Nov

6

There have only been 8 US presidential elections in the history of S&P 500 futures. In 7 of the 8 instances, the S&P 500 had a net gain in the 10 trading days ending on Election Day. With 8 of the 10 days complete this year, the net change of the S&P 500 is -58.

The S&P 500 declined on the day after Election Day in 6 of the 8 instances with an average loss of 11 points or 1.1%.

10 days ending     Net change       Day after election Net change
      11/6/1984      1.30     0.8%        11/7/1984      -2.80   -1.6%
      11/8/1988     -9.00    -3.2%        11/9/1988      -1.00   -0.4%
      11/3/1992      4.20     1.0%        11/4/1992      -3.65   -0.9%
      11/5/1996      6.30     0.9%        11/6/1996      14.00    2.0%
      11/7/2000     41.00     2.9%        11/8/2000     -30.70   -2.1%
      11/2/2004     27.10     2.5%        11/3/2004      14.50    1.3%
      11/4/2008     43.90     4.6%        11/5/2008     -45.20   -4.5%
      11/6/2012     18.40     1.3%        11/7/2012     -36.10   -2.5%
 

Oct

20

Who are the most resonant useful idiots in our day that can always be counted on to say something idiotic? I find it useful to look at El Erian and Gross, as both are never bullish on stocks.

Steve Ellison writes: 

Anything on zerohedge

Oct

11

 I have tried to learn from the poker players here, although I don't play myself. When somebody posits "seasonal weakness" (of which there has been precious little this year, except maybe in the last 2 hours), no matter what the supporting data is, my question is, who is the sucker at the table that will continue selling too low every year? A couple of decades ago, it was alleged to be mutual funds that were trying to avoid taxable distributions by dumping shares of companies in which they had losing positions.

anonymous writes: 

I was in Vegas recently, and although I wasn't a sucker, I had the second worst bad beat of my life. I was playing $10-20 NL hold'em at the Bellagio with six rocks (tight players) and a wild Asian woman. I was dealt Jh, Jd. The flop came out Qs, Js, Qd, giving me a nut full house. I raised to $300 and everybody else dropped out except the Asian lady who re-raised $600 which I called.

 The turn card was the Jc giving me quads. Her play all night was such that I made her to definitely have a Queen and either an Ace or a King and that she was betting on a strong set with a big kicker. From her style of play, I also knew she wasn't bluffing and would at least call whatever I bet within reason. I made a hesitant continuation bet of $600 which she promptly answered by going all in. It took me a millisecond to snap call. We turned over our cards showing my Jacks, and her Ad, Qh which gave her a set. I correctly called her hand and noticed that she had only one out that could beat me which was the Qc. Of course the river card was turned over and it was the Qc, and I subsequently lost the pot.

Things like that happen in poker, trading, in life. Since I played the the hand perfectly, there was no self flagellation. One can play a hand of poker perfectly and still lose so no sense getting upset things turn out badly. It's better to dust one's self off and keep playing the game as long as the edge is still there. In the markets, one can make a (perfect) trade with a 98% edge and still have it blow up in your face. In fact, those huge edge blowups seem to be more common than the numbers dictate. For what it's worth, the baddest, bad beat I ever had was getting a nut straight flush where my two cards were the low cards, and my opponent had the top two cards. No way would I ever lay down a straight flush.

Aug

24

On Friday (8/19/16), the 30-day average true range of the S&P 500 emini was 14.8, the lowest since July 31, 2014. Today's range would have to widen by 5 points to avert another 2-year low.

Aug

5

 I am struggling to find some headline grabbing pundits who are very bullish. If you are aware of any, please highlight them as I'm curious.

Steve Ellison writes: 

I have come across a non-headline grabbing blogger named Logan Mohtashami who is very bullish with a thesis that the so-called millenial generation in the US is close to ramping up its household formation and spending. The ten ages in the US with the largest populations are 25, 26, 24, 23, 27, 56, 55, 22, 52, and 28. This is a US-centric thesis as most other advanced economies do not have large millenial generations.

The productivity drop fits into this thesis because the existing workforce has been aging fast.

Here is a sample:

Interview: "Why the American Recession Bears Failed":

Let me take this opportunity to remind Mike and the other recession callers that a true recession requires certain things to occur. First, we need over investment that creates a supply and demand imbalance in the economy which in turn creates demand destruction leads to a recession. I am not talking about just two negative GDP prints either. We also need a cycle where unemployment claims rise as companies lay off people to keep their stage budgets manageable. When unemployment claims gets to a 323K, 4 week moving average with breath, then we can start talking about a U.S. recession.

But, unemployment claims have never broken come near this level, despite weakness from Europe, Japan, China, Brazil and many other countries since 2011. Even with the oil and commodity collapse, we never broke higher on unemployment.

Apr

14

 One thing that is almost entirely gone from baseball is seeing coaches arguing with the umpire.

Where are the Billy Martins and Earl Weavers of these last few generations?

Basketball seems to still have coaches in college and pros that work the refs. Coach K comes to mind. You don't seem to see many coaches purposefully getting T'd up anymore to motivate the team and sway a ref?

Where are the McEnroe's in tennis?

All sports have seemed to have lightened up a bit. Quite possibly it is because of "video replays" and "challenges" that have take the great theatrical performances away from the game of sports.

Could it have gone away from the markets too over the years? Can't blame or swear at an electronic fill? In the past you had the "lady in the wire cage" to blame, market maker in the jacket, and countless others.

Baseball theatrical tiffs are what I miss the most.

Steve Ellison writes: 

One of the great memories of my childhood was attending a Red Sox vs. Yankees game at Fenway Park in 1977 as the two teams were in a close race. At some point, a Boston player lined a base hit to right field in the general direction of Reggie Jackson. Jackson didn't get to the ball for some time, even though it was in front of him. Meanwhile, the hustling batter got to second base. Immediately, Billy Martin pulled Jackson out of the game. When Jackson reached the dugout, he and Martin got in a fight, to the great delight of the crowd. Despite the ongoing feuding between Martin and Jackson, the Yankees went on to win the World Series that year, and Jackson earned the nickname "Mr. October".

Hernan Avella writes: 

That observation–that a fight is an event very few people can turn their attention away from– has been used by Mixed Martial Arts promoters for a long time. The UFC (ultimate fighting championship) has to be the fastest growing sports franchise since 2000. The Fertitta brothers bought it for 2 million in 2003 and recently there was talk of selling in the range of 4-6 billion. 2015 revenues around 600 mill.

anonymous writes: 

How soon before we have Gladiator games? What's preventing it? If we have the so-called right to choose how we die, and legalized suicide then why not allow voluntary death by public spectacle? Million dollar prize money for the winner, and an annuity for a victim's family should he not survive the bout should make it worth it for folks without economic hope, or a fear of eternal Justice. Combine it with in-the-ring porn star rewards for the victor, and you've got a bread and circuses diversion superior to that of the Roman Empire. A new sport for a new blood-lusty God-less New Age.

Mar

8

 I have been thinking about the imminent times when SPU closes above 2000 and then to 2018 unchanged on year. Many sold out bulls will come in. There's no emotion more urgent and forceful than sold out bull. You just have to get in and not let the big rally you missed go up there without you. So the public buys when it goes to highs above key levels and sell when it goes below key levels. Thus they sell low, and buy low. With intraday swings often hitting 3% on a day, this is very damaging.

But what is the reason that sold out bulls are so anxious to get back in and resent so much the marker rising without them. We'll have to ask Brett about it. But I have a theory. It's a sperm wars theory. The bulls are like the man who's going out with a hot girl and wants to have kids. The worst thing for him is to have another man get her pregnant. So his ejaculations have killer sperms in them that prevent other men's sperm from fertilizing the egg. The same emotion. It's bad enough to miss it yourself but to see someone else get the goods is worst of all.

Steve Ellison writes: 

The market played me like a fiddle in January, and I lost more money than I had a right to. I had a terrible fear of missing the rebound, but at the wrong time in retrospect. I had this fear as the market's (and my) losses mounted on the way down to the initial low of 1804 on January 20. At some point, my position size (which I have now concluded was too large) forced me to exit in order to ensure survival. After the S&P 500 touched 1804 on January 20, it closed 50 points higher the same day. From that point, I felt like I was missing the rebound, but I was more afraid of the downside risk of revisiting that 1804 point. And even on the way up, the S&P 500 would abruptly drop by 20 or 30 points with some regularity, just to reinforce the fear of the downside.

Brett Steenbarger comments: 

 Hi Vic,

I like the sperm war theory. One thing I've consistently noticed on trading floors is that the mood is downbeat but not despondent when the great majority of portfolio managers are losing. When many are losing, however, and a few are making significant money, there is absolute despair. Similarly, when losing money, traders are downbeat. If missing a move that keeps going without them, they are tearing their hair out. Many have said to me that they'd rather lose money on a trade than not participate in a market move. And when a trader gets stopped out of a long position after a pullback, he inevitably roots for the market to go much lower (and vindicate his decision).

The best traders distinguish between market movement and market opportunity. The worst traders treat all (random) movement as opportunity and excoriate themselves for missing "opportunity".

Victor Niederhoffer replies: 

Thanks for you sagacious observation. And of course there must be some regularities that issue from this phenomenon. 

Brett Steenbarger responds:

Indeed! I recently encouraged a PM to calculate his P&L if he had bought the markets at the points at which he had stopped out. Sure enough, the stops brought negative alpha; his profitability would have been meaningfully increased had he not sold at the lows. Similarly, I encouraged a PM to calculate the P&L only for the portions of his positions he had added once his initial position had become profitable. Those added positions also brought negative alpha. The market can be a cruel mistress indeed!

Feb

4

 The gravitational constant, G, is 6.7 x 10^-11 N-MM/kg. Is there a similar G in financial markets for the super hot stocks? It is conventional wisdom that information is analyzed faster and better today than 20 years ago. If that is true, then G has increased. But is it true? Or is the constant really human nature?

An anecdote:

Iomega, the (in)famous disk drive manufacturer that was going to take over the world, ipo-ed in June 1996. It went parabolic. And then flamed out. It took 22 months to trade back at its IPO price before descending into oblivion and a takeover by EMC for about 3$/share in 2008.

GoPro, the hip portable camera manufacturer (with a surfing dude for a CEO) was going to take over the world (and was the next BIG media company), ipo-ed in June 2014. It took 17 months for this stock to trade back at its IPO price amidst a flameout — and with yesterday's news of a loss, is on its way to oblivion — to be acquired by Sony? for about $3/share in about 5 years?

Based on this non-scientific study, the market is indeed moving someone faster. But still plenty slow enough that if you strap a gopro to your forehead and point yourself in the direction of the major slow trend, you'll still make plenty of money (and have a nice video to upload too).

Steve Ellison writes: 

Anecdotally, when I started working at Hewlett Packard in 1992, I worked in a division that manufactured hard disk drives. It was a very dysfunctional organization (that was shut down by the company a few years later because of excessive losses). The production lines were especially dysfunctional. To ensure quality, the drives were tested in a "burn-in" process that took more than 24 hours. Only a minority passed the tests and were shipped; the rest went into a rework queue. The lines prioritized producing new drives over troubleshooting and fixing those that had failed burn-in. This tactic kept revenue flowing, but resulted in ever-growing inventory.

Fast forward to 1995. The division was drowning in red ink. Over a few months, nearly all the manufacturing managers left the company to go to Iomega. Imagining the practices I had seen being implemented at Iomega, I had an idea that Iomega was going down.

Jan

18

I was discussing the Weibull distribution, the classic bathtub distribution, with a colleague this week in the context of time to failure of computer hardware. He pointed out that the Weibull distribution is really a combination of two distributions, a distribution of the weak (high "infant mortality") and a distribution of the strong (in which wearing out from old age is the primary culprit). This is an interesting insight that might have applications in our field.

Dec

31

 I saw this movie about the sinking of the Essex in 1820.

In the movie portrayal, Owen Chase, an experienced seaman and proven leader, was passed over for the captaincy by the ship's owners in favor of George Pollard, who was inexperienced but the scion of a prominent whaling family.

Mr. Chase settled for the position of first mate and frequently found himself in disagreement with Mr. Pollard's decisions. They were like an "ill-married couple" in the narration by the character playing Thomas Nickerson.

I don't know how much of the preceding is fact versus dramatic license, but there might be lessons in decision making when a desire to please others conflicts with the merits of a situation and in lack of harmony among leadership.

Dec

28

 "Kurt Vonnegut graphed the world’s most popular stories"

Has anyone made note of Vonnegut's thesis and applied it to intra day trading?

I have done better than my average employing his Cinderella/New Testament pattern in my daily pattern work.

It never passed my mind that these story pattern were universals of the human brain until seeing this article.

Steve Ellison writes: 

To take chips from the public, much market commentary follows the "From Bad to Worse" storyline.
 

Oct

28

 With all the market soaring again and panic out of the air for a time, it's good to gain equilibrium by turning to the endless store of 10,000 Wiswell proverbs he created for checkers, life, and markets at our weekly meetings over a 20 year period.

Here are some of my favorites from volume 5.

The Speed Artist

One thing you can be sure of, the faster you move, the sooner you'll lose.

Double Time Player

The real secret of patience is to continue thinking while it's your opponents move "tomorrow never comes"

If you want to become a good player, there is one thing that you must learn to do: you need to analyze the games before, during, and after the playing. Don't put it off till tomorrow.

A Cardinal Rule

A move once made can never be unmade.

Strength

The player with a strong double corner is double hard to corner.

Your Daily Prayer

Before every game say the following: "I can defend myself from my opponent but who will defend me from myself".

The Trading Game

Every exchange makes a fundamental difference in the character of your game. Therefore every trade should be made with great care regarding the new formation.

The Shadow

Some of your best moves were moves you never made and they saved you from many defeats. What you don't do is as important as what you do.

Jumping to Conclusions

If you jump to conclusions you can lose at checkers, chess, or commodities.

Stop Look and Learn

The player who hesitates is often saved Friend or Foe.

Having the opposition in chess is comparable to having the move in checkers (or having the swings in your favor in markets, or having one extreme after another make you money). Both can be very friendly and at times very unfriendly. Trust and verify.

Treasure Hunt

All the right moves are there on the board, waiting to be made. Your job is to find them.

anonymous writes: 

I've found with regard to waiting that when a market moves out of bounds of regular activity, wait until you are no longer eager to make the trade and then buy. The first impulse is too early many times. If one is early one lets the forces of capitulation out of their error too easily. The waterfall can last longer than one thinks. Eagerness is a killer.

Steve Ellison writes: 

I am guilty of such "one-way thinking" because I have difficulty finding situations in which the forward expectation for the S&P 500 is actually negative. I won't say that I have never found such a situation, but they are hard to come by.

Oct

1

Single time series statistical analysis or 2 variable correlations are easy to compute with limited data and standard formula and normal assumptions. However in real life situations there are obviously more than two variables. In practice everyone considers multiple variables. I've read and used Kendall's Rank Correlation methods, but am not sure how they work exactly. This seems like a way to weigh multiple factors or variables. Multiple things affect the price of a future contract. Real time data is available for a number of things that should affect price, other than just prior prices. Isn't there a way to factor more than one of these things in on a quantitative basis? Do them one at a time but simultaneously, and average it?

One way game theory way to make decisions is to have two columns, plus's and negatives. A factor can be added to each as to its weight or importance to the participants or its possibility or probability. Simply weighing the two sides can help with a decision and it can be quantified.

Steve Ellison writes: 

I sometimes use a machine learning technique called gradient descent to get an idea of which of many factors is more predictive. The (greatly oversimplified) general idea is to start with a default weighting parameter on each input, then make a prediction and compute a "cost function" (error) on the difference between the actual result and the prediction. As it sequentially processes each occurrence, the algorithm adjusts each weighting parameter up or down to try to reduce the cost function. The factors that end up with weights farther from zero (in either direction) appear to be more predictive. This technique helps me narrow down the possibilities, and I can then pick a few factors to evaluate using simple linear regression.

Mr. Isomorphisms writes: 

Linear algebra is the study of multiple variables interacting at once. However it's a difficult subject which requires multiple go's to really understand intuitively.

http://linear.axler.net is something I'm looking at these days. MIT OCW has a good first course.

Gram Zeppi made some interesting comments on Quora: the Jordan decomposition is the main result. (Or maybe it's factorisations.) Based on pure formalism and symbols, one can rearrange the interacting factors into smaller independent matrices which compose together as a sequence of simpler transforms rather than one big transform, but achieving the exact same result.

I still don't really understand how linear algebra is used in time series. One of the standard transformations is to swap dimensions. But this should be strictly disallowed in time series. (Differencing and then doing linear algebra would be a little better in this regard. Then, like with most choices of window, one implicitly assumes that the "pieces" all come from a statistical population.)

Sep

15

 From the 1960s-1982 the Dow stayed in a range between 600 and 1000, with several 40% swings. Then came the great bull market.

Is there any reason why we might not return to such a range for 20 years or more? We are off all time highs, but with quite the penumbra around 1950s. Also, it's been a bull market for 7 years.

anonymous writes: 

In real terms (adjusted for inflation) from the peak in 1966 to the bottom in 1982, that was a 75% decline in the value of the Dow, and a 29-year trough before a new high was made. The decline from 1929 to 1932 by comparison was 85%, also with a 29 year valley before the 1929 peak was surmounted.

Ralph Vince writes: 

Yes, but in August of 1982, you KNEW the lid was coming off.

On Friday the thirteenth, after a languishing bear market, things jumped. It had a different feel to it. By the next Tuesday, the 17th, it was off to the races.

I remember it well. It was a complete change in market character from what had been going on for several years before it (at least since the Summer of 1980, and August of 82 was profoundly different than that even).

My point is, you didn't have to be a contrarian to know something big was just getting going. It came in with bang,

We live in an era where damn few remember — if anyone ever knew — how to read a tape, the pace of whats coming across the Electro-Lux. I've tried to catalog this in terms of patterns of volume bars. If you go back and look at the Friday, August 13, 1982, it occurred on a low volume bar turnaround — v. bullish (assuming a descent into it).

But the real tell came later — the 18th, a high volume bar day, the end of the short term runnup, On the 18th, the DJIA dropped a small amount, on very heavy volume, marking the high that day as an interim high that should hold for a few days. Not only did the market blow through that, showing extreme strength, but the coup de grace was the following week when the market continued higher on very high volume. Often, a single bar making a high on high volume markets an interim high (there are fine points I am not mentioning here), or, even stronger still, if there is a few bars in between and another high on high volume. But a series of 3 or more bars, on very high volume, where the market continues to grind or grind higher, is very, very bullish.

There was a confluence of factors leading up to that — negative sentiment, bank failures, bankruptcies, etc. amid an environment of declining energy prices, falling rates, technological breakthroughs (as evidenced by Ipos in the 18 months leading up to it — Apple, Genentech, etc.) the pc was in its infancy , Apple was talking about "Lisa," the mother of Mac, there was by many people's accounts, a political climate favorable to business.

There are perhaps many similarities to today, and many differences. I suppose it could happen, could happen in the coming months (look at the advances in cancer treatment, and I don't think we've even begun to feel the effects of the technological advances afforded by a true, coast-to-coast high speed network drones and mass transport, or even the productivity created asa result of the handheld devices most of us use today). But if it's anything like the last, great bull market, it come in with a roar, and I would expect it to be evidenced by inexplicably high trading volume that generally persists.

anonymous writes: 

I miss the noise those Trans-Lux jets made, with those funky fluorescent black lights and those little colored pegs. They were crude, but effective. The bars around the exchanges all had jets so you could have a drink and still see the prices, real time. Nobody minded in those days if a broker went down to the bar for a quick one or three as long as they were good earners. The Germans, Irish and Italians were the ones who went to the bars for a quick one during market hours……..the Jews at the CME always wanted to maintain decorum and control, and never show public intoxication…..the drug of choice for the Jews was cocaine and naturally they didn't drink like the Germans/Irish, and the lack of good drinking establishments around the CME was evidence enough. The bars around the Merc were never legendary like the ones at the CBOT like Broker's Inn, Sign of the Trader, Trade Inn, and Alcotts around the corner. Those bars were in a league of their own and the back stories of what went on in those establishments would be worthy of Runyon or Hemingway. I have sources that have the 1970's Russian Grain Deal being worked out at a back table of the Broker's Inn. Whether or not this event occurred and is verifiable, I wouldn't say it would surprise me. I've seen 20mm tonne cash grain deals done on the back of a napkin and with a handshake.

Steve Ellison writes: 

It took the S&P 500 7 years to regain is 2000 high, but it could not hold that level for long. It was not until 2013 that the S&P 500 again reached its 2000 high, so we already had a retrospectively-defined trading range for 13 years. I have a hunch that the next "great bull market" is already here. The so-called millennial generation in the US is larger than the baby boom generation. I keep noticing things about this decade that remind me of the 1980s, including a commodities bust and concurrent strength in the US dollar and US stocks.

Stefan Jovanovich writes: 

Steve gets my vote. Part of what happened in the 80s was the destruction of previously secure franchises. Mr. Walton's stores destroyed thousands of local "downtown" merchants who had enjoyed distribution monopolies in the villages and towns of what became known as flyover country. Even as AT&T decides that satellite streaming of NFL football games is worth $3200 a customer, the kids are growing up wondering why anyone would be so stupid as to subscribe to a service whose ability to provide programming on demand is as ancient as a Betamax recorder.

anonymous writes:

But where can rates go, Steve? Or perhaps it isn't the direction of rates, so much as their absolute values?

The other big element that concerns me is not the systemic liquidity problem (which we had a taste of on 8/24) but that volume has been tapering off throughout this run up from the 09 bottom.

Aug

7

 This market song is by Phil Flynn, not me–to the tune of "I Fought the Law" by the Clash, but I thought it was very good.

The Energy Report - I Fought the Fed REDUX"

Here comes Ben with that big gun,
I fought the Fed and the Fed won,
I fought the Fed and the Fed won.

They needed money so they printed some,
I fought the Fed and the Fed won,
I fought the Fed and the Fed won.

