The rally continues, and the S&P 500 has gotten back above 1000. Pretty impressive on many fronts. How does it compare to other markets though? This chart shows how several other world markets have done so far in 2009.
The strength of the rallies don’t make sense to me based on logic. But trends don’t depend on logic. So, I dusted-off my copy of Trend Following and will simply ride the bucking bronco.
Why Citigroup’s Volume Is Significant.
Last week saw some interesting trading in Citigroup, as it recorded an “utterly insane” amount of volume – 2.7 BILLION – in a single day. That huge volume value caused problems throughout the financial information world. Financial systems are designed to handle certain ranges of values. If a number is outside that range, it “overflows” the data field for that value. Citigroup’s volume overflowed, which should tell you something about how likely that level of trading is to occur.
I watch volume patterns. Capitulation bottoms typically happen on huge volume spikes. I don’t know if the reverse holds true as well. But the markets are extended so I’m watching things a little more closely.
What About Gold?
If the Markets start a deeper pull-back, then Gold looks poised for a break-out to the upside. Here is a chart showing a potential Reverse Head-and-Shoulders bottoming pattern. There recent shoulder is a triangle pattern, which indicates we should expect expanded volatility soon.
The rally continues, and the S&P 500 has gotten back above 1000. Pretty impressive on many fronts. How does it compare to other markets though? This chart shows how several other world markets have done so far in 2009.
The strength of the rallies don’t make sense to me based on logic. But trends don’t depend on logic. So, I dusted-off my copy of Trend Following and will simply ride the bucking bronco.
Why Citigroup’s Volume Is Significant.
Last week saw some interesting trading in Citigroup, as it recorded an “utterly insane” amount of volume – 2.7 BILLION – in a single day. That huge volume value caused problems throughout the financial information world. Financial systems are designed to handle certain ranges of values. If a number is outside that range, it “overflows” the data field for that value. Citigroup’s volume overflowed, which should tell you something about how likely that level of trading is to occur.
I watch volume patterns. Capitulation bottoms typically happen on huge volume spikes. I don’t know if the reverse holds true as well. But the markets are extended so I’m watching things a little more closely.
What About Gold?
If the Markets start a deeper pull-back, then Gold looks poised for a break-out to the upside. Here is a chart showing a potential Reverse Head-and-Shoulders bottoming pattern. There recent shoulder is a triangle pattern, which indicates we should expect expanded volatility soon.
People often ask me which trading books I'd recommend. I've read a lot of books about trading; and though some of them are good, only a handful stand out.
Many books are little more than marketing for their author or an
attempt to sell a "magic bullet" to less experienced traders. In contrast, both of Covel's books are simple enough that a novice would gain valuable information
from them; yet there's enough content and nuance that experienced traders also will
benefit from the books.
I've always loved Jack Schwager's "Market Wizard" book series. Covel's books are different than these because they deal with a narrower subject … more deeply. Yet they are similar in terms of the value-added content they provide and how accessible they are; and that's high praise from me.
Covel has an engaging writing style. He keeps things interesting by telling stories rather than simply providing a mechanical "how-to" textbook. You get enough narrative and detail about accomplished traders to give you a sense of their personality, thought process, and some of the key ideas and distinctions that help make them successful. In addition, he backs-up his research with lots of data, charts, and links to additional information. This makes it easy for you to continue on your own.
What is In the Trend Following Book?
The "Trend Following" book:
explains the basics of trend following;
introduces you to the some of the great trend following traders;
explains the positives and negatives of the technique from a
performance standpoint;
shows how trend followers did during big
events, crashes, and panics;
and the later part of book focuses on the
human-nature side of trading, decision-making and building trading
systems.
I like how Covel segments his books logically, and in bite-size chunks. That means I can pick it up and read something without feeling compelled to start at the beginning and read all of it at once.
For example, I just opened Trend Following (to page 253) and saw "Five Questions for a Trading System". In this section he lays-out things to consider when evaluating a system. Examples include how the system determines which market (and how much exposure) to trade, as well as what constitutes entry and exit triggers? Then, in addition to explaining the basics, there are examples and quotes from other traders about the topic. And he extends the discussion to include emotional issues like how much money you intend to make, the level of time and effort you intend to invest, and the strengths and weakness you bring into the equation. Bottom-line, he goes out of his way to give you a thorough
understanding … while getting his points across in an
easy-to-understand, informative, and interesting ways.
I found myself referring to both of these books several times in the past several months. If you're looking for something to read (or for some new ideas about trading and money management) I recommend you check out these books.
People often ask me which trading books I'd recommend. I've read a lot of books about trading; and though some of them are good, only a handful stand out.
Many books are little more than marketing for their author or an
attempt to sell a "magic bullet" to less experienced traders. In contrast, both of Covel's books are simple enough that a novice would gain valuable information
from them; yet there's enough content and nuance that experienced traders also will
benefit from the books.
