The Jessie Livermore Stock Market

The legend and romance surrounding the famed stock plunger Jessie Livermore has long held a fascination among traders. Livermore has become somewhat of a cult in recent years and there are several books that purport to reveal his secrets for making a fortune in the stock market. None of them can hold a candle to the book which Livermore himself commissioned (written by journalist Edwin LeFevre) entitled Reminiscences of a Stock Operator.

This book is essentially an autobiographical account of Livermore’s trading career as told to LeFevre. It chronicles his meteoric career starting with his early days as a small time operator in “bucket shops” and culminating with his heyday as a big Wall Street mover and shaker. Market students have for years combed this book hoping to find the “hidden secret” to Mr. Livermore’s successful career as a speculator but their efforts have largely been in vain. Livermore left no abiding set of rules for consistently beating the stock market. In fact, he himself fell victim to Mr. Market as he won and lost a fortune on more than one occasion. His life and career came to an inglorious end when he killed himself in the cloakroom of a Manhattan hotel at the age of 63.

The fact that Livermore was never able to crack the secret code of the stock market hasn’t stopped his legions of fans from their endless pursuit of the market’s “Holy Grail.” Had they listened to Mr. Livermore himself, however, they would realize that there is no Holy Grail when it comes to forecasting the stock market with consistent accuracy. (Tragically, Livermore himself seems to have forgotten his own advice on occasion).

Yet there is a wealth of wisdom in Mr. Livermore’s autobiography and much of what he wrote some 90 years ago is just as applicable in today’s financial marketplace as it was in his own day. His assessment of human nature and the markets could easily be applied to the recent credit crisis. “Nowhere,” wrote Livermore, “does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature.”

One of the most famous aphorisms to come from Reminiscences of a Stock Operator was Livermore’s statement, “It never was my thinking that made the big money for me. It was always my sitting, got that? My sitting tight!” Livermore’s experience here is invaluable, for he’s telling us what we already know from experience, viz. we must be patient after we’ve made a due study of market conditions and made our trade. It doesn’t pay to second guess the market and if we trade following the rules of our discipline we are bound to come out winners sooner or later. Once the stock in question begins moving in our favor it’s then simply a matter of raising the stop loss and locking in profits along the way until the market itself signals the end of the trend. No forecasting or second guessing of the market is required under this basic approach to stock trading.

Livermore was also perhaps the original momentum trader as the following statement bears out: “Prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.” Livermore believed in accumulating his “line” on the way up and pyramiding his profits.

He also carefully avoided selling too soon, preferring to let the market announce the commencement of a downtrend rather than sell short at the top of a rally in anticipation of a reversal. “Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.”

Livermore was a master of market psychology and he was conscious of the fact that the stock market is, to a large extent, a manipulated entity designed in which the few (insiders) profit at the expense of the many (outsiders). Regarding bull markets he wrote, “Stocks are manipulated to the highest point possible and then sold to the public on the way down.” This statement has proven true countless times since Livermore’s time and its veracity has spelled the ruin of countless inexperienced traders.

Concerning trading ranges he wrote, “In a narrow market when prices are not getting anywhere to speak of but move within a narrow range, there is no sense in trying to anticipate what the next big movement is going to be – up or down. The thing to do is to watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take up interest until the price breaks through the limit in either direction.”

Another important but overlooked discovery by Mr. Livermore forms the basis for group behavior in the stock market. He observed, “Experience tells me that it is not wise to buck against what I may call the manifest group-tendency.” This forms the basis for our internal momentum approach to the major stock market industry groups and has been responsible for most of our profitable trades over the last few years.

The foregoing quote by Livermore on group behavior goes hand-in-hand with another famous statement of his, one which I consider to be the single most important observation anyone has ever made about the stock market. He wrote:

“A man may beat a stock or a group at a certain time, but no man living can beat the stock market! A man may make money out of individual deals in cotton or grain, but no man can beat the cotton market or the grain market. It’s like the track. A man may beat a horse race, but he cannot beat horse racing.”

