A recent trip to upgrade my family's phones saw me leave with 3 extra android tablets, 2 iPads and a monthly phone bill that was 2x what it was when I walked in. The siren's call of the deep discount is as irresistible as the naive expectation of easy money. The closer we get to Black Friday the more we are exposed to the lure of 50-80% off deals. The ease of point-and-click shopping leaves us even more vulnerable to the pitfalls of anchoring bias. I find myself prone to frivolous and unnecessary purchases, just because items are cheap relative to what they once were, rather than because they are a good value and one needs them. Bears keeping in mind during the current holiday trading season.



 I read a few days ago on a website that no more evolution is possible beyond the human form, until consciousness is worked upon. I interpreted that nature kept forcing a biological evolution & brought us into human form and hereon for remaining relevant in the continuing evolution, for improving the lot within this and the next live(s), one will have to raise the envelope of one's consciousness.

If I connect this idea to another idea that we cannot let people press the wrong switches in our being, causing either morbid fear or fatal attraction, then I have a combined thought that for my evolution to continue I have to de-activate the wrong switches in my consciousness such as outside of me other forces cannot trigger them. Only inward flow of intelligence into any action or thought switch has to activate any.

This leads me to a thought that if God is the supra-intelligence design that Governs this Universe and every Universe, then there is a tendency for the human world to keep becoming more and more vigorous, intense in the stimuli each next generation will keep getting. The one effective in a world that will have more and more intense stimuli are then going to be those who are stronger in the face of such stimuli. The same way that progressive resistance training builds the muscles on our body, progressive resistance training to information stimuli may develop Emotion Intelligence.

More information, more TV channels, more internet, more books, more facilities, more attractions & eventually more frustrations and at an increasingly faster speed is the trend within this life. To evolve and become more effective than others is a goal of the process Darwinian Evolution, then each life we get is a preparation for the next one is one view. To be given birth in a much faster, more enticing, more opulent world one might be then actually getting eligibility by effectively training received in a lesser / simpler / easier world to respond less and less to external attractions and frustrations.

So if I let this process of imagination propagate forwards, undergoing evolution of the Emotionally Intelligent side of our brains we may one day become eligible to be given birth into Heaven and if we keep failing the tests of Emotional Intelligence we may keep receding into lower worlds and reach Hell too.

Yet, who knows if all universes are co-existent and time is a mere illusion that causes a sense of separated-ness and time provides a mythical yarn on which our mind travels, then Heaven and Hell may both be very well existent within this life and many have been to both several times within this life.

May I therefore conclude, those amongst the human specie that are able to restrain an impulsive response to stimuli more than others are on the way to building their Heavens, while those who respond more impulsively than the rest are accelerating their journeys towards Hell. This is felt most truly in the profession of trading, that provides unambiguous instant feedback with each piece of action and inaction, yet may be true in every human enterprise since this is the path of the ongoing evolution.

I am hopeful you will allow me an indulgence that, mere Intelligence is for those who are afraid of handling the journey to hell and emotional intelligence is for those who are making a successful trip back from hell with a determination to get to heaven on this leg. Perhaps, the passport to heaven, for getting in and staying there, is a high EQ and not a mere high IQ.

Gary Phillips writes: 

One can never count on the consequences of their actions, yet one can always count on the motive(s) of the action. The trader needs to take responsibility for the consequences of his own choices. The market demands objectivity and precision which is directly quantifiable. The ego is completely different from the market, and can only be measured subjectively and qualitatively. Why not simply, look at life as a flash of beta? There isn't any measurable premium to be paid to insure compensation or avoid retribution for the kind of earthly life one lead before one's option expired. Trite but true, "not everything that counts can be counted, and not everything that can be counted counts."



While helping me pack the SUV the other day, the 5 year old casually remarked, "I went to the doctor today". Oh yeah, how did it go? I said. "I got a shot". How was that? "Painful! he responded, with a slight grimace. I know how you feel. I had to get out of my long SPOOs today. "How was that?" he remarked. Painful! I lamented, with the very same look on my face.



Will someone explain to me how a 57% man survey versus a 57.5 consensus in cha— must be 1 in 200 varied, with a standard deviation of the number of 5 percentage points or 25… could cause an immediate drop of 20 points in SPU and 300 in Nikkei et al. Is it random? Is it bullish or bearish in itself? The old story… a number is seen as bad for China. The US markets swoon. And then China goes up regardless, but the bearishness persists. When people are bearish they're bearish.

Gary Phillips writes: 

Herd behavior appears to have become more institutionalized i.e, ETFs, risk parity funds. Traders need to adjust to the reduced level of liquidity (Volker Rule's effect?), and the higher level of realized and implied volatility. Eventually these things sort themselves out and the fundamentals reassert themselves. I suspect that's what will happen this time too. 




Success in the opening can lead to a weak middle game, and finally defeat in the ending. (Today in SPUs?)

The three pillars: playing much, suffering much, and studying much– these are the three pillars of learning.

A breakdown

Market and board players should not rely too much on the computer. Something new might arise and they might have to think.

Idiot savants

There are genius players who have a sixth sense but some of them do not have the other five (Sornette? The derivatives expert?)


Win, lose or draw, it's good to have friends. But it's especially good to have game friends. I've had some of them 50 year years (the spec list was started 18 years ago. How long will it last?)

A paradox

Checkers is so simple– it is difficult. Chess is so difficult, it is simple. (What is the simplest market, the simplest technique. The tall basketballer from Harvard who started with me liked to buy the open to 11 breakout in all markets).

Christopher Columbus

When you discover good moves on your own, you are likely to remember them. When you learn them by rote or the computer, you tend to forget. (Keep doing the hand studies. And follow the 3rd Contrivance in the art of trading. Keep half hour prices by hand. One has been doing so for 45 years. The bound books are all moldy in the former trading room)


The search for the right move during the game is helped by the research you have done before playing (read the 100 year old books.)

These are 10 of the 5,000 proverbs that Tom wrote for us during the 20 years he gave us lessons. He wrote 25 books, and always said that the book he wrote based on these proverbs would be his best book. He'd always look around wistfully after saying that: "the one thing I wished is that I married a girl like Susan". Then he'd shake his head sadly. "But if I had, I might not have written the 25 books."

Gary Phillips writes: 

Like my mother used to say, Mr. Wiswell's first quote gave me goose bumps.

Vince Fulco writes: 

How many times will we decide we need to focus on one position to the detriment of the successful mix reminding of the term "perfect is the enemy of the good"?

Stefan Martinek writes: 

I think perfectionism is dangerous. In trading it leads to procrastination. For example, we can view any system as 3-dimensional cube: (dim "a") p of winning; (dim "b") avgWin/avgLoss; (dim "c") number of opportunities. Retail traders usually love high "a". But high "a" usually reduces "b" (we can also inflate "a" by faster exits/targets pushing "b" down). But in case that one is lucky and finds something with high "a" and "b", "c" typically gets killed (valid also outside of trading). Less perfect models with lower "a" and higher "c" usually make more money on both absolute and risk-adjusted basis.



 I was waxing nostalgic when I was reminded of one of Vic's favorite precepts…

Not that it was anyone's business, and not that anyone really cared, but after the trading day was over, one was often asked matter-of-factly, "so how'd you do today?" even back-in-the day (on the floor of all places) traders doled out socially accepted responses to this very probing question. These responses were realistically based on a hierarchical assessment of one's intra-day p&l.

Ranging from bad to worse, were the losing days…

- they got me
- got killed
- at least I got my health

Ranging from good to better, were the winning days

- not a bad day
- got 'em
- had a nice week today

A gentleman never kisses and tells; and a trader does not provide full disclosure about his performance; the trader should instead exhibit humility. For those on the right, humility may be seen as political correctness by a different name, while those on the left may see this as a way of stifling free expression. However, like a poker player without a tell, one should never be able to discern if a trader had a good day or a bad one. A trader shouldn't whine, or proffer excuses on bad days; and there should be neither bragging, nor hubris tendered on the good ones. Trading makes strange bedfellows. Individuals from disparate backgrounds with varying opinions, beliefs, and backgrounds are brought together by their passion for trading. But, what should also unite them is a shared belief that humility is not only there to protect them, but is a kind of moral compass that should always remain a virtue.

Anatoly Veltman writes: 

People would never guess so after the close, if I just made some easy six figures. I never-ever thought of the reality of that cash (for me, the winner). People would hear me going off at "that silly market", which just did so unprofessionally today.

Reminds me of one Robin Hood's trading idea to never cover if the market let his contrarian position recover back to break-even. His logic was that if "they" were covering themselves so aggressively as to even forget "to force me out first"–then my initial premise must have been reeeeally good, and is bound to go a long way!

Jim Sogi adds: 

My second cousin is a pitcher for the Dodgers. He and every other baseball player has daily, game by game, lifetime, yearly statistics kept and prominently displayed whenever his name appears. Why don't professional traders have this type of info if they are running a public fund or ETF? I think it would be good.

Sushil Kedia writes: 

In my earlier years, there was a dream job I wanted to get hired for. Interview processes lead me to the final round with the big man, who has been an idol nearly for me for close to two decades now.

At the deeper end of what most would consider to be a long interview by his standards, since he had already given me twenty minutes he asked me to tell him one exceptional quality I have in me which would be really difficult to find in most others and how it is relevant to the job of running his billion dollar book.

I told him humility is my most effective quality. He asked why. I told him that it is the most powerful currency that can ever be invented. He stared at me and asked why. I told him, without spending any cash of any type, it is very effective in seizing a put option from the world of your own short-comings, follies and errors. He said, this may not always work, as some will be so good that they will still encash your short-comings. I wasn't sure if he didn't like what I said. Then with a long pause he asked, what more ways can you justify saying that humility is the most powerful currency. I said it helps you see others' cards often better without revealing most of yours. He smiled. He asked, tell me a third way in which humility is a currency. Told him, the same way that deception minimizes struggle for the discovery of the deal zone, humility also reduces the required effort for closure. He said you are hired, subject to reference checks.



I'm not sure how to frame this out yet (perhaps others have ideas) but I am thinking of an accumulation indicator. The basic idea is this. Have you ever seen a market that went from "volatile" to almost a controlled, with a steady rise up. The qualitative thing you see is every single morning dip reverses very quickly. The second thing is that over a period of time there are no sustained pullbacks of any magnitude, an invisible hand guiding the market up. You can imagine how that kind of market feels for a short–every single short covering opportunity is thwarted prematurely.

Regardless, out of these conditions the qualitative hypothesis is that the price needs to accelerate before it can reverse or have a substantial correction. The question is, if defined quantitatively, might such an accumulation pattern show above average expected value. It is perhaps the flip side of the normal swing-type idea of buying a dip. Also, it might be helpful to only look at markets that have a positive drift.

John Bollinger comments: 

Fred Wynia's volume work addresses this concept quite well. The work
is proprietary and quite elegant/sophisticated, but the underlying
concept, that of measuring and comparing volume in swings, has been
around for a long, long time. As usual, the devil is in getting the
details right.

Gary Phillips writes: 

Ed, good luck trying to develop an indicator that is both robust and deterministic. Just a note however, if one only looks at markets that have a positive drift, back-testing results could be affected by said structural bias and rendered useless because they would only reflect the longer-term tendency of the market to go up.

Ed Stewart replies: 

Thanks. The idea as it stands is to complex to begin evaluating. I don't think I have captured the essential nature of the idea yet. I'm going to look if any specific elements of the idea on a stand alone basis. In terms of drift impacting results, that is very true. Drift needs to be incorporated in or it is pure futility. Many years ago when I was a random reader of the site I emailed in and Victor sent me a paper explaining a method that I still utilize, if I recall correctly. That ended up helping me tremendously. 

When I wrote the accumulation post, it was in large part based on watching the climb in IBKR over the prior few months and also similar observations on a short-time horizon. What do you know, IBKR has accelerated quite nicely. Up 5% today and almost 10% in prior 3 days. You can see the qualitative example if you look at a 3 month chart. No luck though, understanding the phenomenon on a systematic basis on the intermediate term. I've had luck with the idea on a shorter time horizon though. 

Gary Phillips adds: 

Most trend following systems have average win rates because of high draw-downs during whipsaw periods. The fundamental problem of most trend-following systems is that in order to deliver a high payoff ratio they must sacrifice a high win rate. If you try to increase the fraction of winning trades, the payoff ratio will suffer. So in effect, you would like to mitigate the negative effects of these problems by by combining a trend following strategy with a short-term trading system that would compensate for the negative trend following performance when markets are range-bound or mean-reverting. I am sure there are those that would argue that volume and volatility are both robust and deterministic indicators, but neither rising volume, nor falling vol, are necessary, nor sufficient, for the market to always trend higher, and even if they are randomly presented they do not necessarily establish timing. 



 Michael Munowitz's Knowing: The Nature of Physical Law is a great book. All pairs attract and repulse based on proximity. Very relevant to bond stocks last week while away. A do si do.

Gary Phillips writes: 

I was lucky enough to buy spoos/sell bonds Tuesday morning feeling that the principals had traveled far enough apart, and would begin to attract to one another. I subsequently added 20% to my position the following day as their proximity increased and the attraction between them grew stronger. Unfortunately, I only covered a portion of my position on the payrolls number, and then the balance between attraction and repulsion tilted the other way. I hope that that the principals are simply taking a "step back" (covering short bonds due to a less than robust number), and that the attraction will resume next week.

Gary Rogan writes: 

Why is it more useful to look at unrelated things being attracted to one another vs. them getting to cheap or too expensive and reverting to some sort of a "mean" which would look like attraction if one is so inclined? Or if the yield on one sort of security is out of whack with respect to another and they equalize over time is this attraction or people buying for yield and selling expensive stuff?



One found this article one of the most revealing I've read in sociology:

"Negatively Sixth Street"

Gary Phillips writes: 

I've been on the road for the last 8 weeks or so, traveling the eastern seaboard with my wife and 3 of our 6 (call it a partial fill). While I had envisioned a trip worthy of Kerouac or even Kuralt, the eventual reality presented was much more griswoldian. Nevertheless, traveling by car does allow one greater freedom, the opportunity to experience extraordinary scenery, and the ability to capture the charm of small towns and the inherent individuality of its people. It also allows one to step back in time to a place where the only cracks visible are in the sidewalks, and not above the baggy trousers worn by rapper wannabes. And, it serves to remind us of the civility that once was part of the rich heritage of this great nation.

One used to receive a hearty "you're welcome" or "it was my pleasure" when one expressed gratitude. The contemporary response appears to be "no problem", as if your social counterparty was doing you a favor. I once believed the ubiquitous sense of entitlement and 'increasing narcissism" I encountered was and primarily contained among the members of generation z, but was disheartened to discover the casual disregard of manners crossed generational, regional, and cultural boundaries. This phenomenon has been summarily rationalized as the result of the internet's effect on the way people communicate. And indeed, social media may have conditioned individuals to be expert parsers of language, meaning, and authorial intent. Perhaps the brevity of discourse does not allow for a subtext of manners and humility. But is it really anybody's fault? "For a flow system to persist in time (to survive) it must evolve in such a way that it provides easier and easier access to the currents that flow through it". According to constructal theory, a written language evolves to "connect" better to the masses. If the elements that constitute a language are complicated, the language will take too long to write and will be more difficult to remember, and global resistance will increase. On the other hand, if the language elements are too simple, the users of the language will lack precision. The meaning of words will be misconstrued. The natural evolution of written language, then, must head for a balance between the complicated and the simple, and twitter seems to fit the bill. And as with the case with language, technological advances in information technology have caused markets to quickly adapt to anomalies and present traders with less and less opportunities. Nevertheless, one may still find an oasis of civility here and there if one looks hard enough and lucky enough, and the same can still be said for trading opportunities.



 Hi Victor,

Here is a new discovery that may be of interest to your readers at Daily Speculations, and which may serve as introduction to my Junto presentation on 3 September:

"Why humans build fires shaped the same way"

It has generated a wave of interest on the web during the past few days.

Here is an excerpt from the Abstract:

Here we see why humans unwittingly build fires that look the same: edifices of fuel, as tall as they are wide. I show that the hottest pile of burning fuel occurs when the height of the pile is roughly the same as its base diameter. Key is why humans of all eras have been relying on this design of fire "unwittingly". The reason is that the heat flow from fire facilitates the movement, spreading, and survival of humans on the globe.

With best wishes,


Adrian Bejan ( MIT ' 71, ' 72, ' 75 )
J.A. Jones Distinguished Professor
Duke University
Academy of Europe

Gary Phillips adds: 

I wonder if there are corollaries from the abelian sandpile model that are relevant to the ways fires are built and subsequently burn.