I thought the data was a launching pad, thought the race was won.
Well Ben says the jobs market is bad,
I fought the Fed and the Fed won,
I fought the Fed and the Fed won.

Rates will stay down until the Fed is done,
I fought the Fed and the Fed won,
I fought the Fed and the Fed won.

Jul

5

Every bit of bad news about Greece's situation, including the exposure of European banks to Greek debt, has been known and priced in for years.

Jun

26

 Here is a thought provoking chart that made its way to me this morning. Much in the literature talks about different distribution selection dependant upon the existence or otherwise of 'excess Kurtosis' inter alia. (k = 3 for normal distribution). Much online about this interesting measure. Debatable though if the higher moments are useful in the trenches– as it were.

Good weekend all.

P.S. Aliens have landed. No, not really, however - in news that has a similar probability of observation - London is set to have a run of two (YES, TWO!) consecutive days where the sky will actually be visible through brief partings of the oppressive, grey clouds . There have even been rumours on the internet that the temperature may scale the heady heights of 25 degrees centigrade. Like the perfect game, that last point may be an event too remote without divine (or at least Flexionic) intervention.

Steve Ellison comments: 

In the past year, I did some research on kurtosis to inquire whether there might be any predictive implications when the price change part way through a period of interest was in the "narrow shoulder" of the distribution.
 

May

11

Over at Business Insider, they carried this graph. It looks pretty scary. I don't think it's possible to sustain current prices in the face of declining inflows, but maybe I'm misinterpreting it.

Larry Williams writes: 

Look at the chart! This has happened many times before where the blue line guys got out and the rodeo went on higher. It's not the first rodeo they missed. Who're you going to believe, the chart or a cub reporter?

Steve Ellison adds:

I don't have the data to test this rigorously, but my hypothesis is that "net inflows to mutual funds" is a contrary indicator if it is an indicator at all.

anonymous writes: 

All the studies such as the ones carried out by DALBAR suggest that returns weighted by investor money flows are always worse than time-weighted returns.

There is a movement of people who think that this "behavior gap" can be closed with education or sound advice for all. I find it more likely that it is a necessary feature of markets for the reasons described by Bacon. Some can do better but nothing can work for everyone at once.

Victor Niederhoffer writes: 

One would have thought that this post came from Mr. Conrad rather than you, who has been exposed to the drift.

Bud Conrad responds: 

Mr. Niederhoffer mentions my name as suggesting I might be bringing negative opinions about the future for the stock market, but I have been relatively quite on this list in that nature in recent years. My base for stock market valuation comes from the view of comparing the potential return from the stock market earnings to that of long term government bonds. For several years and continuing to today, the returns from stocks as measured by dividing earnings by the price (E/P ratio) have far exceeded the returns from fixed income, so I have been a bull on stocks, despite the many worrisome commentaries about the general economy. The Chair and others will recognize this general approach as sometimes called the "Fed Model" for stocks. My summary comment is that "The stock market is the best game in town", sort of like the comment on the dollar compared to other currencies as "The best horse in the glue factory".

I have been bullish stocks for the first half of 2015, but with caution that there are other forces like the Fed raising rates, a slowing GDP for the general economy, a disastrous collapse in the oil and gas fracking that will cost lenders huge sums, and continuing trade and government deficits that make me be more concerned that the outlook for 2016 is possible for a down turn. I'm interested in extending that watch for a turn in stock market optimism as others find quality analysis.

As to the specifics of the flows in the chart from BofA ML, I notice that the 2013 down turn in flows didn't hurt this bull market, so the indicator may not be capturing some of the drivers, like possibly foreigners that are even less enamored with their domestic prospects, who may be finding dollar denominated assets much safer than say those in the declining Euro. As a related note in my local area: Palo Alto is supposedly 20% owned by foreigners, mostly from China. Real estate prices are booming in Silicon Valley, and there is plenty of inflation in asset prices here.

Anatoly Veltman writes: 

This was an interesting point, reminding me of a disaster of a trade I had in 2005. Copper, for the first time in history, eclipsed its decades-long resistance of Fibonacci $1.6180 level at the COMEX. It was clearly driven by developing China demand, and I wouldn't stay in its way. I had good luck picking up Longs at the other Fibonacci end around 61.8 cents just six years prior…

But as the 2005 rally progressed beyond the $1.6180 breakout and all the way to the un-phathomable $2.000/lb round - I could hold myself off no longer. My Shorting reason was that throughout the 2005 rally, COMEX Open Interest figures have declined(!) dramatically. Classical technical analysis states that a commodity's prolonged upside run, when accompanied by progressively declining Open Interest - must be Shorted!! The reasoning is very compelling: in zero-sum game, such event can only mean one thing - that the pricing is extremely over-bought, while progressively more-and-more Shorts have already covered!! Thus, as a new Short, you're getting the greatest downside potential in history, while the risk of potential blow-off to the upside is now severely constrained. Well, I'm still a huge believer in this indicator, except…

…2005 happened to be the first year of an unprecedented GEOGRAPHIC shift in Copper inventory. Away from the COMEX in US, and in favor of the LME in London as well as a brand new physical and derivative market born in China and vicinity. While the COMEX Open Interest was going through temporary decline, the pick-up overseas was enough to feed the demand and put further increasing stress on supply. Thank goodness for my catastrophic COMEX stop-loss above $2.0025 - that trend roared unabated straight to the next Fibonacci extension of $3.62!

anonymous writes: 

Some people are going to believe what they want to believe, hear what they want to hear, and avoid information that contradicts what they already think or believe. These are the people who find comfort with a group-think mentality. On the other hand, there are those who love to fade the market, for the sake of being contrarian. These people cannot resist doing the opposite of popular opinion and possess a mindset toward reactive devaluation. This forum strives to operate on a level where useful information is transferred from one reader to another; often times from the extremely knowledgeable (victor, rocky et al) to the less-so (myself included). We all strive to reach independent conclusions based on a reasoned process. We ignore popular opinion, and do not take anything at face value. We keep open minds, organize and filter our ideas to determine what is relevant, yet allow conflicting ideas to generate new conclusions.

In an effort to promote and perpetuate this practice, I still find myself sanguine about the prospects for the market. Real short-term rates are still negative. The fed maybe tightening, but the yield curve is steepening. GDP has averaged 2.25% per year since 2009, and yes, real GDP growth in q1 was weaker than expected; but that may only serve to be a down-tick and not the beginning of a nascent trend, as as was the case last year. Growth is there, but it has been stultified by the Obama administration's policies. If we were to see tax rates and regulatory burdens rolled back with a new administration, we could see a renewal of corporate investment and risk-taking and an acceleration in productivity and growth, and a much higher market yet.

Jeff Watson writes: 

Many are overthinking this stock market and are missing out on the move. Trying to fit events into one's belief system can be very costly in the long run. Sometimes, like in surfing, you just gotta catch the wave because it's a groundswell, and the waves are stacked up like corduroy all the way to the horizon. Plenty of opportunities here.

May

11

 The only reasons why Europe is recovering (euphemism) are the collapse of the euro (ie almost a return to the old currencies (peseta, lira, franc and drachma, etc ..) and the collapse of oil.

Steve Ellison writes:

Stef, this is an excellent point, and there is a meal for a lifetime if one can understand and anticipate how markets move to correct imbalances. As one who trades only S&P 500 futures, I have noticed that every time that market sold off in the past 5 years ostensibly over Greek worries, the euro went down at the same time, which directly alleviated the root cause of Greek non-competitiveness. Soon enough, there was no longer any reason for the S&P 500 to decline further.

anonymous writes:

I threw challenge a few weeks back: could anyone test "5 year expected earnings" vs ES.

I'll re-post these links as a trailhead at least for how one might go about such a study:

"Expectations and the Valuation of Shares
", Burton Malkiel, John G. Cragg

And the book.

Mar

2

 The Chair talks about trees often. I find them interesting as well. Tree roots emit an unknown chemical that attacks competitors roots, but supports their own species roots or symbiotic plants. Trees in Hawaii predate other trees and choke them out. I've seen that in the Amazon forest also.

Companies such as Microsoft and Google design their programs so that other companies apps and programs do not run well or at all on their systems, but allow their own apps and programs to run well, or those of cooperating companies.

Countries obviously help their own companies survive and create barriers for companies of other countries thru tax incentives, tariffs and regulations. Politicians look after their own state's, and their own supporters interests.

Various market exchanges make is harder for orders coming from other sources to execute and give preference to their own dark pools, and cooperating brokers. Brokers give preference in execution to their own proprietary traders, over their own clients or outside orders.

This idea of looking after your own and torpedoing the competition has far reaching implications at many levels. The flexions, and the military industrial complex are just two broad examples. Knowing how this works is important to succeed in in business and trading.

Steve Ellison writes:

Jim, I remember asking you about the roots of the banyan trees when I was in Hawaii. I had never seen anything like them. Some roots dropped from branches to the ground.

In northern California, there are mistletoe plants that are parasites on other trees. The mistletoe roots bore into the host branches. When deciduous hosts drop their leaves, it is easy to see the evergreen mistletoe.
 

Feb

23

There's lots of discussion of correlations on this site. In many ways, it's a big data in the financial world.

Yesterday, I was working on a pharmacoepidemiology syllabus and realized that in epidemiology, we now have the technological power and data access (in theory, at least) to follow entire populations of tens of millions of people. It's the age of big data. It's the age of genomics/genomic markers. In such circumstances, do the precepts of what is a cause change? Is it a matter of biological plausibility when the correlation for a genomic market with a disease is moderately strong but there is no known mechanism (and may not be since the market may be a regulatory gene—or it may be close to the gene that has an effect)? With big data, epidemiologists may be able to follow vast populations (tens of millions even). In such circumstances, are the means of making a causal inference unchanged?

The correlations reported have been provided a course to profits for some. But if the precepts of causality haven't changed, then the correlations in the absence of other data don't provide a much of a path; those sustaining losses from using the same correlations (assuming the events themselves are random) would simply be silent. Our perception would then be that the correlations have some meaning, and we build upon them.

I'm sure I'm missing something here, but I'm also confident that those on the list can provide some needed direction.

Steve Ellison writes: 

We have sometimes discussed here the problem of multiple comparisons. If one looks for enough things in the same set of data, the odds of finding something that appears to have p <0.05, but actually occurred only by chance, increase dramatically.

Dec

2

 In honor of our new spec and Larry, I hypothesize that like Pascal's Law, that a small move in a big market will cause probabilistically, a large move in a smaller market. I'll give 1,000 bucks to the personage that comes up with the best predictive relation on that theme.

Mr. Isomorphisms replies: 

I would start looking in smaller markets that are dependent on the larger one. Eg, look at a town where >50% of the workers are employed at one company. The decline of various parts of Detroit's supply chain could fit this story. Or Iceland/Scotland with their large banking sectors relative to within-country wealth.

Steve Ellison writes: 

Chair: "I hypothesize that like pascal's law, that a small move in a big market will cause probabilistically, a large move in a smaller market."

Let us first get an idea of which markets are big and small. Glancing at the futures contract listings in the newspaper, here are some rough estimates of open interest:

3-month Eurodollar 10,000,000
S&P 500 e-mini        3,100,000
10-year US Treasury 3,000,000
Crude oil                  1,300,000
Soybeans                   670,000
Euro                           465,000
Gold                           400,000
Wheat                         360,000
Cocoa                         175,000
Copper                        155,000
Silver                          150,000
Palladium                      31,000
Oats                               8,500
Lumber                           5,000

Next, I would like to introduce the bullwhip effect. Most goods have a "supply chain" that begins with raw materials, progresses to components and finished goods, and may include warehouses and stores. The bullwhip effect posits that, the farther "back" in the supply chain an operation is (farther away from the end customer), the greater the swings in production and inventory will be in response to fluctuations in end customer demand. Here is an article on the subject.

During the dot-com crash in October 2000, stocks briefly rallied on a glowing earnings report by JDS Uniphase. The CNBC screamer correctly noted that JDSU was a component supplier, farther back in the supply chain, and its record sales had probably just bloated the inventories of companies such as Cisco Systems that had already reduced forward guidance.

From this perspective, lumber seems a good candidate for a Pascal's Law study. It is a raw material that must go through additional processing before reaching most customers, and its futures market is very small. The S&P 500 is a large market that theoretically is based on the whole economy and should be more sensitive to final sales.

Using 3 months as a rough rule of thumb for total lead time in a typical supply chain, I compared quarterly net changes in the S&P 500 with net changes one quarter later in the lumber price.

LUMBER                        S&P 500
          Adjusted  Net              Adjusted   Net
Date      Close     change   Date    Close      change
                           09/30/11   1048.50
  12/30/11   291.1         12/30/11   1180.75  132.25
  03/30/12   283.0   -8.1  03/30/12   1337.50  156.75
  06/29/12   294.8   11.8  06/29/12   1297.50  -40.00
  09/28/12   311.3   16.5  09/28/12   1382.00   84.50
  12/31/12   391.4   80.1  12/31/12   1373.75   -8.25
  03/29/13   407.6   16.2  03/28/13   1521.50  147.75
  06/28/13   310.2  -97.4  06/28/13   1563.75   42.25
  09/30/14   355.7   45.5  09/30/13   1645.50   81.75
  12/31/13   365.7   10.0  12/31/13   1818.75  173.25
  03/31/14   334.4  -31.3  03/31/14   1849.25   30.50
  06/30/14   340.3    5.9  06/30/14   1944.50   95.25
  09/30/14   338.0   -2.3  09/30/14   1965.50   21.00

There were only 11 data points since 2012, not enough for significance. In a regression, the t score was -1.55, and the R squared was 0.21.

The quarterly changes in lumber were a little larger in percentage terms (about 8% mean absolute change) than in the S&P 500 (about 6% mean absolute change).

Victor Niederhoffer writes: 

Excellent. You win the prize. Everything a report should be. (A little weak on the predictivity but not your fault.) If it was easy, we would all be wealthy men. 

Dec

2

 An all seeing eye could write a novel about what happened today. Some lessons seem to cry out. Buy on the announcement of the bad news. Gold lost the vote in the mountains, and oil lost the OPEC meeting amid talk of 40 buck oil. They both sent up 10% or so from low. The first day of the month is the most bullish day. Great. Too many people know it. Great time to sell when it don't open the right way. Bonds, nas, and dax finally went down after 12 or 13 of the last 15 up. Nothing goes up forever even stocks and bonds. Gold's price up 50 bucks from its overnight low has nothing to do with deflation. It's beautiful, useful, and a hedge against evil. When the battleship is leaking, that's the time to buy. Commodities all around at 5 year low. They're up 3 or 5% today.

What other things do you see that the all seeing eye should note?

anonymous writes: 

The sneak attack has to come at night, on a holiday, when the Americans, and only the Americans, are eating turkey and on holiday, stuck in airports.

Ken Drees comments: 

The grains at the end of the summer–indeed. 

Gary Rogan writes: 

Something needs to be done to avoid the supposed "government shutdown" by Dec. 11. Talking about it could provide some mild market-related entertainment.

Steve Ellison writes: 

Silver made both a 20-day low and a 20-day high on Monday. Going back to 2006, I find no previous occurrences of such an event.

Craig Mee comments: 

It would appear the commodity turn around was a function of a Friday Monday suicide run created by combined single factors and then astute cover, not by a function of any meaningful low being in and a return to global meaningful growth.

Duncan Coker writes:

March Chicago wheat had a robust move to the upside almost at limit on Monday, which in this case was not mimicked by the other grains, in other words grain spreads got a lot wider.
 

Jeff Watson comments:

Yesterday, the spread between beans and wheat narrowed, and is still narrowing, while the spread widened with corn. Spreads in wheat stayed pretty much in line. Due to arcane exchange rules for the delivery in grains, there is much gamesmanship in the front month that's ready to expire. The gamesmanship comes from the cash side of the business.
 

Oct

6

 The book Illumination in the Flatwoods by Joe Hutto, the best book on nature I have read, is a 1 1/2 year chronicle about the connection of a naturalist and artist who lived as a turkey, the most human of birds. It teaches you about the life of humans, the relation between romance and affection, the beauty and artistry of nature, the connections between all things including animals and humans, and how to be part of and leader of a group. One comes away from it with a reverence for the turkeys and Joe Hutto, and many ideas for how to trade the markets better, and live a better life.

Hutto imprinted himself on two dozen wild turkey eggs when they hatched, a thing he has done with foxes, deer, monkeys, waterfowls and many others. He lived and foraged, dreamed about, and protected the turkeys each day, until they grew into independent adults. There's mutual love between them memorialized in such passages as "I have never kept better company or known more fulfilling companionship. Our communications although somewhat abstract is completely satisfying and out interests are identical: plants, insects, reptiles, birds, mammals. We are driven by the same engine, and in spite of our divergent morphology, and intellectual approach, I find that our similarities are greater than our differences." Hutto mixes scientific knowledge and studies about animal behavior with the documentary so that one gets an education about ethology, ecology, psychology, and geology seamlessly and painlessly from a reading.

The Turkeys, spend most of their time on the ground walking on two feet, communicating and sensing like humans, and grow to be close in size to our size. They contain within them the instincts developed from 20 million years of evolution, and all it takes is a trigger from their daily life for them to know exactly the right thing to do. They are totally exuberant and enthusiastic and teach us to enjoy the present moments with gusto. As Hutto says: "They are more alert, sensitive and aware, they are vastly more conscious than I. In many ways, they are more intelligent… Every day I see that the most important activity of the turkey is the acquisition and assimilation of knowledge. They are curious to a fault, they want a working knowledge of every aspect of their surroundings, and their memory is impeccable."

 Hutto himself is an admirable person. He is a can do person who loves nothing more than building things, eating a grasshopper along with the turkeys, painting a scene about nature, and picking up a dozen rattle snakes with a garden hoe and transporting them to a new home. I particularly admire his ability to withstand the thousands of insect bites from gnats and Florida black bugs, the constant wetness from perspiration that cause him all sorts of pain and soreness that arise in the day and fray with the turkeys. Yes, this life was difficult, but he notes it was easy compared to his previous imprinting study of water fowl where he lived with them for 6 months, submerged half way in tide pools, with alligators stalking him and his charges 8 hours a day. Without further ado, but recommending the book and accompanying PBS documentary wholeheartedly, I turn to the 15 or 20 things I took away from it that should help us with our trading.

1. Seriousness

The turkeys are the favorite prey of many animals, and parasites, and have to be very careful from birth that they don't die. As a consequence, they are very serious about learning at all times, and never allow anything out of the ordinary to escape them. While they are exuberant and enthusiastic, they don't have time for frivolity. Like the turkeys, the market person is always prey to disaster, and must not be distracted during the fray.

 2. Sense of Place

The turkeys like certain places and will speed up to get to them, and once they get there just relax and admire the beauty and majesty of it. They especially enjoy ponds and edges. The market person has certain landscapes that they should look forward to, and should expedite their passage to them, and take full advantage of their beauty and profits potential.

3. Interconnections

The turkeys often join flocks of other species, including jays, chickadees, woodpeckers, cardinals, wrens, gnat-catchers. The birds are attracted to the movements of other birds. On occasion, the market person must know that all markets move together. The normal negative correlations don't work. The bid moves in one market carry over to the others. Try to find the mechanism that creates this, but also be alert that one big move can presage another.

4. Curiosity

Nothing escapes the turkey's attention. Nothing new can happen without them investigating it and assimilating it into their daily life. They won't move on until they understand it. They never forget once they have uncovered it. The market person must be alert to all new things, all unusual moves, all crazy events that cause big moves. For example, on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was a preamble to one of the biggest drops the next day in market history.

 5. Edge areas

The turkeys loves to forage in areas that are between forests and farmlands, wetlands and drylands, pastures and creeks, pines and oaks. The edge lands are more interesting, provide a better variety of food, and provide more areas of escape. The edge of markets are great opportunities for us. The time between one market open and another open, the moves that occur during and after the fixings, and reopenings, the times that pit markets close and electronic markets open, the times between work and lunch, are all grist for an opportune study and alacritous attempt to profit.

6. Acquisition of Knowledge

The turkey's main business during the day is gaining knowledge. Any object that they haven't met must be assimilated. All new things must be examined by each turkey. The market person should have a wide canvass. He should study science, economic, psychology, politics, and turkeys. Whenever a new relation occurs, whenever a new crazy reason for a market move is on the cusp, the market person must pause to understand it.

7. Fossil Ancestry

The turkeys have 20 million years of evolution to teach them about all things that have ever been life threatening to them. They instinctively know which reptiles are dangerous, which insects are edible, which places they are safe. They rely on instincts leavened by knowledge of the current environment. The humans have fossil ancestries and instincts also. When you feel your color changing, your hair raising, your sense of fear arising, know that your tens of thousands of ancestors are sending you a warning, and pay attention to your instincts.

 8. Color

The turkeys will try to remove any clothing on Hutto that they don't like. Blues are their favorite color, and reds their most hated. Market persons should wear colors that are not distracting to their colleagues, and don't interfere with their quiet contemplation.

9. Skirmish Lines

The turkeys move in a line so that when one turkey harasses an insect but doesn't catch it, and the insect flies away, the turkeys behind it are able to catch it. They maintain that order all the time so that they are optimally formed for the flock to capture the maximum of prey. The humans who trade markets maintain a line of trades so that if the first one doesn't lead to the desired move, the trades right behind it perhaps on a scale down or scale up will do the trick. Similarly, the big market operators can't move the markets by themselves. They form a skirmish line with their colleagues by having meetings where they agree that the market should be down or up, and then go to the old stream media now the new social media to broadcast their views, and make sure that the personages in the line next to them can move the food in the desired direction.

 10. Sensory abilities. The birds can detect movement and smells and color to a discrimination level that is almost supernatural. They can spot a hawk at 2,000 feet above. They are always alert and never rest without the protection of cover and their leader. They can smell all their predators and prey and investigate all new things with their beaks. The market person must always keep his eyes and ears open and should never wear headphones or any other distraction.