This advice is in invaluable in that it underscores the futility of constantly trying to predict the market’s near term movements. Livermore’s success came from judging accurately the market’s main interim trend and taking individual stock positions accordingly. When he was at this best he was never at odds with the market, nor did he concern himself with guessing the market’s short-term direction. Instead, he contented himself with his individual stock gains and allowed the market to wend its own path along the way.

The stock market of today is very much different than it was in the day of Jesse Livermore. Never have there been as many opportunities for taking advantage of group behavior and internal momentum than today with the many sector ETF and individual stock offerings. Yet Livermore’s observation that “human nature never changes” when it comes to stock market speculation is still true, unfortunately, to the detriment of most market participants. Instead of focusing on group behavior, most traders would rather play the utterly futile game of constantly guessing the stock market’s next move. If the crowd does successfully manage to jump on board a bull market and ride the broad market advance in prices, they inevitably stay on board too long and give back most of their profits. “In a bull market and particular in booms,” wrote Livermore, “the public at first makes money which it later loses simply by overstaying the bull market.”

Livermore believed the stock trading public should always keep in mind some basic principles, which if followed would keep them from losing money. He wrote, “When a stock is going up no elaborate explanation is needed as to why it is going up. It takes continuous buying to make a stock keep on going up. As long as it does so, with only small and natural reactions from time to time, it is a pretty safe proposition to trail along with it. But if after a long steady rise a stock turns and gradually begins to go down, with only occasional small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should any one ask for explanations?”

If Livermore was alive today, how would he explain today’s stock market in relation to the principles he laid down in Reminiscences of a Stock Operator? Market participants seem vexed by the persistence of the stock market rally that began two months ago and many feel the market is overdue a potentially deep correction. The constant tendency on the part of some participants – including pros who should know better – is to short this market when, according to Livermore, such a move would be premature. If my reading of Livermore is correct, the man himself would wait for the uptrend to break before he even considered selling short and he almost certainly would look for marked deterioration in the tape in terms of the leading stocks and the market’s internals. He would ride the market’s current uptrend as far as he could and let the market signal its own reversal instead of trying to guess the top.

Our use of the 30-day moving average to delineate the market’s dominant short-term trend is a close enough approximation for the market’s main path and when it’s broken we can assume the path of least resistance is no longer up. To date, the 30-day moving average for the SPX remains unbroken and therefore the trend is still technically up. As long as this trend line is unbroken, stock prices can still go higher before the market reverses its trend.

Livermore ends his book with a repetition of his earlier statement that no one can consistently and continuously beat the stock market, though he may make money in individual stocks on certain occasions. “No matter how experienced a trader is the possibility of his making losing plays is always present because speculation cannot be made 100 percent safe,” he cautioned. “Wall Street professionals know that acting on ‘inside’ tips will break a man more quickly than famine, pestilence, crop failures, political readjustments or what might be called normal accidents.”

Livermore concludes, “There is no asphalt boulevard to success in Wall Street or anywhere else. Why additionally block traffic?”

Gold ETF

In the previous commentary we looked at silver and the iShares Silver ETF (SLV), which showed us greater relative strength versus the gold market. As previously stated, “SLV has remained above one of its most important short-term trend lines since the rally began in August, a testament to the strength of the uptrend.” Since then the SLV has achieved higher highs to keep the uptrend intact and on Friday, Nov. 5, closed at a new quarterly high of 26.20.

It was also pointed out in the previous commentary that the buying interest in silver has been predominantly from institutional players and this has been the number one driving force behind the rally in SLV. I concluded, “When silver shows relative strength vs. gold, the gold price typically follows silver’s lead in the near term. Accordingly, the yellow metal should be able to recover its high from earlier this month as it takes its cue from silver.” The SPDR Gold Trust ETF (GLD), our favorite proxy for the gold price, finally followed silver’s lead and on Nov. 5 broke out to a new high.

Now that gold and the gold ETF are finally back in alignment with silver and the mining stocks we should see some additional gains in the weeks ahead as the PM sector bull market continues.

About the Author

Market Analyst
clif [at] clifdroke [dot] com ()