Jan

25

Market Moves, from Jim Sogi

January 25, 2008 |

Jim SogiI remember the 1960s through the 1970s (Chart). There were 50% price swings. Though I cannot test it, I hypothesize the recent 20 year sample won't be predictive in that 1960s out sample. In the 1970s and early 1980s apparently simple trend following strategies worked, but in the last several years such tactics have not worked. Successful trend followers became extinct. But today we are seeing 20% trend moves which might be defined as multiple 100 point moves without an equal bounce. Bollinger wondered whether old things might have their comeback. I do too. To quantify this, we have had a 200 points down with no 100 point bounce. In 2001-2002 there were several 300 point down moves without a bounce.

In 2000 and 2001 mechanical day trading tactics worked. Strategies such as trailing stops, breakout/down buy/sell stops, buy prior x bar high breakouts, pyramiding etc. These have not worked well the last five years. Also note that ranges, gaps, absolute volatility are all non-significant for 15 years data. Today entries and exits almost had to have been at market to get in or out in time. There were no retracements on the runs up or or down runs. Today's 68 point bounce was the biggest up move open to close since 1994.

Referring back to our discussion of stop/no stop/leverage tactics, the no-stop method does not work well in a trending situation and one trend, whether random or not can hurt a no-stop leveraged account. Larry Williams is right on this. No stops may have been right before, but things have changed, again.

StegosaurusThe non-significance of current moves indicates climatic changes. Only adaptability will prevent extinction. In evolution theory, fixed or slow moving characteristics or non-adapters were wiped out when climates or conditions changed rapidly. Even the mighty dinosaurs disappeared after ruling the earth for hundreds of millions of years. The question is, are the data becoming stale? Hurricanes build when energy is released. All this stimulus is going to keep these storms going strong. What about a 50% trading range like the 1960s-1980s? There were weird government maneuvers going on then too, price controls, the dollar off the gold standard, Vietnam, Savings and Loans, inflation pre-Volcker, assassination of presidents, impeachment, war, race riots. All very weird. I remember getting out of investments in October 2001 after some stiff losses thinking, things are changing. Glad I did. It saved me.

Paolo Pezzutti adds: 

The market will come back eventually.

What is amazing is how quickly you can give back your hard gained money. Especially, what happens to small traders is that even if you do recognize situations like this one as buying opportunities you are under capitalized to enter the market. You are caught by surprise, when you consider selling it is too late, your gains have already gone, you decide to hold because it will go back up, but you are unable to profit from the "On Sale!" prices. You cannot participate in the party and you get only the crumbs. End of story.

When trading short-term you do not have these problems, you are in and out often, but the small trader, part time trader is not consistent, does not have time, has high commissions, may have a not-perfectly-tuned strategy and the results most of the times are at best underperforming.

In all these years, I have learned that when volatility is above a certain level, I have to stay out. One loss can be so big as to eat all the profits I made in two months. Normally volatility does not increase so abruptly that you cannot tell that  the environment has changed.


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6 Comments so far

  1. George Parkanyi on January 25, 2008 10:06 am

    ON BEARISH COMMENTS AND CULTURAL DIFFERENCES …

    ROGUE TRADER: Merde, j'ai perdu sept milliards!

    BROGUE TRADER: Shite. That'd be a minus b'fore that seven billion then?

    :)

    ON MARKET MOVES
    I'm thinking you could put together a very nice little allocation strategy using the opposite correlation of long/short equity and/or commodity ETF pairs - with some modest 2x leverage to double the volatility. You might just be able get a little of that volatility to stick to your brokerage account over time by letting some money flow from high ground to low ground when the opportunities present themselves, whichever side(s) happens to be moving. I even have a name for it: Short/Long Edge - SLEDGE. Look ma, I'm a sledge fund!

    THEN you'd never have to feel angst over market direction. (only over counter-parties defaulting on your ETF management company.)

    A top o' the market to ya …

    GP

  2. lon on January 25, 2008 3:19 pm

    Thank you Mr. Sogi, It is comforting to hear the voice of reason, or least of speculation, in among the cacophony of 'why test it, it worked before?' Yes, Mr. Sogi, there has been a sea change. It will be a hard ride down. I cut my speculative teeth on a day trading floor located not far from the NYSE. I well remember the gaggle of 25 year old millionaires squacking with profundity regarding the inevitable bounce as NASDAQ imploded. As I exited that experience at the dawn of 2001, I noted that of all the millionaires I had been associated with there was but one left still standing. Jumping from the frying pan and into the fire, I took up the futures game. I've been waiting a patient seven years for this, the latest of the market's Ponzi implosions. Well positioned, I'm comfortable, and still patient in my expectation that we've still a bit of a drop before the inevitable "inevitable." Oh, One last thought. When should I cover? About the same time those who accumulate around this site begin hitting the bid in earnest. You know, when the blood is running in the streets. "Hey, relax guys. Bang away, I'm a buyer." Cheers! lon

  3. Greg Herder on January 25, 2008 10:48 pm

    With the volatility and intraday spikes, if you are contemplating using stop losses you may as well just send your broker a cheque, and not waste your time trading.

  4. Anil Baptist on January 27, 2008 6:03 pm

    Very interesting article.As we move into the internet age where information moves fast, there is a rush of money flowing in and out of markets. Coupled with computerized trading where systems are highly mechanical these add to volatility. I feel volatility is here to stay and so many systems that worked in the past may not work today. I have been trading for the last five years and I find that what i learned all these years is coming to naught.Using indicators that had a good probability of success is not working in these markets. I feel that one has to constantly look for blue ocean strategies to succeed in this and future markets.My belief that intuitive traders will have a good chance of success in the future. With all this technology floating around these traders are few and far between

  5. Bill aka NO DooDahs! on January 28, 2008 12:39 pm

    “In the 1970s and early 1980s apparently simple trend following strategies worked, but in the last several years such tactics have not worked. Successful trend followers became extinct.”

    Maybe the simple trend-following tactics YOU have tested did not work, but please don’t be arrogant and assume that all of them did not work, just because the ones you may have observed or tested did not.

    :-)

    A simple strategy of 100 day and 180 day exponential moving average crosses provided outsized risk-adjusted returns throughout the entire existence of the S&P 500 index, including over the last decade. Long the S&P 500 if the short average is above the longer average, cash otherwise.

  6. Craig Bowles on February 1, 2008 12:14 pm

    Hi Jim, It just dawned on me yesterday when running home from work that you might be right on the 1960s situation. That was also coming off the previous recession when housing expanded throughout due to demographics. It was a bizarre decade where the lagging economic indicators like debt remained high. Japan and Korea were hitting their stride like China and India are now. The reason it’s probably more like the 1970s is inflation and being at the end of a debt boom.

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