11. Herding versus Following

The turkeys like to be together at all times. They have numerous calls to assemble. And when they can't see their brothers and sisters they are unhappy and nervous. They never wish to be alone. And yet, they know that Hutto is their mother and leader. They wish and know they should follow him, but he must never do anything that disperses or confuses them. Hutto's relation with the turkeys is similar to many trading mangers, and leaders on a trading floor that I have seen. He stands at the front and reports various ideas and opportunities, and trades that he is doing, and the herd of traders and salesmen follow him in a flock of related activity. Never forget that humans have the herd like tendency of birds in a flock, and as Galton points out the mentality of oxen who will never lead but follow a leader with blind ambition. Okay, that's a start.

Steve Ellison comments: 

In point 4 you write: "For example on Tuesday, the market dropped a 1/2 % in a minute on news that one man in Texas had contracted Ebola. It was meaningless for its impact on the total economy but the move itself was preamble to one of the biggest drops the next day in market history."

This is a very interesting example. I suspect the 10-point decline in the S&P 500 after the unemployment report on July 8, 2011 was in the same category. The S&P 500 fell another 130 points in the next month and did not regain its pre-July 8 level until late October. I generally think most news is discounted before it happens, so any market reaction to news is likely to be reversed. However, there may also be cases in which a reaction to news exposes an underlying supply/demand imbalance. Finnegan moves, such as the 2010 "flash crash" and quick recovery (only to have the S&P 500 drop back to the flash crash low 3 weeks later and continue down), may be in the same category.

Jim Sogi writes: 

Viciousness. I've heard turkeys can be vicious. I believe trading takes a bit of viciousness. The reality is you are taking money from someone. You may be ruining someone. It takes a certain attitude to do this. It's abstract as you are screened from the other side in anonymity behind the screen. But I've seen the reality of it. A trader needn't have a vicious or a terrifying mien. Take the Chair, for example: he seems mild mannered in person, but underneath there is a drive that makes him a good trader. Please don't take this wrong, I don't mean he's vicious. He's the most magnanimous man I've ever met.

Andrew Moe writes: 

I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff

The only reason they are able to do this is that they provide a necessary function for the market at the lowest possible cost. Perhaps one should take heed of the original brilliant post in this thread and examine the why and the where of how HFT fits into the market ecology. What do they eat? How do they hunt? What do their tracks look like (nanex will show you some pretty pictures)? Do they herd? What are their defenses? When are they weak? The turkeys undoubtedly know all this and more about anything that might be stalking them. Once you understand the predator, it is much easier to avoid being the prey.

Anatoly Veltman writes: 

"You are taking money from someone" And do you say the same about someone who is perpetually long stocks?

It's interesting to hear your opinions on the subject. I'll tell you one thing for sure: I know HFT people who unquestionably take money from someone every millisecond. They are extremely intelligent, geniuses of sciences, seem to be kind; yet they're dedicated full-time to the most direct "taking money from someone" a fraction of an inch behind Bernie Madoff.

anonymous writes: 

My 2 cents

The investor's wealth ultimately comes from flows that derive from the real economy such as eventual dividends, buybacks, etc. I would include the return of leveraging equity which is financed by "real" economic activity. This is particularly true when the finance rate is in some way subsidized by state intervention, which is frequently the case.

Trading and speculating -if successful- takes advantage of the money flows of other traders and market participants. Many of these strategies (at least what I am familiar with) are based on the concept of "urgency." My finding is that ideas with persistence are in effect "giving the market what it wants" even if what it wants is mistaken if viewed from an X period(s) of time later perspective, which is where the profit is made.

In the real world there is much overlap, however I see these as two distinct sources of potential return.

If one believes (as I do) that the primary purpose of financial markets to price things (equity, debt, commodities, currencies), it makes sense that there is a competition to set prices and achieve equilibrium (which is never reached). If one does not want to participate in this contest they can hold for very long periods and seek to get the investor's return that derives from the "real" economy and leveraging equity.

My way of seeing HFT is that it occupies the space the floor used to have. They are consistent (the good ones) because they get massive scale and turnover beyond what an individual could achieve trading manually. This is why (once again, the good ones) are so consistent, it is a law of large numbers type effect.

I had the opportunity to invest in such a firm when it was just getting started and the principles were looking for backing. Upon reviewing their business model I felt I could not get a handle on the extreme blow-up risk do to potential operational error. It was outside of my competence level to assess accurately or prudently. I passed and still feel I made a good decision, even though with hindsight the guys were very successful and I would have made a large return. My point in mentioning it is that the great HFT return stream can hide things that are not obvious - particularly operational risk that often appears to be huge (…or at least I tell myself that rather than kick myself for passing). 

Andrew Moe writes: 

I'm glad the thread lives, and it will hopefully develop in a few directions. But one point I raised was very pointed: I was not implying HFT as a sector. I was questioning the moral aspect of a handful, who managed to place themselves into a no-risk pocket within the ecology. Their only risk is CAPEX committed and personal freedom, should lawmaker flip on them one day. But their conscious choice is to operate daily as nothing more than a tax on all participants.

When Mr. Sogi said "taking money from other human", he merely implied competing (and prevailing) within the risk-taking endeavor–not within 1:1000 day risk of loss.

Sep

15

"NBA Hawks GM Ferry Takes Leave After Luol Deng 'African' Remark"

My friend wrote to me the other day, "I Wonder what the Politically Correct element is in the markets. What are we not supposed to notice in order to preserve the current order."

I suspect there is a meal for a lifetime in this statement.

Aug

4

Thursday's decline of 40 points was within a few points of the largest declines we've had since 8/10/2011. It's only 2% depreciation following 200% appreciation. Sure, get me out, I've become way too rich compared to the income growth within the economy.

Steve Ellison writes: 

I have no idea if this was the key weight, or even if it was important at all, but I had noticed that the DAX last made a new high on June 20. It made a 20-day low on June 26. It made new 20-day lows on July 8, 10, 21, and 28 while the S&P 500 continued making new highs, with the last new high on July 24.

Allen Gillespie writes: 

Clearly the taper (smaller negative interest rates) have an increasingly large impact. we v - cf/i. The curve bends take and to the right as one approaches zero. Law of small numbers in the denominator. The no man's land of the zero and then the euphoria of the small positive followed by the small number effect again should be interesting.

 

Jul

31

In any comparison in which one groups Dow Jones Industrial Average net changes into 12 bins, like in this chart of the day, one of the bins will have to have the lowest net change, even if only by chance. The proper way to test this is to randomly reshuffle monthly DJIA net changes into 12 bins and note the average net change of the worst bin. Repeat this test 1000 times or so as a simulation, and identify the 5th percentile of the average net change of the worst bin. This result is a reasonable threshold for statistical significance. If the average net change in September is lower than the 5th percentile, you may be onto something.

I have done this test in previous years, as have Big Al and others on the list, as you can see in the Daily Spec archives. As a student of Bacon, I recall hearing much last year about September being the worst month, but the S&P 500 futures gained 50 points (3%) in September 2013.

Jul

28

emini contract net changes

Day  Close to open   Open to close
Mon        -5.50               0.25
Tue          8.75               0.00
Wed         5.00               0.75
Thu          2.50              -2.50
Fri           -5.00             -4.25

Sum of the absolute value changes from close to open: 26.75
Sum of the absolute value changes from open to close: 7.75

Jul

16

And the headline news was a 3-point decline in the S&P 500 that was attributed to the grandmotherly chair thinking some stocks were too high. It seems like a nice deception. "Do as I say, not as I do."

Jul

15

A conglomerate run by a flexion nears the constructal number of 200,000.

Steve Ellison writes: 

Price is down today in every market, even the bond market, except the dollar and the pound. I will have to study if this has portended anything in the past.

Jul

3

Not that the market needs an excuse for a drop, one may be coming courtesy of Vietnam. It sounds as though VN is going to make a stand. Will the Chinese do likewise? Probably. The result will make for some interesting fireworks.

There is a very, very big round number for the S&P 500 only 27 points away.

Jun

23

Was Friday's range (June 20th), the lowest ever intra-day range % ( as in (high-low)*100/avg(high,low), since Jan 9th 1995? (including the x-mas holiday season).

Steve Ellison writes: 

I find the 10 lowest true ranges in the S&P 500 emini contract in the last 2 1/2 years to have been (on a close-to-close basis):

                       True
       Date        Range
  12/30/2013    5.00
   8/17/2012    6.00
    8/5/2013     6.25
  11/27/2013    6.25
   3/16/2012    6.50
   5/13/2014    6.50
   3/12/2012    6.75
   1/23/2013    6.75
   12/9/2013    6.75
  12/27/2013    6.75

Thursday's 8.25-point range is tied for 28th place, and Friday's 8.50-point range is tied for 35th place.
 

May

19

 I have a Roomba vacuum cleaner. This article explains how it navigates when cleaning a room:

The first thing Roomba does when you press 'Clean' is calculate the room size. iRobot is a bit hazy on how it does this, but HowStuffWorks believes that it sends out an infrared signal and checks how long it takes to bounce back to the infrared receiver located on its bumper. Once it establishes the size of the room, it knows how long it should spend cleaning it.

Possible market application: Check the depth of the order book.

When HowStuffWorks tried it out, we found that Roomba starts cleaning in an outward-moving spiral and then heads for the perimeter of the room. Once it hits an obstacle, it believes it has reached the perimeter of the room. It then cleans along the 'perimeter' until it hits another obstacle, at which point it cleans around it, finds a clear path and proceeds to traverse the room between objects like walls and furniture until the allotted cleaning time is up.

Possible market application: Bounce between the bid and ask for a while, then trend for a while to see how many bids or offers actually get hit. When volume dries up, try the other direction. Conversely, if there is an "obstacle" of deep liquidity at a specific price, try the other direction.

May

5

 This was a very interesting article.

"A chinese mathematician figured out how to beat anyone at rock-paper-scissors":

"The pattern that Zhijian discovered — winners repeating their strategy and losers moving to the next strategy in the sequence — is called a "conditional response" in game theory. The researchers have theorized that the response may be hard-wired into the brain, a question they intend to investigate with further experiments."

Jordan Low writes: 

If I am reading it correct, the losers are basically choosing to display what won recently. Isn't it like using 3Y returns to pick mutual funds? Or did I get it wrong?

Steve Ellison writes: 

I don't play that game, but a good strategy might be to make selections as randomly as possible, for example by memorizing long sequences of digits of irrational numbers (Arthur Benjamin has a memory aid for how to do so).

Bill Walsh, the coach of the San Francisco 49ers football team in the 1980s, scripted the first 25 plays of each game in advance. This strategy made it harder for opponents to guess what play might be coming next. I have an idea that, if I could ever find enough trading systems with positive expectations, it might be good to randomly pick a sequence of systems to use in advance, in order to keep the crocodiles guessing.

Apr

10

 1. If an agrarian reformer without the agriculture is in the driver's seat, does that mean you should steer the car for bullish highways for gold and bank stocks.

2. Who would have thought that ducks are as smart as the floor traders, and at the slightest movement of voice, smell, or reflection will veer away from your blind at the speed of light or the speed of a HFQ slipping ahead of you.

3. All books by the former intern at the Brothers will be engendered by a foundation of hatred of the rich and envy. How would this affect in reflection his book on the statistics on baseball.

4. The continuously adjusted corn contract hit a low of $1.80 in June 2010 and reached a high of $7.00 inSpe 2012 and went down again to 4.2 in Feb 2014, and is now playing footsie with $5.00

5. The kudos being handed to Smith for breaking the 3 point record is a horse from the same garage of ephemeral moves always being harmful to shortsighted people.

6. What are the transformations of markets like the Laplace transform in math that make it easy to unravel their basic structure and path?

 7. The best restaurant in the US is Brushstroke on Duane street, but it takes the life of a Methusala to finish the meal there.

8. The SPU is very high relative to the Nikkei and this is presumably bullish for Nikkei as was the recent leading movements in the Tel Aviv 25 bullish for SPU.

9. What are the most recent humorous remarks by the Chairwoman that should be added to the 1.4 million adulatory references on Google of her past humorous remarks.

10. If there was one person from history that I would like to sit on a log with and learn from, it would be Francis Galton. One wonders if he was as good with the buying and selling of stocks as his cousin Darwin who filled out a questionnaire in 1869 saying that the timely buying of stocks was his greatest talent.

David Lillienfeld writes: 

I’d go for Richard Feynman. My father told me that in addition to the intellect, Feynman had a wicked sense of humor in high school (and he apparently ran circles around the Columbia math PhDs then teaching at Far Rockaway High). 

anonymous writes:

 Speaking to both HFT and Laplacian transforms, some of the bid/ask action from HFT algos look spot on for the triangular wave, square wave, sawtooth, and step functions. Catching the price with a sawtooth and moving it with step function.

Steve Ellison writes: 

A propos of your third point, there is a hint on the book jacket of the library-owned copy of Moneyball in front of me at this moment. The last sentence on the flap goes: "He also sets up a sly and hilarious morality tale: Big Money, like Goliath, is always supposed to win … how can we not cheer for David?".

Gary Rogan adds: 

The full title of the book is Moneyball: The Art of Winning an Unfair Game. The man himself is a son of a community activist and lives in Berkeley. The richer he gets, the more he hates his own kind and the side represented by his other parent, a corporate lawyer.

Apr

7

 I found this approach quite fascinating.

An M.I.T. professor wants his students to begin using educated guesses to come up with solutions to math problems in the real world.

"Why Math is Like Street Fighting":

Street fighting and math hardly seem like they would fit together.

But for Massachusetts Institute of Technology professor Sanjoy Mahajan, street fighting is a perfect analogy to encourage his students to use educated guesswork to solve math problems in the real world.

"In street fighting, the beautiful form of a kick doesn't matter," Mahajan said in a phone interview with the Star. "What really helps you is if you connect and get results you need and survive. You can think of problem-solving as being in a duel with nature. You want to get to the end. The beauty and the elegance of it doesn't matter."

In his course, the "Art of Approximation in Science and Engineering," Mahajan, associate director for teaching initiatives at MIT's Teaching and Learning Laboratory, wants his students to use a variety of principles or ways of reasoning - everything from analogical to pictorial - to come up with solutions.

Mahajan believes essentially the students have to lower their standards - a hard thing for any educator to utter and even harder thing for perfection-wired students to embrace.

"They have been trained that science and engineering is all about rigor and exactness. And yes, it is at the end. But at first you need a rough idea of where you are. You need to lower your standards and get something on paper."

Mahajan believes that if students focus on rigorous exact formulas of mathematics, they'll never come up with solutions. "Life comes at you with roughly stated problems," he said. And "you need rough answers."

He often encourages students to draw a picture of why something is true and then they can usually apply the answer to a harder issue. "Our brain is more developed visually than symbolically," he explains.

He also advises his students to find a simpler version of a problem they're trying to solve and try to solve that first. Once that's done, the student can apply the answer to the larger problem.

Another technique he said students can use is "the divide and conquer" form of reasoning. "If you have a hard problem, divide it into bits," said Mahajan. "Like the British ran their Empire."

Mahajan says the key to street-fighting math is to be intuitive and adept at understanding how equations work in the real world.

"You can use these techniques to explain interesting things about the physical world," said Mahajan, who was born in England, grew up in New Jersey. He went on to study physics at Stanford, then mathematics at Oxford University. He did his PhD in theoretical physics at the California Institute of Technology and post-doc work at Cambridge University in England.

"I wish everyone would learn math this way."

In an attempt to share his theories with the world, he has written a textbook for his students and anyone else who might be interested. Street Fighting Mathematics: The Art of Educated Guessing and Opportunistic Problem-Solving is published by MIT Press but is also available online, licensed under the Creative Commons Non-Commercial Share Alike. That means anyone who is interested can download it for free and distribute copies of it as long as they don't sell it.

Orson Terrill writes: 

I totally agree with this guy. Progress shouldn't be a prisoner of perfection. When I traded my first algorithmic "system" in currencies, I did not have the privileges to automate my trades with my currency "broker" (often they take the other side on paper), nor the funds to get a real intermediary (I was in college while supporting my teenage brother). Keeping two separate computers running, I had my right hand over my ten-key to an excel workbook, and my left middle finger on the key to take the bid or ask. Often, I would only get the initial figures into my excel sheet, and then "quick and dirty" my way forward for a few minutes. I was still able to put a large number of trades lasting less than a minute, and many that were only a few seconds (it depended on market volatility). The approach was to scalp after a relatively large move began to pause, and depending on the time of day, it could be unreasonable to expect scalping opportunities to remain for long (though they could before an important announcement, or as traders battle each other over the significance of whatever line in the sand has formed, or both).

It is true that much learning is sacrificed at the cost of the perfect learning of formulas that are usually only a model, or an impression, of what happens in the real world anyways. If you're hoping that a price model can be generalized, a holy grail, then it is almost certain that the conjecture will need be formulated with liberties taken.

Craig Mee replies: 

Point taken. But though you can win a scrappy dog fight, and the numbers are all quite correct in the excel spread sheet, for longevity in this game, I'm all for finding form and beauty. If you can fight day in and day out and keep your head above water and do ten years and kill it, good job, as in, job done. But to fight every day, and not suffer long term brain damage, I think, is tough to ask. 

Apr

3

 Bubble might be the most overused term in finance. It seems that if any asset price goes up, somebody will say it is a bubble. I think of a bubble as being an event of extreme price increases accompanied by widespread behavior that would be considered irrational in normal times. As Eric Falkenstein pointed out in the excellent article cited below, fraud becomes rampant, too. Valuing money-losing Internet startups on eyeballs in 2000 was irrational in hindsight. So was giving $700,000 no-doc mortgages to anybody who showed up. The only comparably insane activity that I am aware of today is building whole cities of empty buildings in China.

"A Batesian Mimicry Explanation of Business Cycles"

[B]usiness cycles are best understood though the framework of Batesian mimicry, an endogenous mechanism for booms and busts thru a misallocation in the horizontal structure of production. In ecosystems, Batesian mimicry is typified by a situation where a harmless species (the mimic) evolves to imitate the warning signals of a harmful species (the model) directed at a common predator (the dupe). …

… In an expansion investors are constantly looking for better places to invest their capital, while entrepreneurs are always overconfident, hoping to get capital to fund their restless ambition. Sometimes, the investors (dupes) think a certain set of key characteristics are sufficient statistics of a quality investment because historically they were. Mimic entrepreneurs seize upon these key characteristics that will allow them to garner funds from the duped investors. The mimic entrepreneurs then have a classic option value, which however low in expected value to the investor, has positive value to the entrepreneur. The mimicry itself may involve conscious fraud, or it may be more benign, such as naïve hope that they will learn what works once they get their funding, or sincere delusion that the characteristics are the essence of the seemingly promising activity.

Gary Rogan writes: 

The thing about bubbles, they can only be definitively identified in retrospect when it's useless for any practical purposes. Is Facebook with P/E of 100, P/S of 20, and P/B of 10 a bubble? Is Facebook paying $19 Billion, more than 10% of its market cap for a company with $20 million in revenue a sign of a bubble?

anonymous adds: 

I have never understood the "only identified in hindsight" notion. I think I have been reasonably good at identifying bubbles. Most of the traders I have known, If I look back, i think have been decent at identifying bubbles. The real problem is that identifying bubbles has nothing to do with profiting off of them, and that creates confusion.

The real problem for those who want to call a "bubble" and benefit from it is that there is almost never a mechanism for arbitraging the situation other than by participating in, and thus perpetuating, the bubble. That is why it becomes a self-reinforcing process. People claim not to know things are not irrational because that is how one saves face or reputation after the music stops. Before the music stops, everyone hopes to be quick enough to find a seat.

To switch the topic, or perhaps an analogy, in Atlas Shrugged Rand had the heroes use a very interesting strategy to change the social order. Rather than "fighting" the system, they accelerated the system. That was a good strategy. I think this same type of ordering process occurs at times in financial markets. At times, the fastest way to end a bubble or pop a bubble is to accelerate its growth - the underlying process is too strong to fight or go against. 

Mar

12

 This professor in my daughter's department at MIT is working on using viruses to build batteries. I found this article about it pretty interesting.

"The DNA of Materials"

Molluscs produce proteins which combine with ions of calcium and carbonate in seawater. This provides the material for them to make two types of crystals, which they assemble into layers to create an immensely strong composite structure.

As [Angela Belcher] looked out of the window one day while wondering about this, her gaze drifted to a periodic table of elements stuck on the wall. If an abalone has within its DNA the ability to code for the proteins needed to gather the materials to construct a shell, would it be possible to tinker with the DNA sequences in other creatures to gather some of the elements on the periodic table? In particular, Dr Belcher asked herself, could creatures build semiconductors like those used in electronic circuits?

Pitt T. Maner III adds: 

The ascidians (sea squirts, tunnicates) ability to concentrate vandium at 100x the level found in current seawater has always been an interesting evolutionary puzzle.

1. Check out the wikipedia article on vanadins

2. Here is some related recent research involving vanadyl compounds used to inhibit gastric cancer cell line.
3) Ascidians provide a fertile ground for studies in the field of natural products. Similar to sponges and bryozoans, many ascidians avoid predation or fouling by producing noxious secondary metabolites [48]–[52]. Because of these properties, numerous species of ascidians may thus be a potential source of new anti-cancer compounds [53], [54]. Trabectedin (earlier known as ecteinascidin-743, commercial name Yondelis®), a marine-derived alkaloid isolated from extracts of Ecteinascidia turbinate, is now being used in treatment of soft-tissue sarcomas [55], [56]. Antimalarial compounds have been isolated from the solitary ascidians Microcosmus helleri, Ascidia sydneiensis and Phallusia nigra [57], and numerous other compounds with anti-cancer, anti-viral and anti-bacterial capabilities are in various clinical trial stages by the pharmaceutical industry. The management and use of these organisms as sources of natural products is dependent, however, on understanding their taxonomy, the integrative basis of biology.

http://www.plosone.org/article/info%3Adoi%2F10.1371%2Fjournal.pone.0020657

Feb

3

Using SPY (93-2013), here is comparison of return for 1st day of month (close last day of prior month to close first day of new month) vs. all days in the period:

Two-sample T for 1DOM ret vs all dat ret

                      N    Mean    StDev  SE Mean
1DOM ret      250  0.0029  0.0136  0.00086  T=2.8
all dat ret     5270  0.0004  0.0122  0.00017

For 1DOMs following a down month as we just had, checked 1DOM returns when the prior 20 trading day return was down more than 2%.  Here again compared to return of all days in the period:

Two-sample T for 1DOM <-2% vs all dat ret

                           N    Mean   StDev  SE Mean
1DOM <-2%      60   0.0012  0.0200   0.0026  T=0.32
all dat ret        5270  0.0004  0.0122  0.00017

>>not as good

As to whether 1DOM has become DUM, attached is a chart of mean 1DOM return by year.  Recent years 2008 and 2011 have undermined the pattern (the last year on the chart is 2014, which represents one data point = 1st day of January)

Gary Rogan writes: 

A steep multi-year rise making equity values fairly expensive, buying on the dips always having worked in recent past, and then a reduction in liquidity. Three was no other specific catalyst for the equity markets to unravel, but it was an end of an era: the enthusiastic dotcom era, and this is the beginning of the end of the era of "the market goes up because the Fed will always save the day, so any bad news is good news".

