, but I think that you can interpret it easily enough. Are there any conclusions that you can draw from this?

What Are The Bond Markets Telling Us?

noreply@blogger.com (Dr Bruce Hong) — Thu, 30 Oct 2008 12:22:00 +0000

I'm starting to see some interesting things in the bond markets. Now, a word of caution. I'm looking at this through a technical analysis window. And TA does not always give a clear and unobstructed view. But I caution you to always remember that Fundamental Analysis trumps Technical Analysis. And there are still some important hurdles for the bonds to clear. Let's take a look at the charts.

First, is a bar chart of the 30 year US Treasury Bond. Below that are line charts of the SPX, followed by the 30 year bond yield ($TYX) and the 10 year bond yield ($TNX.) Note that the 30 year bond ($USB) is showing a pattern of lower highs and lower lows. Contrariwise, the yield of the 10 year bond is showing higher highs and higher lows. That's encouraging.The key question now is: Can they clear their intermediate hurdles (interim highs) at 4.4% for the 30 year bond and 4.0 - 4.1% for the 10 year bond. Ultimately, you would want to see them regain their old levels of 4.5- 4.6% for the 30 year bond and 4.2% or more for the 10 year bond.

Now here's the problem. The Fed just cut its overnight lending rate by 0.5% and indicates that further rate cuts might be in order. That means that bond yields should decline. and indeed, the price of the shorter term notes, like the two year note has already jumped. (Remember that as bond prices rise, bond yields decline.) The shorter term notes tend to be more sensitive to Fed rate changes. But there is some speculation that the Fed may start targeting the longer term bonds. If they start to manipulate the prices/yields of the 10 and 30 year bonds, then the current charts become uninterpretable. Then, the fundamentals of the bond markets will change. And that's what I mean when I say the FA trumps TA. All the fancy chart patterns in the world won't help you then.