I've always loved Jack Schwager's "Market Wizard" book series. Covel's books are different than these because they deal with a narrower subject … more deeply. Yet they are similar in terms of the value-added content they provide and how accessible they are; and that's high praise from me.
Covel has an engaging writing style. He keeps things interesting by telling stories rather than simply providing a mechanical "how-to" textbook. You get enough narrative and detail about accomplished traders to give you a sense of their personality, thought process, and some of the key ideas and distinctions that help make them successful. In addition, he backs-up his research with lots of data, charts, and links to additional information. This makes it easy for you to continue on your own.
What is In the Trend Following Book?
The "Trend Following" book:
explains the basics of trend following;
introduces you to the some of the great trend following traders;
explains the positives and negatives of the technique from a
performance standpoint;
shows how trend followers did during big
events, crashes, and panics;
and the later part of book focuses on the
human-nature side of trading, decision-making and building trading
systems.
I like how Covel segments his books logically, and in bite-size chunks. That means I can pick it up and read something without feeling compelled to start at the beginning and read all of it at once.
For example, I just opened Trend Following (to page 253) and saw "Five Questions for a Trading System". In this section he lays-out things to consider when evaluating a system. Examples include how the system determines which market (and how much exposure) to trade, as well as what constitutes entry and exit triggers? Then, in addition to explaining the basics, there are examples and quotes from other traders about the topic. And he extends the discussion to include emotional issues like how much money you intend to make, the level of time and effort you intend to invest, and the strengths and weakness you bring into the equation. Bottom-line, he goes out of his way to give you a thorough
understanding … while getting his points across in an
easy-to-understand, informative, and interesting ways.
I found myself referring to both of these books several times in the past several months. If you're looking for something to read (or for some new ideas about trading and money management) I recommend you check out these books.
This week's news brought President Obama declaring: "We have stopped the free-fall. The market's up and the financial system is no longer on the verge of collapse. … So there's no doubt that things have gotten better." Obama also defended the bailout of the banks as a necessary measure to hold-off greater financial trouble; explaining that he inherited "the worst economy of our lifetimes." That's all well and good; yet, it reminds me of a different President who declared "mission accomplished" … just a tad too quickly. Time will tell. I just hope we keep making progress.
The Markets Have Done Well Recently.
During the last three weeks, the S&P 500 climbed more than 10% higher on better than expected earnings. So far over 70% of companies have beat earnings estimates. The Dow Jones Industrial Average Index is strong too. Here is a chart showing recent performance.
What is Driving the Rally?
Sentiment is driving the markets higher. But, does it worry you the earnings picture isn’t actually improving? How about that the defensive posturing by corporations evidenced by massive cost-cutting is not true organic income statement improvement? It’s certainly not sustainable, and it’s only questionably good news. Still, the market has continued to respond bullishly to “better than expected”. This is similar to celebrating that the economy and consumer spending are shrinking … but less than expected.
Markets can continue to rally in the face of logical questions about its true strength. For proof, you can look at the following chart of Shanghai's market, which many skeptics believe is a bubble waiting to pop.
So, are we really in a new bull market? Or is this prolonged rally a massive trap, sucking-people-in, only to collapse back down? In my opinion, it doesn't matter. Despite what we call it, whatever will be, will be. What matters is how you trade it.
This week's news brought President Obama declaring: "We have stopped the free-fall. The market's up and the financial system is no longer on the verge of collapse. … So there's no doubt that things have gotten better." Obama also defended the bailout of the banks as a necessary measure to hold-off greater financial trouble; explaining that he inherited "the worst economy of our lifetimes." That's all well and good; yet, it reminds me of a different President who declared "mission accomplished" … just a tad too quickly. Time will tell. I just hope we keep making progress.
The Markets Have Done Well Recently.
During the last three weeks, the S&P 500 climbed more than 10% higher on better than expected earnings. So far over 70% of companies have beat earnings estimates. The Dow Jones Industrial Average Index is strong too. Here is a chart showing recent performance.
What is Driving the Rally?
Sentiment is driving the markets higher. But, does it worry you the earnings picture isn’t actually improving? How about that the defensive posturing by corporations evidenced by massive cost-cutting is not true organic income statement improvement? It’s certainly not sustainable, and it’s only questionably good news. Still, the market has continued to respond bullishly to “better than expected”. This is similar to celebrating that the economy and consumer spending are shrinking … but less than expected.
Markets can continue to rally in the face of logical questions about its true strength. For proof, you can look at the following chart of Shanghai's market, which many skeptics believe is a bubble waiting to pop.
So, are we really in a new bull market? Or is this prolonged rally a massive trap, sucking-people-in, only to collapse back down? In my opinion, it doesn't matter. Despite what we call it, whatever will be, will be. What matters is how you trade it.
