Thanks to everyone who participated in the chat. Here’s the lightly-edited transcript:

6thworld: I just realized that there is a bubble of real estate bubble bloggers, lol

CMaoxian: how’s the weather in NJ?

6thworld: blue skies, nice temp

Bill: It’s hot and muggy in IL

CMaoxian: blue skies in Beijing, which is unusual

CMaoxian: had a bad sandstorm the other night

6thworld: i read about that

CMaoxian: going outside… it was like one of those post-apocalyptic scenes

6thworld: Mad Mao and the Thunderdome

CMaoxian: scary stuff

6thworld: whaddya think about XLE, breakout of its old high?

CMaoxian: it’s bullish ;-)

6thworld: trend is up

6thworld: must be ready for an upgrade, lol

CMaoxian: yeah and when i’m sitting in bumper to bumper traffic here i have a silly smile on my face

6thworld: ever read about peak oil?

CMaoxian: yeah but i dunno enough about it to say if it’s bunk

Observing: hello - came across this site this week, thanks for making it an open chat

CMaoxian: welcome Observing, thx for coming

CMaoxian: the new recent comments thing in the sidebar is nice, kicks up the interactivity of the site

CMaoxian: shoulda done it years ago but i’m a dummy

eyal: yeah it is. did u manage to get the admin side of it working?

CMaoxian: no eyal, it’s still a blank

CMaoxian: the vaunted Ugly

eyal: hey babak, how’s it going.. still waiting on u know what ;)

Ugly: Hello everyone

6thworld: heya Ugly

Ugly: what does “vaunted” mean?

eyal: hi ugly

CMaoxian: it means el supremo

6thworld: that’s what they put gold and valuables in

Ugly: I can’t tell if “vaunted” is a compliment or insult

CMaoxian: vaunted is a compliment

Ugly: what’s on the agenda for tonight?

CMaoxian: nice catch of the NTRI ugly

CMaoxian: NTRI is of course a Notable New High

CMaoxian: is it a top alpha dog?

Spock: CM - how’s sandstorm treating ya?

CMaoxian: spock it was miserable here for a couple of days

CMaoxian: i mean more miserable, the environment here is a catastrophe

CMaoxian: 10% GDP growth though… trade-offs

eyal: so you reckon that when the economy slows down the pollution and sand will go away? ;)

CMaoxian: ha! eventually eyal

eyal: I wonder how they’ll take care of the desert

Spock: CM - have you stopped trading altogether to concentrate on your business ventures? Just wondering… you seem to be enjoy trading

CMaoxian: yes spock

Spock: guess the time zone doesn’t help either being in Asia

CMaoxian: yes spock, i’m getting too old to stay up past bedtime

ks: CM, FWIW i do appreciate your notable new highs

CMaoxian: thx ks

CMaoxian: i’m gonna yack about relative performance charts a bit tonight

CMaoxian: do you guys use these regularly?

CMaoxian: stockcharts has a nice intro to relative performance charting

CMaoxian: All you do is divide the price of one stock or ETF or index or whatever by another.. thus the name “ratio chart”

CMaoxian: so you can see how the one is performing relative to the other

CMaoxian: they’re often called relative strength comparisons but i avoid that term because it causes confusion with Welles Wilder’s Relative Strength Index (RSI)

CMaoxian: here’s a weekly chart of the Pharmaceutical HOLDR divided by the S&P 500 (SPY): PPH/SPY

CMaoxian:

CMaoxian: the gray line is the relative performance (PPH/SPY), the red line is a 13 week moving average, the blue line a 52 week moving average

6thworld: so what we have with PPH then is a declining performance rel to the SPY as it moves sideways

6thworld: so are we to read in this that price has stabilized and its way oversold?

CMaoxian: I don’t like the term “oversold.” Better to say Big Pharma has been “out of favor” for awhile now

6thworld: so CM, you think PPH has bottomed based on the sideways price action

CMaoxian: Until the PPH’s relative performance improves, it’s an area of the market to avoid

CMaoxian: i’m pointing out that by using the rel perf chart you can see how badly PPH has underperformed… the opportunity cost of holding it these many years has been great

Babak: ok, so what you’re saying is that if someone was long PPH they might not understand the opportunity cost they are incurring because it just goes sideways

CMaoxian: right, Babak

CMaoxian: that said, i’m a fan of Big Pharma because i see a lot of value there

CMaoxian: my wife thinks that “the rules of the game have changed” for Big Pharma but what does she know?

CMaoxian: incidentally she told me to sell all our tech stocks in March 2000 and buy real estate in China during SARS, (I refused to do either one), but what does she know?