 I have often walked down the moving average street, but I like to look at what number for the average elicits buying so as you get near it, you can hope for a nice change in the distribuion of subsequent changes. I like to stop and stare at the amount that the curent price is above moving averages of different length and look at the expectations that follow various amount above and below. The changes in direction of the moving average have also been of interest. And the first advisory service I ever bought in commodities was called 'the cumulative average'. 60 years ago I bought it.

Ed Stewart writes: 

In 2012 I applied a 10 - 20 moving average cross to VIX trading product as an example showing the propensity to trend downwards in those markets, do mostly to the massive contango effects that were even more severe at that time - I also noted that every single MA combination worked in a wide range. A guy has continued to track that simple MA cross in XIV (inverse VIX etn), and it has continued to work, often much better than "sophisticated" multi-factor systems. I have had a great deal of luck trading the VIX futures with a combination curve slope, moving averages, and my preference for getting a period after a (seemingly) failed breakout of elevated volatility.

My thought based on this is that if one has reason to believe a market has a great deal of trend persistence yet timing might still be an issue, the simple MA approach seems like a good or reasonable tool. It's not the tool or technique itself so much but the features of a market that count and define if an idea or tool might work.

On the distance from MA idea, I like to do a similar thing but use mid-point of an X period range or a point like open, close, or other specific time.

Gary Phillips writes: 

"It's not the tool or technique itself so much but the features of a market that count and define if an idea or tool might work."

Good point. Any technical information and inferences made from using this or related indicators reflect not a primary but a secondary process that involves compliance of the indicators with fundamentals and/or a cognitive bias. However, indicators that are derivatives of price, track price changes; and, if there is persistence (the future is like the past) they inevitably end up contributing to the myth that they are predictive.

Stefan Martinek writes:

I think the best tools/techniques "learn" from the market and use the data features in some way (e.g. market specific level of noise, noise "memory", etc.). This is why I never use MAs or anything that has MAs inside where we arbitrarily via parameter selection force our views on data. Good techniques are usually adaptive and ask data what parameters are preferred now.



 Nothing but free time, as I sit here long (from an average of 1999.00) watching the spoos take their shot at ath's.

I recently had the opportunity to don my cargo pants and tool belt and accompany my gc wife and her 15 worker crew on a project where we deconstructed the display merchandise at a dozen decommissioned u.s. branches of a large European bank. For one day I gave up the comfort of my home office and $1500 ergonomic office chair, for a box truck and impact drill — and thoroughly enjoyed the experience. While I was certainly, a fish-out-of water, I felt right-at-home taking orders from my wife. She is an unapologetic task-oriented leader, whose sole focus is getting the job done in a timely and productive manner, yet can always be found working along side her workers, showing them how-it's-done.

Luckily she had previously detailed the step-by-step procedures necessary to complete my arduous tasks, so I was able to immerse myself in the work-at-hand. Inevitably, second order analogies to trading came to mind, and it wasn't long before I began to compare my current blue-collar labor to the commonly perceived, white-collar vocation of trading. It really isn't much of a stretch as one would think, especially for an ex-cbot floor trader. Most of us had empathy, if not an outright disdain for the *suits,* whose shoulders we rubbed as we walked defiantly past them on la salle street. Those of us who traded in the pits, did not consider ourselves white collar guys. After all, there was nothing sexy, nor glamorous about standing next to a bunch of sweaty guys, with alcohol on their breath, risking your own money, in order to make a living. In reality, making markets was quite the workman-like activity and not much different than the task-like work I was currently performing for my wife.

To this day, I consider trading to be a blue-collar work. After all, the activity that is trading, is not that much different in it's simplicity from manual labor. One only needs to look at the worker, and not the work; to find where the blame lies for any added complexity. The laborer understands the workplace procedures required to get the job done within the team environment. If he does his work, he collects a paycheck. Yet as traders, we fall prey to our natural instincts which often make our analysis unnecessarily complex and our work burdensome.

Because we are self-professed critical thinkers, I believe we sometimes forget that we are at heart, traders and speculators. We often fail to just trade-the-market, or as Jeff wrote, "we over-think the market and miss out on-the-move." Which is why I often go back-to-basics and go *caveman* on the market. I study the markets price action, and if I think the market is going higher, I buy it. If I'm wrong I get out. If I'm right, and I think the market is going to continue to higher, I buy more. And when I don't think it can go any higher, I get out. and then, I do it all over again. There are no excuses; I just do my work and collect a paycheck. Maybe I'll start wearing a hard-hat when trading…



 1. One wonders to what extent ind stocks that go up when market is way down are bullish in the next relevant periods. Does something comparable for markets exist.

2. Gold and spu both break through round number on same day. Is it non-random.

3. How low do grains have to go before they turn bullish.

4. One reads The Life of a Leaf by Steven Vogel which shows leaves reacting as much to their environment as our markets do to theirs.

4. The absurd moves up in bonds whenever the economy is weak because of expected liquidity from the fed, and more importantly the absurd moves down in them when the announcements are strong, provides opportunity.

5. I own a reasonable quantity of twitter on the sprained ankle theory . Will it suffer the same fate as the blackberry I rode down from 60 to 10.

6. To what extent now do companies that are hit hard in the stock market by revenue shortfalls provide opportunity.

7. One of Wiswell's favorite proverbs was that "checkers is a game of architecture". I believe the same is true of markets, but I am not a good enough architecht to apply all the proper principles.

8. There are more things in heaven and earth. The great great grand nephew of Robert Boyle comes in and tells me the reason that one can't make money trading in stocks is that all the high frequency people use some sort of lock the price then front run to get ahead of you and not violate the rule that the customer has to get the best price. 

Larry Williams writes: 

Please tell the great, great, grand nephew there are still people making money buying value/momentum stocks and holding for more than a nano-second.

Whenever I hear people decry the market place as to one person, group, etc running the table so we mere mortals "can't" succeed I think it is just a losers lament.

People, lots of them, still win in this game.

Gary Phillips writes: 

Everybody needs a "scapegoat" especially the the disenfranchised traders who thinks the market owes them a living.

anonymous writes: 

It is particularly fruitless on that small time scale because any countermeasure you develop that works will be viewed as a criminal act. You either actively lose or you are found guilty of winning–take your pick. Larry's idea is the sensible one.

Victor Niederhoffer replies: 

As the EC says about all their countries, "they're one of us. We'll protect them", the grand nephew is one of mine. He worked for me and did a fine job, and is well aware of the drift. His only weakness is that he knows that the other side is a bunch of highway robbers, and like the man who complained about the Australian moves even though he doesn't change it, he's a real trader and knows you can never get an honest deal from the markets.



 Preeminent statistician and election prognosticator Nate Silver, recently lamented on the problems pollsters are experiencing; and the recent election results in the UK may be a glaring example of their waning accuracy. Most pre-election polls called for a deadlock between the conservatives and the labor party and not the one-sided victory that actually transpired.silver listed the inability to reach voters over the telephone, and a growing distrust with probability sampling as two of the factors contributing to the pollsters' problem. To make matters worse, there have been instances where some pollsters withheld results when they differed from other surveys. Instead of acting independently from the other pollsters, some pollsters have herded with the popular consensus.

"Why Did A Rasmussen Reports Poll Disappear"

Jeff Sasmor writes: 

The Observer Effect , i.e. polls are generally less effective because people are bombarded with polls, surveys, etc. The act of observation is tainting the process.

Purchase a car lately? The salesman will explain to you how someone will call from the OEM and they'd like you to give them all "excellent" on all questions.

Use opentable and you're asked to post a review. Go to a website or use a company's interactive phone system and you'll be prompted to please take a short survey. Marketers and pollsters call on the phone several times a week to ask your opinion.

There's so much of that going on that many people won't participate. What does that do to the validity of the statistical methods used to process responses from people who refuse to play?



A survey from CRT capital on the causes of the bond sell-off had 40% saying Bunds were to blame. Next was positions with 25%, followed by inflation fears (ECI, oil, the dollar and TIPS) with 15%. Domestic data only got 13% and other carried 8%. Liquidity and corporate issuance were mentioned as stressors.



 Guaranteed paydays in boxing implies there is no inherent risk premium, so taking larger risks in prizefights does not provide larger returns. Accordingly, Floyd "Money" Mayweather took very little risk last Saturday evening, and fought "not-to-lose".

Both traders and fighters are susceptible to being emotionally enticed into behavioral patterns that adversely affect their performance, so while Floyd's approach may have appeared to be "uninspired", his strategy was based on reason rather than emotion.

Throughout the night Mayweather displayed superb technique, pacing, discipline, patience, and emotional symmetry.

In the end, the punch count was close to even, but Mayweather landed more "big" blows. It may not have been an exciting fight to watch, but asymmetric punches were the difference.

Mayweather exploited Pacquiao's weaknesses while staying away from his opponent's strengths. Even though Manny was the aggressor, Mayweather took the fight to Pac-Man and pressed at the right times. When the openings weren't there, he covered up and rested.

The chair exposed naive analysis of the markets for the pseudoscience it is; with technical mumbo-jumbo, spurious correlations, and causal urban myth making it a negative-sum proposition for most to try to predict the market.

Even for non-pugilist tacticians who can make a variant perception of the market look like anything but rocket science; without proper execution, an ever-changing and idiosyncratic market will quickly render any prescient analysis less than effective.

A trader sits down in front of his screens, and faces what is arguably a much tougher and more formidable opponent. At times his opponent is very predictable and easy to hit, but the majority of the time, his opponent is extremely unpredictable and elusive.

The trader will know his opponent's tendencies and have a plan, but just like the fighter, the trader will ultimately rely on a dynamic assessment of price action and adjust his strategy accordingly.

In either game, no matter how well you have sized up your opponent and tested your strategy, you still have to go out there and fight-your-fight.

Jeff Watson writes: 

Gary, great post by the way.

I might add, the "not to lose" habit is the most important characteristic of any successful speculator. When winning, one presses their bets, and when losing, one takes the losses with alacrity. Managing the losses with strict discipline will allow the wins to take care of themselves, provided one knows how to take a win. Winning is not as easy as it sounds or looks.

Gary Rogan writes: 

Once again diversification is an alternative to taking losses "with alacrity", at least in some markets. If what you are buying or selling has no known intrinsic value than perhaps there is no choice but to let the market be your guide. But as the well-known metaphor of "Mr. Market" indicates, in some areas "he" is not rational and should be taken advantage of instead of being used as a guide. I know that's not how you operate Jeff (and what's the intrinsic value of onions when not in a burlap bag?), but there are alternatives.



I took the various sectoral indices trading more than 5 mil avg vol, with entry set at the close of tax day (15 Apr 2014 close in this year) and exit set to various 1/2/3/4/5/ trading days.

Top instruments for five day holding period, with win % > 80% , with data points >= 15 , avg expectation > 2%

Instrument    Exit    #    Wins    % Wins    Avg%    Avg Win %    Avg Loss %    Pay Off
QQQ              t+5    15    13           87        2.20        2.83             -1.85            1.53
XLU               t+5    15    13           87         2.01        2.47             -0.95            2.60

XLE                t+5    15    13           87         2.19        2.73            -1.28            2.14

Gary Phillips writes:

i must confess, i’d rather just guess
than be duped and fooled, by randomness
i rather think twice, than just roll the dice
these random studies, do not drive price

rather think like a fox, not be put in a box
as the markets are, a recursive paradox
if not arc sine laws, then ever-changing-cycles
if you are in denial, it can be almost suicidal

these damning effects, must be circumvented
but not with the invented, nor the misrepresented
not with tools that are myopic, or simply synoptic,
lest the retail hypnotic, not benefit the agnostic

a causal understanding, is certainly demanding
but in-or-out of sample, it sets the best example
there’s so much more, than just trade and win
like adding to profits, when others are cashing in

immune to the tout, trading without any doubt
entering trades, where others are stopped-out
not stepping out-on-the ledge, with an illusory edge
there’s no need to hedge, this is my solemn pledge

Kora Reddy responds:

whether it was working by fluke or not… a reminder at today's close!



dig if you will the picture
doubt and patience amiss
the smell of fear now vanquished
can you my bears
can you picture this

how can I be too long
when rates refuse to rise
maybe it's because of the dollar 2 strong
maybe I'm in for a surprise
maybe I'm just like the herd
they're always foolishly enticed
trying to change the free bird
maybe it's already been priced
but this is what happens
when doves fly



This is an excellent article on deception with many applications to our field where deception is needed at all levels to stay ahead of competition.

Gary Phillips writes: 

We're not only susceptible to being deceived by the narratives of others, but by ourselves as well. We take a linear view that doesn't lend itself to the complex systems described above. We see something happening in the market, and we can't help but create our own narrative to explain what's happening. Traders are very good at linking cause and effect, often incorrectly; thereby unintentionally deceiving themselves.

However, you can't understand a complex system, by simply looking at it's individual parts. There are multiple heterogeneous agents that make independent decisions that evolve over time. These agents will interact which leads to emergence i.e., the whole becomes greater than the sum of the parts. and, emergence will disguise cause and effect. Therefore, it may be difficult to determine if deception would have an effect on the outcome, or not.

In hindsight, it's often the hidden factors that one did not anticipate or even consider, that were the drivers behind a move. So, even a move built on the back of deception or misinformation, may still be an actionable event, if one if one practices good trade management.

Jeff Watson writes: 

I remember back in the pit days when I'd want to shake out some weak hands by trying to fake a rally…..I'd start, then after 5 minutes I'd start believing my own fake out.



Given the strong whiff of deflationary sentiment in the group and the extended thread about negative yields, I'd inquire if anyone else got a short term buy signal for TIP today? I am going to ignore my signal this time but not because I disrespect this crowd's sentiment.

Rocky's Ghost writes:

My models have demonstrated with statistical perfection that 100% of the TIPS that traded today were purchased by people who think they will increase in value on either an absolute or relative basis.

But regardless of the sophistication of my tongue-in-cheek model, a discussion regarding under what circumstances an investor/trader should ignore one's "signals" is a very worthy topic of discussion. I have found that ignoring an entry signal is more insidious than ignoring an exit signal. Missed opportunity cost doesn't show up in the P&L, hence it results in self-delusion.

Gary Phillips writes:

Missed opportunity can often end up costing you more than money, especially if it causes one to chase or revenge trade.

anonymous writes: 

One corollary question associated with the negative yield situation is as follows: how negative must yields get before managers of short-term assets decide that it is more cost-effective and return-supporting to cease putting assets in sub-zero instruments, and instead hoard physical currency in their own private vaults. Yes, it would incur security and insurance costs, and probably tempt personnel to engage in fraud, but one wonders about the extent to which significant and persistent negative yields would lead to disinternediation.

anonymous writes:

Samuelson discusses negativity in an opinion piece today

"A new economic mystery: negative interest

Stefan Jovanovich writes: 

"Negative interest rates" are no more unprecedented than the idea that the Federal government should be smaller than the combined bureaucracies of New York, Massachusetts, Ohio, Illinois and Pennsylvania - which was the case by the time Ulysses Grant left office in 1877. If you held money - either coin or U.S. notes or a demand deposit account at a bank that saw itself as an intermediary and not a lender, you paid negative interest rates; if you had bullion and you wanted to convert it to money, both the U.S. Mint and the brokers who still dealt in "gold" exchanges would charge you a fee. So would the depository you trusted. The closest you would come to not paying negative interest rates was to do as Charles notes and incur your own "security and insurance costs".

Under the Constitutional gold standard, you traded the costs of negative interest rates for (1) avoiding foreign exchange risk - your gold dollar would be worth exactly as much as its weight in pounds, francs and marks, and (2) the market risk that the fluctuations in securities and asset prices always holds.

In abandoning the gold standard, the United States joined other believers in central banking in the notion that foreign exchange could be "controlled" in a way that still allowed national governments to play credit roulette using their own debt as currency while, at the same time, administering "stable" prices and full employment.


Gary Rogan adds: 

For the purposes of calculating the discount rate of future cash flows and for valuing the stock markets it seems like today's market-based negative (or low) interest rates are in a different category than being charged a fee for bullion conversion.



 I always felt that Chicago is one of the most exciting cities to call home. Vibrant and sophisticated, yet friendly and very manageable; it's culturally diverse residents have a Midwest sensibility and a blue collar work ethic that complements the resilient economy. While it is often referred to as the city that works, it's politicians and patronage style government have historically, been corrupt. In turn, this doctrine of deceit has spawned many over-zealous and overly ambitious prosecutors, who have used the office as a springboard to higher political office.

