Capitalogix

Here Are Some Links for Your Weekend Reading

When was the last time you called your Mother?

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Luck In Business. What can you do to deal with uncertainty better?  (Fortune)
• Six Things to Put on Your To-Not-Do List. (Forbes)
• The Role Human Judgment Plays In Creating and Managing Algorithms. (Aeon)
• Why Don't Airplanes Fly Faster?  Economic Lift and Drag. (Medium)
• Meet GeoGuessr, a fun little Web game about global geography you haven’t played yet. (TNW)

 

Trading Links:

• Buffett’s Career in Less Than 1000 Words. (AlephBlog)
• When Economists Agree, Start Worrying. (Wall Street Journal)
• Using Big Data to Combat Big Risk. (Advanced Trading)
• 5 Reasons the Government Fails at Venture Capital. (Forbes)
• Jim Rogers. "I Suspect They'll Take The Pension Plans Next; I For One Am Worried, and I'm Taking Preparations" (BullMarketThinking)

What Happens in a Half-Second of High Frequency Trading Activity?

What happens in a half-second of high frequency trading activity? The answer is a lot more than you'd guess or notice.

This video illustrates an actual half-second of trading in in Johnson & Johnson stock, slowed down so it takes five minutes to watch. Don't worry, you don't have to watch more than a few (slowed down) seconds to get the point. The size and scope of what is happening changes the game and the playing field.

 

 

 via Nanex.

The question isn't whether high frequency trading is about efficient allocation of capital or attempts at short-term market manipulation ... it is what you decide to do after you know it is happening and becoming the norm (rather than simply an understood but infrequent risk).

 

Related articles

Ian Fraser: The beauty and insanity of HFT

Machines Dominate the Market: 84% of All Trades HFT?

High-frequency trading tactic lowers investor profits

Mark Cuban Explains Why High Frequency Trading "Terrifies Him" - But That May Be Why It Interests Him As Well

Can High-Frequency Trading Drive the Stock Market Off a Cliff?

HFT Stock Manipulation In Action

Here Are Some Links for Your Weekend Reading

Things are changing here in the United States. Whites’ deaths outnumbered births for first time.

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Why Would Hackers Target Your Little Company? (Harvard Business Review)
• How the NSA Might Snoop Personal Web Data Without the Provider’s Knowledge. (GigaOM)
• A Box with a Hidden Video Camera Documents Its Own Journey Through the Mail. (Popsci)
• The End of Sleep? Emerging tech could radically reduce our need to sleep. (Aeon)
• 10 Reasons Why So Many People Are Moving to Texas. Half of the 10 fastest-growing cities in the US are in Texas. Why? (BBC)

 

Trading Links:

• Following the Smart Money in Asia. (Forbes)
• Doing Business in China Safely. The Due Diligence Basics. (ChinaLawBlog)
• The Only 3 Indicators Of Chinese Monetary Policy That You Need To Watch. (BizInsider)
• What Will Happen To Markets When QE Ends? (FT)
• Is Thomson Reuters Giving Elite Traders and Unfair Advantage? (Benzinga)

Playing 'Smart' Doesn't Mean You Are Cheating

When did playing 'smart' start to mean that you were a cheater?

Recently, Apple got grilled for its low-tax strategy. While not every business can, or does, copy that approach ... many do.

Here is a look at what S.&P. 500 companies paid in corporate income taxes — federal, state, local and foreign — from 2007 to 2012, according to S&P Capital IQ.

 

Click here to read the NYTimes article this infographic came from.

At its core, our democratic process and legal system were designed to take care of issues like these over time.

Likewise, our free market system will adjust to level the playing field.   There is game theory in government.  If you make things too difficult, the smart players find a different game to play.

Meanwhile, other countries certainly are incented to find a way to make to entice big players to play on their turf ... and creating a tax haven is one way to do it.

Going back to Apple, on one hand I'm sure the government wishes they had paid more taxes, but on the other hand I'm sure they are glad that Apple didn't move away and take their tax dollars with them. 

As you have probably surmised, this happens on many levels and in many places.

In trading, for example, statistical arbitrage was once an easy way to make money (if you knew how to do it). The reason was that relatively few people knew how to do it, so there was limited competition (and fairly easy winnings). Then, as the success of the early winners signaled others into the game, it got harder to win.  People started programming computers to find mis-priced assets and the discrepancies filled themselves in moments.  As you might guess, many traders who have tried statistical arbitrage have moved on to other things.

Identifying inefficiencies (or loopholes) in a system is potentially good for everyone involved. It benefits the person who identifies the inefficiency, because they get paid. Yet, it is also good for the system because it identifies weaknesses or areas that need additional attention, oversight, or regulation.  And it provides a feedback loop allowing the parties to course-correct and play smarter.  Over time, this often results in real progress.