Bill: brilliant

Spock: guess she never checks your transcript?

eyal: then u could have really retired ;-)

CMaoxian: no spock, she has more important things to do lol

Spock: ;-)

6thworld: CM, i’m with you on Big Pharma

CMaoxian: And that worries me, 6th ;-)

Babak: she was also right about digital photog ;o)

CMaoxian: here’s a chart for the MidCaps, S&P MidCap 400 divided by the S&P 500: MDY/SPY

CMaoxian:

CMaoxian: so you can see midcaps have been outperforming for a very long time

Babak: bloody missile

CMaoxian: here is the S&P SmallCap 600 compared with the S&P 500: IJR/SPY

CMaoxian:

CMaoxian: SmallCaps have been outperforming for what feels like forever

CMaoxian: the beauty of these ETFs is that they’re super-liquid

CMaoxian: here’s a chart of the Consumer Staples SPDR compared with the S&P 500: XLP/SPY

CMaoxian:

CMaoxian: you can see that during the bear market the Staples outperformed (defensive)

CMaoxian: and since the bull market began in 2003 they’ve underperformed miserably

CMaoxian: so as long as the relative performance of the Staples is trending down you don’t want to touch them

CMaoxian: ditto the Pharmaceuticals

CMaoxian: you want to follow the money, and only be in the strongest sectors (and preferably the strongest stocks within the strongest sectors)

Babak: CM, what is criteria for det. trend?

CMaoxian: Babak, for these charts I’ve just put two moving averages on: 13 week (quarterly) and 52 week (yearly) … a simple moving average crossover system

Babak: no, I mean, how do you determine if/when trend changes

CMaoxian: just for simplicity babak i’m saying watch for the crossover of the 13 week and 52 week moving averages

Babak: ok

Ugly: does stockcharts.com show the relative performance?

CMaoxian: yes ugly

CMaoxian: here’s their intro, ugly

Ugly: is it the same as the RSI?

Babak: no ugly

CMaoxian: no ugly, don’t confuse the two!

Ugly: how do you get the relative strength?

Babak: in stockcharts.com use XX:YY (colon to mean ratio)

Babak: insert symbols for XX and YY

Ugly: okay thanks

eyal: for malaysia

CMaoxian: Here’s the chart of the Dow Jones US REIT Index divided by the S&P 500: IYR/SPY

CMaoxian:

CMaoxian: you can see that the bull run in the REITs is still going strong

CMaoxian: you can also see that during the 2000-2002 bear market the REITS were just fine

vic: Sorry to join late. Chairman, what are your thoughts on real estate and gold

CMaoxian: they’re still strong, vic

roger: C. how about using relative performance to short the weakest stock in the weakest sector

CMaoxian: yes roger, you could reverse the idea to find shorts

Ugly: check out this chart of NTRI compared with the SPY

CMaoxian: now here’s the very interesting chart of the Energy SPDR compared with the S&P 500: XLE/SPY

CMaoxian:

CMaoxian: see how the relative performance was flat for many years and then the breakout came in early 2004

eyal: CM, so are you scanning thru these to look for similar signs of breakout and outperformance?

CMaoxian: yes eyal

eyal: cool

CMaoxian: these charts are through last Thursday by the way

CMaoxian: the XLE moved to a new all-time high today but the chart doesn’t reflect that

eyal: yeah I saw it at the pump this morning

Spock: anyone think GS’s crude oil prediction of >$100 a barrel may happen this year or next?

CMaoxian: their guess is as good as mine, spock

Spock: i’m sure… but it’s at $72 now, incredible

CMaoxian: in inflation-adjusted terms, spock, it’s just so-so

CMaoxian: so personally i apply a trend following system to the relative perfomance chart for signals

6thworld: how?

eyal: do u use fuzzy for this or something else?

CMaoxian: here’s my chart where i apply the Fuzz to the relative performance chart

CMaoxian:

nsdq: CM what are your charts created in

CMaoxian: nsdq - Metastock

CMaoxian: so like all trend following things you get whipped around for awhile (sometimes years) but eventually you get a payoff (not always)

eyal: u gotta be damn tough to go through that 2002-2003 period :)

Babak: fuzzy=sweet

CMaoxian: yes eyal, people talk about trend-following like it’s some kind of always-wonderful thing but they’re forgetting the tough times

CMaoxian: just ask John Henry about his recent performance

Spock: some big time trend followers had some rough time this past few years - decreasing volatility, etc

CMaoxian: yes spock

Spock: JH is certainly one of them

CMaoxian: so anyway my point here is y’all should be aware of relative performance at all times

Spock: when to resume trading, CM?