I would imagine then, that Chicago would have seemed like the perfect setting for the producers of the "The Sting", a caper film that involved a complicated plot by two professional grifters, Robert Redford and Paul Newman, to con a mob boss, Robert Shaw. They were shooting scenes for the movie, in Chicago's Union Station, whose tracks ran below the Chicago Mercantile Exchange (CME) while I still worked as a clerk, during the summer of 1973. While taking a break from shooting, the cast was given a tour of the CME trading floor by Leo Melamed and other Merc officials. Trading literally came to halt, as Paul Newman, Robert Redford, and Robert Shaw, et al, walked from pit to pit. As they walked by me, I overheard Alan Freeman, a quintessential Merc trader, remark in typical Merc-Jerk fashion, " Well, I might not be as good looking as Newman or Redford, but I bet you I have as much money as they do."15 years later, the same hubris on display that day, would come back to haunt many of the members of Chicago's exchanges, as they became the target of a very similar sting operation.

Chicago had always "enjoyed" a much publicized bad-boy reputation, which some Chicagoans felt, was better than no reputation at all. Before MJ, Oprah, and Obama, Chicago was best known for being the home to the Mob and Al Capone. If you screwed the wrong people they would get back at you one way or another - either physically, or if they were powerful and had friends in the government, they would find a way to seek retribution through the court system. Duane Andreas was the chairman of Archer Daniels Midland, one of the largest food processors in the world. He was also one of the largest and most prominent campaign donors in the country, contributing millions of dollars to both parties. ADM had been investigated for price-fixing and would eventually be assessed the largest antitrust fine in United States history. Nevertheless, it was Andreas who complained to Federal prosecutors, that the Chicago futures exchanges were ripping him and the public off for millions of dollars.

The Federal governments response was to launch an undercover probe of floor trading practices at both the CME and the CBOT. The sting operation would not be easy to pull off. The floors of both exchanges were like a boy's club. Guided by a set unwritten rules and a bond of trust, we were able to make trades with each other, sometimes risking millions of dollars, on nothing more than our word. The FBI agents would have to infiltrate our tight- knit group, and then fool us into becoming their trusted friends. The best way to break into our fraternity, they reasoned, was to become one of us.The FBI sting was to become as intricate and complex as the 1973 movie. Four FBI agents, 2 at the CME and 2 at the CBOT, posed as traders, and taped conversations, both on and off the floor, with the real floor traders and brokers. They created lives for the agents that duplicated the typical trader lifestyle. The agents dressed like us, lived in luxury apartments, drove exotic cars, ate at the same restaurants, joined the same health clubs, and bought memberships on the 2 exchanges. Each agent traded in a different pit. At the CBOT, one agent was trading Beans and another was in the Bond pit. At the Merc, it was the Yen pit and the S&P's. Over a two year period, the agents befriended traders and brokers, going out for meals with us, playing basketball at the East Bank Club, and partying with us. At all times, however, the agents were wired; recording every word of every conversation they had with the real traders.

By the time the sting operation was terminated, the FBI had spent millions of dollars. The agent/traders lost an undisclosed amount of money attempting to trade, but were alleged to have made a profit when they sold back their memberships. In all there were 47 indictments; a small fraction of that number actually resulted in convictions.The alleged millions of dollars in customer losses, turned out to be in the thousands, One trader was indicted for trading after the closing bell and another for changing the price on an order, which turned out to cost the customer $62.50. Of course, the government response was:

"No infraction or loss is too small when it comes to protecting the public. The message has to be sent, that these kinds of actions will not be tolerated, and in the final analysis, operations like these save customers millions of dollars."

It was a classic Chi-town example of hypocrisy, and misuse of power and influence. But, Duane Andreas had gotten what he wanted. He convinced a politically ambitious prosecutor to spend millions of taxpayer dollars to investigate Chicago's "corrupt" futures exchanges, while at the same time, he manipulated the markets on such a large scale that he was eventually fined a $100MM. And in order for the exchanges to maintain their self-regulatory status, the exchanges tightened up their audit trail and increased the penalties for breaking their rules. But, nothing really changed as far as the way business was transacted on daily basis in the pits; we were just more careful about whom we trusted.



As we grudgingly approach the 2100 level, let us not forget the legend…

"Opinion: Stock market guru’s new forecast: S&P 500 at 2,300 in six months"



Any reader who has not looked at a price chart in the past 90 days please stand up and identify yourself. For that person and that person alone can cast a stone (at technical analysis).

Gary Phillips writes: 

I look at charts all the time, but that's really not the point. For someone who is as truly blessed with the ability to determine causality as yourself, you must realize that charts are not predictive in of themselves.

Larry Williams writes: 

Parts of charts are most definitely predictive. Patterns repeat. And I agree that so much of TA is misleading and based on whims and fancy yet there are parts that really do work.

anonymous writes: 

Ah, the chart debate has returned.

While surely an example of survivor bias, I have witnessed industry greats use charts and technical analysis as part of their speculative arsenal. Of more interest is that these people used their own personally derived versions of these methods and not the versions available at no cost to everyone. I dare say that the creators of well known indicators have ways of using them that they would never reveal (rightly so!).

A few points about charts:

1. At the higher frequency end, in the OTC macro markets, ALL of the chart services are wrong and ALL of the chart services are correct. Each has its own price, so there is no 'right'. This probably doesn't matter to most and doesn't fatally damage the pro chart school.

2. Some market extremes are written out of history for various reasons (regulatory, legal, error, political correctness and vested interest). The move toward full electronic trading might alleviate some of these in future.

3. Commodity prices on charts…. Should we adjust them by inflation? What are we actually looking at? What are we comparing.

4. Equally spaced data? What to do with price action measured in equal intervals (say, for example, 5 minute charts) when the price doesn't change during the period but the recording software has to put a number in there so it averages, uses the last price, the first price of the next period etc…

5. There is a reason why the big quant firms have interesting individuals whose life's passion is ensuring data is clean/ accurate.

6. It is probably a fair point to state that the recording of price information has improved since, say, the 1970's. The tricks now are more to do with latency of its delivery and the subtle recursive methods some providers appear to use to set their lows and highs. As an example, watch EURUSD spot today if you have something approaching Direct Markey Access and if you watch closely enough you may note that the high as printed on your screen (for eg.) sometimes moves higher a few seconds after the price has actually moved lower. A less charitable person than I would suggest it was to ensure all the stops on the banks' electronic platforms could be said to have been done within 'the range' ( whatever that is ). I guess it might just be an optical illusion generated by my mind's inability to accept being stopped at the high. Ha!

SideBar on this last thing– one great method market makers employ to get stops done is to drastically widen their spreads when near stops. ( Much small print allows stops to be done if inside the spread for ' risk management' purposes ). This may go some way to explaining the mystery of the changing highs/lows after the fact….

John Bollinger writes in: 

I don't understand. If charts aren't predictive why in the hell do you all waste your time looking at them? Do you have so much time on your hands that you can engage in frivolous pursuits at work? If you gonna talk the talk, walk the walk. If you think charts aren't helpful, STOP LOOKING AT THEM.

Rocky Humbert writes: 

While I am in agreement with the inestimable Mr. Bollinger that looking at charts has utility, I would be cautious about the term "predictive."

When I go to the doctor's office, her nurse always takes my temperature. My temperature is not so much "predictive," but rather it is informational. In numerous ways, looking at charts are like taking a patient's temperature.

I wish I could claim credit for this insight, but I can't. It's from Bruce Kovner (who I still consider the best trader/investor from a risk-adjusted return perspective of the past 30+ years.)

Ed Stewart writes: 

It seems to me that body temperature is predictive of future temperature change do to homeostasis. The breakout from the range where homeostasis functions is going to be predictive of body temp = ambient temp if there is not a reversal or intervention.

Rocky Humbert replies:

Fair point. But you don't need to take a patient's temperature to know that EVENTUALLY body temperature = ambient temperature.

Keynes figured that out when he wrote that "in the long term, we're all dead." (See: JM Keynes "Tract on Monetary Reform, (1923) Chapter 3)

Kovner's actual quote was in reference to so-called fundamentalists who scoff at charts. He said, "Would you go to a doctor who didn't take a patient's temperature."

Gary Rogan writes: 

You don't need to take the patient's temperature nor to study medicine to know that eventually the body will assume ambient temperature, but there are clearly situations when the current temperature is highly predictive of the timing, barring an intervention. As such, this whole analogy and the corresponding point just don't work.

A more expanded quote by Keynes reads as follows: The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. He was in fact arguing for short-term action based on predictions even though in the long run the economy will recover. So it a way it's almost the opposite point to what Rockstergeist indicated he was making.

Craig Mee writes: 

No doubt with the right risk management you can make money trading in many ways, but surely the best outcome is to not leave plenty on the table and have a lot of what ifs in the outcome, together with an ordinary win loss ratio while still banking a healthy return. In the pursuit of excellence, it doesn't seem winning and the above go hand in hand. Though possibly for others this isn't an issue, and probably quite rightly it's all about the bottom line. Hence the saying, "trade the way that you're comfortable with".

Gary Phillips writes: 

Considering the maelstrom of controversy and unchecked emotion the subject elicits, perhaps TA should join sex, politics, and religion on the list of banned subjects for this site.

John Bollinger replies:

Careful, the site will become very quiet as the best part of what is discussed here is technical analysis in one way or another as a survey of the literature will confirm.



 I am currently on a road trip with my wife, and I couldn't help but consciously relate my experiences on the interstate back to trading. Insights gained from negotiating the roads inevitably reinforced my perspectives on trading. One can draw their own inferences from my observations, but the analogies are pretty clear. (Only #8 has nothing to do with trading, but may have everything to do with the difference between men and women.)

1. People will speed for miles, then slow down for a state police vehicle, and continue to drive slow after passing, even though the odds of seeing another trooper has probably been lowered.

2. A driver will be content to drive at a moderate speed, until he is passed by another vehicle. He will then inevitably speed up. Driving behavior becomes ego driven.

3. It only takes one driver texting to upset the flow of traffic or cause an accident. Small perturbances can affect complex systems.

4. Cars have a tendency to bunch together. Even with a total bumper-to-bumper density that would be physically able to go the speed limit, cars will drive in fits-and-starts, at an average speed that is allowed under the constraints of the variables affecting the constructal flow of traffic.

5. Professional drivers are not necessarily better drivers, but they are bigger than you.

6. It's best to think two moves ahead when driving. And, always leave yourself an out.

7. If you're tired, pull over– if you're in the flow, press on.

8. Nine times out of ten a driver in the left lane, who is not keeping up with the flow of traffic, and refuses to change lanes, will be a woman.

9. It's always best to slow down when conditions become inclement.

10. Anticipate how other drivers will act and expect the worst.

11. The Toyota Prius is the new Volvo.

12. One can learn a lot about a person by observing how he drives



 American Exceptionalism. I have always hated that phrase and the perverse doctrines that accompany it. The American Constitution is remarkably exceptional; one wishes it were still followed. But the idea that we Americans were born or (equally bad) become endowed with some special grace is one that makes me look for the Exit sign in the hall every time I hear it.

It also reminds me of the disastrous presumption that infected so much of the period that Stern writes about and led to WW I.

Ed Stewart writes:

I notice that every time I start believing that I am an exceptional trader (like I did a few weeks ago), a large loss is near at hand. Best to curtail commitments at the hint of that feeling– the opposite of what the feeling suggests to do.

Gary Phillips writes: 

Success is more destabilizing emotionally than failure.

Ralph Vince writes: 

Failure is absolutely necessary–in fact, nothing is more necessary, in all aspects of life.

For one, it teaches the individual not so much not to do what caused the failure, but how to regroup, reassess and recover from failure. The lesson of failure is about what you do afterwards.

Many things in life require failure. No one learns, say, to lift a lot of weight, to solve a differential equation, or do a backflip on pavement, without failing many, many times. There is no may to accomplish many things in life without enduring the requisite and many failures required.

Jeff Watson writes: 

Failures teach you much more than successes which can lull you into complacency and hubris (like when you have 10 successes in a row). But you must attention pay attention to and analyze the failures inside and out. You have to ask yourself "why?". Ralph hit the nail on the head with his post.

Ralph Vince replies: 

The 13-year-old boy looks around the gym, struggling to lift pipsqueak weight. Failing.

I point to all the old smellies, putting up ungodly amounts of weight.

"You see those guys - every one? Every one of them failed at every increment, every 5 pound increment between what you are failing at and lifting what they lift and they failed at every increment over and over. That had to keep trying, eventually, sneaking up on it. Failure, repeated failure, is part of the process."



 It was 10 days before Christmas, Dec. was soon to expire

We neared the festival of lights, with its eight days of fire

The bulls were dormant, their hubris handily contained

Stocks had collapsed, and crude oil was to be blamed

While visions of dollars, danced in their heads

the bears rejoiced, as the bulls slept in their beds

Dreaming of a sleigh, pulled by many a reindeer

Bulls wondered, if St. Nick would show up this year

One long abruptly awoke, searching for the great man in red

But, found a woman standing there, dressed in blue instead

No one else awoke; there was nary another soul to see

He whispered to himself, Janet Yellen is standing next to me

"Happy Hanukkah", she said as she brushed off some snow

Maybe you were expecting someone else? I just don't know

A fat man named Chris with a sled pulled by many a reindeer

Turned out, PETA complained, and I'm replacing him this year

Thought some charitable work, would be good for my reputation

Hit a few homes here and there, before I go to Miami for vacation

No sliding down chimneys, nor any high flying sleighs in the sky

No reindeer named Rudolph, just a limo with a driver named Sy

With a smile, a wink in her eye, and a tilt in her head

"i'm long chocolate coins covered with gold", she said

I feel your pain; the price of gold is way down there too

Just have faith in the Fed, as she began to fade from view

I know you've been good, not bad; and not naughty, but nice

So no need to pout, that stocks are at such a reduced price

Yet, it's only fitting to give credit, where credit is rightly due

Not to some fat man in red, but the munificent lady in blue.



Overheard at the oval office. Considering the lack of aplomb dealing with domestic and foreign policy currently on display, it's no wonder he's singing-the-blues…

market at the crossroads
not sure where to go
market at the crossroads
same ole 3 ways to go
one is up, one is down
one, it just don't know

market at the crossroads
trying to catch the drift
market at the crossroads
hoping for a draghi lift
propped by asian greed
and one more yellen gift

you can fight, you can fight
comrade from moscow town
you can fight, you can fight
red with an indelible frown
we may be at the crossroads
but you can't putsch us down

i’m going down to crimea
take my grach by my side
going down by the black sea
take ole vlady for a ride
bust a cap in his kgb ass
dump him by the ocean-side



I would posit that every time an equity market set a 10% correction, defined in some quantitative way, it was a good time to buy. Often the definition of a correction is very fuzzy depending on whether one uses intra day or closing prices, and much latitude is often taken to try to prove the point.

Anatoly Veltman writes: 

Yes: if you are a perpetual Bull, a 10% discount can't be worse than a lesser discount. But that was the question I posed yesterday: are there market junctions, where such discount may be justified, and more discount is likely coming?

My proposition: yes, such junctions are quite possible in the markets. Temporary factors (like sub-prime credit, or ZIRP, or QE) might have produced such overvaluation at market peaks that a one-third price correction (and not just a 10% correction) is required to bring prices more into line with economic realities. In the process of such "one-third correction", you may still get a quick bounce off of a 10% level or any level. Is such a bounce a "good play"? Your stats may well agree. Yet others will prefer to use your bounces as a shorting entry point to continue position themselves within a greater decline phase. Both may be profitable plays. During a decline phase, "Short and hold" will prove profitable. But quick bounce-ups will also prove profitable, because they will be sharp. You are already having an over-20 handle bounce on some Friday short-covering, an odd Putin tweet, all kinds of mumbo. Yes, there are ebbs and flows for both sides.

On the precise sampling of "10% declines": why buying into a twentieth "10% decline" is supposed to produce the same success as buying into a seventh "10% decline"? Given the progressively increased valuations (which might have not been supported by corresponding economic growth), such study makes no sense to me. I only hope someone proves me wrong, and I am anxious to find out exactly why my reasoning is worthless.

Jeff Watson writes: 

While the sky is falling among the retail class of trader, and they are getting quite bearish, the fact is that the S&P is only off 4.22% from it's all time close on 7/24. Hardly any reason to shout "Fire" in a movie theater. We're nowhere near correction time yet. And when it does come, there will be great opportunities for the nimble minded trader. I've been in a bear market in the grains for months and am quite enjoying it, but then again I'm one of those who learned the ropes in a decade long bear market.

Gary Phillips adds: 

It all depends on one's time-frame. As a leveraged trader, one makes short-term decisions/trades, manages the risk/ keeps draw-downs to manageable levels and occasionally turns short-term winning positions into longer ones. Since early 2013, the average spx one-year return has stayed above 5%. Today's low was at the ~4% level and at major technical support, i.e., the highs of the previous 3-month-long trading range, so a bounce back to 1950 should not be overruled. Nevertheless, p/c ratios, breadth, and volatility indices, remain on sell signals, leaving the market intermediate term bearish. Long term, everybody knows the " bubbly" situation, yet even the valuation bears see the market going to 2250, and as long as Japanese funds continue to diversify out of the yen, Chinese investors continue to park their money outside of China, Draghi's narrative is accepted, and interest rates don't rise dramatically. The final tipping point is probably years away.