This video from The Economist is a great metaphor for where we are in the market.
The Economist is one of those magazines that piles-up in my office. I don't want to throw it out; but I also don't read it as often as I want to, or should. I tell myself it is because I want to read it thoroughly. Then, when I finally read them, I think that I should read them when they come in (rather than putting them in the pile).
Nonetheless, The Economist always seems to provoke thought, and they throw-in something funny more often than you might expect. I like that they often talk about the "bigger" ideas … and as a trader, I too often get sucked-in by the Siren's Call of urgency and "news".
So, this week I thought I'd write about two of the bigger ideas that the markets are provoking me to think about recently.
The first is how much stock to put into China's recent economic growth? The second, perhaps related, is really a question about how much canwe trust the recent rally, in light of what happened just beforehand. With regard to the second question, I'm talking about the U.S. Markets too.
First, Let's Look at China.
The Chinese market and economy seem to have rebounded quickly. However, there are some signs that all might not be well behind the Great Wall. For example, here is a chart that shows a dramatic decrease in electric power usage. It leads to this question. Although Chinese government officials claim GDP is well, are they lying or making things out of thin air (meaning, without electricity).
Getting back to our markets, I continue to be surprised by the length and strength of the rally. Apparently, Artificial
Intelligence is a good substitute for lack of the real thing. So at least
my trading systems have been comfortably "long"… even though I'm feeling bearish.
Could The Recent Rally Simply Be a World-Wide Reflex?
At its simplest, most people try to create a diverse portfolio by trying to buy different types of assets. For example, banks, utilities, tech, staples, and cyclicals. Other classes of assets include things like real estate, precious metals, currencies, and energy. Common sense says that some things go up, while other things go down; that is called "Sector Rotation". However, during times of economic and financial market distress, a surprising number of things move in the same direction, resulting in few safe havens.
This asset class correlation was prevalent during the past year. There were days when virtually everything, around the globe, seemed to fall. I saw unusual correlation in our trading systems, too. When the markets really broke down, the diversity we normally see in our trading signals disappeared. It is tough to be long and wrong when trading models say it is more likely that the next move is back up, but the markets keep falling. Discipline says follow the model; but common sense says the model was designed for normal (or at least "mostly normal") market conditions … and that was not the type of market we were in at the time.
Not surprisingly, research shows that high correlations were a result of the steep fall in market prices and investor sentiment. An interesting article about this is "Do Correlations Matter When the World is On Fire". In addition, Felix Salmon poses a disturbing question: since we're still seeing such a high correlation, even as so many things are going up … is it possible that this is a natural artifact of the recent financial crisis, and perhaps another sign that the market is still in a time of economic and market distress. Likewise, Bloomberg points out that investors are moving in-lockstep like never before, driving up stocks, commodities and emerging markets.
The point is this high correlation actually creates a risk of replaying last year. In other words, the herd mentality threatens to leave investors with little refuge once again.
This video from The Economist is a great metaphor for where we are in the market.
The Economist is one of those magazines that piles-up in my office. I don't want to throw it out; but I also don't read it as often as I want to, or should. I tell myself it is because I want to read it thoroughly. Then, when I finally read them, I think that I should read them when they come in (rather than putting them in the pile).
Nonetheless, The Economist always seems to provoke thought, and they throw-in something funny more often than you might expect. I like that they often talk about the "bigger" ideas … and as a trader, I too often get sucked-in by the Siren's Call of urgency and "news".
So, this week I thought I'd write about two of the bigger ideas that the markets are provoking me to think about recently.
The first is how much stock to put into China's recent economic growth? The second, perhaps related, is really a question about how much canwe trust the recent rally, in light of what happened just beforehand. With regard to the second question, I'm talking about the U.S. Markets too.
First, Let's Look at China.
The Chinese market and economy seem to have rebounded quickly. However, there are some signs that all might not be well behind the Great Wall. For example, here is a chart that shows a dramatic decrease in electric power usage. It leads to this question. Although Chinese government officials claim GDP is well, are they lying or making things out of thin air (meaning, without electricity).
Getting back to our markets, I continue to be surprised by the length and strength of the rally. Apparently, Artificial
Intelligence is a good substitute for lack of the real thing. So at least
my trading systems have been comfortably "long"… even though I'm feeling bearish.
Could The Recent Rally Simply Be a World-Wide Reflex?
At its simplest, most people try to create a diverse portfolio by trying to buy different types of assets. For example, banks, utilities, tech, staples, and cyclicals. Other classes of assets include things like real estate, precious metals, currencies, and energy. Common sense says that some things go up, while other things go down; that is called "Sector Rotation". However, during times of economic and financial market distress, a surprising number of things move in the same direction, resulting in few safe havens.
