As you'd expect in a Colbert segment, there is lot's of 'truthiness' mixed in with the humor.
For example:
Some say all this computer trading is dangerous, but I say it's actually safer. Because if the stock market ever crashes again, instead of brokers jumping out of windows in a panic they'll simply turn on their computer and see the soothing message, 'error 404, economy not found.' What's the worst that could happen?
There
we were at the Cowboys game. It was a beautiful day. I was feeling
terrific because I was with my two sons. The crowd was cheering … and I
had a great thought: 'Let's get a picture of this'.
Perfect … a random series of events had led to a satisfying crescendo … and I captured the moment.
It wasn't so random. Despite a difference of four years and two stadiums – the result was similar (if not predictable).
History doesn't necessarily repeat itself. But it often rhymes.
It Is True In Trading As Well.
The Hype Curve is an interesting map of human emotion. Below is an idealized version.
Here is a chart of Apple going back to 2004. Note the similarities.
Classic economic theory dissects the economic cycle into four distinct stages: expansion, trough, decline and recovery. A stock is no different, and proceeds through the following cycle:
Stage 1 – After a period of decline a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers. Price action is neutral as sellers exit their positions and buyers begin to accumulate the stock.
Stage 2 – Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows. A bull market begins and the path of least resistance is higher. Traders should aggressively trade the long side, taking advantage of any pullback or dips in the stock's price.
Stage 3 – After a prolonged increase in share price the buyers now become exhausted and the sellers again move in. This period of consolidation and distribution produces neutral price action and precedes a decline in the stock's price.
Stage 4 – When the lows of Stage 3 are breached a stock enters a decline as sellers overwhelm buyers. A pattern of lower highs and lower lows emerges as a stock enters into a bear market. A well-positioned trader would be aggressively trading the short side and taking advantage of the often quick declines in the stock's price. More times than not all of stage 2 gains are given back in a short period of time.
While these stages are historically defined over long time periods they actually exists in all time frames, allowing traders to take advantage of a cycle regardless of their trading time frame. Fortunately this phenomenon, known as a "fractal", exists within all security markets. A fractal is simply a rough geometric shape that can be subdivided into smaller parts that have the same properties; a smaller version of the whole.
This is important to understand because through technical analysis as we are often analyzing multiple time frames. In the short term, the four stage model may repeat itself many times. The combination of these short term cycles form a medium term cycle, and the combination of multiple medium term cycles form a long term cycle.
Sometimes simple indicators are better. Trend lines are easy to follow and often meaningful.
Below is a weekly chart of the S&P 500 Index showing the recent break of an up-trend in place since 2009. If price stays beneath this level, it will likely be tough for Bulls.
In addition to the trend line break, there is a negative divergence (where recent price highs happened with lower momentum). Technicians often take this to be sign of weakness.
Many traders expected a sell-off after the election. We got that, and now the market is pretty oversold. So, is it time to jump back in … or should you pay attention to signs that we are still in a "Risk-Off" trading environment?
Traders know it is tough to call a meaningful 'Market Top' because you have to be right about both price and time. Adding to the difficulty is that humans seem to be wired to focus on what they missed, so it doesn't take much to trigger buying behavior.
With that said, sometimes it makes sense to pay attention to warning signs. In this post, we'll look at a technical warning pattern some traders call "the four horsemen of the apocalypse". As you probably guessed, it involves four components.
Why are they called the four horsemen? Because when you see all four of these rise at the same time, the underlying message is ominous.
Under normal circumstances, these market symbols are not correlated. In other words, the "horsemen" generally do not ride in the same direction. For example, when gold is going up, the dollar and USTs are normally going down, or vice versa.
When they all rise together, however, it indicates an extreme correlation of "risk-off" and diminished risk appetite across the board.
Here is a composite of all four charts. The yellow highlit areas show the coordinated move higher.
According to Mercenary Trader, U.S. Treasuries rise via their designation as the ultimate deep liquidity safe haven instrument.
Gold rises as the "alternative currency" not subject to a printing press — the safe haven for those who fear U.S. Treasuries are booby-trapped.
The Dollar rises as US investor capital is repatriated from emerging markets (and foreign investor capital flows into bonds).
And the VIX rises as equity risk assets are being shunned …
Why is this happening now?
One possibility is rising concern over the "fiscal cliff," and the likelihood of partisan deadlock, as the threat of automatic tax hikes loom (via the expiration of time limited reductions). Some believe that the heavy selling we are seeing, especially in market bellwethers like Apple (AAPL), is at least partially the result of capital gains lock-in prior to a higher taxation period.
Regardless, it seems the safe move is to position for the worst and hope for the best.
Gold is entering a seasonally strong period. The chart below shows the
predicted turning points based on the past five years of historical
data.
History does not typically repeat itself, exactly; but it often
rhymes. So, it makes sense to keep seasonal tendencies in mind. With
that said, some things potentially different this year include that this
is an election year and world governments are coordinating central bank
stimulus actions.
However, the chart below should serve as a reminder that there a lot other markets worth trading too. For starters, Corn is up 34.3% so far this year.