Related articles

Seven Fun Facts About Corporate Taxes

The Biggest Takeaways From Apple's Tax Grilling

We Need a Tariff, Not a Corporate Income Tax

What Tim Cook should say: Tax me more, Apple not at all

Some Thoughts on the 'Hindenburg Omen' Pattern Predicting Market Instability

Tracking the Hindenburg Omen: How Much Danger Is There?

Warnings were heard from many corners of the financial blogosphere that the Hindenburg Omen triggered.

What is it?  It is a fairly obscure technical analysis pattern, which supposedly gives an early warning of unstable market conditions (and even potentially stock market crashes).

While the calculation is based on five factors, the primary conditions indicate that there is a big disagreement about market conditions.

For example, two of the conditions are that a substantial number of stocks have to be at yearly highs, while a substantial number of stocks have to be at new annual lows.  Ultimately, it is hard for those two conditions to be met in a short period of time, unless there's uncertainty in the market.  Moreover, after a rally, uncertainty is often a precursor to a decline.

In addition, technically (in order for the pattern to be complete), a second sighting of the five elements must occur within 36 days. Logically, lingering uncertainty is a momentum killer.  Well, in this case we have it; the pattern flashed in mid-April and it happend again on the last day of May.

 

 

While this pattern has correctly predicted every big stock market swoon of the past two decades, including the October 2008 decline (that set the global economic recession into motion), not every Hindenburg Omen has been followed by a crash. Resorting to a geometry analogy: All rectangles are squares, but not all squares are rectangles.

Personally, I don't make trade decisions based solely on indicators like this. Nonetheless, it has a pretty good track record, seems to be based on reasonable theories, and might be useful as just another data point urging caution.

The Rally Continues, Even Though Smart Money Expected a Short-Term Top

Traders are often confronted by mixed signals. 

Personally, when I have to choose between something straightforward or something complex - simple is better.

For example, when large "Smart Money" traders show their directional bias, it often pays to follow in their tracks.

Another technique would be to bet against the smaller retail "Dumb Money" traders (because, historically, they are often wrong at major turning points.

However, if I have to decide between following "Smart Money" or doing the opposite of what "Dumb Money" does ... then in the absence of other information, following Smart Money wins because it is more straightforward and simpler.

Here is an example.

Smart Money - Dumb Money Confidence Index.

The chart, below, compares the bets made by small traders (a.k.a. the "Dumb Money"), to those of large commercial hedgers (a.k.a. the "Smart Money").

In practice, Confidence Index readings rarely get below 30% or above 70% (they usually stay between 40% and 60%). When they move outside of those bands, it's time to pay attention.

Even more noteworthy is when there is a wide confidence spread with bullish bets by the Dumb Money and bearish bets by the Smart Money. This type of sentiment spread only happens a few times a year. We often get substantial bullish reversals when that happens.

So, early last week, I took notice of this chart from SentimentTrader. The confidence spread it shows was pretty close to extreme levels.

 

Conventional trading wisdom says that Crowds are usually wrong at turning-points.  That doesn't mean they are wrong all the time (yet, as discussed, it makes sense to notice when the Smart Money clearly disagrees). So, after such a strong rally, this is the kind of data that causes me to pay closer attention.

The Markets had been selling-off a litte.  Would this be  a trend-break or a buying opportunity?  Would Smart Money start actively making Bearish bets?

As the next chart shows, two days was all it took to get back to the status quo.

 

 

That is why trend following works.  Price is the primary indicator, and until it breaks down, dips will be met with buying.

Are the New Market Highs the Start of Something Bigger?

The Markets are in rarefied territory.

Have you been waiting around to "buy the dip" on this latest stock market rally? If so, you have been waiting a long time. 

The Dow and the S&P 500 surpassed their all-time highs.

How Strong is the Up-Trend?

 

The chart below compares equity markets to their three year highs. Thus, if a market is shown to be at 100%, then it's currently at a new three year equity high. If not, then the percentage number indicates how close it is to reaching a new equity high. 

Looks pretty strong, globally; doesn't it?

 

Also visit the Drawdowns Metric page to view historic equity high watermark charts.

 

Does the economic, valuation, and political background support the budding euphoria? It just doesn't matter.  Traders know that when Markets go up on bad news ... that is bullish.

 

No Pull-Backs to Speak Of - That is Bullish Too.

 

Risk can be defined in many ways ... the two Russell 2000 charts below focus on a variety of drawdown risk measures that provide prospective on past risk and potential opportunity.

The Russell 2000, shown as a black line in each chart, is making new highs. In the chart below, the pink curve, shows the draw-downs from prior high water marks.  The green diamonds (at the zero line) show new highs.  This chart shows the past three years.

 

Drawdown Definitions

• Current Drawdown: Open loss since last underwater equity high.
• Maximum Drawdown: Largest peak-to-valley loss.
• Underwater Volume Index: Accumulation of all drawdown periods.
• MAR: A ratio that compares Reward, defined as Compounded Annual Growth Rate (CAGR)
  to  Risk, defined as Maximum Drawdown.