CMaoxian: not sure spock

eyal: do u apply that to individual stocks vs. their sector etf as well?

CMaoxian: yes eyal

CMaoxian: the people who are crying about no opportunities in the market must still be trying to trade MSFT and CSCO and DELL and other once-great now dead-money stocks

tinter: do you see sector rotations away from energy/commodities anytime soon?

CMaoxian: not at the moment tinter

CMaoxian: not with the XLE XLB all trading at new highs

CMaoxian: GLD DBC PBW the list goes on and on

6thworld: well i really found this topic useful tonight

CMaoxian: follow the money and go where the action is

Ugly: yes this was great, thanks

Ugly: I never knew about those stockcharts.com perfcharts - those are cool

CMaoxian: yes ugly, they’re very cool

CMaoxian: ugly did you use a Dummy technique to enter NTRI?

Ugly: yes, I trade dummy style

CMaoxian: send me a check! ;-)

eyal: I’ve been doing the dummy style as well, NTRI didn’t show up but lots of other nice ones have

eyal: CM, I never get anything above 1:4 risk reward. do you think the markets may have changed since you last used the dummy method?

Ugly: the computers are taking over

CMaoxian: yes the computers are making execution a lot harder anyway

Spock: eyal… i think 1:2 is real good if you can do it consistently

Spock: is 1:4 too ambitious a goal ?

eyal: Spock, I have a 40-45% win ratio, it’s real slow progress with 1:2

eyal: Spock, I mean out of the past 100 trades or so the highest was 1:4 (or thereabouts) it’s not something I’m expecting every day

Ugly: I got 7R with NTRI today

eyal: that’s really nice..

Observing: what do you mean by 1:2 or 1:4 - does this involve risk/reward ?

CMaoxian: right, the number of times your initial risk, e.g. initial risk $0.50, eventual reward $1.00 gives a R/R of 1:2

Spock: eyal, i do noticed there are less momo these days… but perhaps if you can increase # of trades if you have a good hit ratio

CMaoxian: i like to say reward/risk instead of risk/reward, just a quirk

eyal: Spock, possibly, I haven’t been around that long to tell how it’s changed

Srini: what is dummy method?

CMaoxian: these are the dummy lessons

Ugly: hey maoxian - you should put the dummy link right on your front page

Srini: Thanks CM

CMaoxian: yes ugly, but i dunno where to put it

Ugly: just put it at the top

CMaoxian: i’ll get around to it one day

Ugly: it is very good - too good to hide away

Babak: you know, there are other ways to use ratios

Babak: I wrote a recent entry about the use of ratios, similar to tonight’s presentation on RS

tinter: do u worry about catching the top?

CMaoxian: good question tinter… the later you enter things, the more risk you’re taking on

Bill: what makes a good starting point for relative perf charts? It seems like depending on the relative starting point, your chart could look very different

CMaoxian: good point Bill, i try to do the comparisons from the same starting date, usually 1/1/2000

CMaoxian: with many ETFs they haven’t been around that long so….

roger: does anyone scalp or day trade any more?

CMaoxian: yes, ugly does roger

roger: thx C

Ugly: roger, check out my website www.uglychart.com - you can email me from there

roger: Ugly..thx for the link

Bill: CM thanks for the review of the robot toy bug - we found them at a local store this week, kids had a great time this weekend trying to put it together.

CMaoxian: how old Bill?

Bill: i have six under 9. 9 & 7 helped build it, the rest of them chased it around

CMaoxian: Six!

CMaoxian: how many over 9? ;-)

Bill: busy house

Bill: It’s fun

CMaoxian: Bill, check out all tamiya’s toys, they’re great

Bill: thanks - will do

smoo: oh yeah, CM. I just started at an Ibank and noticed something about newspapers. I haven’t seen anyone reading a paper on my floor in my 2 weeks so far

CMaoxian: if you have a Bloomberg you don’t need a paper, smoo

smoo: that’s true

smoo: if you have the Internet, you don’t need a paper actually

CMaoxian: right, smoo

6thworld: hey ugly, what’s with the $50 sponsor pixel thingy?

Ugly: it’s based on the idea of http://www.milliondollarhomepage.com/

roger: Ugly..that’s a lot of eye candy

smoo: on milliondollarhomepage? there’s eye candy?

Ugly: a million $ worth

CMaoxian: did someone actually paypal ya something, ugly?

Ugly: yes, two people so far

CMaoxian: OK guys, I have to run

vic: CM, have a good day

Babak: thanks CM - as always, beautiful charts

eyal: thanks CM!

6thworld: actually i learned a lot tonight

CMaoxian: thanks to everyone for coming