The chart shows the top-ten performing markets, ranked by yearly
performance, for the past few years. The data is color coded based on
sector. The first column posts the current year's open performance
followed by six columns of closed yearly market performance.
Note how much diversification there has been in the top-ten throughout the years. Click the chart to see an expanded version of this data (showing 40 global futures markets).
That is the funny thing about markets … something is always working. The trick is finding it while it's working.
In addition, he has a popular interview series where he talks with great traders and about a wide range of topics. We are honored that he chose to interview our portfolio manager, David Stendahl. Here is a link to the Interview.
The interview is simple enough for a novice, but nuanced enough for advanced traders. Some of the topics include:
Stendahl's world is 100% systematic, and he has been involved in conceptualizing and thinking up systematic approaches to trading the market for decades. But what is a system? Stendahl's explanation may surprise you.
Stendahl's approach is that a system should have as few moving parts as possible; it should be simple enough to be explained on the back of a cocktail napkin.
Stendahl explains that your system doesn't have to be complex to work. Sometimes the best system can be only four lines of code.
Covel and Stendahl make an analogy to cars, and how you can easily fix a simpler car in your garage as opposed to a complex Lexus.
Stendahl explains that everyone is using a system in one way or another: every time you make a decision to buy or liquidate, whether it's based on a real system or based on advice from someone on the television, it's systematic in some regard.
If you can talk it, you should be able to quantify it. If you can't quantify it, it might not really be there.
Find out how Stendahl's dyslexia played a role in his technical trading, and how he turned this disadvantage into an advantage.
Covel and Stendahl discuss Ray Dalio of Bridgewater, who says that he is 100% systematic, but doesn't use any technical information.
Covel and Stendahl also discuss position sizing and money management, and how you can approach this systematically.
There is a lot of good stuff in the interview. Hope you enjoy it.
Frank Partnoy ex-Wall Street derivative trader and self-confessed procrastinator, reveals the science behind our decision-making disasters and successes, and argues that decisions of all kinds, whether 'snap' or long-term, benefit from being made at the last possible moment.
The art of knowing how long you can afford to delay before committing is at the heart of many a great decision.
While talking with traders, one of the topics that keeps coming up is how much the markets and trading have changed recently.
One
of the primary catalysts to such change has been the amount and
frequency of government intervention and stimulus. Another big driver of
change has been the massive shift to algorithmic or program trading.
Recently, the piece of this getting the most press and attention
is high-frequency trading.
Below is an interesting video where Mark Cuban, Dallas Mavericks
owner and high-profile entrepreneur, shares some thoughts about why high-frequency trading
terrifies him.
Here is the video. The market related comments start about 30 seconds into the clip.
Some people may watch that video and assume that
high-frequency trading is a bad thing, or something to be regulated and minimized. However, there is another side to the argument.
Let me digress for a moment. If I talked to an entrepreneur, and asked them what the biggest constraint on their business was … some might say it's the Obama administration and their policies. This is absurd, because they don't have any control (or at least meaningful control) of that supposed constraint. Instead, that is simply a "reality" of the current competitive environment for them and others.
What that means is the thing they control is how they respond to that competitive environment. For some, what they perceive limits their options or thwarts their strategies. For others, it is a catalyst for new action, new strategies, and new ways to win.
So, why is Cuban afraid of high-frequency trading? First, he believes we are likely to see another "flash crash". Second, an increasing percentage of market action is a result of algorithms trying to outsmart algorithms (and he recognizes that the decisions they are making happen faster than humans can respond to our comprehend). As a result, human intervention isn't the answer because any actions would occur too late.
Some people recognize the advantage algorithmic traders are gaining and seek to weaken it (or at least slow it down), while others pull their money out of the market because of their disadvantage and the new risk. Contrast that with those that see the advantage and try to figure out how to extend it or get some of it for themselves.
It's like most things in life, it's not as much about what happens, it's about what you do.
In addition, he has been talking with great traders and thought leaders about a wide range of topics. I'm honored that he chose to talk with me last week. Here is a link to the Interview.
We talk about the business of systematically finding edges through all sorts of different approaches – not only trend following. I like to think of it as finding more ways to win.
And we talk about a broader range of topics as well. For example, we discuss the "E-gene", and how entrepreneurism is at the core of what we practice.
Other topics include:
how hunches can be dangerous;
turning your hobby into your business;
recognizing patterns;
thinking big;
the "three levels of mastery" – cognitive, emotional, and physical;
how minimum standards can define your life;
how systematic trading can define your minimum standards; and
controlling emotions through automation.
We also discuss the importance of the world outside America, and which area both of us agree is important to keep an eye on.
There is a lot of good stuff in the interview. Hope you enjoy it.
In the interview he describes some of the processes by which Capitalogix creates diversified portfolios.
David discusses the systems design process and how trading styles, across multiple time frames, complete with stop management are applied to variety of global futures markets.
He then describes how Capitalogix combines these systems into baskets (which are specialized mini-portfolios) using techniques liked fixed fractional and ratio level position sizing algorithms.
The interview ends with a description on how the baskets get allocated properly using Optimal Weight, Minimum Variance or Risk Parity allocation formulas to form the final trading portfolio.
