Last year at this time, I interviewed Josh in his position at the New York Stock Exchange where he had been working for many years as a Senior Specialist for Kellogg Group. He has since taken a position in Chicago where we meet up again – this year — to do a follow-up interview.
Molly Schilling [MS]: Josh and I are enjoying a beautiful evening here in Chicago at the Park Hyatt Lounge overlooking Michigan Avenue and the lake. I’m so happy to see you again – it has been one year since we last met at Bobby Van’s down on Wall Street, and you were a Senior Specialist on the floor of the New York Stock Exchange – and you’ve had a lot of changes since that time.
Josh Rosen [JR]: Yes, last October I was a Senior Specialist for Kellogg. But I had been thinking about expanding upon my experience and my writing (I used to write an on-line technical piece) — and the perfect opportunity came along — I took a position as a Senior Domestic Trader at a long-only money manager with Driehaus Securities, a unit of Driehaus Capital Management LLC here in Chicago — right in the heart of downtown Chicago. My wife and I live very close to work — there’s a lot going on here — but compared to NYC, it’s very calm and mellow.
MS: What’s your working environment like?
JR: Dreihaus is in a landmark Chicago mansion. Richard Driehaus, who owns the company, is a prolific collector of architecture and art, especially Tiffany stained glass – I think he has the largest personal collection in the world. It is a museum within a money management operation. I first learned about Richard Driehaus when he was profiled by Jack Schwager in Market Wizards. He is known as the father of momentum investing and as well as having an aggressive growth approach to investing, he truly believes in the art of technical analysis.
MS: So, what is your day like?
JR: As a trader for Driehaus Securities, our client is Dreihaus Capital – but our portfolio managers’ clients are institutions, pension funds, and high net worth clientele. So my job is to trade the capital at the portfolio managers’ direction, in the best way I can. So, I buy and sell, add to positions, create new positions, or liquidate old positions. Each portfolio manager has a different personality, and they have a different needs, so you really have to create a relationship with each manager, and understand what they want out of their trader. Some are extremely involved in the trading process; others are not as involved and are more interested in the bottom line at the end of the day than they are in the minute by minute trading.
We traders understand how to execute those orders, and we communicate with the portfolio manager as we’re trading — but our primary job is best execution, getting in and out of the market without leaving a big footprint that could roil a stock or a sector.
MS: What does that entail?
JR: I have to pay close attention to volume, to price action, and the impact that it might have if we try to get an order done all in one day. So there’s a lot that goes into each trading decision — everything from liquidity, technical analysis, overall analysis in the market, sector analysis. You don’t want to come in there like the bull in the china shop.
MS: How do you do it without leaving a footprint?
JR: One of the most important jobs of a trader is to understand how to access the liquidity that’s out there. The fact of the matter is that almost nobody shows their hand — there are always sellers and buyers, you just have to find out where they are. The NYSE hybrid system was supposed to reward liquidity and transparency – and NMS was supposed to create a more liquid transparent market place –
MS: NMS?
JR: NMS, the new National Market System, which was actually initiated on August 19th. The market has been through the trial phase with about 250 stocks, and now we’re going to go full blown — the main goal of this is to reward liquidity and transparency so that everybody can trade in an easier fashion. It was also designed to protect the small retail investor from the large blocks that trade through them. Of course, that’s not going to work (the goal of adding more transparency) because this is not a business where everybody’s going to just start showing everything they have. And it’s probably not a smart thing to do, because if you start putting all of your offers and bids out there, people are going to jump in front, and it can become a very difficult, cumbersome task to get anything done.
In the end, a trader needs to use many different tools to find liquidity by really understanding the markets that you’re trading in, and the equities that you’re trading. You have a job, and the job is to get the best execution and to complete orders.
MS: Now we’re meeting on Friday afternoon at the end of one of the most turbulent weeks we’ve seen in the market in a long time (August 17). How did you manage last week during this upheaval? Was it more difficult?
JR: Well it definitely wasn’t business as usual. The level of intensity was much higher; the emotions that were fl owing were more intense. We were trading many more orders. There was a lot more to take in, and when you’re trading that many more orders, it’s that much more difficult to make sure that you do the best you can on each one. So absolutely, I felt it. It was different, it was exciting. I mean, it’s why we trade.
MS: An exciting challenge?
JR: It’s a challenge — you could feel it. Closing volume levels on the NYSE and the NASDAQ were higher than they’ve ever been in the history of trading. So it was definitely an exciting time.
