Capitalogix

The S&P 500 Index Just Broke a Long Term Up Trend - Do You Care?

Trading doesn't have to complex.

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.

Let's see what happens.

Related articles

A Quick Look at S&P 500 and It's Likely Next Move

Is the S&P 500 Index at Its Likely Bounce Point?

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.

 

• US Dollar
• US Treasuries
• Gold
• VIX Volatility Index

 

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.

 

Related articles

7 Unexpected Events That Could Blow Apart Investor Portfolios In 2013

The CBOE VIX Is Standing Between You and the Fiscal Cliff

Seasonally Strong Period for Gold is Coming

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.

Listen In as Michael Covel and David Stendahl Discuss Trading Strategies

Michael Covel is the President TrendFollowing.com and TurtleTrader.com. 

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.

Here is a review of Trend Following and the post on Trend Commandments.

See the list of all Covel's Trend Following Manifesto Podcasts in iTunes and here for a more complete description of each recording.  Check it out; he has produced a bunch of terrific interviews that are worth listening to because of their educational content, and because they will make you think.

 

Related articles

• Listen In As Michael Covel and Howard Getson Discuss Trading Strategies (capitalogix.typepad.com)

Procrastinate! Why Waiting to Decide May Be Better for You.

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.

 

 

Listen to the podcast of the full event including audience Q&A.

Related articles

• Procrastinate until your heart's content: we make better decisions when we take our time (blogs.lse.ac.uk)
• Book Review: Wait: The Art of Procrastination (blogs.lse.ac.uk)
• Wait: The Art and Science of Delay (ritholtz.com)

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

 

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.

 

Visit NBCNews.com for breaking news, world news, and news about the economy

 

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.

Related articles

• Mark Cuban: High-Frequency Traders Are the Ultimate Hackers (moneyscience.com)
• In Defense Of The High-Frequency Hackers (techcrunch.com)
• Interview With A High-Frequency Trader (zerohedge.com)
• Machines Dominate the Market: 84% of All Trades HFT? (ritholtz.com)

Listen In As Michael Covel and Howard Getson Discuss Trading Strategies

Michael Covel is the President TrendFollowing.com and TurtleTrader.com. His first book was "Trend Following: Learn to Make Millions in Up or Down Markets". His second book "The Complete TurtleTrader" is the only narrative account of trader Richard Dennis and his student traders nicknamed the 'Turtles'.  His newest books are "Trend Commandments" and "The Little Book of Trading".  Covel's first film documentary is "Broke: The New American Dream".

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.

 

 

Our interview was fun and fast-paced.

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.

Here is my review of Trend Following and the post I did on Trend Commandments.

See the list of all Covel's Trend Following Manifesto Podcasts in iTunes and here for a more complete description of each recording.  Check it out; he has produced a bunch of terrific interviews that are worth listening to because of their educational content, and because they will make you think.

David Stendahl Interviewed on Traders.com

Traders.com is a great resource for technical traders, and so is their Technical Analysis of Stock & Commodities Magazine.

Our Portfolio Manager, David Stendahl, was recently featured in the August 2012 issue. 

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.

As a trader, you are likely to find something interesting in Technical Analysis of Stock & Commodities Magazine.

Related articles

David Stendahl: Portfolio Manager at Capitalogix on Covel Podcast

Portfolio Construction: Risk Vs. Capital Allocation

Not Equal: A Comparison of "Risk Parity" and "Equal Risk Contribution"

The S&P 500 Index is Entering a Seasonally Weak Period

The S&P 500 Index is entering a seasonally weak 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, Soybeans are up 45.25% 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.

Related articles

• S&P 500 Index at Inflection Points (ritholtz.com)
• S&P 500 Index: Summer Is a Time for Patience and Endurance (minyanville.com)
• S&P 500 Index: Put Your Seatbelts On, It's About To Get Bumpy (INDEXSP:.INX, SPY) (etfdailynews.com)

Socrates' Triple Filter Test and the Modern World

Small distinctions separate wise men from fools.  Perhaps one of them has to do with what the wise man deems important.

 

Socrates' Triple Filter.

In ancient Greece, Socrates was reputed to hold knowledge in high esteem.  One day an acquaintance met the great philosopher and said, "Do you know what I just heard about your friend?"

"Hold on a minute," Socrates replied. "Before telling me anything, I'd like you to pass a little test. It's called the Triple Filter Test."

"Triple filter?"

"That's right," Socrates continued.  "Before you talk to me about my friend, it might be a good idea to take a moment and filter what you're going to say. That's why I call it the triple filter test.

The first filter is Truth.  Have you made absolutely sure that what you are about to tell me is true?"

"No," the man said, "Actually I just heard about it and..."

"All right," said Socrates. "So you don't really know if it's true or not. Now let's try the second filter, the filter of Goodness.  Is what you are about to tell me about my friend something good?"

"No, on the contrary..."

"So," Socrates continued, "You want to tell me something bad about him, but you're not certain it's true.  You may still pass the test though, because there's one filter left.  The third filter is Usefulness.  Is what you want to tell me about my friend going to be useful to me?"

"No, not really."

"Well," concluded Socrates, "If what you want to tell me is neither true, nor good, nor even useful ... then why tell it to me at all?"

 

How Does That Apply to Me or Trading?

  The concept of Socrates' Triple Filter applies to trading as well.

As a technical trader, rather than looking at fundamental data and scouring the news daily, I focus on developing dynamic and adaptive systems and processes to look at the universe of trading algorithms to identify which are in-phase and likely to perform well in the current market environment.

One of the arguments in favor of technical analysis is that fundamental data, news, and sentiment are already built-in to the chart.

 

Filter Out What Isn't Good For You.

In contrast, there are too many ways that the media (meaning the techniques, graphics, music, etc.), the people reporting it, and even the news itself, appeals to the fear and greed of human nature.

This is the main reason that I don't watch CNBC during the trading day.  Even though I like it on several levels ... I don't think it helps me.  So I filter it and get the news in other ways.

Likewise, I don't watch TV news anymore either. It seems like story after story is about terrible things. For example during a recent visit with my mother, I listened to her watch the news.  There was a constant stream of "oh no," or "oh my," and "that's terrible". You don't even have to watch the news to know what it says.

 
Focus On What You Want.

Instead, I get the news I need a different way that is more efficient and productive for me. I subscribe to certain things via e-mail, and other things via RSS feeds.  Then I supplement those with a series of search services that alert me to items that match the criteria I set. An example would be Google Alerts.  Two other nice alert services are from the Financial Times and the New York Times.  Recently I've also been using two great iPad apps - one is called Flipboard, the other is called Zite.

Check them out.  It will save you a lot of time and effort.

Personally, I care about the source of my news. It helps me identify and account for potential bias. So using subscriptions, feed readers, and alert services help here too.

Another reason I like these tools is that I can use different filters for different purposes.

 

What's The Purpose Of News For You?

My purpose changes what I'm looking for and the amount of attention I pay to different types of information. Am I reading or watching the news for entertainment, to learn something new, or to find something relevant and actionable?

Getting back to Socrates' three filters and the business of trading, I ask might: is it important, does it affect our edge, or can I use it as a catalyst for innovation?