Steve Ellison writes: 

 Three years ago, I posted on a variation of this idea that was published by Norman Fosback in 1976 and added stats from 2005 to 2010: http://www.dailyspeculations.com/wordpress/?p=5867 . When an idea has been known this long, it would be surprising if it worked at all. There was even an ETF a few years back that was only going to be invested on the 1st of the month. I don't know if it has survived.

I found that, over a very long period of time, this idea could still lead to good returns, but there were periods lasting a year or more when it did not work. As Steve Irwin found, the crocodiles hate you and might be waiting for you at the same spot you jumped in last time.

Jan

2

 If market or individual stock a has a positive predictive correlation with market b, and b had a positive predictive correlation with market a, then there is positive feedback, and an explosive growth when a is up would occur. Similarly, if there is a positive predictive correlation, i.e. the serial correlation of a with b say one day forward is 0.2, then market a goes down. If there is a negative predictive correlation of market a with market b, then when a goes up, b will tend to go down, and vice versa, and there will be a stable equilibrium between the two with each pulling the other in opposite directions.

The situation is very similar to what occurs in all feedback circuits in electronics, including what you seen in any kind of amplifiers where there is negative feedback to maintain stability.

What are the markets that have positive predictive correlation with each other, i.e. when a is up today, b tends to go up tomorrow, and when b is up today, a tends to go up tomorrow? There aren't many. And when such occurs, it is only for a limited time. So you have to be on your toes if you wish to use positive feedback. All this can be quantified with varying degrees of reality and rigor.

Steve Ellison writes:

I evaluated the correlations of the 1-day change (16:00 to 16:00 US Eastern time) in 6 markets with the following 1-day change in each of the 6 markets. The 1-day correlations from September 13, 2010 to September 4, 2012 (498 trading days) were as follows:

      S&P 500 10-year bond  crude oil     gold     silver       euro
S&P 500        -0.08       0.12      -0.05       0.05       0.11      -0.11
10-year bond    0.01      -0.05       0.04       0.05      -0.02       0.04
crude oil      -0.04       0.05      -0.06       0.00       0.04      -0.05
gold            0.01       0.00      -0.01      -0.01      -0.01       0.03
silver         -0.03       0.03      -0.01       0.02       0.05      -0.01
euro           -0.05       0.07      -0.03       0.06       0.06       0.03

By randomly reshuffling the daily changes in each market and running 1000 iterations of a simulation, I identified that a correlation with an absolute value greater than or equal to 0.09 was significant. Hence there were only 3 correlations that were significant, and 2 of them were positive:

10-year bond vs. previous day S&P 500: 0.12
Silver vs. previous day S&P 500: 0.11
Euro vs. previous day S&P 500: -0.11

None of these correlations held up in later data. From September 5, 2012 to May 2, 2013, the correlations of the 10-year bond with the previous day S&P 500 and silver with the previous day S&P 500 were negative. The correlation between the euro and the previous day's S&P 500 was -0.08. However, from May 3 to December 27, 2013, the correlation of the euro with the previous day S&P 500 was positive.

Rocky Humbert writes:

 An apochryphal tale: Rocky was hired to be the operations manager of a local towing company/garage and instructed to optimize his manpower work schedules and resource utilization to improve profitability.

Rocky noticed that tow truck drivers sat around idly drinking coffee at certain times of the day. But then there would be a surge of demand and customers might have to wait many hours to get a jumpstart or tow (and the garage would lose business to competitors).

It was a classic operation research/queueing theory problem. Under pressure to quickly turn the company around, and with a HBA MBA plus a PhD in applied mathematics in tow, Rocky conducted a study looking at six months of trailing data (between November 1st and April 1st) and discovered that the peak demand for service was daily between 7am and 8:45 am. His p-values were low. His T-tests were high. He was highly confident and energized to put his statistics to work concluding that batteries must die sitting unused overnight. So he changed his company's work roster to have more staff at the peak 7:00-8:45 hours and implemented the changes effective May 1st. Lo and behold, starting around May 15th, there were almost no customer calls between 7:00 and 8:45 and instead the demand spiked between 4:00 and 6:00.

So instead of improving things, he screwed them up and by September, Rocky concluded that the prior data must have been faulty and re-jiggered the staff to meet the afternoon demand — and implemented the changes effective November 1st. (Yup, the demand shifted yet again just in time for the chilly autumn air ).

Rocky was fired and became a successful money manager and annoying DailySpec poster. The moral of the story is that all of the cool statistical analyses should produce the QUESTIONS. Not the ANSWERS. What is the underlying process at work????

There will be times when stocks and bonds correlate. There will be times when stocks and bonds negatively correlate. Rocky submits that at some point in the not-too-distant future good news for the economy will be bad news for stocks (which is the opposite of the current regime). This isn't ever changing cycles. It's common sense. Or as Rocky's dad (a pioneer in digital computing) liked to say: GIGO.

Dec

30

December 30, 2013 | Leave a Comment

 My apologies in advance for a seemingly strange piece of research.

Recently a Speclister posted a link to a site which inferred considerable success in trading various markets on the basis of solar and lunar events. We have all seen these for decades. There are lots of charts that seemingly draw the connection between full and new moons, sunspots, geomagnetic radiation and of course the financial markets. I myself found nothing in the way of serious data that would make me want to trade on that basis, but the site exuded so much confidence that it was hard to dismiss out of hand.

The site like many in the genre spends a lot of space arguing WHY. You know, humans are mostly water and Earth's tides are controlled by solar and lunar gravitation, so why not humans. Personally I don't care what the reason is, as long as a reason exists and the data is non-random. In this case I am going to assume that a reason exists, but is not discernible. So the answer was for me to take a look at the data with our research tools.

My period of study was from January 1, 2005 through December 27, 2013. That could always be enlarged if some worthwhile results were forthcoming. As a benchmark equity asset I used SPY, as it included dividend yield and was a real and tradable market.

Over the period SPY achieved a 7.4 percent compound annual rate of return (CAROR) while experiencing a 60.83 percent maximum drawdown (DD). Thus the return to risk ratio (R/R) was 0.12. Full statistics and a chart are here.

The site made some strong claims about the value of the full and new moon dates, so my first look was there. To look at solar influences I would need a significant number of cycles and they are approximately 11 years each. First I bracketed the half-month on either side of the full moon, and the same with regards to the new moon. With regards to the full moon, you would buy SPY at the first quarter and hold for the half-month through the full moon, selling at the third quarter. When you were out of the market you were in cash, earning nothing. Thus the following constitute programs in which you are only invested for half the possible time:

Full Moon Bracketing:           2.1% CAROR,    36% DD,     0.06 R/R
New Moon Bracketing:        5.19% CAROR,    47.98% DD,     0.11 R/R

This agreed with the site in that longs would favor the new moon. But if the full and new events corresponded to troughs and peaks, we had to look at equity growth between the events. This also constituted investing for only half the possible time.

New to Full (waxing):        9.82% CAROR,    46.08% DD,     0.21 R/R
Full to New (waning):        -2.2% CAROR,    41.17% DD,     -0.05 R/R

These results would suggest that equity prices tend to trough at the full moon and peak at the new moon, exactly as conveyed by the website.

Links to stats: 

1

2

3

4

5

Steve Ellison writes:

To what does the t score of 3.46 refer, and how significant is it given multiple comparisons (you tested 4 subsets of data, and one looked pretty good)?

Dec

16

 There should be a study of whether time outs when a team is winning is better than time outs when a team is losing. Take basketball for example. Many spurts come with non-percentage and lucky threes in the minute by minutes of a game and between games. Often a team will win big with threes in one game and then lose big the next with the same strategy. Take the worst player like Smith. He won a few games at the beginning of last season and then lost dozens more with the same non-percentage play at the end. This compounded of course with his bad character— how do teammates let a player get away with partying late in the night before a play-off? And how does a persons' percentage on risky shots drop near the crucial ends of a game or playoffs when the adversaries pay it much closer and tougher?

Of course, this relates to markets. The time to quit is when you're way ahead not, when you're way behind. Take Jeff as an example. After creating untold profits with his trifecta on the grains last year, he's been quiet. Not only because of the illness in his family. But because he knows about ever changing cycles. And he knows that at Vegas, everyone has a stop loss when they lose too much. But never a stop gain when they make too much.

Steve Ellison adds: 

In last night's hockey game between the Boston Bruins and Vancouver Canucks, Canucks coach John Tortorella called time out early in the second period immediately after the Bruins scored to tie the game, 1-1 (a Canucks defenseman muffed a pass back, and a Bruins player snatched the puck and scored on a breakaway). He was visibly angry and shouting at his players during the time out. Whether by coincidence or not, the Canucks scored within minutes to retake the lead and never looked back as they eventually won, 6-2:

"'There was a lot of emotion. He just wanted the boys to get going,' said Canucks winger David Booth of Tortorella's impassioned words early in the second." 

anonymous writes: 

 For what it's worth, this is a brief exploration of short and mid-term timeout effects on basketball scoring according to situational variable.

Abstract

The aim of this study was to identify the effects of timeouts on Basketball teams' performance differences, as measured by points scored by the team that calls a timeout and points scored by the opponent team according to game location, the quality of the opponent and the game quarter. Sixty games were analysed using the play-by-play game-related statistics from the Asociación de Clubes de Baloncesto (ACB) League in Spain (2009–2010 season).

For each timeout, the points scored in the previous and post 3, 5 and 10 ball possessions were registered for the teams that called the timeout and for the opponents (nC6 and nB7, n22 andn19, n2 and n0 for 3, 5 and 10 ball possessions, respectively).

For the teams that called the timeout, the results reflected positive effects on points scored, with increases of 1.59, 2.10 and 2.29 points during the period within the third, fifth and tenth timeout ball possessions.

For the teams that have not called the timeout, the results identified timeout negative effects in points scored, during the period within the third and fifth ball possessions (decreases in points scored of 1.59 and 1.77, respectively).

Unexpectedly, the situational variables had little or no effects on points scored, which opens up this important topic for further studies and discussion.

Pitt T. Maner III adds: 

Time Outs in pro basketball are thought to favor the defense, allowing time to get set and also introducing the inbound play (and the potential for a steal). But as the writer of the following article notes there are lots of variables to consider (and you may want to call a TO quickly if Smith is dribbling down court on a 1 on 4 break).

Further testing may be needed. A couple of quotes:

"Call Time-Out? Not So Fast, Pro Coaches"

Said Stotts: "One thing I think is very difficult for basketball in comparison to football and baseball is those two sports have static events. There's an at-bat and something happens on that at-bat and you can quantify each at-bat and same thing with football with, even though there's 11 players on the field, you have a down and yardage each time and it's a very static event. Basketball is a free-flowing, with different matchups and different set of circumstances, perhaps every time down the floor."

and

'By utilizing play-by-play data from each game of the 2012-13 NBA season
(as well as computer skills far beyond my capabilities), it is possible
to determine what effect "prior events" have on a team's subsequent
shooting percentage. The excellent site NBAwowy.comhas this data for
each individual team. Aggregating all of this data allows one to draw
some very interesting conclusions league-wide, based on a sample of over
200,000 possessions throughout the season. At first blush, one
conclusion immediately leaped off the spreadsheet before any other:
Coaches should call timeout much less often after a change of
possession.'

Nov

17

 It's shocking to see with all the disapproval of the Oval that the stock market keeps going up. Usually the Oval is like a father figure, and when disapproval of him goes up, it makes everyone insecure in a freudian way. Suicide and expiation for evil thoughts comes to the fore, even the sale of stocks. I think I'll sell some tonight.

Gary Rogan writes: 

I note with interest that Aetna was up 1.74%, Wellpoint 1.67%, United Health 0.61%, Humana 0.89%, and all of them are a lot closer to their 52 week highs than lows. Superficially the Oval has created a dilemma for them today where they will supposedly be blamed for an incredible mess as they are now "allowed" to re-offer the just canceled individual plans that they can't possibly offer in time to have the formerly insured covered again in the new year on any scale as it takes too long to reprogram their computers, send the letters out, get various local approvals, etc.

Vic Niederhoffer wrote at 10:06am EST via Twitter:

All bad things must come to end including shorts. I call this a draw. I
will go after believers in flow funds more important than stocks next week.

Steve Ellison writes: 

One wonders if the stock market is moving inversely to the diminishing likelihood of any further attempts at agrarianism before 2017 given the tremendous loss of political capital by the Oval Office and the lame duck status of the incumbent.
 

Sep

30

 Today marks the close of the regular baseball season. For those of us old enough to remember, one might have expected the World Series to begin on Tuesday, possibly a night game, but more likely a day one. Now with the post-season trifectas, it's amazing the October classic isn't played in November.

Pardon the curmudgeonliness, but the Os finished 85-77. The season closed on a high point, and Jim Johnson continued in his quest to rival Don "Two Packs" Stanhouse for how close one can come to blowing a save without actually doing so while garnering his 50th save. Chris Davis finished the year leading the league (AL) in RBIs and HRs–he made it over 50, only the second Oriole in history to eclipse Frank Robinson's epic 1966 Triple Crown season with 49. Despite that, and despite Adam Jones' 3rd place in the AL RBI standings, the Os generally didn't produce what they needed to in order to get to that October/November classic. Pitching was weak. Actually, weak would have been an improvement. There was one starter on the staff with any consistency, and lots of games the bullpen blew. Still, given the prediction that last year was a fluke and the Os would return to the AL East cellar, there is some satisfaction to be had in the omnipresent cry at the end of the season, "Wait 'til next year!" I'm also betting that Buck keeps his job. And after two decades of baseball folly, to have two winning seasons in a row, well, it just puts the season into perspective.

As Tim Melvin has observed, it's now time to become re-aquainted with the Kindle. Personally, I'm looking around for a copy of "Birds on the Wing"; it's pre-Kindle, but since it's a physical book, neither of my kids will have touched it, so it will be exactly where I put it a couple of years ago (pre-Buck). If you grew up in Baltimore during the 1960s/early 70s, I'm sure you know of the book. That and Freedom's Forge should get me to Halloween. Then the countdown to spring training can begin anew.

There was an interesting piece in today's NYTimes about what ails baseball. I found myself in disagreement with the analysis–at least part of it. But I want to give the matter some more thought, and I'll get back to fellow dailyspecs with some comments in the next couple of weeks. After all, there's a cold winter to be navigated yet, and 4 months of quiet before hope springs eternal again and the cry goes out, "Play ball!"

Steve Ellison writes: 

In PracSpec, the Chair and Collab postulated that baseball was a mirror of American culture. Eras when baseball emphasized fundamentals and hard work, such as the present, tended to be followed by favorable economic periods. It was the long-ball eras that heralded trouble ahead for the economy and stock market.

Stefan Jovanovich writes: 

 Yesterday was the anniversary of Willie Mays' catch and throw in Game 1 of the 1954 World Series. Since I played hookie from school every day the Giants were in town during the summers of 1952, 1953, 1954 and the spring of 1955. (The NY Public Schools in Harlem and the Bronx were so stuffed with boomed babies that no one missed me.) As a life-long Giants fan I have no more nostalgia for the Polo Grounds than for Candlestick. As Joe Torre (born in Brooklyn but smart enough to be a Giants fan) said, "I never hated the Yankees; I just wanted our Giants to be as good a franchise as they were.)

From the beginning the Yankees were smart enough to build a stadium that rewarded their left-handed dead pull hitters. (Ruth didn't build the stadium; Rupert built it for him.) With the Polo Grounds it was the exact opposite. The stadium absolutely killed the teams that I grew up with. They had a wealth of talent; but their best players were - like so many of the great Southern ball players of that era (Aaron, Matthews) - brought up in the Ty Cobb school. They were gap hitters with power. But, instead of getting County Stadium (where Mays hit his 4 home runs and Aaron and Mathews had the careers made), my Giants got the impossibly deep alleys of the Polo Grounds - the places where Monte Irvin's and Willie Mays' homers regularly went to become outs in Richie Ashburn's glove. The only genuine sluggers the Giants ever had in all the years at the Polo Grounds were the baby Ruthies - Mel Ott and Johnny Mize - dead-pull left-hand hitters who were late on the ball if it went anywhere left of right field. (Mize thought he had died and gone to heaven when he was traded to the Yankees late in his career. The right field fence in the Polo Grounds was 15 feet high; in Yankee Stadium it was 3 feet.)

As dreadful as Candlestick was, it was not that bad; Willie Mays and McCovey could reach the right center fence without having to take steroids. But, with the wind blowing in from the north (which it still does almost all the time), only Dave Kingman had the strength to regularly hit it out to left field. To his credit Peter Macgowan had the sense to remember the Polo Grounds and Candlestick and build the former and now again AT&T Park with a short right field so that his Babe Ruth (Mr. Bonds) could find the seats. It was the making of the franchise, which sold out - again - this year even though the team only tied for third in a weak division on the final day of the season - also yesterday.

P.S. Go Cleveland, Go Pirates!

Sep

24

 Charles Dow used to counsel that no individual should ever be promoted if they hadn't made a large error at some point. Phil Fisher used to insist only in investing in those stocks that had management teams willing to make big mistakes. If they didn't make mistakes, they wouldn't also take the risks required for success. Is this the essence of success? How does a corporate management team, upon the fruition of such errors, survive being "stopped out" of their positions in today's hair twitch paradigm? Is being expropriated from your career rather than your capital not the bigger risk today? And thus can it only be stocks with founder, family or veto shareholdings that make for truly great growth stocks today? Should not Tim Cook undertake an LBO with the Qataris?

anonymous writes:

Does modern risk management preclude financial Darwinism?

Steve Ellison writes: 

Having worked in the technology industry, it has long seemed to me that many companies are never again the same when founders are replaced by "hired gun" CEOs. My best guess on why this might be is that hired managers don't fully understand non-financial aspects of the founders' visions that prove to be critical to success. As I posted in 2010, this study found that founder-led companies outperform others:

"Eleven percent of the largest public U.S. firms are headed by the CEO who founded the firm. Founder-CEO firms differ systematically from successor-CEO firms with respect to firm valuation, investment behavior, and stock market performance. Founder-CEO firms invest more in R&D, have higher capital expenditures, and make more focused mergers and acquisitions. An equal-weighted investment strategy that had invested in founder-CEO firms from 1993{2002 would have earned a benchmark- adjusted return of 8.3% annually. The excess return is robust; after controlling for a wide variety of firm characteristics, CEO characteristics, and industry affiliation, the abnormal return is still 4.4% annually. The implications of the investment behavior and stock market performance of founder-CEO led firms are discussed."

Sep

18

It is interesting to reflect that out of 37 open market meetings since the beginning of 2009, 11 have closed the day before at a 20 day high versus just 3 at a 20 day low. That might seem unusual without the knowledge that since 2009 there have been 292 separate 20 day highs and only 95 20 day lows. Thus 25% of all days have been at 20 day highs since 2009 but 30% of the open market day precedings have had that honor. A most insignificant but interesting difference and framework. 

Jeff Rollert writes: 

I had a long discussion about this with someone internally yesterday.

Writing and "doing" concurrently in a team is a very difficult organizational exercise, as ideas and implementation folks have different time frames frequently. I've seen similar dynamics with pilots and racing skippers with their navigators.

Steve Ellison adds:

I found that even talking about my trades introduced subtle motivations that I did not believe to be performance-enhancing.

Aug

13

 Have you seen this opinion piece by Jason Richwine: "Why Can't We Talk About IQ".

The reason "we" aka the enlightened cannot talk about IQ is that "we" don't want to know what the test mean any more than the group spokespeople who dislike what they presume the results of the testing show. Neither side of the supposed "debate" wants to accept the wisdom of the 14th Amendment.

"Race" - as crudely defined in this article - i.e. people of northeast Asian descent, European lineage, sub-Saharan African descent, Hispanic Americans - is so innately stupid a categorization that it has only one purpose - to somehow use skin color as a marker of innate capabilities. People of Northeast Asian descent, i.e Japanese, Koreans, and Chinese from Northeast Asians represent a small group of entrepreneurial minded self selected emigrants. If one were to test the descendants of similar European groups - Huguenots, Moravians, Jews, English Catholics, the IQ results would be disappointingly similar.

My father, who created the modern IQ test that is the cause of all this fuss, wanted people to be tested every 3 months so that the test could serve its proper function - which is to measure a person's changes in cognitive abilities. When he offered to sell quarterly testing services to the New York City and other "urban" schools for the same price that he was selling annual testing (in order to avoid any suggestion that he was trying to channel stuff his customers), they turned him down flat. The school bureaucracy knew what a threat such an offer was; it would make it that much harder for teachers to avoid individual accountability.

Cognitive science - the new sociology - will do everything it can to avoid using IQ tests as a measure of progress. It will be far more profitable for academics to create yet another "group" question - i.e. are "black" people really more stupid than whites, er, Europeans. If the answer is "yes", the subsidies are guaranteed to flow; if the answer is "no", then clearly there is no reason not to have further quotas in favor of having the skin color of every occupation match the color wheel of the population at large.