MS: What is your assessment of the market – broadly speaking?
JR: I’ve seen the market starting to break down for a while now. I keep a careful diary, a trading notebook, of the market, and I make a point of reviewing it seriously every Sunday night. I look at the Dow, the S&P, the NASDAQ, the transports, homebuilders, brokers; I look at advance/decline lines, sentiment indicators, some new highs, new lows, trends, moving averages, point and figure, where we’re at in that. I look at monthly, weekly, and daily time frames on all these. Then I look at any trading patterns, any interesting volume, a couple of oscillators, most likely a MACD, but sometimes an RSI on top of that, any major divergences, candlesticks, anything that’s really jumping out to me.
So I have my own carefully documented timeline. I can look at the larger picture, and work to the smaller — starting with the major indexes, then looking at some of the more important, or what I think are the more important internal indexes, like financials, housing, drugs, so you can get a really good look at the entire market.
Then, the last thing I do is look at relative strength. What’s outperforming, what’s really underperforming? So by the end, and this takes no more than about 30 minutes since I have it fairly streamlined, I can come up with a score for the market. And so over the last few weeks my score for the market has been neutral, at best, if not a little bit cautious.
MS: You’ve developed your own comprehensive system to guide your decisions?
JR: Right — here are some notes on oscillators (showing me his notebook), you know, huge volume on down. There was evidently a bear trap in the daily of the Dow Jones Industrial. On the S&P — resistance but the trends are still positive, and the moving average is still positive on the monthly. As you move down the line, what you’ll see is, the monthly looks pretty good. The weekly Industrials still look good, the S&P I did not like — under distribution, divergence, candlesticks, and a couple of other things I felt were turning negative. On the NASDAQ — monthly’s look good, weekly’s are still holding but they are under-distribution. And lastly, I look at the dailies. I had already assessed that a market correction was in the wind on 8/6. You know, the next week things weren’t getting too much better.
The Russell 2000 had a dead cross on their moving averages, as well as the small cap index. Housing and brokers, as far as I am concerned, are dead right now — in the shorter term, and longer term, forget about them.
MS: You have little hope, even in the long run, for housing and financials?
JR: I hate to get emotional about them, but I wouldn’t buy them with my enemies’ money. I don’t bottom feed. It’s not part of my nature as a trader, or an investor. And they’ve broken long- term trend lines as well as short-term trend lines.
The home builders chart, has retraced, or had retraced .682 of its entire move up from 2002. It has now since broken that level and traded down quite a bit. Any retracing that we’re seeing in the homebuilders and brokers right now looks to me like a little retest of their 200-day moving average.
These indexes, if you look at the stocks within them, even the greatest financial stock of all time, Goldman Sachs, looks like it’s a rounding top. If you go with the idea that great stocks that go up 20, 30, 50, 500%, come out of bases – sound bases, and are in up trends, are above their moving averages, and are breaking out on great volume – then these are not them right now. Could they form great bases, and could I be proven wrong? Hopefully I’ll notice that on the charts, but right now, I don’t believe that that’s the sector to be involved in. Not only is it not a necessary sector to be involved in, but quite frankly, they couldn’t be underperforming the market any worse.
MS: What about value investors?
JR: There are value investors out their that I’m sure have a horizon of 5-10 years, that might think this is a great time to start adding to those positions, and they might be very right. That would not be something that I’d be comfortable with because that’s not how I see it. I’d be much more comfortable with growth metrics and the technicals showing me that there’s a future. Right now, even with a strong move up, there’s so much overhang resistance – all of those people that got caught buying on the way down, you know, that might be looking for a spot to revisit the situation, and get out. So no, I’m not comfortable with those gains.
MS: Are there any traders or teachers who have inspired you along your way…
JR: Bill Shrire who used to be at Citigroup was one of my first teachers in the technical field. I tried to get into Ralph Acampora’s class, An Introduction to Technical Analysis, and I couldn’t. So I ended up taking a class at Smith Barney through the New York Institute of Finance with Bill Shrire, and one of the things he used to always say was, “Housing and financials lead bull markets. They’ve got to be rocking and rolling for everything else to be doing well.” So, if you believe in that wisdom, as I do, and if those sectors are breaking down and going down. That’s a concern for me.
MS: Let’s go back to your Sunday night analysis and method. You’re very methodical, you take notes, use the notebook, you digest it thoughtfully every week, you look back from week to week to see what you’ve written before, so you really chronicle your perceptions over a period of time?