This asset class correlation was prevalent during the past year. There were days when virtually everything, around the globe, seemed to fall. I saw unusual correlation in our trading systems, too. When the markets really broke down, the diversity we normally see in our trading signals disappeared. It is tough to be long and wrong when trading models say it is more likely that the next move is back up, but the markets keep falling. Discipline says follow the model; but common sense says the model was designed for normal (or at least "mostly normal") market conditions … and that was not the type of market we were in at the time.
Not surprisingly, research shows that high correlations were a result of the steep fall in market prices and investor sentiment. An interesting article about this is "Do Correlations Matter When the World is On Fire". In addition, Felix Salmon poses a disturbing question: since we're still seeing such a high correlation, even as so many things are going up … is it possible that this is a natural artifact of the recent financial crisis, and perhaps another sign that the market is still in a time of economic and market distress. Likewise, Bloomberg points out that investors are moving in-lockstep like never before, driving up stocks, commodities and emerging markets.
The point is this high correlation actually creates a risk of replaying last year. In other words, the herd mentality threatens to leave investors with little refuge once again.
On a related note, Bespoke notes that, in the first half of the year, Goldman set-aside over $11 Billion to compensate its employees. Nice work if you can get it.
The economy, and the mood about the economy, seem to be doing a little better. I give credit for the effort. Though, I am watching spending and employment numbers to tell me more of the story.
Some Market Charts.
For the past few weeks, many people have been watching the potential head and shoulders pattern. Its failure to trigger caused many people to cover their short positions. This was probably the primary catalyst for the “Oops” trade that took the market back near its recent highs.
Those recent highs are interesting to me for several reasons. First, they’ve held since early June. Second, and potentially more importantly, they may be part of a much bigger pattern forming on the major U.S. equity indices.
Here is a picture of the S&P 500 Index. Notice the potential inverse head and shoulders bottom pattern (marked in orange). If it triggers (shown by the green neckline of resistance), and if it hits the measured target (shown by the purple arrows), then it is certainly worth watching. Of course, that is a lot of “ifs”.
Some Things to Watch.
So, the upside is clear, take out the June highs and see if we get some buying volume. However, I can’t get excited, yet. There are a number of things holding back my enthusiasm. Right off the top-of-my-head: jobs, spending, lack of volume, and the failure to trade above recent highs.
However, another thing I’m watching is that recent moves up in the market were met with an increase in the VIX (instead of the expected inverse relationship). Here is a picture from Marty Chenard’s chart service called StockTiming.com.
Recently, it bothered me that the VIX failed to show a spike of fear when the market was going down. And now, the VIX is bothering me because it’s going up when the market goes up. So, either this is not a good time to follow the VIX for trading guidance, or the VIX is indicating that something unusual is happening in the markets. Either way, it makes me cautious. What about you?
While I expected a short-term rally, I still believe that the markets are due for an intermediate-term move downwards. However, neither logic, intuition, nor economics are primary indicators. Price is the primary indicator; and it has been moving upwards.
On a related note, Bespoke notes that, in the first half of the year, Goldman set-aside over $11 Billion to compensate its employees. Nice work if you can get it.
The economy, and the mood about the economy, seem to be doing a little better. I give credit for the effort. Though, I am watching spending and employment numbers to tell me more of the story.
Some Market Charts.
For the past few weeks, many people have been watching the potential head and shoulders pattern. Its failure to trigger caused many people to cover their short positions. This was probably the primary catalyst for the “Oops” trade that took the market back near its recent highs.
Those recent highs are interesting to me for several reasons. First, they’ve held since early June. Second, and potentially more importantly, they may be part of a much bigger pattern forming on the major U.S. equity indices.
Here is a picture of the S&P 500 Index. Notice the potential inverse head and shoulders bottom pattern (marked in orange). If it triggers (shown by the green neckline of resistance), and if it hits the measured target (shown by the purple arrows), then it is certainly worth watching. Of course, that is a lot of “ifs”.
Some Things to Watch.
So, the upside is clear, take out the June highs and see if we get some buying volume. However, I can’t get excited, yet. There are a number of things holding back my enthusiasm. Right off the top-of-my-head: jobs, spending, lack of volume, and the failure to trade above recent highs.
However, another thing I’m watching is that recent moves up in the market were met with an increase in the VIX (instead of the expected inverse relationship). Here is a picture from Marty Chenard’s chart service called StockTiming.com.
Recently, it bothered me that the VIX failed to show a spike of fear when the market was going down. And now, the VIX is bothering me because it’s going up when the market goes up. So, either this is not a good time to follow the VIX for trading guidance, or the VIX is indicating that something unusual is happening in the markets. Either way, it makes me cautious. What about you?
While I expected a short-term rally, I still believe that the markets are due for an intermediate-term move downwards. However, neither logic, intuition, nor economics are primary indicators. Price is the primary indicator; and it has been moving upwards.
