Here is this week’s Weekly Top 5.  These are articles that weren’t in the headlines and probably under the radar, yet are still well worth a read.

Here are the Top 5 reads of the week.

• Phil Pearlman on what it takes to be successful in trading.
  • Phil is the Executive Editor over at StockTwits and is a true genius at integrating social media and trading.  Also I’m a fan of his for the way he views the market based on psychology and behavioral tendencies.
  • In this post, Phil discusses why most people will fail at trading and those that are going to succeed will have many failures along the way.  This isn’t an easy game, but one that takes many years of practice and constant learning.  To improve in ’13 he suggests focusing on just one critical aspect of your craft and master it.  Or as he puts it ‘crush it’.
  • I’ll be the first to admit that one of my weaknesses over the years is I’ve bounced from strategy to strategy, always trying to find the latest and greatest trading edge.  One thing I’ve learned over the past decade is there isn’t a holy grail.  I’ve greatly toned down what I look at on my charts and instead try to focus on just a few key indicators I believe in.  Along the lines of what Phil said, looking at too many things can let you take your eyes off the prize.

• CNNMoney poll of various strategists and money managers looking for the SPX to close at 1,490 this year, up just 4.5% for the year.
  • Are there concerns out there?  Yes, absolutely.  None the less, given various indexes are close to new multi-year highs, it is simply amazing how much distrust there still is toward the market.   Whether is it hedge fund exposure, strategist allocations, or retail investors constantly missing this rally – nearly everyone has missed this multi-year rally.  For this one reason (and in a very simplistic way of viewing things), we continue to expect the rally to continue because so many don’t.
  • FWIW, I was in this poll and I’m looking for the SPX to close at 1,650 – a 16% move higher.

• Speaking of hedge funds underperforming, the Wall Street Journal had this article noting they’ve underperformed for four straight years now.
  • The average hedge fund was up just 5.5% last year, according to HFR.  This is nothing new, as they’ve underperformed since ’09.  A lot of our work last year suggested they were drastically underexposed to equities, so this underperformance isn’t a shock.
  • Still, this hammers home a few facts.  First off, hedge funds have missed the rally.  At the same time, they do still have a huge amount of money on the sidelines which could be very bullish once they finally put their cash to work.
  • The chart below sums it up.

• Derek Hernquist explains his personal process and what process means to him.
  • Out of anyone I follow, Derek does simply some of the best work on what it means to have a process.
  • He lists six beliefs that summarize his personal process.  Remember, we all should have our own process, but nothing wrong with seeing how others, who you respect, do it.
  • I won’t give all of them away, but these two beliefs resonated with me.
    • Market moves start inward and spread outward, so studying the “market of stocks” makes more sense to me than studying SPX
    • I have no way to “outknow” the information on any stock, sector, or asset class; time spent trying is time taken away from honing my true edge
• Well said and I suggest everyone read what Derek has to say and figure out what process works best for you and hopefully this will help you have a very successful ‘13

• AP story on why ordinary folks are losing faith in stocks.
  • This is nothing new, as the retail crowd continues to doubt this rally.  Still, this article was chalked full of great stats which hammer home just how much distrust there still is toward Wall Street from the eyes of Main Street.
  • My favorite stat was investors have pulled $380 billion from US stock funds since April ’07, while pouring more than a trillion dollars into bond funds – according to the ICI.  Simply amazing.
  • Not to be outdone, according to our data, last month was a record 20 straight months of domestic equity mutual fund outflows.  The lack of trust is alarming, yet incredibly bullish from a contrarian point of view.  Look at the Greek stock market.  This time a year ago their country was toast, all that happened was their stock market gained 30% last year.  I can’t stress this enough, you want to buy low ‘expectations’, not low ‘prices’.  To me, expectations toward US stocks are still extremely low.
  • Pension funds have historically been horrific market timers.  According to the article, “Private pension funds have cut stock allocation from 70 percent of their holdings to just under 50 percent, back to the ’95 level.”
    • Keeping this very simple, ’95 was a tremendous time to be accumulating stocks for a huge multi-year run.  This is just one stat, but still one that I think bodes well for the viability of this rally having substantial legs.

Lastly, if there is anything you’d like me to take a closer look at or an article you feel is worthwhile, please feel free to mention it below.