JR: It took a very long time for me to get to this point where it really works because it is a lot of work to do it. It’s one thing to be looking at your screens and charts, and having an idea — it’s another thing to write it down on paper and to follow a set of rules. In that same notebook I have a list of 30 rules that I’ve written down, and that I should be following every week. And yes I do the diary every week, every Sunday night, but I’m constantly following things midweek as well. And I also write a couple of technical pieces each week, which I keep in chronological order and publish in-house. And I keep a hard copy for myself. So on top of the diary I go back and look at each one of these. There’s nothing like putting it down on paper.
MS: When you have to digest your impulses sufficiently so that you can write about them, that really does process your thinking doesn’t it?
JR: Right, I get it down on paper and if I had to pick one word that matters more than anything else in investing, it’s discipline. And it took a long time for me to learn it, but part of the discipline is writing down what you need to do, the rules you need to follow, and the things that you might need to change, or learn more about, and keeping it on a piece of paper. It’s almost like writing down goals and checking them off one by one. It’s easier said than done. It takes discipline to get it down on paper, and follow those rules. And if you’ve broken them, to make sure you know why.
MS: Gives you a sense of structure and security.
JR: Yeah, it gives me a sense that — if I am wrong, I can know why. It’s written down. If I’m wrong I can even know that it’s because of one of two things: either I’m not following my rules (which would be a real shame, and maybe I’m not in the right profession) or I’m not following the right analysis because I’m not listening to what I wrote… or I’m lazy. Or, my rules are wrong, which is fine. Everything in life, or at least I believe this, are a work in progress, and there’s nothing more dynamic than being a trader or investor. By writing down the rules — if you’re wrong, if you’re following them — maybe your rules are wrong. One great thing that somebody said about emotions, I’m sure I’ve said this before because it’s one of my favorite ideas — it’s that you don’t want to learn how to trade without your emotions, you just want to know that they’re there. You need to understand that idea. Meaning that you are going to be emotional, just understand that that’s part of the fact, don’t try to overcome it. You are going to get fearful and greedy, and panicky, but if you know that going into it, and you know that that’s part of it, you’re in a much better position. So it’s not trying to erase them, it’s just trying to understand that they’re there.
Another great thing – and I was talking about discipline and how important I think that is in trading, there was a study done, and I believe it was by Bob Prechter, who is a market technician, and an incredible sociologist – he says that some of the best traders out there, the top performers, were ex-armed forces — Marines and Navy men. It was that type of lifestyle, he believed, that was instilled in them, and they transferred that sense of discipline over to their trading life. That discipline is key in what you do, it is key in the armed forces, and I believe it is a huge key in trading as well. You know there are guys that say they trade by their gut — that might be true but I don’t believe that that’s some “unknown factor”. What I believe is that someone who’s been in the market for 20, 30 or 40 years, and has seen something over and over again, those guys that have that gut, have a perception that’s probably better than a lot of other people, so when they see something, or something happening on the charts, or in a fundamental way, they may not know why they’re getting the feeling, but it’s only because they’ve seen it time and time again, and they’ve been able to internalize that.
MS: So, great traders – traders who have developed a “gut” sense of the market – come out of discipline too?
JR: I would imagine that they started out being very disciplined – you know, concentration is one of the hardest things in the world to do. To really be in the moment, not to have your mind going other places, if you’re really in that moment you’re doing it correctly. It’s called being in the zone. It’s not magic; it’s just not allowing anything to be going on in your world except for what you’re doing.
That’s discipline.
MS: What do you think when you look back at the New York Stock Exchange?
JR: It’s obvious that the specialist system, that specialists for the most part, are making less money, or losing money. I mean, look at LaBranche, they’re the only publicly traded specialists out there, and you can tell by the action in their stock that it’s been tough for them down there. Specialists at the New York Stock Exchange had the opportunity to both add value, and to make money. The truth is, there were guys down there that just took advantage of the system. And what I mean by taking advantage was, there were, and these are the stories that everybody’s read, a few people manipulating the system so that it was just almost impossible for them to lose money; they also got in the way of smaller investors and institutions, and it created a feeling on the entire street, and I mean institutions, hedge funds, where it wasn’t a good idea to be on the floor. You always got screwed by the specialist. He was always out to get you.