Jeff Watson replies:

Everyone knows the "Bubbly Situation"? I guess I need to be more enlightened because I don't see that at all, or am unable to see the forest for the trees. Anyway, one has seen the effects of a market where "everybody knows." In those kind of cliche cases, everybody usually gets a hard kick to the gonads from the Mistress. Since the stocks as a whole haven't been going down as much as "everybody" thinks they should, I wonder who is on the other side of the trade, buying? After all, the Fed is working 24/7, 3 shifts a day creating money that the flexions get first crack at. That should be pretty bullish for stocks. But then again, I am the absolute worst stock picker on the planet and what do I know? 



 One found this Ted Talk on the Constructal Principle the most stimulating video about markets I've seen in the last years.

Gary Phillips writes:

Configuration - Evolution - Performance

Humans and animals instinctively nest before giving birth while price intuitively reverts to the mean or fair value time regulates gestation before each moves away– driven and sustained by an evolving flow structure that moves price and people more effectively and is fueled by monetary and human stimulus.

Richard Owen writes: 

I couldn't tell in my naivete if the video Vic kindly shared was genius or stating the obvious. Or indeed, stating the tenuous: "life is a function of force times distance and energy" is a bit like saying "the pop charts are a function of quantum mechanics". In some fundamental sense yes, but, well… um.

I have spent the afternoon trying to manipulate 600mb of data. With rudimentary tools on a regular computer, this is is not very efficient and requires souped up DBs and subscriptions to a cloud and so forth. This is despite my processing requirements being very simple.

As is typical with such affairs, I end up with fifteen applications and fifty browser windows open, trying to speed read this, that and the other, with high tonnage of adverts and so forth. Thus everything slows to mud.

This experience seems to have been a constant throughout my years of using computers, despite Moore's law and my task business task being somewhere in complexity along the lines of what IBM was tinkering with back in the 1950s.

I then start to wonder if the constructal principle isn't subject to its own law of relativity, such that just as light is constant in speed despite all available rocketships, so are my cromagnon perversions a constant despite all available processing power. Now hmm, where's that Miley Cyrus video where you can almost see her nips. I'm sure I had that loaded HD on youtube somewhere.



without exogenous concern
sans respect nor deference
for what or whom preceded
just an internal preference

ever changing context
predictability they crave
these traits not found
in the home-of-the-brave

old formulated solutions
for a state-of-flux enveloped
knee deep in past bias
game irrationally developed

it is a self-evident gift
hell sent, but heaven bent
it's dimson and then some
all else is just sentiment

everything is always different
to some degree
everything remains the same
it has to be

if you catch my drift…



Whatever the market does… will be. Whatever the market doesn't… will not.

Some may argue that the market is overpriced relative to SPX's p/e ratio which is trading at about +1 SD above it's mean, but p/e ratios have no predictive capacity, especially in high cap indices like the SPX, and since the 2008 crash have become seriously skewed because of their high values attained at that time.

So where does today's market fit in with past markets? Maybe the answer is, it doesn't. And, maybe this is the reason traders, pundits and analysts, are having such a hard time getting it right. And, why their models, which are all predicated on past price action, aren't working - because they're backward-looking. And there's the wrinkle, the ultimate post hoc fallacy of the "it's overvalued" crowd. It's an arbitrary judgment of past earnings, past price action, and past situations. Past performance does not dictate future returns - the future determines the future.

Traders are hard-pressed to explain the present, nevertheless the future. Markets are in uncharted territory and there have been structural changes to the markets, as a result of the crash and prolonged qe/ zirp contamination. The markets reaction to the taper is a glowing example of how fate can be twisted. Historically, bonds sold off and the curve steepened when the fed tightened. Instead, post-taper money, paradoxically flowed into both assets,as the curve flattened.

Stock prices are rising, earnings yield, dividend yields, and 10 year yields are rolling over. Debt levels are not-an-issue and liquidity is sanguine. One thinks that as long as treasury yields are kept in the basement, there should be a continued risk-on, yield grabbing skew to stock prices, irrespective of fundamentals, past economic models, or aggregate financial ratios - and maybe valuations will follow- or not.



 As the month of June arrives and heralds in the dog days of summer for equities and debt, it is inevitable that a trader's fancy lightly turns to thoughts of grains. Over the years, untold fortunes have been made and lost during the summer grain markets. I have participated and traded in these markets off-and-on since the mid-seventies; starting in the soybean pit at the Mid-America commodity exchange, and then on the floor of the CBOT in the soybean pit. I went on to trade 30 year treasury bond futures for almost 25 years, but when the bonds went to the screen, I traveled full circle and finished my career back where I started, in the bean pit.

The beans had changed dramatically from when I first stepped into the pit in the seventies. The commodities markets back then were relatively inefficient, and dominated by heavy retail participation. Busy summer markets would see runners lined up 10 deep trying to get retail orders into the pit to their filling brokers. The commercials did manipulate the market, but there was still an a value oriented element to pricing.

My second time around however, saw a market dominated by commercials (hedgers) and commodity funds. In addition, there were now options on soybeans futures; and indexes and etfs were beginning to emerge. The eventual result was the financialization of commodities. Beans were now lumped together with other commodities into one asset class.

As I contemplate my return to trading beans, I wonder:

If beans have lost their uniqueness, price discovery and risk transference functions, due to financialization

If given the near extinction of retail participation, and the almost total dominance of professional and algorithmic trading, if readily "available" cognitive reference points that are the providence of the retail trader, still exert their influence on bean pricing.

If the change from a commodity to a financial instrument means that at times, price drivers for soybeans may have nothing to do with soybean fundamentals, and everything to do with their inclusion in the commodity asset class

If I'm competing against professionals in a relatively illiquid market, do I want to venture away from my core competency to "play poker against a guy named doc"



The long expected break-out to new all time highs proved to be the real deal, and not the obligatory fbo/bull trap we have grown accustomed to enduring. The market quickly reached escape velocity and extended it's historical move, with a strong second day and even added more distance as the eminis were marked up throughout the week into the last day-of-the-month. With consistent positive returns generated on Fridays and Mondays it appears, this timeframe is a sine quo non for continued bullish momentum. Equity only p/c ratios are all on a buy signal, and market breadth is bullish also, which lends positive confirmation to the breakout. The continued low volatility situation has received much press, and no doubt, signals an overbought condition, but it is not a sell signal. That being said, the market is good, and is headed much higher; but is overbought. This means there is a high likelihood that the market will experience a sharp, but short-lived correction at any time. However, a sell-off should be greeted with open arms and both hands, as an opportunity to initiate or add to a long position. As reported by trim tabs, savings accounts remain the most popular destination for investor money and saw $139 billion flow into them in the first four months of 2014, exceeding the $77 billion inflow into all equity funds. So with the taper winding up and qe winding down, the next impetus for higher prices may just be the (fomo) fear-of-missing-out trade, as retail money inevitably chases the market higher.

As we say farewell to May and welcome in June, we should keep in mind, that the last trading day of the month plus the first four days of the following month are the best performing days of the month. Nevertheless, the economic calendar is busy next week, with china pmi, the ecb meeting on thursday, and and the employment situation on Friday; and any of these events or others, could provide the catalyst for a sharp sell-off.

It still appears to me that the current rally has been fueled by lower interest rates, which was the result of the big yield grab in both u.s. and European bonds. money flowed out of the euro into bonds ahead of the ecb meeting while the rally was further fueled by bad short bond positions. Nothing has changed valuation-wise since last year, other than the fact, that the market as a whole, is growing more expensive; but with rates falling from 3% to less than 2.5% the ratio of earnings yield to bond yield is being dynamically maintained. Since the crash, the difference between the 10 year yield and the dividend yield has been shrinking compared to the historical norm. When this distance is negative, it is only natural that money moves out of treasuries and into blue chips (dividend stocks). It is interesting to see that this move reversed when the gap between treasury yields and dividend yields reached close to 2% - the current ratio is 0.60%. For a reversion to 2 % to come about, dividends would have to stay flat or fall while interest rates would have to rise to at least 3-3.5%. However, as long as treasuries keep rallying and interest rates keep falling, equities will remain undervalued and continue to rally. It is interesting to note that the money flow into equities was weak today, which is not normal for a Friday, especially at the end-of the month. Low volatility stocks outperformed their high beta counterparts and the utility sector was uncharacteristically strong for an up-day in equities. This supports the theory that investors are looking for yield and not growth.

It is also interesting to note, that an oversold spot $vix with a steep contango in the vix futures used to mean that smart money was betting on higher volatility in the near future– and they were usually right. But since 2008, and especially since the inception of the VIX exchange traded products in 2009, the steep contango has not necessarily preceded equity sell-offs. This phenomena exists even with the vix at seemingly oversold levels with the attendant expectation for mean reversion. This is because the volatility products lose money when they roll their positions before expiration to maintain exposure. Etfs are forced to roll long positions into more expensive deferred contracts… on the other hand traders are more-than-happy to take the other side of the trade, and continue to sell-the vol-and-roll their short positions, because it still remains profitable.



Granted, es's test and failure failure from last Friday's unemployment-spike-high cannot be ignored, but still, the market has been going sideways for around 3 months (and is still priced in the upper-half of the range); yet, the cognoscenti appears to be convinced there has been a regime change. Methinks everybody is a) a bit TOO bearish, b) believes everything they read, and c) is prone to a multitude of cognitive biases and faulty heuristics.

Let's take a look at comments from zero hedge this a.m.

*It has been a very quiet session so far, and despite the slow-mo levitation in the USDJPY, its impact on US equity futures has been minimal if not negative. In fact, following yesterday's latest late day tumble, which Goldman summarized as follows, "Equities tried and failed again to break 1885, it continues to be the level that we can't escape"… it would appear we are increasingly changing the trading regime, and as Guy Haselmann explained simply, markets are slowly but surely coming to the realization that the Fed's crutches are being taken away (that they may well return following a 20%, 30%, or more drop in the S&P is a different matter entirely) and that the economy will not grow fast enough to make up for this. Perhaps the most notable "event" is the sheer avalanche of banks pushing up their forecasts for an ECB rate cut (and or QE start) to June following Draghi's yesterday comments. And so the 1 month countdown begins until the end of forward guidance, or until the ECB "shatters" its credibility as expained yesterday.*

My thoughts:

1. I wouldn't trust Goldman's "opinion" even if Donald Sterling were to give me all of his money.

2. Guy Hasselman is "assuming" a) the 5 yr equity rally was "entirely" a result of qe, simply based on correlation b) taking that stimulus away will prohibit the market from continuing higher and c) earnings growth will not be able to keep up with the market.

Here are two opinions that essentially meaningless, if not self-serving, but because it is in print on a widely recognized site, they will be taken as gospel by the herd. Indeed, the market looks like crap, largely in part to momentum stocks that got way ahead of the market, and are still in the process of getting re-priced to acceptable levels.

What they fail to take into consideration or fail to say is:

continued low interest rates are:

- improving(shrinking) spx dividend yield/10yr yield ratio
- taking the "pressure" off of earnings growth
- making equities under-valued as risk-free rate drops
- and even more undervalued if equity-risk-premium drops
- helping fund buy-backs

…driving price, and keeping equities undervalued on a relative basis

and, as long as the ten doesn't get back above 3.00%, the bull market may be tougher to derail than most people think

granted these too, are all assumptions

but that's the point…isn't it?

p/c ratios are split, breadth is struggling, $vix is still bullish, the indicators are mixed, and the outlook is neutral, but the bull trend is intact. both the bulls and the bears had their chances to assert their dominance, but at the end-of-the-week, all we are left with is an inside week

key levels look like this:









It's not central bank policy per se that makes the price of the market go up or down, it's Common Knowledge regarding the ability of central banks to control economic outcomes that makes the markets go up or down.

-Ben Hunt

The market has been locked in a trading range for an extended period of time. Is it because the market is still in the process of vetting both the taper and Janet Yellen or is it simply Le Chatelier's principle's market clearing effect? And, while there has been, both a policy change and a changing-of-the-guard at the Fed, it is still unclear as to whether there has been a regime change in the market. What we are left with is a stable equilibrium where competing influences are balanced, resulting in no net change. While it is virtually impossible to predict, it will certainly be interesting to see, what shock to the system will have enough influence to disrupt this equilibrium.

Stefan Jovanovich writes:

What the market may, in fact, be forecasting is the beginning of a shift in sentiment to a common opinion that the government cannot and should not "control economic outcomes". What we now see as the classical liberalism of John Stuart Mill - laissez faire - was hardly the product of benign progress. It came to be received wisdom only after a deep skepticism had taken hold of the country. People whose families had seen a 100-fold increase in public indebtedness over the previous century had had enough when that spending to defend Britons had ended not in freedom but in the loss of traditional liberties.

I leave it to the readers of this site to gauge how the exact parallels between the post-Waterloo period and our own; but there is no question that the rise in the sentiment for "free trade" would not have occurred without the reaction to Robert Jenkinson's ministry. The suspension of Habeus Corpus in the U.K in 1817 (which had not happened during the Napoleonic Wars) was a shock; the adoption of the Six Acts was the last straw. Between them they produced a financial and political revolt that ended with the bi-partisan abolition of the Corn Laws and the adoption of the Bank Charter Act (think the repeal of the Internal Revenue Act and the enforcement of the gold clause in the original Federal Reserve Act for the appropriate modern American comparisons).

For those who may not know them, the Six Acts were these (my numbering):

1. The Training Prevention Act - which made attending a meeting for the purpose of receiving training or drill in weapons a crime punishable by transportation.

2. The Seizure of Arms Act. It allowed local magistrates to order the search of any private property for weapons, the seizure of weapons and the arrest of the owners.

3. The Misdemeanors Act. It restricted the availability of bail and allowed summary trial.

4. The Seditious Meetings Prevention Act. No meeting of more than 50 people could be held without the permission of a sheriff or magistrate if the subject of that meeting was "church or state" matters. Attendance by people not inhabitants of the parish was a violation.

5. The Blasphemous and Seditious Libels Act confirmed that political speech could be a crime; punishment was increased to fourteen years transportation.

6. The Newspaper and Stamp Duties Act required all publishers to post a surety bond and pay a duty for any publication (previously only "news" papers but not journals of opinion had been required to pay a duty; neither kind of publication had had to post a surety bond.)

Gary Phillips comments: 

Perhaps they're taking a knee, but I wouldn't count out the perception that Fed policy was responsible for sanguine market outcomes; if that wasn't the case gold would be trading at much higher levels. The QE narrative continues to persist and effectively shape our world today and like all good narratives it succeeds because it has an intrinsic ring of truth which speaks to broader interests on an intellectual and emotional level and even though, it always coincides with flexionic goals and preferences.

Stefan Jovanovich writes: 

During the century in which the Bank of England's notes were taken to be as good as gold, the metal's price declined. The market expectations are never true in a compass sense; they are always shifting - sometimes against insiders' certainties. The bets made against the dollar during and after the Civil War did a great deal to weaken the City's dominance over American finance. If the flexions in London and Amsterdam and Vienna and Paris, the Morgan Bank would still be a mere correspondent.

Anchors drag.

David Lillienfeld writes:

A number of railroad bankruptcies helped, though they also affected the Dutch, not just the English.



 I found this 1926 paper "On Being the Right Size" by J. B. S. Haldane quite fascinating.

To the mouse and any smaller animal it presents practically no dangers. You can drop a mouse down a thousand-yard mine shaft; and, on arriving at the bottom it gets a slight shock and walks away, provided that the ground is fairly soft. A rat is killed, a man is broken, a horse splashes.

Gary Phillips writes: 

That reminds me of Billy Eckhardt's comments on bet size…

If you plot system performance against bet size, you obtain a curve in the shape of a rightward-facing cartoon whale, going up in a straight line before dropping dramatically.

He said: "Trading size is one aspect you don't want to optimize: the optimum comes just before the precipice. You want to be at the left of the optimal point, in the high zone of the straight curve."

Ralph Vince comments: 

Not altogether true.

Expected growth-optimal bet size is a function of horizon, i.e. how many plays or periods.

For one period with a positive probability-weighted expected outcome (what most refer to as the misnomered "positive expectation") the expected growth optimal bet size is 1, one hundred percent.

As the number of periods approach infinity, this diminishes to the asymptote at what I refer to as Optimal f (not "Kelly," which is subset of Optimal f).

But all that is f we are discussing expected growth-optimal as criterion.