 

To get a different perspective, the next chart smoothes the Under-Water Index (drawdown curve), by taking a twelve week moving average of it.  It is a good way to identify potential turning points for the Russell 2000.

 

The Blue circles and Green squares signify possible tops and bottom for the market.

One of the ways to use the rolling UVI chart is as a longer-term trend based indicator by watching the general direction of the UVI. If it's moving higher we might expect bullish systems to fare better, while if it's trending lower we might look for bearish systems to trade more effectively.

Right now there is a negative divergence.  It is underwater while the market makes new highs.  This is where buying should come in ... if not, then this is an early warning.

To see this indicator on other markets, click here.

The Trend is your friend ... until it isn't.  But that is pretty easy to tell based on support and resistance levels and indicators like this.  Till then, enjoy it while you've got it.

Here Are Some Links for Your Weekend Reading

Certainty is a 'funny' thing.  Just because you know the 'right' answer doesn't mean there isn't a different answer that might seem even more correct.

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Business lessons from the Dalai Lama. (CBSNews)
• We Wait Too Long to Train Our Leaders. (Harvard Business Review)
• Here's What Happens Every Sixty Seconds in the World of Data. (DZone)
• The Smell of Nature Is Almost as Good For Us as the Real Thing. (TheAtlantic)
• How to Think Like Sherlock Holmes: Lessons in Mindfulness and Creativity from the Great Detective. (BrainPickings)

 

Trading Links:

• The World's Youngest Billionaires. 29 Under 40 - (Forbes)
• Retirees Set to Outnumber Canada’s Youth for the First Time. (Globe&Mail)
• An Aging Population May Be What the World Needs. (Businessweek)
• Self-Learning Algorithms. The New Frontier for Trading & Market Surveillance (AT)
• Data Shift to Lift US economy 3%. Because of this change, the U.S. economy will 'officially' grow in July ... as R&D and film royalties are added. (FT)

Why the Fake-Tweet Market Reaction Was a 'Good Thing'

You probably heard that a fake Tweet (claiming that something happened in Washington DC) caused the market to have a mini flash crash this past week.  Within minutes of that Tweet on Tuesday, more than $130 billion disappeared from the value of US stocks trading on Wall Street.

 

Who is to blame ... hackers, Twitter,  or perhaps algorithmic traders?  I don't think so.

After looking at the data, here is a different perspective on what happened ... and what I think it means for the future.

Let's assume that a trading algorithm was able to identify a potential risk (or opportunity) and make a trade based on that information. Once that trade becomes visible to other traders through the open-market system, it's going to trigger a series of causes and effects.

This is no different than when a local on the floor of an exchange places in order during slow market periods to clean out the stops. A spike down beneath people's risk tolerance creates a desire to sell. However, if there is no further selling pressure, the market will rise as traders suspect a 'bargain'. Does that constitute is a micro flash crash also?

The point is that markets are becoming faster and more volatile. It doesn't make sense to complain every time something like this happens. It's going to happen with increasing frequency.

This is now part of the market; consequently, it is time to figure out what to do with it. Some traders will move to faster and more responsive algorithms. Other traders will increase the time-frame that they focus on in order to filter out the "noise" and small variations like this constitute. 

Whining about it and calling for increased regulation may be missing the point as well.  Why?  Because there is a financial incentive for algorithmic traders to become better at correcting these errors themselves. Frankly, it's too expensive to be wrong for long (especially when your trading large-size). As a result, the algorithms are going to get better at the 'two steps forward, one step back' testing and evaluation process. It's inevitable.

Trading isn't about predicting the future. It's about calculating the probabilities better. By doing this you can know faster and act faster. This will likely result in smaller errors - and (if you care) the markets will seem more orderly. Nevertheless, what it really means is more ways to win for people who can spot the opportunities quick enough to take advantage of them.

Related articles

Fear This: The Trading Robots Really Are Reading Twitter

Fake Report Erasing $136 Billion Shows Market's Fragility

Flash crashes only a tweet away

Are US Markets Signalling Risk-Off Behavior?

There was finally an uptick in securities reaching new 52-week lows this week.  Don't get excited; but it had been more than 100 days since we'd seen at least 3% of issues on the NYSE tick at a 52-week low.

Meanwhile, other indicators of where we are on the risk-on/risk-off spectrum have been pointing 'bearish'. For example, the following chart shows that the Russell 2000 Index is under-performing the S&P 500 on a relative basis.

 

via Chartsetcetera

So new highs were met with lower momentum, and indicators show the bulls are lagging ... Are you thinking "Sell in May?"

Related articles

Russell 2000 vs S&P 500 Divergence: April Fool's Joke or Something Else?

Chart of the Day: Number of New Lows Almost Highest in Past Year

As Dow, S&P Make All-Time Highs, Bond Investors Cower