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.
The
World's First Vegetarian McDonald's. To capture more of India's $12 billion
fast-food market, the burger chain will jettison meat entirely in favor of the
McAloo Tikki burger and the McSpicy Paneer. (The Week)
Do
you want sprouts with that? A former McDonald's boss would like to welcome
you to his new restaurant. No butter, cream, white flour, or additives. (Wired)
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.
The iPhone 5 is cutting edge ... and Siri is getting smarter. Too bad it can't answer the tough questions. Here's a cartoon that imagines what would happen if asked "Can the economy be fixed in the current political climate?"
Here are some of the posts that caught my eye. Hope you find something interesting.
Flight to Safety for Markets?
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 ...
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