In capital markets, the criterion is often to maximize the risk-adjusted return, which occurs in the region between the inflection point less than the peak, and the point where the curve's tangent has the highest slope, which is greater than the inflection point, but less than the peak. These two bounding point for risk-adjusted return optimality are, as with the peak itself (and, as I hope I have convinced in another, previous post, the actual "expectation") a function of horizon.



u know the old skool chartists
are looking at the daily,
and can't help but notice
what they believe to be
an inverted complex head and shoulders (bottom/continuation) pattern
replete with upward sloping neckline and a higher right shoulder
and the attendant bullish implications
they have come to expect,
perhaps they visualize a diamond pattern (debatable implications, there)

if the market does indeed trade higher
and makes new historical highs,
or fails to do so,

it will have nothing to do
with the perceived formations



maybe i'm just an old school trader
unaccepting of the postmodern world
weary of the intellectual masturbator
no skin of his own exposed and unfurled

and the varied self-serving ramblings
of journalists who in reality never trade
not a penny earned from their gambling's
just a wall street journal and cnbc fade

granville, garzerelli, prechter, & cohen
self appointed legends of just one hit
yet, they just keep on comin and go'in
like armchair rappers talking their shit

forever searching for fortune and fame
always eager to proclaim & bet the pot
proficient at talking a brave good game
especially when taking a virtual shot

risk and reward it's inherent in the biz
short some futures or even sell a call
put your money where your mouth is
and where they may the chips will fall

why predict and degrade-the-trade
to show all you can’t be tricked
sharing success before you've been paid
just to show you got the market licked

long and protracted is the bullish status quo
as gimmicked prophecies seek to behold a top
iconoclasts looking 2b right just once-in-a-row
with so few outcomes why* not* call for a drop

they look at the age of the bull and it's lofty level
say markets look forward and emh must be true
not realizing it’s backwards the details-in-the-devil
as the data has nothing to do with objective value

oh so many disillusioned by gambler's fallacy
hubris and greed led to tug on shiller’s c.a.p.e.
or influenced by evolutionary red-queenalicey
yet equity-risk-premium reality they can’t escape

so short of a m.a.d. russian icbm first-strike
the beginning-of-the end & world war three
or mario draghi caught with a nubile young tyke
playfully bouncing on his eurocentric roam'n knee

we drift higher….



 I was talking to an old friend of mine yesterday. He was a floor broker for Lehman Bros in the bond pit (he once sold me 500 calendar spreads while standing next to me at a urinal in the men's room). When he first left the floor he attempted to trade electronically and within a relatively short period of time went through all of his money. He had to take a job with the CME working at their help desk, and was eventually promoted to associate director of the Globex control center working the third shift from 3 a.m. to 11 a.m., and is now a senior director at the CME.

He told me an interesting story about his experience trading after he left the CBOT. It was about another ex-denizen from the floor. This individual, however, had worked as a clerk for a mutual friend of ours, who had been a trader. My friend went on to tell me how the ex-clerk had been making $1,000- $1,500 screen trading, per-day, like clockwork — averaging $25,000 per month for quite a period of time.

However, after my friend went through all his capital and stopped trading, he lost touch with this ATM of an ex-clerk. But serendipitously, ran into him the other day when he hopped into a cab. However, the ex-clerk was not another passenger, but the driver. Of course, there are quite a few lessons to take away from this story- not the least of which are:

- markets change and if a trader doesn't adapt, he'll be driving a cab
- becoming a successful trader is not easy, even if you're experienced
- core competency in one endeavor, does not guarantee competency in another
- working for a living sucks
- always be prepared to trade
- markets aren't the only thing that reverts to the mean
- not every cab driver in Chicago is from Pakistan or the Middle East

- never turn down an edge, no matter where you are, or what you have in your hand
- always wash your hands after making a bathroom trade

- success is fleeting, losing is forever

Leo Jia writes: 

Thanks Gary, for the interesting post.

I found your title (or the last lesson on your list) quite intriguing: "success is fleeting, losing is forever". Seems apparent in a lot of cases. But why and how is that true? Especially when we consider your other lesson: "markets aren't the only thing that reverts to the mean".

Anatoly Veltman writes: 

Isn't it true: even having made 5,000% on your money, once you lose only 100% - you got no money left. That is more like self-sabotage.

Leo Jia writes: 

Normally, if one wins/loses in percentage terms, one nearly never loses 100% - sure one may lose so much as to have not enough fund to continue trading.

Let's assume that he wins/loses 5% on each bet. To make 5000% in the fastest way, he needs 175 consecutive wins. From here, to lose all he has made and get back to his original amount (which is still enough for him to continue trading), he needs to go through 166 consecutive loses. If his wins/loses do not happen consecutively, which is normally the case, it might have taken him over thousands of trades on each way.

So in this process, even though losing takes fewer times than winning (166 vs. 175), winning and losing both take a long time. So the other lesson "markets aren't the only thing that reverts to the mean" could apply here: after losing some, one starts to win. I am not sure how one can conclude "success is fleeting, losing is forever".

In the worst god-given case where he has no edge at all and trades simply based on flips of a fair coin, he has equal chances of winning and losing.

The only case where "success is fleeting, losing is forever" is possible is when he always strives so hard to create a very large negative edge for himself.

J. Hughes comments:

 Interesting, but the distinction needs to be made, "he was a floorbroker", quite a different occupation than that of floor trader. It's easy to trade against an order deck.

Having done both job's, cabdriver, and trader, though for different reasons, I can state unequivocally, yes markets change and if traders don't adapt, they perish. But the bigger insights lie in how much cab driving is similar to trading. Both position risk capital upfront, the 3 G's, gates, gas and graft. Then there is risk control, it takes skill to size up an individual when one is traveling at 35 MPH and trying to cover the costs of the 3 G's. Then there is return on capital, I can say first hand, my return on capital as a cabbie, on a nightly basis, was far superior on a percentage basis and more consistent as a hack, than a trader. Although I am back to driving a computer once again, and there are times I wish I was back pushing a hack. Both positions are very much traders. It's a natural fit. The lesson is, "life is replete with vicissitudes."

Ed Stewart writes: 

The problem with making $ 1,000-2,000 a day is it is enough to provide a salve and decent quality of life that makes one feel like a professional, but this is not dentistry or a job at a federal regulator. IMHO the correct target is to get rich and become a real capitalist. How one does that, via trading, a service business, or a money manger (combining the two) does not matter so much as actually doing it by any means that is legal and ethical. Going for crumbs doesn't cut it.



all the charlatans, poseurs, and gurus

no skin-in-the-game, never paid any dues

with all their gimmick driven prophecies

they cant see the forest through the trees…

as a 92 yo legend patiently waits for 2100



i must confess, i’d rather just guess
than be duped and fooled, by randomness
i rather think twice, than just roll the dice
these random studies, do not drive price

rather think like a fox, not be put in a box
as the markets are, a recursive paradox
if not arc sine laws, then ever-changing-cycles
if you are in denial, it can be almost suicidal

these damning effects, must be circumvented
but not with the invented, nor the misrepresented
not with tools that are myopic, or simply synoptic,
lest the retail hypnotic, not benefit the agnostic

a causal understanding, is certainly demanding
but in-or-out of sample, it sets the best example
there’s so much more, than just trade and win
like adding to profits, when others are cashing in

immune to the tout, trading without any doubt
entering trades, where others are stopped-out
not stepping out-on-the ledge, with an illusory edge
there’s no need to hedge, this is my solemn pledge



Taking a look at the BDI over the past year, is there now a head and shoulders? I ask out of pure ignorance—just trying to learn.

Gary Phillips writes: 

Back in the day, before the day…

I am loathe to admit it, but I first read Technical Analysis of Stock Trends by Edwards and Magee in 1971 when I was 18 y.o. (Btw: the acknowledged bible on technical analysis was written in 1948). There weren't any computers back then, so we had to keep the charts by hand. Along with reading and studying the book, Leo Melamed and Barry Lind mentored me in the application of TA to trading. I used to keep charts back then for Tom Dittmer, who ran Refco. In return, he taught me how to scalp in the pit when I first became a member of the CME in 1976. Bob O'Brien sr. taught me about the livestock markets, and when I migrated to the CBOT, I leased my membership from Bill Eckhardt, and was lucky enough to receive his tutelage. I stood next to the largest independent futures trader in the world (Tom Baldwin) for 10 out of my 25 years in the bond pit, and after + 40 years of trading, at the age of 61, I am still learning the craft from Vic and others on the list. Ghere are a couple of points to be gleaned here:

1. as Rocky H. once said, I am smart enough to know I'm dumb enough, that I don't know everything; which is the reason why I have always surrounded myself with individuals who are smarter and more experienced than myself. Unless you are playing poker, you never want to be the smartest person in the room– you won't learn anything, and you should never stop learning! and 2. the bible on technical analysis was written when Truman was president. I think they were still communicating by telegraph back then! Does anyone in their right mind really think that today's machine driven markets even remotely resemble the markets of that era? 

David Lillienfeld writes: 

Ok, but I don’t think the BDI is an object of HFT. So wouldn’t older approaches (i.e, from 1948) still be applicable? Or from a technical perspective, is it the tenor of the market (a butterfly in Africa flapping its wings sort of thing) which matters?

Gary Phillips writes: 

It's still an index and algo-driven professional trade, and I can't envision the palindrome putting on a massive short position predicated on a h&s top formation.

What is timeless in reference to traditional TA, is the tendency for traders to isolate the one data point (formation) that supports their directional bias while ignoring data points that contradict with their forward looking view of the market.

Charts in and of themselves are invaluable. They provide a point of reference for money management, capital flows, correlations, relative strength, etc, but, traditional TA (cliched patterns, trendlines, etc) seem anachronistic as a stand-alone predictive tool.

Craig Mee writes: 

Hi Gary,

I think its a mistake to put all TA in one basket. For example, trendlines are very different than patterns. If you can quantify the edge your setups possess, you may have something to work with. The problem that I see is with most technicians, they are running so many parameters and indicators that this is unachievable. I think market volatility and news is a function of whether markets behave similarly now to 60 years ago and am constantly amazed at often they do.

Gary Phillips writes: 

Perhaps in a very generalized manner, i.e., markets go up and they go down, they back and fill, and uncertainty is still a fundamental reality in trading, and, just as in the past, the best we can hope to achieve, is an incomplete, but probabilistic knowledge of that environment. However, the tools we use have changed and so has the perspective needed to understand the context of the contemporary market. It requires an approach built on an analytical framework that is relevant to current drivers of price. While traditional TA may provide a comfortable resolution and a summary shortcut to order amongst all the chaos, it doesn't yield any insight into market structure. What dramatically distinguishes today's trade from yesterday's is market structure and Fed policy. To a very large extent, price action is no longer controlled by humans, and to an even larger extent, price action has been contaminated by qe/zirp. This is the fork-in-the road where the past deviates from the future. This means resisting the sirens' call to assign causality to traditional ta patterns, trend-lines, fibs, and other hackneyed tools that were created for highly auto-correlated markets, driven by human decisions and real risk/reward considerations. It means using the right tools with proper perspective and incorporating relevant informational signals from a wide range of deterministic processes. The new-normal approach begins with recognizing the current dynamics of liquidity provision and developing an informational framework with signals that reflect the machine driven reality of HFT, along with an understanding of the impact of qe/zirp and risk-on/risk-off.

Craig Mee writes: 

Agreed there are some larger drivers at play, and something like a magnetic or invisible hand keeping the pull to one side. But the boom and bust nature of the markets of the last 19-20 years is far from at an end so any extension will still be reverted. There may be periods and instruments where opportunities at times are limited, (for example, I would say its probably easier playing the curve now in rates then trading outrights) however fear and greed under the right volatility conditions is, in my humble opinion, still a force to be reckoned with. Separating the house of TA from price action and behavioral sciences is probably a good start so as not to give a illusion of believing in hocus pocus and mad methods while not understanding the underlying. The major returns and opportunities will still run with fundamentals, whether forced or established, but being able to have a value entry via the opportunities that humans create through their ever present qualities such as running with the herd on news and perceived threats which don't eventuate can allow for outperformance. I believe that the question of whether to weigh the opportunities that human behavior presents has to be sized up under the right volatility to ascertain whether risk has been compromised. 



hey janet yellen

what do you say
you must be learning
ya saved the bulls today

you made it done,
a fait accompli
a jew from brooklyn
just set us free

it was just a flash thought
a fact i did contemplate
what the struggling market
had been missing to date

conspicuously absent
was any help from zion
although I'm sure it's not
for any lack of gods' tryin

but, u know what they say
& it  just might be true
they're good with money
know business and fair value

so, like Moses before ya
his people he led
u didn't pass us over, &
got the spx out of the red



I hate to say it, but i don't see that much difference between yesterday's human-driven liquidity providers (floor traders) and the machine-driven liquidity providers of today. Except that as a local in the pit, I often possessed exogenous information, yet to be incorporated in the market. Predatory algorithms must rely on their endogenous actions to trigger the desired outcome.

Of course, in my own version of strategic sequential trading, I would often hit bids and lift offers, in search of stops, only not quite as fast or unemotionally. Yet all of this was easily rationalized as our due privilege for the risk incurred while providing liquidity. Ceteris paribas, we did this for the same reason a dog licks his balls… because we could.

Perhaps, if Goldman wasn't Obama's largest campaign contributor, and SEC officials didn't have a quid pro quo for job placement in place with the private sector b&ds and law firms, and the exchanges hadn't gone for-profit, we might not be discussing this topic.



 Friday’s end-of-the-week festivities failed to endure past the European markets’ close before the es began it’s daily swoon, and couldn’t even reach a level lofty enough to allow yesterday morning’s longs the opportunity to escape at break-even. After all is said and done, the SPX is still trapped in the ~40pt trading range that has defined the market for the past +1 month. Emerging markets re-emerged and displayed very good relative strength as money rotated out of past over-performers (bio-techs-naz and momentum stocks-rut) into past under-performers (EEM). The yield curve continued to flatten and credit spreads widened as the market discounted Yellen’s, and other’s hawkish comments. Once again, internals are mixed, with a bearish p/c ratio and breadth, juxtaposed against a benign and bullish $vix. After settling the week midway between the weekly S1 and the weekly pivot, the market appears to be waiting for long-term traders at-the-margin to weigh their options before stepping in full force. Relatively low vix and skew readings indicate an unreasonably complacent mood in the market, although a $2.8BB put position was executed this week — so someone is concerned about downside tail risk.

The market has taken on the visage of an aging fighter who has absorbed an inordinate amount of blows to the head and body, yet still remains standing; willing, but not as eager as he once was, to continue fighting. of course, the market cannot stay in the current trading range indefinitely; some endogenous or exogenous event will cause the threshold to be breached, and the market will eventually make it’s mark, as it departs from current value. Perhaps the fix is in, but somebody is betting a lot money, that an overextended and beaten down Mr. Market, finally utters “no mas” on his way to a hard landing on the canvas.



Let's assume the HFT does take a 1/2 tick out of the market per trade. But reflect back to the good old days when you would call in your orders to the floor. Then the locals would sit on the order for 1-2 minutes allowing plenty of time for front running, and other evil dong, then charge execution commissions of .50bp to 100bp. This was all before decimalization so instead of spread of .01 or .005 on stocks you had spreads of .06 or .25, higher by a factor of 5x. For a stocks or futures trader I will go with current electronic age even with those pesky HFT algos. If I was a floor broker, sure the old days were a lot better, but if you are sitting upstairs today beats by a mile.

Jeff Watson writes: 

But the trouble with the electronic market is that it's harder to know the size of the market (ie: how much wheat is really for sale in the pit). Plus, the electronic market eliminates the visual and auditory clues that one would get in the pit. The feel of the grains has changed significantly since electronic became the mainstay, but a bad fill is a bad fill, and your market order can get you a bad fill.

Gary Phillips writes: 

Floor brokers in the bond pit were under extreme pressure to provide institutional customers with good fills

Brokers were only as good as their last fill…

Good fills were taken for granted, but fills that were perceived as bad, were always acknowledged and then contested.

Adjustments for bad fills were de rigeur, if a broker wanted to retain his business.

But when a broker had an error, he had to eat it himself.

The risk /reward was definitely skewed against the floor broker.



 Frank Zappa said it best. The market may not appear to be portrayed against a bullish backdrop, but irrespective of fundamentals, geopolitical perturbances, inter-market context, and lofty location, it is the willing beneficiary of the matriarch's munificence and investor inflationary expectation.

you are what you is
you is what you am
you ain't what you're not
so see what you got

a cow don't make make hams
and a bear don't make clams
five years since its birth
the bulls still inherit the earth

p/c ratios, breadth and volatility are all sanguine — but not overly so, it is what it is — and that's all it is.