IQ testing is only useful as a measure of the changes in individual ability; and like all monitoring of organisms the testing needs to be done repeatedly over time for there to be any meaningful results. Dad was able to get a few odd schools to submit to regular testing; what made his experiment interesting is that he had both the parents and teachers participate. The result was what common sense would predict; the children who made the greatest progress were those whose teachers and parents also made the greatest progress over time.

His conclusion: "Genius cannot be taught; everything else responds to practice and effort."

Aug

12

 This chart is interesting. It comes from a passionate market historian, Robert Prechter and his Elliott Wave group.

However, I disagree with it. A local maximum in interest rates is established only after they peak out somewhere and start declining again. So this illustrious list of busts and crises is not happening during the spike, but at its end.

A classical cart and horse problem. Framing Bias will make it appear that each time a spike in interest rates happened a crisis happened. The reality is likelier that each time a crisis could no longer be shoved under the carpet, when the economy could not sustain playing on the house money, when the illusory money effect succumbed to gravitational pull of reality, when the epidemic effect of the meme played out the asymptotic end of the S-curve, no one was willing to pay more for using Other People's Money (OPM). Interest rates are a willingness of people to undertake risk. Yet when this willingness becomes a larger risk than the aboriginal risk, a crisis comes.

Also, in the customs I learned on this list, there is always a chance that endless other financial crises have come along the curve too. Not sure, just checking with the specs which other key crises have happened at the troughs of interest rate cycles? Have there been any or as many?

Steve Ellison writes:

Yes, there is always bad news around, and any number of events could have been annotated at the low points on the chart, too.

Here is an example
I posted on the site in 2005.

One of my prized possessions is a chart of stock market returns in Venita Van Caspel's book "The Power of Money Dynamics." Each year is annotated with a reason to have been bearish that year:
 

1934: Depression
1935: Civil war in Spain
1936: Economy still struggling
1937: Recession
1938: War clouds gather
1939: War in Europe
1940: France falls
1941: Pearl Harbor
1942: Wartime price controls
1943: Industry mobilizes
1944: Consumer goods shortages
1945: Post-war recession predicted
1946: Dow tops 200 - market "too high"
1947: Cold war begins
1948: Berlin blockade
1949: Russia explodes A-bomb
1950: Korean war
1951: Excess profits tax
1952: U.S. seizes steel mills
1953: Russia explodes H-bomb
1954: Dow tops 300 - market "too high"
1955: Eisenhower illness
1956: Suez crisis
1957: Russia launches Sputnik
1958: Recession
1959: Castro seizes power in Cuba
1960: Russians down U-2 plane
1961: Berlin Wall erected
1962: Cuban missile crisis
1963: Kennedy assassinated
1964: Gulf of Tonkin
1965: Civil rights marches
1966: Vietnam war escalates
1967: Newark race riots
1968: USS Pueblo seized
1969: Money tightens; market falls
1970: Cambodia invaded; war spreads
1971: Wage-price freeze
1972: Largest U.S. trade deficit in history
1973: Energy crisis
1974: Steepest market drop in four decades
1975: Clouded economic prospects
1976: Economic recover slows
1977: Market slumps
1978: Interest rates rise
1979: Oil prices skyrocket
1980: Interest rates at all-time highs
1981: Steep recession begins

(Van Caspel, 1983, pp. 124-125)

Unfortunately, I have the 1983 edition, so the chart ends there.

A modest attempt to bring the record up to date:

1982: Double-digit unemployment
1983: Record budget deficit
1984: Technology new issues bubble bursts
1985: Dollar too strong
1986: Dow at 1800 - "too high"
1987: Stock market crash
1988: Worst drought in 50 years
1989: Savings & loan scandal
1990: Iraq invades Kuwait
1991: Recession
1992: Record budget deficit
1993: Clinton health care plan
1994: Rising interest rates
1995: Dollar at historic lows
1996: Greenspan "irrational exuberance" speech
1997: Asian markets collapse
1998: Long Term Capital collapses
1999: Y2K problem
2000: Dot-com stocks plunge
2001: Terrorist attacks
2002: Corporate scandals
2003: Gulf War II
2004: High oil prices
2005: Trade deficit

Jul

27

 Seems like the market has been rather trendy lately. Of course now that I've realized it its probably near the end of the trend. But that's the same thing I though at the beginning of the trend.

Mean reversion systems have difficulty in a trendy market, and simple TA things work well for trends if you're lucky.

Rocky Humbert writes:

Mr. Sogi writes: "Mean reversion systems have difficulty in a trendy market, and simple TA things work well for trends if you're lucky."

I suggest that Mr. Sogi should have written: "Simple TA things have difficulty in a choppy market, and mean reversion systems work well if you're lucky."

Every single profitable trade requires a trend!

If you buy at 9:30am at a price of 100 and sell at 9:31 at a price of 100.25, there was a one minute trend. Call it whatever you want. But if you have two points connected by a line, that line is a trend.

The carpenter ants that live in my yard don't know that my neighbor has much better foraging.

Steve Ellison writes: 

As I understand the premise of trend following, it is allegedly good to identify the trend in place before placing one's trade and enter the market on the side of that trend. To say every profitable trade requires a trend seems a tautology to me and not useful since the statement refers to the trend that occurs after entry and hence cannot be known at the time of entry.

Bruno Ombreux adds: 

Rocky,

This is a semantic debate. It all depends how you define a trend. "Point A to point B" is a "line", not necessarily a "trend". There are actually formal definitions for "deterministic trends" and "stochastic trends". There are also statistical tests to check the presence of those trends.

Mean-reversion: you can make money in a market going from "point A to point A" instead of "point A to point B". 

anonymous writes:

Having spent a number of years in the trend-follower business, I can confirm that trend-following, as practised by some rather large CTAs, means betting on markets where models suggest the continuation of a move. So if the price went up from A to B, a trend follower would make bets where the move from B to C is in the same direction, whereas a mean-reverting player will try trade instruments that he believes will move back towards A.

Over the years, I have given much thought to the workings of the whole trend-following business, and its role in the market ecosystem. The Chairman's various critiques of the style are all valid, and worth heeding. Yet, properly understood, I believe trend-following remains a valid approach to trading. i.e., it is a trading style that exposes you to risk factors for which the market is willing to pay you.

Rocky Humbert adds:

A wise man once said, "There ain't no point in beating a dead horse. But there ain't no harm in it either."

We've all had this trend following discussion ad nauseum in the past, and the chair's pathological aversion to trend following is well known. So to avoid re-opening old wounds, I will re-offer the single most plausible and economically rational reason why trend-following can work and has worked. (That is, I'm not saying anything about whether it still works or will work in the future.)

In order to move a price, the market requires new information. And this new information takes time to disseminate among market participants. And during this period of dissemination and acceptance of a new perception, prices will appear to trend. If you are the first person to acquire and understand this new information, you are said to have a variant perception. If you are the second or third person to realize that there is new information, you are called a trend follower. And if you instinctively fade this perception as it disseminates through the market, you are either called a contrarian or Anatoly. Strictly speaking, a true contrarian, like a stopped clock, is right twice a day. And while this new information is disseminating through the market, there are obviously many opportunitities to profit.

Ultimately, however, a trend-follower is economically equivalent to a person who buys synthetic options or volatility. And a mean-revision trader is economically equivalent to a person who sells synthetic options or volatility. Transaction costs notwithstanding, unless one has superior information, there is no apriori reason to believe that selling synthetic options should, over a career, be more profitable than buying synthetic options. However, the equity profile of an options seller is that of many small profits and a few big losses. Whereas the equity profile of an options buyer is that of many small losses with a few big gains.

Jul

1

In the old days when I used to trade ag futures, about once a year I would see total unanimity of signals. Grains, meats, sugar, cocoa, etc. would all give the same signal at the same time. For example, they would all give a buy signal, such that I would think to myself, "holy mackerel, these markets are going to explode". But the total unanimity was a fake as the markets would stutter and then all drop. I was never bright enough to conjure up a reason why it happened, but it did.

Recently all of my financial market indicators gave sell signals. Stocks, Bonds, REITs, Gold. And the sell signals were everywhere. Momentum, behavioral economics, actual volatility, actual volatility of implied volatility, and some bizarre stuff you would never think of. You name it and it was bearish. Even the fundamental stuff I watch like surrogates for employment and retail sales are bearish.

We are very mechanized traders, and when I get a bearish signal for equities, I simply look to my overall rankings and see what to switch to. But everything was bearish, so there was really nowhere to relocate. However in looking at the rankings, equities were ranked higher than the competitors (e.g. bonds). So I had no choice but to stay in equities, being very selective and keeping every stock on a very short leash.
I have no idea why unanimity of indicators would negate the indication.

Any ideas? I don't see any flexion hands in this, but maybe others do.

One of the holy grails out there is to know how to forecast future co-movements between different assets. (As if forecasting just one isn't hard enough.) As it all starts to hit the fan, the correlations between all assets approach 1.0 at something much greater than an exponential rate…

My qualitative take on it is that the growth rate of the cross correlations as they inexorably accelerate towards parity approaches a certain velocity 'x' at which point, mathematically, we are as close to the asymptote as the 'system' can stand.

This is the 'going to the cliff and back again' phenomena that The Palindrome speaks of as a result of 'reflexive' interactions of market participants' expectations with the price and the price's effect upon the market participants' expectations. Arguably this is the ideal time for stabilising 'flexionic' behaviour (as opposed to shenanigans in TY around auctions et al.)

How they might do it, and more importantly time it, is a very deep question. For 'them' to have it figured out I think they would have to have figured out the actual underlying price generating process (what really moves prices).

Now, I guess only Renaissance Technologies' Medallion Fund has gotten anywhere near identifying the answers to that series of non linear questions. The most that one can say at this stage of the game is that the occurrence of substantial downwards co movements of assets tends to cluster (which is a 'warning sign' in itself) and for short periods after this clustering risk assets often make substantial minima. 

Steve Ellison writes: 

My first guess to Mr. Rafter's question is that, like a Higgs boson, unanimity in any market is very volatile, unstable, and unsustainable. As Richard Band wrote in a book about contrarian investing (doesn't everybody profess to be contrarian?), "If everybody is bullish, who is left to buy?"

To test this proposition, my first idea was to find instances in which the Investors' Intelligence survey of advisors had a 4-to-1 preponderance of bulls over bears or vice versa. There have been no such instances in the 2 years I have subscribed. I settled for instances in which either the bullish or bearish percentage was below 20%. There is typically a sizable group of fence-sitters predicting "correction", so the sum of the bullish and bearish advisors is much lower than 100%.

There were 10 recent weekly reports in which the percentage of bearish advisors was less than 20%. I get the reports on Wednesdays, so I tabulated the change in the S&P 500 futures from the Wednesday close to the Wednesday close of the following week.

Report             One week         Net
Date     Close     later    Close   change
3/13/2013 1550.00  3/20/2013 1549.00   -1.00
3/20/2013 1549.00  3/27/2013 1556.75    7.75
3/27/2013 1556.75   4/3/2013 1548.50   -8.25
 4/3/2013 1548.50  4/10/2013 1582.75   34.25
4/24/2013 1574.00   5/1/2013 1577.25    3.25
 5/1/2013 1577.25   5/8/2013 1628.75   51.50
 5/8/2013 1628.75  5/15/2013 1654.25   25.50
5/15/2013 1654.25  5/22/2013 1655.50    1.25
5/22/2013 1655.50  5/29/2013 1647.00   -8.50
5/29/2013 1647.00   6/5/2013 1608.00  -39.00

Average                                 6.68
Standard deviation                 25.31

Considering that the average net change during my subscription has been a gain of 3 points per week, I get a t score of 0.46, which is not only insignificant, but has the opposite sign of what my conjecture implied, i.e., that low bearishness is bearish.

Jun

4

 Blackjack tables seem to be the major profit centers in Vegas, and I don't see them going away anytime soon. The house has the edge when you're playing a "perfect game." Make one or two mistakes or deviations from the perfect game and the house vig goes to ~18%.

At the Riviera, if they suspect you are counting, that shoe gets reshuffled every other hand. On those non-regulated offshore gambling boats, they either put in a mechanic or a gaffed shoe to bury you. Blackjack, roulette, slots, lotto, keno, etc are way too tough for me.

Steve Ellison writes:

I had three fraternity brothers on the team referenced in the below article. The most obvious parallel with trading is that casinos won't tolerate any player who consistently wins. Casinos have rules against card counting, but the principle applies in other games, too. My wife knows a guy who has won big at video poker and is banned from several casinos.

"Aces Return to Vegas for Gaming Panel"


"Blackjack is the 'minor leagues,' said John Chang '85, one of three alums from the notorious MIT blackjack team who returned to Caesar's Palace in Las Vegas May 28 for a panel discussion at the 15th International Conference on Gambling and Risk Taking.


The Las Vegas Sun reported on the panel, at which Chang joined Houh '89, SM '91, PhD '98 and Andrew Bloch '91 for a frank discussion of the years-long streak that MIT students enjoyed, putting their math skills to practice.

Chang had to join the panel remotely, answering questions in a prerecorded session, since his ban from Caesar's (among other casinos) is still in effect. …"

Apr

17

 There are some traders who make money based on news events. Please tell me how an analysis of the recent news could have been beneficial to traders who analyze news. The first reaction was a drop of 1 % in the last hour in S&P and a rise of a corresponding amount in gold. The reaction overnight was the opposite. Why was this news so bullish overnight? Is all news just an opportunity to do the opposite of the initial reaction? What do you think? Is there a systematic way to profit from news announcements? The 9-11 was not a temporary thing. Was that the clue?

Steve Ellison writes: 

I would hypothesize that any market reaction to a news event that triggers strong emotions should be faded because of the availability heuristic (people tend to give too much weight to dramatic but rare events).

I would also hypothesize that any market reaction to government statistics should be faded, since they have margins of error and are often significantly revised later. However, when I tested this proposition using the government report that routinely provokes strong market reactions, the monthly US unemployment report, it was not clear there was any edge to trading in the opposite direction of the S&P 500's move on the report day.

Jeff Watson writes: 

I generally don't fade USDA crop reports after they come out and grains are offered limit down. However, I've been known to buy wheat right at the top just before the report and have it go limit down on me. I hate that feeling as the noose tightens when the trapdoor opens. In fact that just happened to me on the last go-around.

Alston Mabry writes:

How do you test news events? First, you have to immediately and accurately evaluate what effect the event "should" have, ex ante. And then at some future point in time, compare the predicted to the actual effect the event "did" have, ex post. As there is no objective measure to use for the first step, you wind up simply testing whether or not you're any good at predicting the effects ex ante.

Steve Ellison writes: 

I tested using the following logic. If the absolute value of the change from Thursday's close to Friday's close on an unemployment reporting day was greater than the median of the absolute value of the daily change in the previous month, I assumed the market was reacting to the unemployment report and selected that day. For all the selected days, I backtested a one day trade entering at Friday's close and exiting at the next trading day's close, positioned in the opposite direction as Friday's net change. That is, if the net change on Friday was positive, the hypothetical trade was a short. The results were consistent with randomness.

Sushil Kedia writes: 

News is a rare commodity in today's world. We are inundated with broadcasts today. Any media missives that bring by a communication of fact and those amongst the fact-set that are beyond the expected may still have some market moving value. The durability of that fact or how out of line of anticipations it was may perhaps have some effect on how much and for how long the prevailing state of prices will be affected. Those broadcasts that provoke emotion are likely that are worth inspecting a fading trade. Whether news of war, crop-failures or any such genre' of information flows that produce an instant or moment of endocrinal rush.

The fine art of speculations rests on anticipations. Broadcasting media would never report what is coming to happen tomorrow, but only what may have (no guarantee that the broadcast is totally factual, since we have more "viewspapers" today than newspapers) already happened. Those who rely more on figuring out what they ought to anticipate on such resources are often the food for those who would rely on these broadcasts to figure out where the likely dead bodies will be buried. Price may not have all the information of what keeps happening every moment, but does have more information than any other resources of what is expected to happen.

Event Study Method may be a decent tool to evaluate the statistical behaviour of specific kind of events that occur repetitively with varying outcomes and of studying the repetitive actions of specific mouth-pieces than of studying erratic and randomly occurring news.

In a highly inter-connected markets' world and where the risk-free rate itself has a volatility the comforts of isolating non-random abnormal returns' evidence too is fraught with risks of playing on a frail advantage that keeps fluctuating in its expected value with ever-changing cycles if not fading away. Thus, it seems fair to me rather than an over-simplification that the most important factor for the next price is the price at this instant or any distant instant is the price at this moment and in the prior moments.

Rocky Humbert writes: 

I have one secret on this subject that I will share. Well, actually it was explained by Soros and Druck as the "Busted Thesis Rule." I think I've written about this previously on the Dailyspec.

If there is a news event that SHOULD BE unequivocal in it's meaning (i.e. bullish or bearish), and the market after a bit of time starts going in the opposite direction to the consensus meaning, then it's a wonderful opportunity to throw your beliefs out the window and go with the short-term direction. Many important big moves start this way. For example, XYZ is bullish news, yet the market after a little pop starts going down, down, down, …. don't fight it. Rather, "Sell Mortimer Sell!" P.S. I learned this lesson the hard way when Bell Atlantic made its ultimately ill-fated bid for TCOMA and Bell Atlantic's stock when straight up instead of what it "should" have done … which was go straight down. I won't describe the censure I received by my legendary boss at the time. Amusingly, neither of these companies still exist. Bell Atlantic became Nynex which became Verizon. And if memory serves me, TCOMA was bought by AT&T when they got into the cable tv business…

Gary Rogan writes: 

In a similar type of episode, when 3Com spun off 5% of Palm thus giving it a market valuation, and the resultant value of Palm significantly exceeded the value of 3Com that still owned 95% of Palm, this marked the end of the dotcom era.

Mar

20

 Many top level executives and successful traders and entrepreneurs have sports backgrounds and continue to be active in sports. Sports provide good training and experience for a young (and old) person by:

1. Providing a competitive but safe atmosphere;
2. Allowing the ability to absorb losses and move on;
3. Teaching sportsmanship;
4. Providing health benefits;
5. Honing the competitive instinct, or killer instinct, in a non
lethal environment;
6. Giving incentive to give 100 per cent plus;
7. Providing the opportunity to learn how to learn under the guidance
of a coach or teacher;
8. Creating the foundation for a training regimen and discipline.
9. Teaching team dynamics and working together as a team in team sports;
10. Making life long friends and connections.
11. Providing a conducive social setting outside of business during
which business and personal matters can be discussed in an informal setting.

I'm sure there are many other benefits.

David Lilienfeld writes:

There's also 12. Developing an implementing a strategy which may not
work and making the needed changes in it to attain success. It's a
variant of "You're going to be wrong.

Steve Ellison writes:

Sports are generally objective. The final score stands regardless of excuses or rationalizations.

I have noticed that many athletes become successful salesmen, which might explain why many are CEOs. I was called on by a former Kansas City Chief selling software. Before 2001, EMC had a reputation for seeking out athletes for its sales force, particularly those who had grown up non-affluent, because they were determined, persistent, and never satisfied.

 

Feb

11

 While most of you don't play racketball, I believe the hobo's history of racketball on site was very educational for those with kids who wish to play it or anyone who plays any racket sport. The torque and the backswings on the backhand and the bends in the pictures are most enlightening. One notes that there have been 4 champions who ruled the racketball world for about 5 years each, winning almost every tournament. I noted the same thing in squash, and tennis isn't too far away in that area also.

One wonders if a similar phenomenon relates to markets. e.g. is there one stock that can outclass all the others in performance for a certain number of years, like Hogan, Swan, and Kane. Eventually those champions receded due to age, competition, or injury. Is there a predictable turning point?

Alston Mabry writes: 

Obviously, AAPL is the current version of this. And looking at AAPL, one sees an example of a company that stumbles as it fails to effectively deploy the very capital it accumulates due to its success. 

A commenter writes: 

This is the measure of how good a CEO Jobs was. He may have been a great innovator and manager, but he may not have been that strong of a CEO. A good CEO assures succession, and it isn't clear that Jobs was successful in this regard. The same was true of RCA and David Sarnoff, By comparison, Alfred P. Sloan accomplished this task for GM, Adolph Ochs for the NY Times, Hershey with Hershey Foods, and the Mars family with the Mars candy business. That hasn't been the case with Apple, at least not yet. Any guesses on how long the Board waits until Cook is replaced?

David Lillienfeld writes: 

There will always be outliers.

There are also companies at the other tail with managements performing more for "enjoyment" (like me athletically–I suck at racketball but I very much enjoy playing it and when I've had access to a court, done so for 3+ hours a week). Are there stocks in which management is in it for fun rather than shareholder value "enhancement"? Sure. It isn't hard to identify underperforming companies.

As for a predictable turning point, there should to be tells in each industry, but that doesn't address your question about one sentinel stock. I don't think there is a sentinel today the way GM was in the 1950s and 1960s. (Some might argue that Johns-Manville was a better sentinel. Either way, there was a single stock.) You've got a globalized market and no one company occupies a dominant position in a sentinel industry (such as autos in the 1950s and 1960s). Of course, implicit in this uninformed comment is that a connection exists between stock performance and corporate performance.

Or have I misunderstood your question?