A lot of the rules, granted, have been changed now with the hybrid system. But you’re trading risk capital now, whereas in the past, your risk reward was always a known because the specialist companies provided liquidity. And all of that has changed. Nobody’s leaving large orders on the floor now. Everything’s fragmented. Market places are fragmented no matter where you are. And that’s part of the job of finding that liquidity out there. But originally as a specialist, your edge was that you had all the orders. You never got too far away from a level of comfort because you had a lot of orders. You had a lot of order flow. Order flow is king. You’d know where the buyers are, you’d know where the sellers are, you’d know where you can comfortably add a little bit of value on the downside and add value on the upside. Keep it nice and tight. Fill in when there’s no buyers there, because maybe they’ll be back, and the stock is moving up. And fill in when there were no sellers there. And that has gone away now. And so it’s going to be very difficult for specialists moving forward in this environment.
The specialists used to have to pay huge fees to work as a specialist on the floor, and I think a lot of those fees are going away, because if they didn’t there’d be no specialists at this point at all. I want to make sure that I leave you with the impression that I do believe in the specialists system. I also believe in technology as well. You don’t want to have a system where it’s all technological and then banks are charged with the duty of adding risk and capital to the market, because that is not their job. Banks were never organized to be “the other side” of all these trades. That’s what specialists do. And without them, I believe that we’re going to see a lot more volatility, and a lot more illiquid situations.
MS: Because there’s no capital.
JR: There’s no capital there and without specialists and market-makers there will be a less orderly marketplace, a fragmented marketplace.
MS: Are there any particular indicators you use?
JR: I try to learn new indicators all the time, but for the most part, I use a small tool box of indicators that are fairly simple, that I could explain and understand in a fl ash, and that keep everything very neat for me. The problem is when you start using too many indicators; it becomes very difficult to get a clean sense of what’s going on because you can have different indicators telling you different things about the market. I always go back to what I learned when I first started in technical analysis, which is that price is what matters, volume is secondary, and everything else is tertiary.
My most important tools are what most technical analysts learn when they read Technical Analysis of Stock Trends, which was written by Edwards and Magee. A lot has been added since then, and I include a lot of those tools, but I always focus on those beginnings – trendlines, point and figure charts. And, I use candle charts.
MS: Japanese candlesticks are interesting sentiment indicators.
JR: Absolutely, you get sentiment and you get some great leading indicators as well, especially when you’re able to use candlesticks with other confirming indicators, like oscillators, trend lines, moving averages, and so forth.
MS: Are there any particular candlestick patterns that you are attuned to?
JR: Those that occur at resistance and support areas. I always look for engulfing patterns, or what a traditional Western analyst would call an “outside day”. Morning stars and evening stars are also great patterns. I like hammers and shooting stars, but with the morning star and the evening star, you get a real full candle pattern and if you’re lucky, an island – it’s something that you can hold onto and work with. And if the pattern is going to fail, you’ll know by a new high or a new low that breaks the formation.
One thing Steve Nison always says is that these patterns, these bearish and bullish patterns, just call for a stall in the current pattern, and you want to watch for a confirmation of a reversal using other indicators. It’s very easy to get ahead of yourself when you see a hammer, and you really want to think it’s time to buy. And that’s not always the case. So, I like to see another couple of confirming indicators along with it.
MS: I have a particular love for the candlestick patterns. They’re historic, and are embedded with great Japanese philosophy. Sometimes I spot a pattern forming and I allow it to build itself until it resolves into something that I expected or that surprises me. In other words, I see that there may be a morning star setting up, or you may get suddenly, a deep and extended shadow, and then you think, “okay let’s see. Let’s see if this happens, will it develop?” Generally speaking, when there is a significant shadow for a morning star or a significant shadow for an evening star, that’s a big indicator to me. I’m watching. I’m tuned in to a reversal.
JR: Absolutely.
MS: There’s always a follow through at some point. It may be a week later, it may be two weeks later, but I’ve at least been given a signal that there’s a shift in the wind.
JR: And as you said, I love candlesticks because of the stories. You can really understand what they mean. If you read a little story about the history of the candles, and what has happened time and time again after they developed, and how the names evolved within the traditional Japanese trading culture, you can really start to understand what the formations means. And I’m a true believer in the psychology of trading and the emotions that we all put into our trades, and the emotions that amass. Candlesticks speak to that to help clarify what’s going on.
MS: We’ve covered a lot of territory, and I’m so happy we’ve had this opportunity a year later, to come back and visit, and to learn about all your new experiences. This has been an enlightening interview and I am honored, and I look forward to visiting with you again next year.
JR: Thank you very much. It was a pleasure talking to you again and I love doing this, so I lookforward to it too.
MS: Thanks, Josh.
A Letter from the MTA Seminar Chair