One of my favorite short term patterns here today; outside day in up close in tight trend markets are bullish and daily a/d line at new high…

Gary Phillips writes: 

Beans in the teens already, but seasonally ripe for a rally…also my only worry is post-taper/risk-on has seen a stronger dollar, although it did decouple today after the european close…



 bots stepped-up the es all day
& the shorts were made to pay
due in part to talk of a taper-off
that became the theme of the day

bad news became good news
cnbc pundits changed their views
while the u.s. dollar retreated
and roro correlations repeated

the curve finally steepened
and the gold mystery deepened
as the venerable nikkei led
an ecb ease was put to bed

emerging markets looks shaky
we know this much is true
their currencies look flaky
not much there to add value

yields now look ready to abate
they want to subvert inflation
with a negative real interest rate
we could become a borrower nation

merkel is troubled by russian phonics
japanese women bleed over abenomics
dimson says,markets inevitably drift higher
so fuk-u draghi - i am a risk-on buyer



 Occasionally one comes across a sleeper in markets — a man of great practical and systematic wisdom who has written a book that is widely overlooked and should be read by all market people for great profit. Such is the case with The Master Trader by Laszlo Birinyi. He is well known as a Hall of Fame Market elf from Wall Street Week, and winner of the outstanding elf of the 1990-1999 decade in performance and analysis. He is the inventor of the money flow method of investing, based on counting the market value of upticks and downticks. When you walk with him on the street, people are likely to come up to him and thank him profusely— You recommended apple in 1994 when it was four and I bought it and now I am a wealthy man. He has a number of great calls like this including catching the market bottom in 2008 with a 850 S&P call, catching the bottom of the bond market in 1994, and maintaining a bullish mien throughout the great expansion of 2012 and 2013.

His approach is somewhat diametrically opposed to mine, so I was particularly interested in interviewing him for an upcoming book review. He loves anecdotes. He publishes a market letter, and runs a money management service. He doesn't deign to compute the proximity of his results to randomness, and he trades mainly individual stocks. Here are some of the things I learned from him.

1. Look for stocks showing a sprained ankle, i.e. a drop of 5 to 10% on such things as a trading loss, an earnings loss. Sprained ankles coming from ratings changes by inferior analysts is particularly poignant of future appreciation.

2. Do things physically. Enter all your trades yourself, and read the newspapers in original form so you can see the placement on the page, the size of the type and headline.

3. Pay attention to divergences in the performance of individual stocks from the consensus about the importance of external events. For example, the housing stocks have been strong throughout all the talk about tapering. How could interest rates be going way up if housing stocks so strong. He likes to look at NVR, Whirlpool, and Sherwin Williams for clues to the real effect of things. These stocks have the virtue of being high priced enough so as not to have high frequency trading interfere with it.

4. Little changes in the institutional structure can have tremendous effects on markets. The importance of big blocks and money flows has been negated by the black pools, multiple market makers, and payments for order flows.

5. Making money in the markets is as hard as making money as a architect or accountant. It requires constant study, practical experience, and openness to new ideas. The best traders are frequently art history majors.

6. The records of markets are frequently faulty. Particularly egregious are the industry performance figures and p/e ratios which are computed retrospectively, for most historical periods before 1940. Big problems occurred when the Dow was reconstituted without adjustment after the first world war.

7. Certain forecasters besides Abelson are particularly bad. Shiller and Prechter have been bearish since 1960.

8. Wall Street is a business where the top feeders always win, and all activities and recommendations must be considered in that context.

9. The relation of individual stock moves and market moves is not linear. For many things like the performance of individual stocks after gaps a 10% move is bearish, a 10-20% move is bullish and a 25 % move is bearish. Similarly he believes for market moves.

10. The public is a very poor consumer of market products. They believe everything they hear on the media. They don't stop to think what the agenda of the person transmitting the information is, or what their expertise is.

Laszlo started out as an immigrant who couldn't speak English. He rose to be head market analyst at Salomon Brothers working next to Mike Bloomberg for 10 years. He now runs a big business in money management, and market letter that affords him the opportunity to own the only grass tennis court in Westport which I have had the pleasure of playing on.

Gary Phillips writes: 

 Thinking about point number 5 about how the best traders are usually Art History majors, add to that…Hungarian, i.e, Birinyi, Soros, and Peterffy. I say this with tongue planted firmly in cheek, but as a first generation child of Hungarian immigrants, I can't help but feel a selfish and chauvinistic sense of pride. My father emigrated to this country in 1938, and not unlike Mr. Birinyi, couldn't speak a word of English. Like most Jewish Eastern European immigrants, he became a merchant and eventually a business owner. Unfortunately, it wasn't until after he passed away 28 years ago, that I realized what a fiercely intelligent, knowledgeable, and perceptive man he was. I cut my trading teeth working on the floor of the CME during my off-time from school, and educated myself reading Hieronymous, and Edwards and Magee. At 18, I naively took everything I read, literally. I remember explaining to my dad about how the commodity markets worked — it was simple; supply and demand. And I'll never forget the (boy, have you got a lot to learn) look on his face, when in his thick Hungarian accent, he informed me how easily and how often, the laws of supply and demand were manipulated and distorted. I was not only surprised by this revelation, but couldn't help but wonder how my dad, who was never a participant in the futures or securities markets, was aware of this esoteric bit of news. This inevitably led me to a couple very salient revelations. Never underestimate the wisdom of your father, and never take for granted the Magyar mentality.



 When confronted with new ideas, the Dailyspec acts like a collective doppelganger; a looming reminder to suspend judgement until empirical proof is provided. It forces one to rethink all that had previously been taken for granted, with inference supplanted by intellectual caution, and reification replaced by consilience. Even one's successes are called to task to insure they are reproducible and not a victim of post hoc fallacy.

These predispositions to incredulity may not sit well with the secular world nor one's mate; they are often misconstrued as pretentious or disputatious, but in the context of the list, polemic comments are neither deemed arbitrary nor argumentative, and a degree of doubt is always welcomed.

So, what's the schtik about candlesticks, and single-day signals, and other simple linear relationships? It's true that a lot of extremes have reversal days; so, the probability is a reversal will occur with an attendant price extreme. but, it does not tell you the probability of having an extreme and a sustained change in market trend-given that you have a reversal day.

These approaches are intoxicating to the contrarian, but in a momentum, algo, and QE driven market, they only serve as a rationale to prematurely exit a successful trend following trade.

Anatoly Veltman writes: 

One reversal bar (or candle) has proven to work better on Weekly than Daily charts. This is a very important note, as old technical analysis books glorified Daily reversal bars, "outside reversal". All of them implied Daily - and this just doesn't work in modern markets. But Weekly reversals do.

Someone will be expected to produce test results. Test results depend greatly on input, and on coding particular signal conditions. I'm afraid the test results we may hear on the list will not be based on proper signal conditions. I'm not aware of any one-dimensional signal that performs in today's markets, but unfortunately we'll likely hear back precisely that: a one-dimensional weekly bar reversal signal.



From Anatoly Veltman:

I just saw this Weekly SP chart, and it's honestly… Ugly (link).

I can't imagine how we're supposed to be Bullish on such chart. Mock me all you want, I am no buyer here, sorry. I'll probably miss another tremendous growth opportunity.

Victor Niederhoffer comments:

Needless to say my silence about the chart interpretations should not be taken as acceptance. And aside from the ecology of markets, deception, avoidance of fear, relation to music and barbeque and sport, longevity, board games, etc, the whole genesis of this site from its founder was to avoid such mumbo jumbo.

Gary Phillips writes a poem: 

beware of greeks bearing gifts
and single data points
they support a myopic view
and play into the hands of the deceivers

at any given point in time
an equally compelling case
can be forged in either direction
depending on one's bias

the thing about charts
is that they fail to let one see
the markets for what they are,
but instead, for what they appear to be

Kim Zussman writes: 

Charts! Charts!
Like musical Tarts
The more you looks
The more it smarts

So look away
From Siren curves
Or you will get
What you deserves

anonymous writes: 

I refer everyone to Bruce Kovner's quote regarding the utility of charts below. If you have a better track record than he does, then you are entitled to mock his wisdom. I will gladly wager that no one who is reading this comes anywhere close to his long-term, continuous, audited track record.

There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he's not going to take a patient's temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is – whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge. Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates anew chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.

Gary Phillips writes: 

Indeed, I look at 22 charts on 4 screens myself. But, what I should have said while in my rush for cynicism, is no one single chart stands out and provides me with a competitive advantage or a forward-looking view of the market; at least not in the time honored edwards and magee kind-of-way. But when charts are related to a broader network of market events, themes, and correlated markets, etc., and provide (to borrow from the chairman) a consilience, then one can assess the departures from value that govern trading opportunities. which is what, I may say, you do so well.

Victor Niederhoffer adds: 

Please forgive my not using the term "armchair speculatons" or "furshlugginer" with reference to all those untested hypotheses and impressionist descriptives but not predictive things about chart movements and also ideas about secular bearish markets when we are within 1% of all time high, and a Dimson 1 buck in 1899 would have risen to 60,000 at present.

Scott Brooks writes: 

I say this respectfully. Vic and I have jousted on this front several times (and I believe the back forth has always been good natured). But my overarching point on secular bear/bull markets is valid to the average investor.

The extreme highs and lows we've experienced since 2000 is all well and good for the speculator who can take advantage of the market ups and downs.

But to the average 401k investor, 2000 - 2013 has been the lost decade (plus 3+ years).

Yeah, they've continued making deposits and benefited from DCA'ing. But for far too many of working class Joe's, there is very little gain outside of deposits.

The trader can benefit from the market movements. Johnny Lunchbucket has no idea what to do except to move his money around chasing last years returns, and after a few years of that, he is just flat out frustrated. Johnny Lunch Bucket and Working Class Joe do not care that the market is near all time highs. What they intuitively know (maybe even only on a subconscious level) is that even though the market is near all time highs, they've lost something far more important–13+ years of time for that their money should have been, but wasn't, compounding.

I'm not trying to be contentious with the Chair….I'm just trying to present a different POV that many on this list never experience….the plight of the average investor.

Gary Rogan comments: 

Scott, the average investor is handicapped by having the urge to sell low. If you sold during the 2008/2009 lows and waited to get in you are certainly left with a very negative impression of the market that feels like a bear market. The only feasible way for an average investor to think about the market is to look at their 45 or so year workspan as the period to evaluate market performance. 13+ years should mean nothing in that frame of reference. Now, if you start investing when you are 55, it means a lot, but you are doing the wrong thing so getting the wrong impression comes with that.

It is true, in my opinion, that the market today is expensive by such measures as total capitalization to GDP ratios. This is somewhat likely to limit returns in the next 15 years although it means very little for the next say 7 years, but within any 45 year period starting from 45 years ago to 45 years into the future market returns are likely to remain close to their historical average (barring a major calamity). The average investor who knows next to nothing should learn this very simple behavior: put a certain percentage of your income into stocks every year, and stop complaining.

Scott Brooks responds: 

The best thing that the middle class working man who who is NOT eligible to invest with top tier money managers (due to accredited investor rules) and is stuck with 15 expensive mutual funds in his 401k or his cousins fraternity brother as a broker or some State Farm guy as his insurance agent, is TIME.

Over time he can make handle the ups and downs. But the fact that the S&P peaked at around 1550 in '00, and is now in 2013 getting ready to hit 1700 means he wasted 13+ years with less than a 1% average annual growth rate. Sure, he picked up a point or two in dividends and maybe benefited from DCA'ing….assuming he wasn't one of the many that stopped putting in money into their 401k's for whatever reason (got scared, saw his pay cut or his job outsourced or his spouse got laid off….or whatever)…..but when you subtract out management fees and 401k fees, he almost certainly netted 1% and maybe less.

That my friends is a secular bear market…..and that's the world that 90% of America has lived in for the last 13+ years.

We gotta remember that people on this list are not like the rest of the country, and it's easy to lose sight of that.

I hope it is clear to everyone that I don't pretend to be something that I'm not. I don't pretend to be a counter or even a trader. I'm a simple man who was raised in a lower middle class world and 90% of my family still lives in that world. I'm not trying to raise anyone's ire with these posts. I'm just trying to shed some light on a subject that is very real…..

And maybe somewhere in my words there is a way to create even more profit for those of us that are blessed with:

1. a brain that works better than 95% of the population and
2. have a burning desire to use that brain to it's fullest.



Possibly the most major inhibitor of short term trading is not reacting enough to fundamental changes in the environment of changing cycles and inter-market relationships that you're not privy too until long after the flexions and insiders have pushed their boat into the pond. Discipline is the only way to combat this. The more the deception, the greater the chance of failure.

Gary Phillips writes: 

I try to think of myself as simply an observer, not a trader, but an opportunist, which means I do not initiate arbitrary trades that inevitably degrade my P&L. This entails allowing questionable trades to go uninitiated, while waiting for trades that are well defined and have a proven edge, and levering up when a real opportunity is presented.



 I'm reading Trading as a Business by Charlie Wright. Pretty good book profiling the evolution from discretionary trader to systematic trader. One of those books where I found myself laughing at having been down the paths. More trend following oriented but I think it is a pretty good synopsis of the systematic world and he covers some bases that added value in terms of elements to consider in one's trading (or at least mine). Decent set of checklists.

Do systematically inclined speculators recommend similar books (besides Victor Niederhoffer's and Larry Williams books).

Also, Tradestation seems to do most anything a trader would want in terms of trend following testing. I have never used it though.


George Parkanyi writes:

The only flaw I find with systems is that they immediately stop working as soon as you try to use them. I think people need to do more research on fading systems.

Christopher Tucker writes: 

Where's the "like" button on the Speclist?

Steve Ellison adds: 

Yes, even systems I developed myself stop working when I try to use them because of data mining bias. Even if there legitimately is an edge, some component of the good backtesting performance is better-than-average luck. 

Leo Jia writes: 

The word "enlightened discretionary" is very appealing. The reason for it, I guess, is because of the word "enlightened" more than the word "discretionary". Everyone hopes to be enlightened in someway. Being enlightened seems to be a spiritual consummation. But I guess that is not the first and real reason why people are after being enlightened. The real reason is that it is mystic and mostly unattainable. This coincides with a human nature of always craving for what they don't have, which is among the reasons why most people are persistently unhappy.

I feel preferring discretion to system is quite illogical. Aren't whatever rules one uses as a discretion by nature a system? It perhaps is not explicitly sketched out, but it by all means is a system of rules that resides in one's head. Couldn't that be phrased and then programmed? I agree some are not very easy. But are they really impossible?

Gary Phillips writes: 

I've been doing this long enough to instinctively know what works and what doesn't. I only need to look at my P&L for empirical confirmation. If in doubt I just try to see the market for what it is and not what it appears to be. One needs to understand market structure, liquidity, and price action and develop a framework for analyzing the market, somewhere between bottom-up & top-down lies the sweet spot. This allows you to see the market in the proper context and provides you with a compass, which will keep you from feeling lost and will show you the way.

Craig Mee writes: 

Aren't ?

Hi Leo, you probably could say "whatever rules one uses as a discretion by nature is a system", but a system may not have the ability to load up once the move kicks (obviously it can be programmed) but at times the opportunity may appear intuitive, and  a trader can do that on relatively short notice, whilst keeping initial risk limited.

Interesting, Gary, the issue with systems seems to be at times data mining against price action and structure which gives strength of understanding. The HFT may work on massive turnover, low commissions and effectively front running, and unless you have those edges then it appears difficult to succeed from a data mining basis (and relatively scary trading something that you don't effectively understand from a logical point of view). However classifying a markets structure, and working off 3-4 premises no more, (as I believe more would allow any edge to be diluted across a range of options), and the ability to leverage once on a move, appears to be something you can work with. This is purely from a hands on execution basis, no doubt the pure programmers can weigh in.

I remember speaking to a guy who professionally programs for others… (admittedly a lot of retail), and we were talking about what are the laws in place for him to not front run me after developing a system I gave him…and he was like "mate, to be honest (probably insinuating "dont flatter yourself") 97% don't make a dime." That was certainly probably expected I suppose, but to hear it in technicolour was confronting and I was surprised he said as much.

Gary Phillips writes: 

I really don't believe that discretionary trading today, is any harder than it used to be. The emotional aspects, and risk management, have essentially remained the same. Methodology is different, because algorithmic driven HFTrading has forced intra-day traders to change from momentum chasers to mean reversion traders. And as you stated, there are countless global/macro concerns as a result of the financial crisis and continued global easing. So, it does demand a broader universe of knowledge, and revamped techniques and benchmarks, but it still boils down to identifying what is truly driving price and how it is being driven. 

I guess this is what gives you the elusive *edge*. But, as we used to say the *edge* can sometimes be the *ledge.* That being said, trading doesn't have to be about being right or wrong the market, or predicting where the market is headed in the next moment, hour, day or week. Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results.