Alston Mabry writes: 

Just to do a little bit of counting, here are the 48 non-financial US-based cos with cash of $5B or more, with LT investments added in. The amounts are in billions of dollars, and the list is sorted by the Total column.

total cash: 729.4
total LT inv: 337.7
cash + LTinv: 1067.1

Ticker/TotalCash/LTinv/Total

AAPL   39.8  97.3  137.1
MSFT   68.1  9.8  77.9
GOOG   48.1  1.5  49.6
CSCO   45.0  3.7  48.7

XOM   13.1  35.1  48.2
CVX   21.6  26.5  48.1

GM   31.9  14.4  46.3
WLP   20.6  22.1  42.7
PFE   23.0  13.4  36.4
ORCL   33.7  0.0  33.7
QCOM   13.3  15.1  28.4
KO   18.1  10.2  28.2
IBM   11.1  15.8  26.9
F   24.1  2.7  26.8
AMGN   24.1  0.0  24.1
MRK   18.1  5.6  23.7
INTC   18.2  4.4  22.6
HPQ   11.3  10.6  21.9
JNJ   19.8  0.0  19.8
BA   13.6  5.2  18.8
CMCSA   10.3  6.0  16.3
DELL   11.3  4.3  15.5
UNH   11.4  2.6  14.1
NWSA   7.8  5.2  13.0
EBAY   9.4  3.0  12.5
LLY   6.9  5.2  12.1
ABT   11.5  0.4  11.9
AMZN   11.4  0.0  11.4

GLW   6.1  5.2  11.3
EMC   6.2  5.1  11.3

HUM   9.3  1.0  10.3
FB   9.6  0.0  9.6
UPS   9.0  0.3  9.3
WMT   8.6  0.0  8.6
SLB   6.3  1.7  8.0
DVN   7.5  0.0  7.5
S   6.3  1.1  7.5
PEP   5.7  1.6  7.3

PG   7.0  0.0  7.0
UAL   6.7  0.0  6.7

HON   5.3  1.3  6.5
DISH   6.4  0.1  6.5
RIG   6.0  0.0  6.0
ACN   5.7  0.0  5.7

COST   5.6  0.0  5.6
NTAP   5.6  0.0  5.6

DE   5.0  0.2  5.2

Richard Owen adds: 

This is a brilliant list with many lessons.

- 80/20 rule: $2tr of surplus cash is bandied about as the figure for US corporations. Here are 50 covering over half of that sum.

- The 1% have an internal dissonance. Here is their accumulated share of National Product, all stored up and failed to be reinvested. The 1% neither wish to reinvest their cash, to reduce their share of Product, nor to have GDP decline, nor to run deficits. This is in aggregate impossible.

- By giving you will receive. By being cowardly, you will realise your fear. Tim Cook is hoarding his cash out of fear. Nobody has EVER put that kind of cash to work successfully. Not even Warren Buffett could do it on his best day. If Apple attempts to do so, they will end up hanging themselves. David Einhorn is so on the point with his analysis. And for once an activist is helping make management's jobs more secure, not less. They just need to listen. Take some options, recap the stock, make yourself heroes. Don't think you can use that cash to buy another magic wand. You will end up buying a pup. The most recent example of what might happen to Tim Cook if he doesn't see the light is the CEO of Man Group. They totally feared that AHL would stop working. They grasped at their cash looking for any credible diversification. They bought GLG at totally the wrong multiple. And then it all fell apart. All totally well intended, all well thought through. But if they had just recapped the stock - "coulda been heroes". Get out of your own way.

Steve Ellison writes: 

A couple of theories:

The crossover point from innovator to mature company occurs when revenue from continuing product lines becomes large enough that it dwarfs revenue that could realistically be expected from starting up a new product line in a new niche, was the theory in the innovation class I took in business school. Let's say that a company might develop a completely new line of business. If it were successful, it would be doing very well to get to $1 billion per year of sales of the new line within 5 years. If the company already had $20 billion per year in revenue, management would probably devote more attention to nurturing and further developing the cash cows that bring in the $20 billion than to a risky venture that might, if all goes well, add 5% to existing revenue. One might test this proposition by setting an arbitrary sales per year threshold and checking stock price movements of companies after they move past this level.

Adoption of new technologies follows an S curve pattern, driven by a small number of early adopters followed by more cautious but herdlike technology managers at large businesses, was the theory advanced by Geoffrey Moore in Crossing the Chasm. One might test this theory by looking for companies whose sales growth decelerated to less than 20% of the maximum growth rate of the past 5 years.

Jan

31

 Driving through the Owens Valley on a beautiful sunny clear day, the entire 150 mile stretch with 14000 peaks towering above showed the geological effects of immense glaciers that filled the entire valley during the past ice age. Ice could have been 3000 feet deep gouging up mountains. Even Mauna Kea in Hawaii has clear geological evidence of glaciers! The last ice age was as recent as 10-20,000 years ago and ice covered a large part of North America. Global warming is the end of the current ice age and has provided good weather and prosperity and the growth of civilization and the human race for 20,000 years. The reverse of global warming, namely cooling, is not an attractive alternative. Imagine if cooling began. It would mean summers with snow that did not melt lasting through destroying crops. 4 years of snow on the ground through summer would wipe out most of the world population. 4 years of 40 foot snow accumulation would erase most signs of civilization under a layer of ice. When Krakatoa went off in 1883 the ash plume circled the world and there was no summer in the US that year. Imagine the impact on gnp and the markets if cooling commenced. Its awful to imagine. So its a case of unintended consequences or be careful what you wish for should they figure out how to reverse global warming.

A commenter writes:

Cold weather crops like rye and barley would come back in vogue if we had an ice age which is not unthinkable. The zones for planting crops would change drastically. One would expect that researchers might do some genetic tinkering with corn, wheat, and soybeans, allowing them to flourish in a colder climate. Quite a number of scientists are predicting a Maunder Minimum at the end of this current solar cycle, which coincided with the "Little Ice Age.".

Steve Ellison writes: 

Quite a long time ago, I reviewed Evolutionary Catastrophes: The Science of Mass Extinction by Vincent Courtillot. Every one of the 7 mass extinction events identified by M. Courtillot was caused by global cooling. Therefore, I agree that global warming (which I see no reason to doubt) is the lesser evil.

David Lilienfeld writes: 

In the 1950s, 1960s, and 1970s, 1980s, and 1990s, the asbestos industry maintained that "there was reasonable disagreement" among scientists about asbestos as a cause of lung cancer; no asbestos-related regulations were needed. In the 1950s, 1960s, 1970s, and 1980s, the same was true of the tobacco industry for tobacco and lung cancer (and other sites, too). In the 1980s, 1990s, and last decade, many in the social conservative school of thought maintained that there was little evidence, or at least controversial evidence, about the role of human papilloma virus in the development of cervical cancer (I won't get into the matter of hand and neck cancer and HPV). In the 1960s, 1970s, and into the 1980s, the US salt industry insisted that the data linking consumed salt and hypertension were controversial and that no regulation of the salt content was needed. The argument against the consensus view holds only so long as additional data do not validate the view of that majority. With Copernicus, that was the case. It was the same with the role of bacteria in the development of peptic ulcers.

Absolute certainty and uniform conclusions by all members of the science community shouldn't be needed for policy formulation. If they were, then the Marlboro Man and Joe Camel would still be roaming the ranges and desserts of our television screens.

Ralph Vince comments: 

What a logical stretch David.

In the tobacco litigation, we found secret emails amongst the defendant employee's indicating a nefarious conspiracy to keep their methods and activities secret.

The East Anglia emails are similar in that regard.

I can tell you, from firsthand observation of the computer code that was in the email trove (because I have been writing code since the 70s, and I can tell you from examining someone's code what nationality they are, what mood they were in when they wrote it, and often what they had for breakfast). The code that was dumped was utterly damning to their cause. Not only does it show that the data does NOT sufficiently show that we are experiencing (anthropomorphic or not) temperature rises, but taints the issue because it raises the question of motive. We're left knowing that CO2 in the atmosphere has increased, a seeming understanding that this should have caused temperature rise, and the facts that do not comport to this, and as-yet no legitimate scientific reason (there are some theories, but that's all) to account for this.

Scott Brooks writes: 

I suggest that we look at the motives of the people involved in perpetuating what I believe is a giant con job.

Let's say the earth is warming. Is this a man made phenomena or is it just a normal cycle that the earth goes thru from time to time? Who stands to profit from these suggestions to stop global warming? Al Gore and his ilk?

Why do we trust these idiots in DC to make decisions that are common sense based and "special interest group" based?

If we start down this path that global warmists like yourself want us to go down, what happens when the earth keeps warming up (i.e. let's say it's really just a cycle the earth is going thru and not man made)…….what will happen then? Do you think the politicians will say, "Well, it's not mans fault. So let's roll back all the regulations", or do you think that they'll bloviate about how they need even more power to solve this horrible problem?

Why are you so willing to give more and more power to the government when they have a LONG history of abusing that power to their own selfish ends?

If you chose to go down that path, you will find people like me standing in your path actively trying to stop you.

Garrett Baldwin writes: 

I wasn't going to jump in on this, but I wanted to shadow something Scott said.

With regard to motives, pay attention to the way that the hearings and the solutions to solving this problem are handled. Some of us want the market to solve the problem. For example, let's say that the biggest threat in the world were something that is hard to measure, like the earth is running out of fresh air.

I'd argue that if that were a serious problem, a man would come a long and invent a machine to solve it. We'd rely on human ingenuity. We'd beat back that threat…

But the people who stand to profit through centralized alchemy only want to do it one way — their way. And any solution that is market based, creates competition, and doesn't enrich allies or decision makers or centralize more power with the government is either demonized, destroyed or regulated from the conversation.

The reality is that central planners can't solve this problem. They claim that they invented the internet, but if the government were still operating the internet, it would just be two dudes from DoD playing pong back and forth between New York and Camp Pendleton. This entire hype has evidence of scam all over it. Naomi Klein has demanded that the U.S. distribute $2 trillion to third-world nations who are "victims" of the U.S. and our energy policy. Ironically, the nations that are demanding the money are also the ones that are near the bottom of the Heritage Economic Freedom Index. Countries that aren't developing because they keep they limit their own people's ingenuity and production are going to get $2 trillion and then do what with it? Usher in a green economy? Come on…

So, when I hear the idea that we have to "do something" and do it fast without exploring the data, without asking questions, and without being allowed to have a debate because doing so would cast the distrustful of government as people who don't care about the children or the future or humanity. Meanwhile, the alarmist will have a moving wardrobe of children follow him as he spouts off how important his intentions are and how we are monsters.

Beyond that, we also ignore one thing in this discussion.

What are the positive benefits of global warming? After all, Greenland had a booming farm trade 1,000 years ago. I'd like to get some beach front property in Greenland. I'd also think that trade through the Arctic Circle would be nice and reduce shipping to Asia in half. Why is global warming such a terrible thing? Is it because we refuse to embrace the challenge, and because there's profit to be made by saving us from ourselves?

So, I will say from my perspective this. I don't consider climate change a big deal, and it's not something that I worry about. Humanity will adapt after government spends trillions of dollars chasing this dragon..

Jan

28

I was skiing in Vermont recently and as is usual for skiing in the northeast, the slopes weren't as deeply covered with snow as one would wish. When one attacks a steep run in these conditions, it is guaranteed that the center of the trail will be bereft of snow — thin cover is the term we use euphemistically to indicate ice and rocks — mostly ice though. When this happens, there can usually be found some snow piled on the edges of the trail, it having been pushed there by previous skiers who made all their turns in the center, their scraping edges clearing it away off of the underlying hardpack and pushing it to the sidelines.

Skiing in such conditions can be done, but not without incurring greater than normal risk. And it is usually not as satisfying as skiing using the entire available path whose deeper, more sweeping turns are somehow more satisfying and which provide greater control. But under these conditions, staying in the center is deadly so advanced skiers will stick to the edges of the trail, making all of their turns in rapid succession on what is in effect a trail only two or three feet wide. This means that turns must be small in degree and therefore must happen very quickly so as not to allow the tips to remain pointed straight down the hill and therefore incurring excessive speed. This kind of skiing requires conditioning, linking extremely rapid turns is exhausting and one must not attempt this when fatigued as the resulting inability to really push hard and dig can be catastrophic. It also requires some nerve, for one, keeping near the edge puts one in dangerous proximity to the treeline (or the edge of the abyss -as the case may be) and one slip at high speed and it's all over. And it means high speed, even while carving one edge after another in succession, the lack of available surface on which to gain traction means keeping the tips pointed perilously close to straight down the fall line. Mistakes at these speeds tend to have greater than normal undesirable consequences.

As I enjoy the speed, I will make one or two runs in these conditions just for the thrill of it, but this kind of tight skiing in a narrow and steep path requires tremendous concentration and loses it's appeal rather quickly. I will spend the majority of my time on tamer runs with more snow, even though they may be more crowded, so I can make the more gratifying, longer, carving turns that I prefer.

Jeff Watons writes:

That's just like surfing big waves vs small waves.I am not comfortable in the brutal conditions Mr Sogi San surfs on an every day basis. In those conditions, I will look for the rip current to get outside, paddle and make a bottom turn, and ride it in. Like typical Sunset. I don't stay out very long as I did when I was younger when it is big. But if the waves are 2-3' overhead, I'm good all day long. I'll still find the rip to make paddling out easier, but I'll attack the wave harder. But some of the very best days are those waist-chest high waves where you cruise on a long board, and catch the glide. However, during calm conditions I have suffered the greatest traumas while surfing. Broken vertebra, herniated discs, tendon and ligament damage, broken nose, etc. Somehow, being relaxed while it's calm is more dangerous then when it's big. Or maybe I'm more careless when the waves are small, and a bit reckless thrown in for good measure. Carelessness happens in the markets also. You start taking your profits for granted. It's humming along nicely with all your positions in the green, then wham, the Mistress gets a little PMS(no sexism intended) and throws the whole system off balance or upsets the cart, and your account suddenly needs a tourniquet. The lesson here is to keep your guard up at all times.

Jim Sogi writes:

 Just back from backcountry skiing in the Eastern Sierras. The conditions were snow that was about a week old, with very cold temperatures, and no wind. The sun made a crust where solar energy hit, so the powder stashes were hidden on north facing aspects where there were old growth trees. The cold had dried out the snow making it sparkle and soft and creamy sugar which was excellent for skiing.. Though it had not snowed for over a week, in the shade, on the north facing slopes shaded by old growth pine where the sun did not affect the snow there was beautiful sugary soft powder. It took some doing finding these niches and some hiking to get there and fighting some pesky brush at lower elevations. No one else seems to have discovered these hidden stashes of nice powder. This reminds me so much of the markets, when even in less than optimal conditions, there are hidden stashes of unridden goods. It takes understanding of the underlying processes that create and destroy snow, the equipment and will to get there, and the ability to ride those conditions. Its surprising in such a huge mountain range that only in such limited conditions would there exist such fine skiing. The last day, new wet snow came and turned everything into the famous Sierra cement.

Laurel Kenner writes:

I took Aubrey to our favorite ski place, Telluride, a couple of weeks ago. A drought was on and the mountain was brown, but the resort's snow-making machines had been at work since November and most runs were open. A few patches of grass were visible in some popular places — enough to send a skier head over heels in the old days. The new equipment was somehow able to ride it out, although caution was still warranted. That strikes me as like the market; if you're well-equipped enough with margin and numbers to ride out the rough patches, you can still do well in adverse conditions.

Steve Ellison writes: 

I ski 10-15 times per year and encounter a wide variety of conditions. Light is an important factor. An overcast sky causes what skiers call "flat light". I slow down in flat light because the lack of shadows makes it hard to spot irregularities on the surface until one is nearly upon them. Dense fog is even worse. I have been in fogs in which I could not see the trees on either side and momentarily lost track of which way was down.

I like fresh snow, but there can be too much of a good thing. One day right after a 2-foot snowstorm, I started down my first run and fell on the very first turn when my outer ski caught some snow. I pushed off my hand to get up, but my arm sank into the snow all the way to my shoulder. It took a few minutes of wiggling and maneuvering to get back on my feet.

Wind is another factor. The Sierras sometimes have very high winds, which blow loose snow off exposed areas. The result is alternating ice and soft powder (in the spots in which blown snow settles). Going too fast at the transition point can result in a fall. On one traverse I often ski, I use moderate wind to my advantage by letting the wind slow me down as I ski into it with no effort on my part.

Duncan Coker writes: 

When backcountry skiing which Mr. Sogi describes another key element is the approach. There are no lifts, so you hike uphill for every turn you will make downhill. It can be exhausting, but also very rewarding and you get to know the terrain including snow pack, the location of rocks, couloirs, tree wells, cliffs and the grade. After enjoying the view at the top you can descend focusing mainly on execution, making some nice turns. Skiing the steeper, untouched terrain has more dangers but is more rewarding.

I love the surfing analogy of "never taking the first wave" alluding to the dangers of being tempted by the first big wave in a set, after a lull. In skiing there are times when it is better to take pass on a run as well. Condition may appear good, but dangers are still there. Ultimately though we all have to "drop in" at some point for whatever activity we are pursuing, and taking some risk is certainly worth it.

Jan

7

 One recently waited 15 minutes after making a big purchase at Barnes and Nobles while they held me up because the computer went down and they couldn't take cash, exact payment, credit card. At the end, they sardonically told me that if I had a complaint about the wasted time, effort and treatment, I should talk to their manager. On the other side, I read in John Mackey's new book Conscious Capitalism about how when a hurricane hit a Whole Foods in Conn, the computer broke and a lower level operative without any feedback from headquarters gave everyone in the store free goods for the 1 1/2 hour that the computer was down. They got millions of good will and publicity as an unintended consequence. A study in the book shows that companies that cater to the customer, and employees and suppliers as well as the stockholders have better performance than the average. Panera and The Container Store are examples. I wonder whether this is a real effect and whether these companies will perform better or worse—- and the former will never get my business again and the latter will. What's your experience and view.

Vince Fulco writes:

My wife works in the textile area of Target, I have tried to look at its operations with a jaundiced eye as a financial analyst would. I've always felt welcomed and well treated there without their knowing we were an employee family.

anonymous writes: 

 I bumped into a colleague at Costco today who quizzed me about the recent tax changes. Not sure why he thought I would know, but after 5 minutes of listing the various relevant increases I asked, "Do you have time for more of these?" "Not really", he said, adding "You've already depressed me enough". "What are we going to do, raise fees?" he asked.

In the wake of recession we have not raised fees, and in many cases lowered them. It is better to stay busy and build good-will when people need it, and raise later when discretionary demand increases.

Increased taxes ordinarily reduce demand. But for businesses with existing demand, they are inflationary.

Maybe the FED gets what it wants (inflation preferable to deflation), and the agrarian organizers do too.

Rocky Humbert adds:

The chair asks a very important question; and the implications transcend business. With the caveat that I'm rather better at asking difficult questions (than answering them), I'd pose the question this way:

1. To what extent do people and organizations act in their self-interest?

2. If (1) is 100%, then any act of altruism MUST BE motivated by either reciprocal altruism or goodwill. If (1) is less than 100%, then any attempt to answer (1) is hopelessly complicated using a rational/analytical framework. And I won't go there since it's a moral argument.

3. A paradox arises because except for reciprocal altruism (i.e. keeping your counterparty in business so he can buy your goods and continue to service your needs), there is a irrationality that occurs for any action which isn't in one's self interest (for both the seller and the buyer) For example, if the customer is rational and self-interested, then ANY warm and fuzzy feelings towards a vendor are not rational if those warm and fuzzy feelings arise because of a historical and non repeating gesture (giving away goods during a power failure assuming that the goods wouldn't otherwise spoil.) However, in contrast, convenience IS rational and is part of the value proposition. That is, a vendor who doesn't make you wait in line when the cash register breaks has a superior product at the same price for SOME (not all) customers. And ceteris paribus, that should garner more business (for some, not all) customers *IF* he doesn't have to raise prices for a massive fault-tolerant computer system. If he has to raise prices for a massive fault tolerant computer system, then the customer who doesn't care about waiting in line won't shop there anymore. But the lone vendor who tries to gain a lasting competitive advantage by giving away milk and bread during a blackout will fail — since the goodwill generated by this will quickly fade and there's no lasting benefit to the customer.

Every economics question can be solved by recognizing that: 1) Incentives Matter. 2) Resources are limited. And … then it's simply a question of utility curves. BUT BUT BUT if there is a moral aspect to the question, then all of the rational analysis goes out the window. And that is, I think, what Whole Foods was trying to do.

Jeff Watson writes: 

 Right before Hurricane Andrew hit South Dade County and went across the state to hit Naples and Collier County, Home Depot was giving away 4×8 sheets of plywood……just had truckload after truckload, bringing it in to offload it to anyone who wanted it for free to board up windows etc.

Their main competitor, Scotty's was gouging, and charging $40 per 4×8 sheets. In the aftermath of the storm, Home Depot kept their prices down while Scotty's jacked them up. Scotty's did the same thing after Hurricane Charley. Much editorial space was spent discussing this in the Miami Herald, El Nuevo Herald, Sun Sentinel etc. Scotty's reputation suffered greatly and eventually went out of business at the end of 2005.

There was lots of bad karma and my builder friends avoided Scotty's like the plague. Scotty's said they closed all their stores because of the hyper-competitive building supplies market…..this was when Florida had the biggest construction upswing in history. Again, real bad karma. Home Depot is still a viable corporation. Because of Scotty's actions(and that of others), Florida passed a non-gouging law in 1993 which Scotty's still ignored in 2004.

Steve Ellison writes:

 In Predictably Irrational, Dan Ariely devotes a chapter to "social norms" (the friendly requests people make of one another) vs. "market norms" (you do x, I'll pay you y). People generally see social norms and personal relationships as being on a higher plane than mere market transactions. In one study cited by Professor Ariely, implementing fines for picking up children late at day care centers actually increased the frequency of late pickups. Before the fines, the parents felt bound by social norms and felt guilty for inconveniencing the day care providers if they were late. After the fines were implemented, a late pickup was reduced to a mere market transaction: I want to be late, and I am paying for extra service.

My guess is that companies such as Whole Foods that serve customers beyond the bounds of how customers expect a profit-seeking corporation to behave elevate themselves on the social vs. market scale and thereby gain much customer loyalty.

Russ Sears writes: 

People are cooperative beings, they want to feel they are in a partnership where one looks out for the other. While the individual is the driver of innovation and change, progress is made by the most connected in ideas. Arts, science and technology thrive is these highly cooperative environments such as the big cities. Ideas are one thing that the sum of the parts can become exponentially more.

If the business really is adding value, then they display it by highlighting cooperation with their customers. Because long term the good will makes them more resilient and able to grow.

Whereas if every transaction is a zero sum game, then the signal to the customer and investor is short term thinking. There is a tinge of buyer beware for the customer and an touch of desperation to next quarters results to the investor.