Kim Zussman writes: 

"Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results."

One would suggest that trading is a waste of time if your historical or expected mean are random.



 Suction is the production of a more or less complete vacuum with the result that atmospheric pressure forces fluid into the vacant space (OED definition)

To what extent did the big down moves in such markets as gold, Russia, Spain (down 24% on year), Italy (down 15% on year) and Europe cause the decline with a lag in US stocks. Is there a general phenomenon with which suction can predict declines in closely related geographic areas? How does the concept of substitute good enter into the fray. A substitute is defined as a good whose price rises as the other good rises  A complementary good is one whose price declines as the price of the other good rises. Are bonds a substitute for stocks? The dollar? What are the predictive relations?

Gary Phillips comments: 

It seems many of the moves and traditional correlations occur without much logic behind them and have little to do with valuation fundamentals but rather with the tactical games the liquidity providers play.

Also, country ETFs emerged as an asset class and this has contributed to increased price volatility.

Similar phenomena were seen with commodities whose financialization led (see Tang & Xiong, 2010) to increased price volatility of non-energy commodities and an increased correlation to oil.

Another factor to consider may be global QE policies. Each country that adopts QE [Quantitative Easing] creates mispricings in assets and goods & services; however, the Central Banks have no control over which assets are inflated, to what degree they are inflated, or in which countries they are inflated in.



The dictionary defines complacency as “self-satisfaction especially when accompanied by unawareness of actual dangers or deficiencies” . I don’t believe it would take much arm bending to convince current market participants that the market may be a tad complacent. In fact, bullish sentiment has been on the rise and is now at its highest level in more than a year. According to the weekly survey from the American Association of Individual Investors (AAII), more than half of all investors polled are currently bullish (51.64%) -Bespoke Investment Group.

Some may argue that complacency is simply the by-product of the intermediate term extant up-trend coinciding with reduced volatility. This has been helping to make intra-day trading more counter-trend within smaller ranges. However, ex-Fed Governor Warsh, sees something more structural in nature, remarking, " Central bank transparency is good, but transparency that delineates future policy breeds market complacency. It threatens to undermine the wisdom of the crowds and the essential interchange with financial markets."

Having laid all their cards on the table, has the Fed removed all doubt; hence, all perceived risk from the markets, essentially eliminating the need for price discovery and any incentives to de-leverage? Traders are certainly demonstrating they are not as quick, as in prior months, to flee the market at the first sign of trouble, e.g., all of the news that circulated about Greece last week, attended by the miniscule range and lowest volume day of the year.

As Mike Aston pointed out, the Fed is supposed to listen to the market for guidance in it's policy decisions; not dictate to the market what it should do, and where it should go. In doing so, The Fed may have manged to both undermine and subordinate the markets. The result is a somnambulent melt-up in asset prices, QE ad inflatam nauseum.

Rocky Humbert writes:

On Bloomberg, it's AAIIBULL Index. I just ran the numbers very quickly. In the past 10 years, there have been 91 weeks when the AAII bull reading have been over 50%.Three weeks later, the average return on the S&P (not corrected for dividends) was +.1% (.065 without rounding). The Stdev of the returns was .00767Over the same period, the average return on the S&P for ALL weeks was -.20% and the stdev was 0.073 SO THE BACK OF THE ENVELOPE CONCLUSION IS THAT THIS IS not A RELIABLE BEAR SIGNAL. Warning: I did this very quickly.



 Do markets learn from each other? For example, is the S&P market this year, following a similar path to bonds last year, with every trepidatious move down being requited with a rise? Are such "learnings" graduated to the point of regularities. And is it a domino effect or a path of least resistance or consilience or convergent evolution or what have you? What do you think? Can it be quantified? Should it be quantified?

Gary Phillips writes: 

Price discovery has become as anachronistic a term as capital formation. The Fed is supposed to be listening to the market to give it guidance in it's policy decisions, not dictating to the market, what the market should do. If investors feel there are no surprises left, as the Fed is concerned, they will once again lever up, and inflate asset prices…QE1 - QE whatever. Rinse and repeat.

Bill Rafter adds: 

Here’s a related (perhaps derivative) question: Do stocks learn from each other?

Let’s say you take a list of ~6,000 stocks and look at them over a 10+ year period encompassing both up and down markets. And you come up with a trading plan that buys a stock if it exhibits pattern ‘A’ and sell it if it exhibits pattern ‘B’. It is not unreasonable to then have a universe of perhaps 150,000 transactions.

On the first pattern you pick you will find positive average results for certain stocks, while other stocks on average will be negative. Some of these winning stocks will knock the cover off the ball by having say 35 of 50 trades positive, and vice-versa.

Now let’s say you pick different patterns, and again you find a collection of stocks that outperform. You think this is going to be somewhat of a random process where some of the winning stocks from pattern A/B become losers when you try patterns C/D or Y/Z. And that does occur. But you also find that some stocks are consistent winners throughout the various patterns. And of course, some are repeat losers (perhaps hoo-do stocks).

That leads to further inquiry to find what constitutes winning qualities or hoo-do qualities. Note that this is not a study of profitable patterns since the behavior is exhibited across different patterns, some mutually exclusive like trend-following and mean-reversion. Nor is it a study of good management styles, as the same behavior is exhibited with ETFs, which typically have no management.

You then try to identify specific characteristics (or group membership) of the winners. You might think sectors, because the behavior also occurs in ETFs, but not all of the constituents of a winning ETF are consistent winners, and ETFs behave differently than their constituents. You trot through the various possibilities: volume, volatility, beta, name recognition, size, sales, earnings, debt, short interest, institutional holdings, etc.

Continuously you come back to the possibility that some stocks are simply winners and others hoo-dos, until you can prove otherwise. It turns out (tongue firmly in cheek) that this is a good thing to know.

Alex Castaldo writes: 

Probably I misunderstand or oversimplify the issue, but I think what is happening is like this.

Among stocks in your database there are some that have considerable price runups and declines, and others that have fewer such features. It is not exactly a question of volatility as conventionally defined, but it is somewhat related to it.

When you examine trading rules, selecting ones that are more successful with some stocks, you are necessarily picking up more stocks in the first category and fewer in the second.

There is a kind of oversampling at work that concentrates the successful population with stocks from the first category.

To take an absurd extreme to make things clear, if there is a stock that spent the entire data period at 10.00 (the ultimate quiet stock), then no method will make money from this stock, not trend-following, not mean-reversion, not seasonality, etc. This stock has zero chance of being among the 'winner' stocks, not because of its industry, or who is the CEO but simply because of the time-pattern of prices.




 While on a trip to Havana in the summer of 2002, I wandered onto the patio of the Hotel Nacional in search of the perfect Mojito, albeit ever vigilant for the perfect senorita, for which to share my refresca. Sitting at a table overlooking the Malecon, was then Governor Jesse Ventura and an armed bodyguard/ Minnesota State Trooper. I was unaware that he was visiting the island for trade talks on behalf of Midwestern farmers, so surprised by his presence, I loudly exclaimed, "Jesse Ventura !!! " "Who are you?", he returned. All I could think of was, "Nobody. Mind if I join you?" He of course, asked me why I was in Cuba, and what I did for a living. I informed I was floor trader, (and with tongue planted firmly in cheek) likened it to being a Navy Seal. This "subtle" segue led to a very long and interesting conversation that was essentially the highlight of my visit.

Later that evening, my cohorts and I, journeyed to La Lisa on the outskirts of Havana to the Makumba nightclub. The club was frequented by the Cuban "elite", and very few if any tourists ever made it there. Once again, sitting at a table was someone I did not expect to meet so serendipitously - Diego Maradona. He was in Cuba for treatment of his cocaine addiction, but nevertheless was in Makumba, famously drunk, partying with his entourage. It took all of about 5 minutes before I was shaking "the hand of God", smoking Robainas, and pounding Cuba Libres, with Diego and some of Cuba's finest mujeres.

The evening I spent celebrating with Maradona was the polar opposite of the afternoon I spent conversing with Governor Ventura. Here were 2 men ( at similar stages in their lives) in 2 very different situations, yet with more in common, than one could see, prima facie. Both of them were particularly outspoken men with a palpable passion for life and drive for success; one had perpetuated these qualities and had manged to maintain his discipline, while the other had lost control of it because of addiction, and slipped through the cracks.

Attitude, emotional control, discipline, and how to handle success and failure, were just as important as knowing how to mange risk, if you were going to be profitable trading on the floor. Ex- athletes, on almost every level, seemed to possess these qualities coming into the (trading) game; others had to acquire these skills. If these traits were non-existent in your personal life, the odds were this shortcoming, would transfer over to your professional life on the floor. Nevertheless, even when an emotionally prepared trader walked into the pit, he had to magnify these extant traits, and step-up his focus and drive.

Attitude, emotional control, discipline, and how to handle success and failure, were just as important as knowing how to mange risk, if you were going to be profitable trading on the floor. Ex- athletes, on almost every level, seemed to possess these qualities coming into the (trading) game; others had to acquire these skills. If these traits were non-existent in your personal life, the odds were it would transfer over to your professional life on the floor. Nevertheless, when a trader walked into the pit, he had to magnify these traits and step-up his focus and drive.

I had begun my career aspiring to become an astute, independent thinking trader, yet had somehow devolved into a momentum chasing, blue collar, bond gladiator. I had morphed into a predatory algorithm programmed to take advantage of my knowledge of, and access to, the customer order flow, and trade in front and all around it. This was in fact, the real and accurate description of a floor trader. Yet somehow, I felt lucky that I had been tenacious enough to secure and hold onto, a valuable piece of bond pit real estate for the viable duration of the contract.

Not that I was complaining mind you, because I was making an inordinate amount of “easy” money. But like any inhabitant of any welfare state, I had become content, and was not prepared for the inevitable move to screen based trading. I underestimated the disconnect between the floor and the screen and it wasn’t until I accepted the reality that I didn’t know anything about electronic trading, was I able to begin to learn how to trade again. Everything I knew as pit trader had to be eliminated from my mind as I began anew, tabula rasa.

The majority of successful floor traders could not transfer their human, pit based “skill set” onto a human-less, computer screen. Being honest with myself and letting go of what had previously worked for me, and had been responsible for my success in the past, was the most difficult part - but it was a start. It was the greatest psychological hurdle I had to overcome on the road back to becoming a successful trader. However, it was a necessary prerequisite if I wanted to provide myself with the best chance for success. In the final analysis, electronic trading has made me a smarter and better trader. No longer playing with the "house edge", it has forced me to relearn my craft, adapt, and re-invent myself. And, it is in the ways, in which we adapt to change, that ultimately defines our success.



Here are 4 charts.

Chart 1 - Key trendline resistance on the monthly off the 2007 pre-recession high

Chart 2 - 12 Year Fib Phenomena… Counting backwards from this month (1), ~ major tops, including the double top formed by the 2000 high (144 months ago), & 2007 pre-recession high (55 weeks ago), along with the most recent swing high on May 2011 (8 weeks ago), all fall into a Fibonacci progression.

Chart 3 - Perfected 13 count on the TD Sequential.

Chart 4 - Not saying that it's January 2010 redux, but it is something to keep in mind especially when considering the other charts



 Anyway, no drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power.

-P.J. O’rourke

It was rollover and I was standing close to the center of the bond pit so that I would have access to both the spread paper and 2nd month brokers, when D. X walked up to me. The bond market was experiencing a brief respite from it’s usual frenzied trading activity and Dx had taken the opportunity to come by and talk to me. He informed me that he was working with some large institutional traders in New York and overseas, and that they were going to be trading some size in the 30 year. He then asked me if I would like to fill their orders, or at least a portion of them. I explained to Dx that although I occasionally did brokerage, it was only as an accommodation to the floor brokers I stood next to, so that they would be able take a break or have lunch.

The majority of the time I functioned as a trader, and I wasn’t interested in being taken out of the market, to fill some orders. Besides, I didn’t know who these customers were. Dx went on to tell me that there was going to be a considerable amount of business, and that if I did a good job, I could have the deck. I respectfully declined his offer and Dx walked away. It wasn’t long before I saw Dx talking to another broker on the other side of the pit, and then another. Little did I know, that I had just made one of the smartest decisions of my life.

I had met Dx and his wife Lisa, who doubled as his clerk, in the lounge of my clearing firm. He was a very talkative and gregarious guy, but in a used-car-salesman kind of way. He was a perennial bust-out, kicked out of numerous clearing firms at both the Merc and the Board, but now had an account where I cleared my trades. There were a lot of *Dxs* that hung around the Merc and Board; ego-driven dreamers that chronically blew up their trading accounts, yet always found a way to get back in the game; hanging on a little while longer before justice was inevitably meted out. A lot of them would quietly disappear, while others would get jobs on the floor, evaporating into the milieu of floor clerks never to be seen or heard from again, yet always fantasizing about making it big one day.

Every trader did it; dreamed about the big trade; fantasized about taking a shot. Chicago’s traders had their own mythical way for making this dream come true, the O’hare spread. The idea was to put on an incredibly large position, get in a cab, and head for O’hare airport. If the trade was a winner, you either returned home or got on a plane to Hawaii — if the trade was loser, you bought a one way ticket to a country that did not have an extradition agreement with the U.S. We also had a saying, “If you are going to blow out, blow out big” If your debit was too small, your clearing firm would write off the loss, and then write you off. But in the CBOT's version of “too big to fail", if you hurt your clearing firm bad enough, they would arrange a way for you to generate the income necessary, to pay them back. Apparently, Dx had taken these fantasies to heart having already already planned to put on an O'hare spread, before he approached me in the pit that day. While I had refused his offer, he did manage to enlist 9 unwitting brokers to assist him and his partner, Tony C, in a scheme that would bring down one of the oldest clearing firms at the CBOT.

The bell rang at 7:20 AM on a Thursday morning and Tony, who had strategically placed himself in the Bond options pit, was buying up every at-the-money put he could get his hands on. Meanwhile, Dx was putting in huge sell orders in the bonds to the 9 brokers whose help he had enlisted earlier. Tom B was on the other side of the bulk of these orders, and when the options traders started to lay off the puts they sold to Tony, with short hedges in the bond futures, panic ensued and the market had nowhere to go but down. Dx then entered the pit himself and began to sell more bonds. In the Bond options pit, the put options were going through the roof, and Tony was beginning to take profits on his long put position.

This all took place before 7:30 AM, when an economic release came out which was negative for bond prices. In a stroke of incredible luck, the market broke even more and Tony covered the balance of his position for about a 1.5 million profit, while Dx was now short about 12,000 bond futures, and up about 5MM on his open position. The feedback loop of selling they had created was working perfectly.

Dx had been dismissed long ago from my clearing firm, and along with Tony C, was now clearing Stern & Co., a family run business that was founded by Lee B. Stern. Lee had made his fortune trading grains, and owned the Chicago Sting soccer franchise, a piece of the White Sox, and was one of the most respected members of CBOT. Lee rarely came onto the floor anymore, but when he did make an appearance in one of the grain pits, his actions were highly scrutinized by other traders, as a possible clue to where the market was headed.

Bad news travels fast in the futures industry and virally fast on the floor, so it did not take long for word of Dx’s and C’s involvement in the "bond panic," to reach Stern’s office. Lee’s son and a few of the firm’s employees rushed to the floor and quickly enlisted the help of the security guards. Dx had lost his count and was standing outside of the pit when they grabbed him, while they physically pulled C out of the Bond options pit. After witnessing this melee, traders in both pits began to piece together what had happened. Tom Baldwin, who had been unsuccessfully taking the opposite side of Dx’s orders, realized the sell-off had been artificially induced, and that traders would have to cover their shorts. He quickly took advantage of the situation and began to bid up the price of bonds. Bond futures and bond options prices reversed on a dime and snapped back with a vengeance.

Meanwhile, Stern’s employees, who had wrestled the trading cards out of Tony and Dx’s hands, were frantically trying to get a handle on what was now, Stern's position. In addition to the trades that Tony and Dx had made, were the fills of the 9 floor brokers, which had to be collected and aggregated in order to get an accurate count. It took them 2 hours before they could figure out the position, and what had been a $5MM winner, had turned into an $8.5MM loser by the time the position was liquidated. Had they been able to figure out Dx’s position quicker, and not tipped off floor to what was going down, Stern could have escaped with anywhere from a small loss to a small gain. Instead, Stern had to make good for Dx’s $8.5MM loss, and as a result, lost it’s clearing status after 25 years in business, and had to lay off 20 employees.