The entrepreneurs I know who are successful only do it because they love the business otherwise the risk the stress and the heartache are not worth the money or the effort.

I believe Jobs showed the world that at some point it is no longer is about the money, it is about making a difference, giving others what they want and of course "beating" your competitors. If you can do these 3 things well it is like having a blank check written by the world.
 

Gary Rogan adds:

 Yes, that's another way of looking at the situation. But Jobs is Jobs, and regardless: when confronted with a situation where a person (or an entire business enterprise) who doesn't know you from Adam is particularly accommodating and friendly to you, you have to decide whether (a) that's just how they are (b) they are doing this to get repeat business as a calculated move (c) they are conning you (d) they saw you and really fell in love with you. The thing is, it could be any combination of these or something else. All I'm saying is that a "they are giving stuff away" or some equivalent to "therefore I will make them by business/partner of choice for a long time" isn't always the most rational thing to do. One really should only feel gratitude to people who are doing it for un-selfish reasons while recognizing that a good businessman will often behave "nicely" as opposed to being a jerk.

Clearly almost all expressions of "good will" and cooperative behavior by businesses are self-serving. The rare exceptions are of the nature of some owner or executive clearly touched by the misery of his customers and/or employees and doing something good for them just because. Cooperative, reliable, and resourceful businesses do add value by not wasting their customer's time and money and not aggravating them, so often everybody wins. Sill in many of these situations have to be analyzed carefully because you are typically not dealing with friends or relatives. Otherwise one can become a "victim" of deception, as someone who buys a company's product because its advertising agency made a particularly effective commercial that is often in no way related to the quality of the product. 

Jeff Rollert writes:

I'd like to share a story that happened this weekend.

A number of you know my hobby is racing sailboats. Well, I'm on a number of forums and they have members that range from the grouchy to super nice and helpful.

About six months ago, a fellow I'd never met or spoken to offered to lend me a sail to test an idea I had been struggling with. There was not a request on when to give it back; in fact it was open ended. After dealing day in and day out with the squids of our occupation, the offer seemed too nice. Something worth $200-$500? Just drive over to my house and you can have it. Really? This is Los Angeles!

Well, in a race this weekend we all got to talking about boats we had owned and one of the guys had the same as mine. We started to compare notes, forums, parts suppliers etc.

It turns out he was the guy who made the offer. I was ashamed at how genuine and nice a guy he was, and what I had suspected.

I only bring this up as a probability point…no matter how pissed you can get at humanity, the percentage of genuinely nice folks is always above zero. I'd forgotten that lesson.

You guys often remind me of that lesson too!
 

Jan

3

A quick check of the last 61 annual changes in the S&P 500 index shows no significant difference in net changes between years immediately following changes of 20% or more and other years. The average net change one year after a gain of 20% or more was 11%, slightly higher than the average net change of 8%, but with t=0.79, so consistent with randomness.

Sorted by previous year change:

Date        Close   Change  Previous year change
12/30/1955   45.48     26%     45%
12/31/1959   59.89      8%     38%
12/31/1996  740.74     20%     34%
12/31/1976  107.46     19%     32%
12/31/1998 1229.23     27%     31%
12/31/1990  330.22     -7%     27%
12/31/1999 1469.25     20%     27%
12/31/1956   46.67      3%     26%
12/31/2004 1211.92      9%     26%
12/31/1986  242.17     15%     26%
12/31/1992  435.71      4%     26%
12/31/1981  122.55    -10%     26%
12/31/2010 1257.64     13%     23%
12/31/1962   63.10    -12%     23%
12/31/1997  970.43     31%     20%
12/31/1968  103.86      8%     20%
——————————

——————–
12/29/2000 1320.28    -10%   19.5%
12/30/1977   95.10    -12%     19%
12/31/1964   84.75     13%     19%
12/31/1984  167.24      1%     17%
12/31/1952   26.57     12%     16%
12/31/1973   97.55    -17%     16%
12/30/1983  164.93     17%     15%
12/31/1987  247.09      2%     15%
12/31/2007 1468.36      4%     14%
12/31/1965   92.43      9%     13%
12/30/2011 1257.60      0%     13%
12/29/1989   353.4     27%     12%
12/31/1980  135.76     26%     12%
12/31/1953   24.81     -7%     12%
12/29/1972  118.05     16%     11%
12/30/1966   80.33    -13%      9%
12/30/2005 1248.29      3%      9%
12/30/1960   58.11     -3%      8%
12/31/1969   92.06    -11%      8%
12/30/1994  459.27     -2%      7%
12/31/1993  466.45      7%      4%
12/31/2008  903.25    -38%      4%
12/29/2006 1418.30     14%      3%
12/31/1957   39.99    -14%      3%
12/30/1988  277.72     12%      2%
12/31/1985  211.28     26%      1%
12/31/1979  107.94     12%      1%
12/31/1971  102.09     11%      0%
12/31/2012 1426.19     13%      0%
12/29/1995  615.93     34%     -2%
12/29/1961   71.55     23%     -3%
12/31/1991  417.09     26%     -7%
12/31/1954   35.98     45%     -7%
12/31/1982  140.64     15%    -10%
12/31/2001 1148.08    -13%    -10%
12/31/1970   92.15      0%    -11%
12/29/1978   96.11      1%    -12%
12/31/1963   75.02     19%    -12%
12/31/2002  879.82    -23%    -13%
12/29/1967   96.47     20%    -13%
12/31/1958   55.21     38%    -14%
12/31/1974   68.56    -30%    -17%
12/31/2003 1111.92     26%    -23%
12/31/1975   90.19     32%    -30%
12/31/2009 1115.10     23%    -38%
 
Of the 58 years from 1951 to 2008, 49 were followed by at least one down year within the next four. The only exceptions were 1981-1985, 1994-1995, and 2002-2003 (and each of these periods included at least one year with a 20% or greater gain).

Dec

4

I tested the DeMark Sequential system, as best I could understand it from the information I could find, on S&P 500 futures daily bars about a year ago and found that there were some strikingly good calls on buy signals, including on October 4, 2011 just before a monster rally, but only 14 buy signals in 29 years. Results of the sell signals appeared consistent with randomness.

Nov

29

 Rome: an Empire's Story By Greg Woolf gives and excellent review of the reasons and history of the rise and decline of Rome's empire which was kept relatively intact for 1500 years. The rise he attributes to efficiency, trade, and military success. The fall he attributes to weak alliances with neighboring countries to rule the provinces, and lack of incentives to produce from the provinces. I find many parallels to the present. The good news is that it took 1500 years to disintegrate.

Steve Ellison writes: 

I am partway through volume 1 of Gibbon's The Decline and Fall of the Roman Empire. There was little incentive for the emperor to rule for the benefit of his subjects rather than for his own pleasure. Rome became a military kleptocracy after the murder of Commodus in 192. The armies knew they were the source of power and demanded an exorbitant price for their support, beginning with the Praetorian guard's murder of Pertinax and subsequent auction of the throne to the highest bidder. Frequently contending for rival generals to seize the throne, Roman armies put more energy into fighting one another than fighting the enemies on the frontiers.

Stefan Jovanovich writes: 

Details, details:

"Romans imagined [the empire] as a collective effort: Senate and people, Rome and her allies, the men and the gods of the city working together." This continued as Rome passed from the Republic to the Caesars, who were kings "even if [Romans] could never bring themselves to call them by that name." It is "a history of remarkable stability. If it was largely true that (as one historian has put it) 'Emperors don't die in bed,' it was also true that the murders of many individual emperors seem to have done little to shake the system itself."

Since "decline and fall" is the current meme, one should hardly be surprised that publishers and their authors want to cash in on the latest craze. (That is all publishers ever do; and authors, poor things, are usually desperate to oblige.) Professor Woolf should have resisted the impulse. He certainly knows better. The "collective effort" he describes is a complete fairy tale. The Empire never even developed a common language; our "classical" education notions are based entirely on the fact that rich people had too know Greek because that was the commercial language of the eastern provinces — which was where the money was. Latin was for the inscriptions on the public buildings and for the official orations and the school examinations but the "common" people continued to speak their own tongues. Even the Army relied on whistles, drums. and flags for its "commands" when it took to the field. This explains why Latin itself became almost instantly obsolete even south of the Rubicon. No one writing about the Hapsburgs, who did manage to keep their own Empire running for a good long while, would ever have offered up such fictions about "court and people, Vienna and her allies, the men and gods of Vienna working together". But, we have enough information to know that the court spoke French in that Holy Roman empire. The beauty of Roman history is that there are so few actual facts that survive that one can make the story whatever one wants it to be.

Jim Sogi writes:

The key is "1500 years". It's not going to fall apart in the next 100, that's for sure.

Gary Rogan writes:

The difference is that they couldn't do state borrowing in anywhere near the same proportion to their GNP as the US can. It also took less than 100 years from the peak, however defined to really difficult times. And as "mr. grain's" article demonstrates in less than 200 years from the peak free people were volunteering for slavery to avoid taxes, an inflation rate of 15,000% was experienced, free employees were essentially made into slaves at their places of work, and women, children, and parents were physically hauled off and abused to get to the tax evaders. All due to overspending and overtaxation.

Also for whatever reason they limited the free grains to a relatively fixed number of people, and the amount was small for quite a long time. Their modern equivalents today with a much more advance education in economics talk about redistribution with such excitement and such lack of concern for where this is all going that would make Nero proud (I mean the part about fiddling while the Rome burned, except they are not fiddling but setting the fires).

Vince Fulco writes:

I am still trying to understand how a society flourishes with reported median family incomes stagnant or below that of a decade ago? And there is no sign the worker is gaining any bargaining power. Sure the govt can artificially tinker with rates reducing the carrying costs but someday existing debt must be paid; at least at the consumer level. It is debt assumption for non-producing overpriced (after debt service costs are added in) consumer goods which will kill this country.

Tim Melvin writes: 

I agree with that to a large degree…..crony capitalism at the expense of everyone else is a cancer in any society….the problem is not capitalism exploiting the workers. it is the complex and intertwined relationship of business and government that does us the most harm. Eisenhower was right.

Anonymous adds:

Tim,

I think the malignancy has metastasized much deeper than that, and now sits in a kind of acid bath (the pending "fiscal crisis') where all else is peeled away and we see it clearly (in fact, the fact that people seem to NOT see this clearly is evidence of its metastastization) and it is this: Our society — at every level — is characterized by a desire for more rules, and an exception of those rules for ourselves.

Talking different tax rates is a carve out. The argument that the elderly should get a carve out. The birth control carve out. The government worker's salaries untouchability as a carve out.

How about when the White House issues exemptions to Obamacare?

Affirmative action is a carve out. All corporate socialism is a carve out. Every bill passed by Congress does not apply to them. I call that a carve out!

The white lady's sinus-snort lament, "This is RIDICULOUS!" always pertains to her being denied her attempted exception carve-out to the rules.

That's the cancer. The cure would take a lot more than Mitt Romney, and likely cannot be cured by a single individual.

History doesn't exactly repeat, usually, an incident is followed by another incident of similar cause but differing results and often differing in duration. I don't think we're going into a 1,000 year long dark ages. I think we're racing headlong now to something far more sudden and shocking, and bigger than any one man or political party can purge from our psyches.

Jim Sogi writes: 

I used to think the revolution was just around the corner, society was fragile and was about to come apart. Not now. Look at NYC and Sandy: that was an amazing comeback. The recession was bad, but the economy is slowly coming back. Things are not bad now. In the 1940's there was nuclear world war. Japan, Germany, Europe came back. Russia fell apart, but now is back. China killed 10s of millions, but came back strong. People are resilient and social systems are strong. The apocalypse is Hollywood and journalistic bogus hokum ballyhoo.

David Lilienfeld writes: 

The same is true of the US post-Civil War. Nothing before or since has had the social and economic impact that that war had. The US is more adaptable than Rome was. As Peter Drucker often observed, the US genius is political.

One of the signposts that Rome was done was when it was no longer able to rely on client states for security. That isn't the case now with the US.

A better paradigm for guidance might be the Persian Empire.

Gary Rogan writes: 

I keep coming back to the debt issue, the current size, and the ability and desire by "the powers that be" to accumulate more at an astonishing clip. Four years ago I predicted a debt-driven collapse that Rocky chided me for so much, and while the timeframe now seems indeterminate, what IS the way out without a currency collapse and all that follows in those types of situations? The bond vigilantes are not too concerned, and they know all, but what is it that they see? Can they see far into the future or are they playing musical chairs? 

David Lilienfeld adds: 

I'm reminded of the comment by Jim Carville, Bill Clinton's political advisor. In a re-incarnated life, he said, he wanted to come back as the bond market. "It can intimidate anyone it wants to."

Oct

12

Thie largest building in the world is expected to open right before Chengdu, a city in the southwestern Sichuan province of China, hosts the Fortune Global Forum in June of 2013.

This video is a virtual reality tour of the compound.

Steve Ellison writes:

It will be the largest building, not the tallest building, so it may be exempt from the Chair's theory that constructing the world's tallest building is a sign of hubris (for example, the Empire State Building was begun near the end of the 1920s boom and finished just as the Great Depression was intensifying).

Sep

23

Let's examine the limit order in more detail. There are essentially three scenarios that can occur when you place a limit order. One - you are brilliant. You caught the bottom, nicked the top and got in at an excellent price and can now manage a trade with great risk/reward profile. Two, you were right on the overall direction of the instrument but because you tried to be cute with price you missed your entry and now watch wistfully as prices move away from you while you remain empty handed. Three - you got your fill and now you wish you hadn't as price continues in the opposite direction of your bet.

So in summary in two out of three cases you have a negative outcome. Now if you happen to be a superb market timer that may not matter, but if you are just an average Joe (and we all are) then your chances of execution are basically 33% on each scenario which means your chance of winning is only 33%. That's why limit orders are a sucker's bet. They play to our desire for a bargain, but in the end they cost much more than we think.

Steve Ellison writes: 

"… your chance of winning is only 33%. That's why limit orders are a sucker's bet."

Here is a quick test of that proposition.

Imagine that traders A, B, and C each make at most one round trip trade in the S&P 500 futures every week. Trader C is a permabull, so every Sunday afternoon when Globex opens, he immediately buys the contract. He sells at the close on Friday.

Trader B wants to only "trade in the direction of the price flow", so he only buys the contract if it goes up 5 points from the Sunday open. Then he sells at the close on Friday.

Trader A fancies himself a tough negotiator and places a limit order 5 points below the Sunday open. He is last in line, so his order is only filled if the price drops to 5.25 points below the Sunday open. If filled, he also sells at the close on Friday.

Here is how each trader would have fared in the last 64 weeks.

Trader A, the user of limit orders, would have had 59 of 64 orders filled. He would have been "too cute" 5 times and missed out on big gains. 7 of his fills would have suffered from adverse selection as the market continued down, and trader B stayed out of the market. Trader A's net profit on his 59 trades was 223 points. 37 of the 59 trades were profitable.

Hence the 2 out of 3 things that can go wrong with limit orders occurred less than 20% of the time empirically. Trader A won far more than 33% of the time. Even after detrending the data to correct for the upward drift during the period, trader A's limit orders were profitable 34 of 59 times (58%).

Trader B would have avoided all the adverse selection weeks in which the market did nothing but go down. However, his net profit on his 57 trades would have been only 53 points.

Trader C, the always-in trader, would have traded all 64 weeks and had a net profit of 172 points.

In this test, the user of limit orders did better than the follower of price flow.

Sample data:

Week          Net profit
Ending   Trader A  Trader B Trader C
 7/8/2011    12.4     2.4      7.4
7/15/2011   -18.6      –    -23.6
7/22/2011    32.1    22.1     27.1
7/29/2011   -36.7   -46.7    -41.7
 8/5/2011  -100.4  -110.4   -105.4
8/12/2011    12.1     2.1      7.1
8/19/2011   -50.4   -60.4    -55.4
8/26/2011    59.4    49.4     54.4
 9/2/2011    -1.7   -11.7     -6.7
 9/9/2011    -2.6   -12.6     -7.6
9/16/2011    79.7    69.7     74.7
9/23/2011   -65.2   -75.2    -70.2
9/30/2011     9.2    -0.8      4.2
10/7/2011    35.9    25.9     30.9
10/14/2011     —    56.2     61.2
10/21/2011   22.0    12.0     17.0

Sep

21

 Having internalized some basic aspects of wave counts, such as alternation of corrective waves within a motive wave, coming back to the counts produced by Advanced GET is a strange experience, as the software-generated counts seem quite wrong.

Have others, as I now have, given up using software to mark the key wave points? Of course one would still use a software grid to mark Fibonacci retracements.

Anatoly Veltman writes: 

Actually, Advanced Get by Tom Joseph was very good when first introduced in late 80's-early 90's. Trick was that one should have also attended Tom's weekend workshop (mostly held near an airport in Ohio), to be tipped on the whole essence: type 1 and type 2 trades, wave 4 index and oscilator. Without figuring out when Wave 4's odds diminish to unacceptable — there is no reliable Elliott Wave trading. And Fib retracements are great — but ONLY if EW type 1 or type 2 trade has first been isolated. I taught Tom's methods for about 15 years. Not sure if any of my students succeeded in black-boxing the entire methodology.

Tim Melvin writes:

Did someone really say fibonacci on the spec list? This could get interesting if it is anything like the old days…

Anatoly Veltman writes: 

Well, that's the whole point. Loving to say Fib doesn't test well– when the wrong application was tested to begin with.

Phil McDonnell writes: 

To be sure one must test something according to the right way of doing things. However that is exactly the problem with wave counts and the like. The rules are so arcane and convoluted even so called experts disagree on them.

If you get 5 different Elliot exerts in a room you will get 5 different wave counts at the same time. It is a bit like the game of Fizzbin. The rules keep changing and are unnecessarily complex. 

Leo Jia writes: 

I think one probably should take this argument as a not-bad news for Elliot theory or any theory that gives non-consenting results. It means that it likely has some statistical truth in it that is worth one's effort in seeking. Don't we agree that a market theory delivering definitive results does not exist or, if exists, ought to be thrown out?

Steve Ellison writes: 

Trying to stay in line with our raison d'etre, I have been coding a method for retrospectively identifying highs and lows of multiple levels of significance.

My approach is to go bottom up, starting with an idea I got from one of the Senator's books. A local high is a bar whose close is higher than the closes of both the previous bar and the following bar. A local low is a bar whose close is lower than the closes of both the previous bar and the following bar (a sequence of 2 or more bars with equal closes count as one bar for this purpose).

After identifying the local highs and lows, I move up a level. A 2nd level high is one that is higher than both the preceding local high and the following local high. A 2nd level high cannot be recognized until one bar after the lower local high that follows the 2nd level high. I record the time at which the 2nd level high could have been recognized.

I follow similar rules to identify 3rd level, 4th level, etc., highs and lows and the times at which they could have been recognized in retrospect.

I haven't finished yet, but this method should give me a platform for testing hypotheses about "primary trends", etc.

Anatoly Veltman writes:

Tom Joseph's contribution to E.W. trading, in my view, was much greater than Prechter's or RN.Elliott's. Tom basically said with his excellent refined Type 1 trade: don't ever place any bid, unless:

1) you've already observed a valid impulse (with extended third wave)
2) a correction is currently in progress, approaching 38% of preceding rally
3) you're filtering this correction with oscilator return to 0, and fourth-wave index still sufficient for fifth wave
4) fifth wave projection extends to at least 2:1 profit/loss ratio, incl. all possible slippage.

I say: if all these conditions are not met (and this may not occur every day) - never place a bid at 38% retracement. If all these conditions are not met, you'll have to bid only at near-100% retracement. What does this principle have to do with popular E.W. or popular Fibonacci methods. Nothing!!
 

Laurence Glazier writes: 

Sure, things are complicated and one would not wish to poke a stick into a hornets nest, but … some things are complicated.

It took hundreds of years to elicit the laws of harmony from the canon of classical music (many to this day deny their existence). Put five composers in a room and have them harmonise a tune (the non-believers might refuse to!), and they will do it five different ways, but they will all have added to the map of knowledge.

Even knowing those laws, one could not reasonably predict how a piece of music would continue if Pause were pressed (unless it were minimalist) - but one might anticipate it would return to the tonic key, and that the free fantasia would not be over-long, and so on.

Those laws are difficult, unprovable, and without material substance but are the result of empirical observation.

Gibbons Burke writes: 

CTA E.W. Dreiss used, in the 1990s, a very similar way to count waves in the market using what he called the Fractal Wave Algorithm (FWA), and he traded futures breakouts from FWA-n magnitude highs and lows. Did quite well, but like all trend followers, it is a bumpy ride.

He also came up with the Choppiness Index, which sums the true ranges in the last n periods, and takes that as a ratio of the n-day range.
 

Jason Ruspini writes: 

This is the natural approach that I took as well. Ignoring the "correct" 1-5 definitions, I just looked for a run of higher such double-X highs and higher double-X lows identifiable with the necessary lag, with attention to what happens when you eventually get a lower major high/low, breaking the "wave" run count, which can keep going after 5. What I found wasn't very interesting, in-line with my previous comment. I'm still unclear if anyone is actually trading a tested (complicated) system or just applying versions of rules with discretion. If it is a tested system, why is it better than a simple long-term momentum system?

George Parkanyi writes:

I like to keep it simple. Many years ago, I read something written by Larry that said, when the commercials are generally substantially more net long or short than specs - that tends to stop trends and turn markets the other way. He admitted it was a rough rule of thumb - that it may take a while to turn the tanker - but I pay attention and time after time I've got to say it works. So right now two markets that fit that profile are coffee and to a little lesser extent sugar. (Oh yeah, VIX as well) I've been long both for a couple of weeks with modest starting positions, and just had a nibble at VIX. I don't know when the trends will turn and I may have to take a stop or two, but I like the chances for a good position-trade in these two markets - and VIX as a bet on a short-term post-Fed hang-over. I checked back to when coffee started this particular big decline - and it was within two weeks of when commercials were selling the crap out of it and their net-short positions had peaked. Gold and a number of other commodities did the same thing at the beginning of this rally that began in May - except that the commercials were the only buyers at the time. It may be a dumb-as-dirt perspective on my part, and will likely set off Anatoly - but its one thing that has stuck with me from reading a number of Larry's books.