Tony C tried to collect on his $1.5MM profit on his options position, but received a 42 month prison sentence instead. The proceeds from his trades were awarded to Stern to help offset his losses, while Stern went after the 9 filling brokers for the balance. Dx hopped in a cab to the airport and got on a plane to his parents home in Canada, completing the other leg of the O’hare spread. He was eventually extradited and sentenced to 42 months for *his *efforts. Dx came very close to pulling off his insane plan, but he let his ego and his greed get the best of him. Had he executed his plan on a smaller scale, in a more restrained manner, he might not have aroused the suspicion of his clearing firm. He had the market right where he wanted it, and had he not lost his count and tipped his hand, he might have been able to cover his position while it was still a huge winner. Whether they would have let him keep his profits is highly dubious, because Dx’s sole legacy from his lunatic scheme, is the eponymously named rule, that allows clearing firms to seize the profits of any trader that attempts to take a shot at them.

Victor Niederhoffer comments:

A generalization and quantification of Mr. Philipp's great story would show why when there is a big swing down and it recovers, it has a long way to go on the upside. All this must be quantified and the reverse as the story probably captures a basic element of human nature.



 When I traded on the floor, superstition gave rise to very ritualistic behavior among traders. A bad day suffered, meant that certain abstract actions and physical items would be avoided if perceived to have caused bad luck. Conversely, if a trader had a good day, he would look to repeat the events that led up to his good fortune.

Not enough time to shave, and then a profitable day? Good chance, you were now growing a beard! Often times, boxers failed to be discarded in the laundry hamper in a timely manner, and most assuredly, ties were never changed after a good day in the pit. Pens were saved and reused, along with the repetition of parking spot, route to the building, and ingress into the pit; as long as your propitious streak persisted.

This perverse protocol even extended to the members bathroom. Inside this veritable sanctuary, every member had their lucky stall, having mentally claimed “squatters rights” after spending time there prior to a particularly profitable day. Conversely, losing stalls were avoided like a trip to OIA.

What are your trading superstitions or idiosyncratic behaviors?

Scott Brooks shares:

Anyone who thinks shaving or not shaving has never watched hockey playoffs…..a bunch of unshaven guys wearing one of two different uniforms, all skating around. One wins, one losses, and both have itchy scratchy beards that played no role in their success.

However, routines, based on logic and reason, can have a huge impact on outcome.

I have routines for hunting that I've used for years that I know work. From the time I get up to the time I am situated in my tree stand, I follow a routine. A routine that minimizes scent and the chances that deer will know I've moved into the area are followed religiously.

Reading my reports, news articles checking the spec list and communicating with other traders are all a part of the routine that I follow every day.

But the most important thing that I do when it comes to trading is this: If I have an up day, I don't change underwear, shower or brush my teeth as long as the winning streak continues, because I don't want the good luck to rub off…..but yeah, I know that's pretty obvious as I'm sure everyone else does the same thing…..right?

Jeff Watson writes: 

I remember knowing a very nasty wheat trader who was very superstitious and wore the same unwashed blue trading jacket for about 4 years straight. The thing was so dirty it stood up on it's own and smelled like a combination of sweat, nicotine, and BO. Although he ascribed many powers to the jacket, he was very careless with it and would leave it hanging on a coat hook after market hours. One night after the close, after about 5 hours at our local watering hole, a couple of us partners in crime went back to our clearing firm's office, in a prankster-ish mood and sufficiently lit, and hid his jacket at the back of a closet. The next morning, before the open he came in and couldn't find the jacket and went absolutely nuts. He was inconsolable, irrational, and out of control….and this was before the open. After the open, he went on tilt, made a hundred mistakes, and ended up losing a ton of money, all in one day.

The trading jacket, like any other talisman, had no power. What had the power was his faulty belief system and his delusions that he could not make money without the jacket. He was one of the most rational people I ever met and he thought a jacket had supernatural powers. He gave the jacket powers because of a couple of untested, unscientific, irrational, anecdotal observations.

Back to the story…..He lost money all week long and I felt very bad and ended up coming in early on Friday morning and put his jacket back up on the hook. He was very happy and thought his jacket would turn things around. Needless to say, he continued on his losing streak, bidding instead of offering, buying the spread instead of selling it, and making a million other costly mistakes. The jacket made no difference and it took him a couple of months and a few weeks off to right his head. Although it was a cruel joke, it wasn't the jacket that was keeping him from making mistakes and he ended up realizing that talismans are what they are….talismans. 

Gary Rogan writes:

These were cool stories, thanks for sharing Jeff! 



 I am researching and reviewing my contact with hats over a not uneventful life. I am considering their value, their uses, their symbolic significance, the great people I know who have worn them, the hat corporation of America I bought as my first trade, the hat that Tom Wiswell always wore to prevent sunburn and cover up baldness, the hat that Shane wore that made him an icon, the hat that the accountant in Monte Walsh wore that Hat Hendersson just couldn't resist noting was just right for a pistol shot, the hat that I wear now to show my respect for those previous, the man I called Hats H.  because he always had a million different conflicts of interest while working for us. The importance of a hat outdoors in the West to shield from rain, sun, and the elements. Et al. What value do you see in hats these days? What anecdotes? They seem to have gone out of style because of the automobile. You don't need protection from the elements any more. Also they're hard to store. How do they relate to markets?

Alan Millhone writes:

Mr. Millhone

Dear Chair,

I remember well the hat Tom wore. The ball cap I wear has a board on it (see picture). The Market trader might wear such a hat to remind them to look ahead and make the right moves (trades).





Sam Marx writes: 

On the subject of "Hats". I am reminded of the aversion that John F. Kennedy had to hats and the picture that has stayed in my mind, since 1961, is of his carrying and not wearing his hat at his inauguration. I believe it was his attitude that caused the downswing in hat wearing in the U.S.

Tim Hesselsweet writes: 

 Seems like a good example of ever-changing cycles. The hat has been making a comeback for the last several years. Kate Middleton has become a popular figure and she frequently wears hats. Upscale department stores like Saks now carry a large selection of hats as well.

Alston Mabry responds: 

Yes, but…mens hats are a different dynamic:

Look at this photo of mens hats at a Liberty Rally in Columbus Circle, 1918, and mens Hats at the Horse Races 1920s style, and 1950s Men with hats.

Scott Brooks writes: 

When I graduated high school, the guy who measured my head for my mortar board said, "Young man, I've been doing this for 35 years and you have the biggest head I've ever measured".

 As a result of my freakishly large cranium, hats rarely fit me. I wear one from time to time, but only out of necessity, and occasionally for functionality.

Necessity is when I need to keep my bald head from burning in the sun or freezing in the winter or dry in the rain. Never under estimate the insulating and protective qualities of hair.

Functionally is because I need a hat when I hunt to keep the sun out of my eyes when I'm scanning for game, peering through my scope to place the cross-hairs on the shoulder of my intended quarry, or placing the aiming pins of my bow in the middle of said quarries chest cavity.

I avoid hats otherwise as I can rarely get one big enough to fit. If I wear one too long, it gives me a headache. Therefore, when it comes to trading, if you see me placing a trade while wearing hat, fade my position as I'm likely making a losing trade because my mind is clouded by the hat that is squeezing my brain all to tightly.

Pete Earle writes: 

I wear a hat, and have for seven or eight years. When I began to wear one, I expected to be lightly razzed by friends; that not only didn't deter me, but never occurred. Instead I've received unexpected compliments, and over the last few years other have seen a higher frequency of hat wearers in Manhattan, Washington D.C., and even when I'm down in Auburn and Atlanta.

Christopher Tucker writes: 

The grandfather of my best friend from college was one of the kindest and most sensible men I have ever met. He was a traveling sales rep for the John B. Stetson company. The man always had the best (the absolute BEST) hats.

GAP Capital comments:

 Born and raised in Chicago, so "hats" remind me of only one person…Dorothy Tillman!!!

Anton Johnson writes: 

"By some accounts, Christopher Michael Langan is the smartest man in America……….he has a fifty-two-inch chest, twenty-two-inch biceps, a cranial circumference of twenty-five and a half inches–a colossal head, more than three standard deviations above the norm"

Esquire article on "The Smartest Man"

Alan Millhone sends another photo:

Here is Tommie Wiswell with his trademark hat tilted back.  Might also been used to keep
overhead light from his eyes while he focused on the many boards.














Russ Herrold writes: 

 I am traveling, and so cannot conveniently post, but I placed orders this week for a new Stetson, a couple of Fedora designs, and some other … I forget …and have in my car, for the conference I am at this weekend, easily 5 or so, which I use both for their protection of my head from the cold, and also so I can 'do some branding' work in the community the conference represents (I also have other 'branding' in my clothing, and appearance), such that people I deal with, who don't know me by sight, can recognize me anyway.

Marion Dreyfus adds: 

I think I am fairly well known as a hat person, and have been since I wore unusual chapeaux /to synagogue and school when 12 or 13.

Aside from style and stating an individualistic aspect, I think a hat harks back to a gentler, more mindful age, perhaps 100 years ago. It also keeps the head, inside of which are all these excellent ideas and scenes for a better tomorrow and a niftier evening today, comfy-cozy. Hats also show, oddly enough, respect. Hatless men in the 1970s were declaring their freedom from the mindfulness of suit and hat, and perhaps we are the poorer for having abandoned hats.

They also keep milliners in funds, and milliners I went to grad school with in the early 90s were aghast at the drop in hat-wearing citizens, alleviated only by temporary crazes or fads that fade as swiftly as they arise.

As a biker, for me, even mild days produce a breeze when one is on that leather seat, and a hat prevents sunstroke and sun in one's eyes as well as too much wind over one's head.

In the Orthodox world, wearing a hat connotes one is married, so it may be foolish of me to wear hats, because i communicate a status I do not currently entertain. But i do like the fashion and focus statement being made by wearing a lid, many of which, actually, i create myself.

Finally, one can maintain a superior air of mystery in a hat, which is impossible to the same degree in a hatless state.

Alan Millhone adds:

What really amazes me on hats are the clods at football games I attend who don't remove their head cover when the National Anthem is played.

Ken Drees muses:

 The baseball cap trend: rappers wearing the caps askew, wearing caps with logos of designers and companies, wearing caps for status/advertising, caps as gang signal, wearing caps in restaurants/indoors, wearing hoodies in lieu of caps, caps as fashion, caps on backwards, caps with brim curved just so, it all has to do with being cool. Lebron James wears Yankee cap to Indians games–it's all about me, fool.

Gary Phillips writes: 

"Wearing a cap backwards is a baseball fan tradition that started with Yankee fans. It wasn't because they liked Yogi Berra, either. The Yankees and Red Sox have a century-old rivalry. A group of young guy Yankee fans, around 1980, took the train up to Boston to catch a couple of games. Boston fans are loud and boo other teams. The young Yankee fans were seated in front of loud Bostonians. The New Yorkers didn't want to start an altercation, but made statement. Those guys turned their Yankee caps around backwards to show the Bostons that they were Yanks fans and proud of it."

Anton Johnson writes: 

On baseball's rally cap superstition:

"A rally cap is a baseball cap worn while inside-out and backwards or in another unconventional manner by players or fans, in order to will a team into a come-from-behind rally late in the game. The rally cap is primarily a baseball superstition."

And hockey's Hat-trick.

Victor Niederhoffer writes:

It would be nice if this worked in the market. But then the adversary could always tell if you were weak or strong, especialy if signals could be reflected from the hat. I was surprised to see that in all the uses for hats I have collected, including flopping the rump of your horse, and fanning a fire, and collecting water from a stream or the rain, I did not see many variants of using it as a signal to get a cab or alert a Native American that a interloper was near, or to collect bets, or to conceal a salt shaker. This latter is particularly effective in the west because to ask a man to remove his hat is akin to a date with boot hill. 

Gary Phillips adds: 

 Surely not a hat, barely a cap, let us not forget the kippah or yarmulke. The Talmud says that the purpose of wearing a kippah is to remind us God is the Higher Authority over us. He alone is Lord of Lords and King of Kings. When we pray and worship with our heads covered, we are saying that we are in total and complete submission to the will of God Almighty now and forever.

I was recently in the hunt for 2 of the crocheted variety for my 2 and 4 year olds to wear to school. My elder son demanded that the kippah be white with a blue Magen David. The synagogue gift shop was unable to fill our order, so I turned to a higher authority - E-bay. As J. Peterman would say, it is 6" in diameter — one size fits all. Handmade in Israel with a *very small* fine stitch. The yarmulkes are from Israel and are made by people who have made Aliyah; low income and handicap people, generating income to make a living.

I grew up and observant Jew until I had my first taste of bacon and blondes, and I never looked back. However, I now find myself lighting the candles, saying the hamotzi, and making Kiddish on Friday nights… Nice.

Jim Sogi writes: 

 A hat is essential in Hawaii to keep off the sun, rain and wind, to keep glare out of your eyes, and at night on the mountain for warmth when it gets cold. There are different hats for different situations. A baseball cap is good all around since it keeps the sun off your face, stores easily, can be worn in a car and is cheap and stays on in a brisk wind. A good brim hat is good to keep the sun and rain off the back and shoulders as well. A nylon hat is light and can be washed. A waterproof rain hat is good for extended rain, and a light nylon brim is good for hot sun. A small brim bucket with a strap is worn in the water while surfing to keep intense sun at bay for hours in the water, and to stay on in the surf. A knit or fleece watch cap is good for boating at night or sleeping in the cold. A helmet is good for sports to protect the skull from boards, rocks, trees and impact. The Original Buff is an adaptable piece that can be worn as a hat, scarf, or facemask. A balaclava is good for winter conditions and can be used as a hat, or face mask in windy conditions. I must have 20 or more hats.

As with all equipment, each type of hat is specialized for specific conditions, and there is not one that is good for all conditions. As with markets, its good to have specialized systems and rules for the differing conditions or cycles and no one rule is good in all conditions but must be tailored to match the expected conditions.

Rudy Hauser writes:

I do not wear a hat indoors with the exception of trains and planes or if there is no good place to put the hat. If there is a draft from air conditioning it helps to keep me from getting a headache. But more important is that unless I just want to hold my hat in my hands there is no good place to put it. I prefer to read, not hold a hat. I once made the mistake of putting a Panama hat in the overhead rack in a plane. The motion of the plane bounced it around enough to ruin it. That gives me little choice but to wear it. If I have a hat without a brim, such as my winter hat, I can a do take it off aside from trains which are not that warm.

Bill Rafter adds: 

 Glare, particularly from lensed overhead lights or high-hat floodlights can cause headaches and eyestrain. That can easily be counteracted by wearing a baseball cap or other large-brimmed hat indoors. I have kept one at my desk for decades.

For years I noticed that whenever I saw a certain actor & director, he was always wearing a hat, even indoors. Then I saw him entering a food emporium at a ski area and he removed his hat. I immediately understood why he always wore one — his particular baldness aged him at least 10 years. So his vanity choice was either a wig or a hat, and he chose the hat.

Hats indoors also provide a level of anonymity for those who do not want to be recognized in an airplane or robbing a bank.

My first "real" hat was a Homburg, which was required for one of my college jobs: pallbearer.



 10. I want to hire a hot assistant, but my wife won't let me.

9. My neighbors think I'm a drug dealer.

8. Oprah retired.

7. The pizza delivery boy is becoming overly friendly.

6. I haven't shaved, gotten out of my pajamas, or left the house in a week.

5. Networking to me is talking to my 2 year old son.

4. My wife thinks I need to get a "real" job.

3. When I take a break, I throw in a load of wash.

2. All I hear is… "Since you're home all day anyway, can you just do this…?"

1. I feel like I live at the office… Wait, I do!

Jay Pasch responds:

 Top Ten Reasons I'm NOT Ready To Leave My Home Office

1. It's all about you and yours, the way it should be.
2. Better to suffer for one's self than for the white shoe.
3. My children are here.
4. The wife appreciates home-cooked meals when she gets home.
5.  The rent is cheaper

6. Friends are easier to find.

7. Foes are easier to shut off.

8. The commuting cost is zero dollars and zero cents

9. The couch is two feet away

10. Dogs aren't allowed in the corporate office



Professional money had sold into the liquidity ramp that preceded this break, adding to their existing short positions. Somewhat coincidentally, they then pulled liquidity before the calls accommodating the sell-off. They proceeded to cover about 25% of their shorts on the break, while weak longs puked and flipped short.

This now leaves the market in a situation where the dumb money is a small short, and the smart money is still a relatively large short, which goes a long way in explaining why there was a short covering rally, on less than spectacular volume, ahead of last weekend. This also indicates large traders are reducing their short exposure as small traders begin to get short.

Given the current market structure, seasonality, willingness of global central bankers to add liquidity, and professional short covering, it would appear that the path of least resistance would be up. However, any bullish sentiment must be tempered by the current context of the market, i.e., Eurocratic risk.

Still very short, institutional traders will pull liquidity at the first sign of indecision or negative news or have their bots step down a vulnerable market. This of course, offers a wonderful opportunity to accumulate some longs.


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