Sep

2

 We did our refi at 3.5%. I keep hearing about a renaissance in the US housing market, with Toll claiming it has pricing power. Yet mortgage rates continue to drop. This makes no sense to me. If the market for homes is coming back, shouldn't mortgage demand be increasing –leading to higher rates, not lower ones?

Phil McDonnell writes: 

If mortgage demand is increasing and that is the only variable that has changed then mortgage rates should be rising. But that is not the only variable that has changed over the last couple of years.Helicopter Ben has been flooding the market with easy money via QEn. that is the dominant factor.

Steve Ellison writes: 

In Foreclosure City where I live, sales activity is very brisk at prices 60% off 2006 levels. Homes that are priced appropriately are selling very quickly, and inventory is very low since a new state law went into effect that required lenders to prove they actually held the mortgage before foreclosing.

Aug

23

Considering that the 8/1 open market meeting issued a very disappointing statement about the prospects for easing, and the market went down about 2 % from the announcement to other next day, you would think that there could have been a more balanced release that stated how many members were waiting in the wings to be accommodative at the sign of the first easing. Let us hope that the sensibilities of any flexions were not discommoded by this decoy as much as the public.

Steve Ellison writes:

It seems most of the investing public was driven out by the 2000-2002 dot com crash, and the survivors were decimated in 2008. In this respect, the upside down man's pronouncements seem like piling on. I know he wants people to buy bonds instead of stocks, but he has already triumphed completely in this regard. How could anybody reviewing the past 12 years not conclude that "gentlemen prefer bonds"?

Aug

14

What of the threat stringing out past the point of threat into a sleep? Market fatigue waiting for the euro mess to resolve, Iran to be bombed, Syria to fall, nat gas to get a pulse, gold to restart, Japan to rise again, GE to come, etc.

Steve Ellison writes: 

Natural gas, 6/15/2012: 2.467 (July contract)

2.196 (adjusted for rolls to August and September)

Natural gas now: 2.752 (September contract)

That's a 23% increase.

Aug

12

An unusual consilience of 6 consecutive 20 days maxs in S&P futures has occurred in the last days.

It is interesting to put some stats on table for frequencies of how often such events have occurred in last 17 years.
 

Number of consecutive 20 day extremes                                          

           min                          max                                          

1         204                     313                                          

2          95                     165                                          

3          37                      88                                          

4          17                       50                                         

5           9                      17                                          

6           5                         9                                        

7          0                         4                                          

8          0                         2                                           

9                                    1                                          

10                                   1                                         

11                                   0                                         

In case my formatting didn't come across on your screens, the number of consecutive 20 day minima starting from 1 and going to 8 was 203, 95, 37, 17, 9, 5, 0 , 0

The number of consecutive 20 day maxima starting from 1 and going to 11 was 313,165, 88, 50, 17, 9, 4, 2, 1, 1, 0.

It is interesting to note the falloffs in consecutive maxs from 4 to 5 and the fall offs in consecutive minima from 2 to 3.

Steve Ellison writes: 

If markets were efficient, one would expect a 50% probability that a run of n consecutive highs/lows would become a run of n+1. In this dataset, of 1017 runs of n, 500 (49.2%) became runs of n+1. That doesn't seem far off 50%, but p=.31 by the binomial distribution.

There was an upward bias to the S&P 500 in the past 17 years, so not surprisingly the results are more extreme when split into highs and lows. Only 163 of 367 runs of n consecutive lows became runs of n+1, an apparent p of .02, if one neglects to detrend the data. 337 of 650 runs of n consecutive highs became runs of n+1.
                                                                                  

Aug

6

 The upside down man's objection: "If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year" is easily rebutted by Philip Carret's observation that common stock is like a leveraged investment. Bondholders are first in line to be paid, but their claims are fixed, so all upside of earnings beyond a fixed percentage belongs to stockholders (as does all downside if the company fails to perform). If the typical capital structure is 50% debt and 50% equity, the typical common stock is a 2:1 leveraged investment, so an expected return approaching 2x GDP growth would not be unreasonable.

Stefan Jovanovich writes: 

There is a complimentary explanation. GDP figures are a sub-set derived from the monetary Marxist notion that nominal expenditure by the government is just the same as voluntary private spending. (This is the same notion that the CIA and all the Galbraithians depended on to decide in the 1970s and 1980s that the Soviet Union had matched or even surpassed the US in economic output.) Er, no. Sherman Tanks may be useful and necessary but their "cost" is not the same measure as the spending to buy a combine harvester. The same applies to civil service pay versus private payrolls; the one measures a Keynesian cost, the other measures an expenditure in search of profit. It should hardly be surprising that, in order to support the dead weight of wars and "public" investments that no private market demands, the equity residual has to grow at twice the rate of the overall "economy" measured in nominal Marxist terms.

Ralph Vince writes: 

Stefan,

Yes, this was the case I made on this or a related list about 4-8 weeks ago and had my economic naivete was assailed. In fact, I would posit that not only should government expenditures NOT be included in the positive column of GDP, but rather might best be place in the negative column. A good portion of government spending is in the form of capital outflows, interest payments to foreign entities, outright gifts to foreign entities (when we give the UN a billion dollars, is that really a billion dollars added to out GDP? 10 billion to Israel, does not increase our GDP by 10 billion), nation building (building schools in Afghanistan does not increase GDP). Outflows such as exports, count on the negative side of the GDP ledger — so too should government spending, or at best, it should be a wash.

If GDP growth is anemic now, remove the YoY increase in government spending from GDP and it's a pretty bleak picture in recent years (and no, I'm not being political about the Oreo presidency of the past 11 1/2 years. Same guy, same party, same people, different faces and names).

Jul

24

There is much pessimism on the site about the stock market. One thing I always like to ask is suppose it were true that the economy is really going to be weaker than people expect. Like we'll have 1 or 2% growth rather than 2 or 3. Why should this affect stock prices? What is the evidence that stocks do worse during periods of below average growth? Why should it matter? How does the rate of return on capital of businesses compare to the 30 year rate as stocks are valued based on discounted value of expected future earnings adjusted for risk, with the growth rate of earnings being determined by the rate of return on capital less the pay out on dividends rate. Is it better to buy stocks when people are pessimistic or optimistic?

All these things must be tested. I'm not saying that I'm bullish or bearish on stocks or that one should be. I'm just questioning the glue and the weakness type of stuff. Assuming it was true, which I doubt, why should that be bullish or bearish? Testing is required.

Steve Ellison writes: 

A regression of the 1-year S&P 500 return from 1981 to 2010 against the US unemployment rate reported the previous December shows a 16% positive correlation, with the regression line for the next year's S&P 500 net change being -1.9% + (1.9 * unemployment rate).

t=0.86, p=0.40

Leo Jia writes: 

I often ask myself similar questions but can not answer them. Perhaps one has to answer this question first: what percentage of the people in the market are rational? Or rather, what percentage of the money in the market is rational? Though I don't have an answer, I tend to believe that there is more irrational money than rational money in general. The clear problem is that the degree varies all the time.

J.T Holley writes: 

With the std dev of 18% and annual rate of 8-9%, I'll order a double helpin' of "drift" with a side of "thank you".

If that meal doesn't fill you up then you must question where you get your meals and disregard the gratuity the next time you sup.

Tim Melvin writes: 

Drift only exists if you have a 100 year time frame in my opinion. See 1970s and 2000 to present. Much of investing success last fifty years for most investors is result of membership in lucky sperm club.

Craig Mee writes: 

Doesn't one new variable in a mix during the testing period influence the outcome– QE, no QE, etc etc…(sure, there's been other ways of doing it). But how to judge what has the over riding influence on the outcome? This could vary under certain conditions. How much of the US equity recent rise is in default of Europe, just like EURGBP taking the heat…and how much of the current price is underpinning based on QE to come?

What has recent price action illustrated, if anything at all…

How should weaker growth effect share prices? I would argue that this would just be a further nail in the coffin, when all the ducks are lining up, but how can we say it's got more weight currently than some other significant half ? It's tough. Are the number of running variables any different than twenty years ago? Maybe not. Are market conditions, HFT, leverage, number of participants in the market any different? Certainly. Has this influenced price action? Maybe Richard Dennis may have some views here.

When does the variation in conditions influence the ability to test? I suppose this might be the question.

Jun

21

 Duveen by S.N. Behrman, the prolific playwright (The Second Man, Fanny) contains a smorgasbord of interesting, amusing, and illuminating grist for the mill of readers interested in marketing, history, and finance. Joseph Duveen (1869-1939) was the most successful dealer in fine arts, or indeed any pricey collectibles in history. He achieved almost a monopoly on selling almost all Italian art painted before the 1700's. His techniques to achieve the monopoly are at once hilarious and instructive. He insisted on paying the highest prices for all paintings that came up at auction or through collectors, and made sure that none of his collectors ever suffered a loss on the market value of any paintings he sold to them. He was the main force behind the collections housed in the National Gallery, the Tate Gallery, and the Frick. His customers, included Mellon, Kress, Rockefeller, Hearst, Frick, Morgan, Altman, Huntington, Bache, Goldman (of Goldman Sachs), Widener, Rockefeller and almost every other magnate of his time.

A key feature of his selling method included preparing a catalogue of the collector's holdings that immortalized the collection and the collector. The one magnate he wasn't successful with, Henry Ford, is the subject of a hilarious story. Duveen presented a catalogue to Ford with all the greatest pictures available in the 30s. Ford said it was such a beautiful book, that there was no reason for him to buy the pictures.

On other occasions, he refused to sell to a collector, until his collection has reached a certain point of grandeur. He always insisted that he could sell his best paintings to Mellon or Kress so why would he wish to sell to a mere millionaire who was not one of his favored customers already. In this technique he predated Madoff. In describing his methods, Mrs. Hearst said, "Duveen didn't want to sell any of his paintings. But his customers always badgered the poor fellow until he gave in."

 He liked to buy entire collections, and stored the collections in palatial dealing rooms that he maintained in London and New York. His mantra was that "Europe had the paintings but America had the money" so his main customers were the American industrialists, and 5 and 10 centimillionaires of his era.

His financing method was to use his paintings as collateral for loans, and to buy up all good collections and store them until the values increased. He was able to beggar his brothers and sisters by buying up their interests and refusing to pay them off during his lifetime. He didn't understand the concept of interest on money, and gave his collectors infinite time to pay their debts to him. Yet during this time, he had to borrow from banks like the Mellon and pay enormous interest. In addition, he had heavy expenses from maintaining his business and paying off all his runners, and finders across the world. Thus, he was always cash poor during his life.

He bought out all the interests in his family but didn't pay them off during his lifetime. The main problem in his financing was that he had to pay cash for everything he bought but he gave unlimited credit to all his customers. A favorite technique was to lend a painting to a collector to hang in his home or gallery for several years, while he became acquainted with the painting. He liked to say that the painting was the one asset that a collector could buy that would cost him no upkeep, and give him constant enjoyment from viewing it. They were unable to sue because he was the only one that could sell the paintings in his inventory.

 Behrman believed that the main customers were lonely, silent men who were ashamed of how they obtained their wealth, and unhappy with the ne'er do wells in their family. Through the paintings they gained respect and immortality. And the paintings never talked back to them, became playboys or died in race track accidents like their children.

Duveen had many partnerships with those who could aid him in his marketing. One was with Bernard Berenson, who vetted all his pictures, and received a commission on all that Duveen sold. Berenson eventually turned on Duveen, when the two had a bitter fight about the authenticity of a Titian that Duveen wanted to sell. Other partnerships were with the butlers and comptrollers of all his customers so that he could get advance knowledge of what they had to sell, and when they were in a mode of buying.

One of his marketing techniques was to buy up all the English and Impressionist paintings of the era that his collectors had in their possession, so that they would not be tempted to add to their collections. He liked to upgrade his customers into buying only the best paintings and eschewing all commercial items. He found out early that his collectors liked pictures of pretty woman, with bright colors and action in his paintings that came from English Nobility. And when a great masterpiece came up without these characteristics he would buy them but not try to sell them, and store them in his warehouse. He liked to say, "it is much easier to sell a second rate picture that has belonged to any English nobleman than a first rate one that has belonged to a treat man of the Italian nobility."

Duveen got his start selling Delft antiques that his poor family collected in Holland. He learned all the techniques of selling from his family's antique furniture business. But he soon came to the conclusion that it was much better to sell million dollar paintings than $ 5,000 rugs and medals. The book is sprinkled with great anecdotes and selling procedures of the time. For example, when he found a Da Vinci that a Russian countess was selling, he had first to pay for an option to buy the piece at a set price of 1 million. But then it had to be offered to the Tsar at that price before he could buy it.

Behrman, the author, is one of those 20th century men who despised business people. He took pleasure in thinking that Duveens' customers were "scrupulously dishonest". And he seemed to think it fair that Duveen was equally dishonest with the customers. He fails to note that people like Kress, and Woolworth, and Rockefeller, the billionaires of his day got their wealth from selling goods to the masses that uplifted their standards of living and gave them the comforts that the richest of two generations back couldn't buy. Behrman writes, "as his customers aged, they felt guilt about such things as machinegunning the strikers at their mines, they were characterized as exploiters of the poor and the source of their misery. they felt futility and hostility closing in around them, they longed passionately for the happy company, in the even darker regions ahead." Duveen's paintings and persona provided that company and relief from their guilt.

 Duveen was always cash poor, as he had enormous overhead and inventory from carrying all the items that were out of favor. He also maintained a lavish life style and was constantly giving works of art, and paying for the buildings of the institutions that ultimately housed the paintings like the Tate and The National Gallery. His New York Gallery was built at enormous expense on the corner of 56th street and Fifth Avenue, currently the Bendel building, but then called the Ministry of Maine. His family complained about the expense but Duveen assured them he had "all the pictures sold". The family said "show us the bills of sale". Eventually when he died, he made a big sale to Mellon, and was able to pay off all his debts and died with an estate of about 7.5 million pounds, the first time he was solvent and debt free in his life.

After he died a rival dealer said "We miss him but we are glad he is gone". What can we learn from Duveen? He had a complete marketing operation, with tentacles in every aspect of the supply and demand chain, paying every conceivable source of supply with bribes and emoluments. In this he reminds one of the publicity hungry flexions that run conglomerates of today, especially those in the Midwest, with their politician antennae always attuned to the sources of cheap goods that they can get ahead of everyone else.

He liked to pay the highest prices for things, maintaining the market for his goods and creating enthusiasm among his customers. He was completely attentive to the needs of his customers and would do anything to please them, thereby showing the wisdom of the motto used by most great businesses that "the customer is always right", and taking back items with no questions asked at the original selling price regardless of the legitimacy of the complaint. He maintained the viability of his market by buying up all goods that came to it, thereby insuring that his customers always made a profit. But after he died, the prices of all his goods suffered a terrific fall. He was a master at manipulating markets. He bought goods, not because he expected to make a immediate or reasonable profit on them, but in order to maintain the illusion that none of his customers ever sold a painting at a loss, and that his favored 400 year old Italian masters would never decline in value. The importance of running stops, and hitting the exercise price of knock out options comes to mind.

I'd like your comments on what we can learn from Duveen. 

Steve Ellison writes: 

His operation sounds like a corner.

Jun

17

 Cotton, sugar, corn, and soybeans all have significant backwardation between the July contracts nearing first notice and the new harvest contracts. The entire forward pricing curve is backwardated for soybeans, but the curves for cotton and sugar reverse to contango.

Soybeans
Jul’12 1379.75
Nov’12 1316.50
Nov’13 1189.50

Cotton
Jul’12 80.04
Dec’12 71.15
Dec’13 76.70

Sugar
Jul’12 20.77
Oct’12 20.01
Oct’13 20.95

Harry Kat found that commodities in backwardation are more likely to positive returns, and commodities in contango to have negative returns.

Jun

12

 Last night's Stanley Cup final game illustrated the Chair's point about diversion of energy. Having lost the first three games of the best-of-7 final to the Los Angeles Kings, the New Jersey Devils won two games and could have tied the series with a victory last night. Early in the game, the Kings' Jarret Stoll put a late hit on the Devils' Steven Gionta from behind and went unpenalized. Seconds later, the Kings' Rob Scuderi retrieved the puck. After Scuderi passed the puck to a teammate, the Devils' Steve Bernier hit Scuderi late from behind, drawing blood. The officials threw the book at Bernier, assessing a 5-minute penalty and ejecting Bernier from the game. During the 5-minute penalty, the Kings scored three goals. The television announcers noted that the Devils' coach and players were furious at the officials for the gross inconsistency in responding to the two late hits. And, it seemed, the Devils had a valid point. Nevertheless, they went on to lose the game, 6-1.

Jun

4

 An interesting list of favored stocks as of year end 1928 appears in Common Stocks and the Average Man by George Frederick, 1930.

Allis-Chalmers , American Can , Atlantic Refining , Fleishmann Co , General Motors , Liggett and Myers B , Montgomery Ward , Paramount , Famous Lasky , US Steel , Woolworth .

These were recommended for buy and hold, and the kind for George Baker, who made more in one day than all the gold miners in history, with his method of buying good stocks and holding them and living on interest. It is interesting to note, that as far as I can see, almost all of them went bankrupt or close to the same in the next 90 years.

The book by Frederick and the comparable one by Ralph Badger, a professor at Brown, (Badger on Investment Principles and Practices, 950 pages), although not 100 years old are both highly recommended as being much better and much more helpful than the average treatise of today, or 30 years ago, especially those like Graham and Dodd.

Steve Ellison adds: 

From the same era, I reviewed The Art of Speculation by Philip Carret on the dailyspec a few years ago. At the time I wrote the review, the phenomenon of "stocks carrying themselves" had not occurred in nearly 50 years, but that bullish condition did occur beginning in late 2008 and has been in effect ever since, as evidenced by the backwardation in S&P 500 futures. As Mr. Carret wrote, "Borrowed money is the lifeblood of speculation."

Jim Sogi writes:

I remember as a young kid my savings account at Seaman's Saving Bank paid 5%. I had a ceramic savings container for coins that was a merchant seaman in whites of the era. I vaguely recall that my stocks also normally yielded about a 5% dividend. My father's advice at the time was to use your rear not your head, and sit on the stocks. That must have been in the late 50's.

Funny thing is now, again, dividends seem almost attractive with SP yielding over 2%. Some utilities are yielding 4.5% and don't seem to have the volatility of bonds nor industrials.

Gary Rogan adds: 

It seems like the SP yield is way below its historical norms, so while
it has been rising it has a long way to go to make it all that
attractive.

Of course given what "they" have done to the fixed yields they are
pretty attractive but sooner or later as we all can feel the fixed
yields will not stay low or negative even in Denmark and Switzerland
forever.  If they find a way to leave the dividend taxes alone, no doubt
sooner or later the yields will come back to historical averages, so I
don't think SP is attractive on that basis.  I do firmly believe in
sitting on stocks for a long time.  The point that was recently made
about all the old favorites having gone BK has a counterpoint: if you
diversify enough into high yield stocks, a small but noticeable
percentage of them will be bought out every year and that combined with
the stream of dividends will overcome the BK factor over the years.

As far as the bank savings accounts are concerned, I remember fondly how the banks and s & l's were engaged in a rhetorical war over, was it, 1/8th of a percent mandated difference? "You could spend that 1/8th of a point crossing town" was what one commercial said. It's pretty crazy how they "deregulated" the banks but left this one innocuous little Fed behind the scenes and now all savings yields are 0 and all the banks of note are TBTF. To me the moral of the story has always been: if you have FDIC in place all "deregulation" is a joke, but somehow the joke isn't funny to those guys and they don't like talking about moral hazards. You don't even get toasters these days.

Jun

4

A friend told me recently that gold mining stocks had been declining much more sharply than the price of gold. He therefore thought the stocks were undervalued.

Attached is a graph of the ratio of GDX (the gold mining ETF) to GLD (the physical gold ETF) with a 50-day moving average and Bollinger bands.

Here are the changes in the ratio in the next 50 days after the ratio of GDX to GLD fell below the lower Bollinger band. There have been only 15 non-overlapping occurrences since both ETFs began trading.

Next 50 days
             GDX      GLD  GDX/GLD   Ratio     GDX     GLD
Date      Adj Close Adj Clos   Ratio  change  change  change
1/18/2007    35.92    62.26  0.5769    1.4%    7.0%    5.6%
8/15/2007    35.42    66.13  0.5356   13.2%   30.2%   15.0%
11/19/2007   44.16    77.24  0.5717   -4.9%   10.0%   15.7%
 2/6/2008    46.34    88.95  0.5210    3.2%    5.1%    1.9%
4/24/2008    43.78    87.22  0.5019   -0.2%    4.4%    4.6%
7/24/2008    43.48    91.33  0.4761  -27.0%  -34.0%   -9.6%
10/3/2008    28.70    82.59  0.3475    4.4%    4.5%    0.0%
 3/2/2009    30.72    90.93  0.3378   25.6%   25.3%   -0.3%
1/21/2010    43.33   107.37  0.4036    3.8%    7.2%    3.3%
10/19/2010   54.01   130.11  0.4151    6.7%   12.4%    5.3%
 1/6/2011    56.58   133.83  0.4228   -1.7%    2.2%    4.0%
 5/2/2011    59.95   150.41  0.3986   -3.8%   -1.4%    2.5%
 8/5/2011    55.26   161.75  0.3416    1.6%    2.1%    0.5%
12/19/2011   51.02   154.87  0.3294    0.0%    7.4%    7.4%
3/14/2012    50.12   159.57  0.3141   -6.2%  -11.0%   -5.1%

Avg                                     1.1%    4.8%    3.4%
Std. dev                               11.1%   14.6%    6.5%
N                                         15      15      15
t                                       0.38    1.05    0.24

Jun

4

 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.

Thoughts?

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.

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