Apr

18

SushilOn the one hand it is said that those funds, individuals, traders who could not get on in the 30% plus move across every equity index in the world will destroy this rally, yet on the other it is argued that because this market has remained under-bought any pullbacks will be bought into. These are both opinions, not facts.

Let me ask those who did not buy in because they did not like the news then or those who did not buy because they did not like the patterns in the data they read will they buy the next dip? News-readers will become ticker tape readers or those who are reading the news now of so many remaining under-bought will be able to sell the tape now?

Blondie said in the movie, "The good, the bad and the ugly" that, "You see, in this world, there's two kinds of people, my friend. Those with loaded guns, and those who dig. You dig."

Those who seek incentives of anticipating will anticipate and those who seek benefits of being followers will continue to follow. Nature of men does not change.

So, who is going to shoot this rally, whenever it does get shot? It likely will be those who are not digging (the guns) and those who indeed had the guns at the last set of lows. Those who shoot this rally will also then have a loaded gun to shoot the next drop when it comes. Yes, Blondie has been so correct, those who dig would dig, those who shoot would shoot.


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13 Comments so far

  1. Hans on April 19, 2009 8:35 am

    what are the stats? What are our chances? If u look at one popular overbought/oversold measure: the %-deviation of the S&P500 index versus its 50 day simple moving average: It currently stands at 9,9 %. This is the highest reading since 23/11/1998. Then comes the reasonable and intuitive conclusion to take some profits because you may think the S&P is oversold. However, I have just tested this deviation: What was the 3-month percentual change in the S&P500 (daily data since 1950) for every time the 50day MA spread was higher than 9,5 %.

    Facts:daily data of SP500 since 03/01/1950

    - number of data points the SP500 stood 9,5 % higher than its 50 day simple moving average = 70
    - mean return of the S&P500 return after 90 days (3 months) = 12, 2 %!
    - minimum return SP500 after 90 days = 0 %
    - maximum return SP500 after 90 days = 21,6 %

    In fact, the intuitive conclusion that the market is oversold by looking at this popular measure is just plain wrong. In fact, the current reading of 9,9 % couldn't be more bullish for the next 3 months. Not once in the past 60 years have we witnessed a 3 month setback in the S&P500 when the indicator stood at 9,5 % or higher. The distribution is as follows:

    0% - 5%: 10
    5% - 10%: 15
    10% - 15%: 14
    15% - 20%: 28
    20% - 25 %:3

    Do we trade against such a bullish reading? Or do we follow this stat…? Would love to hear your remarks.

    Thanks!

    Best regards
    Hans

  2. André René Roussimoff on April 19, 2009 2:01 pm

    “I look back several months when Goldman was in the low 40s and Morgan Stanley was 6. Here was an opportunity to buy the two premier investment banks at fire sale prices while others were saying that the world as we know it had just ended”

    Anybody can look back and post their winners. How about your whole portfolio? Were these your only two trades? Did you have 20 trades and 18 were losers? Come on Steve! You know that posting your winners and patting yourself on the back is bad form. Even with someone who offers so many original pearls of wisdom as you!

  3. Larry Tribe on April 19, 2009 2:05 pm

    Somehow one never hears about the times when Mr. Leslie loses money, whether in the market or at the minimum wage poker table; we hear only about when he outsmarts Warren Buffett. Might I remind everyone, if they have any money left, that Steve told us to buy GOOG, AAPL, RIMM, and GRMN, all at about $1000/share, and he never bothered to tell us to sell?

  4. Sushil Kedia: on April 19, 2009 3:21 pm

    Sushil Kedia's comment at the comment of Hans:

    You are perhaps wanting to say overbought but the frequent use of the word oversold is a Freudian slip or some such thing. Such a slip in general would be a good warning sign that despite the data you are reading, your mind is reading oversold only.

    Now, if indeed you are saying that commonsense is to take some profits here yet the historical data is pointing to non-negative 90 day returns on such an occurrence I would say the most uncommon thing in markets is commonsense. So, listening to that appeal of commonsense is not going to be followed commonly.

    Two, this study is useful of cause. It would become more useful if one were to look at the deepest adverse incursion on picking up a long trade here on such stats as may have occurred in the past before the non-negative 90 day returns were realised.

    The game is to expand one's odds not to find a zero or a unity probability. So, in having a constant eye on the risk and reward if the balance is to take on a fresh long here one should. Exercise left to the commentator to update his stats and report back to the site if he likes.

    However, if we look at the descriptive arguments at the two ends it is actually the action of the underbought at the 700 or sub 700 area on SPX that would drive the game hereon. If they choose to come and try to destroy this rally (as if anyone set of people could ever make or break a market, except for the mythical Japanese taxi drivers who broke the Yen/Dollar inadvertently) they would from their underbought state become deeply underbought and strengthen the rally. If they came into reduce their underbought state and pick up longs here they would have given the opportunity to unload the bullets of those who had the loaded gun then and have it now.

    So, depending on how much is the tolerance for an adverse incursion in between now and the next ninety days one can choose to find this bullish. But then for those who did have the loaded gun a 10% drop is enough for them to shoot as well. So, it depends.

  5. admin on April 19, 2009 3:24 pm

    Sushil Kedia’s comment at the comment of Hans:

    You are perhaps wanting to say overbought but the frequent use of the word oversold is a Freudian slip or some such thing. Such a slip in general would be a good warning sign that despite the data you are reading, your mind is reading oversold only.

    Now, if indeed you are saying that commonsense is to take some profits here yet the historical data is pointing to non-negative 90 day returns on such an occurrence I would say the most uncommon thing in markets is commonsense. So, listening to that appeal of commonsense is not going to be followed commonly.

    Two, this study is useful of cause. It would become more useful if one were to look at the deepest adverse incursion on picking up a long trade here on such stats as may have occurred in the past before the non-negative 90 day returns were realised.

    The game is to expand one’s odds not to find a zero or a unity probability. So, in having a constant eye on the risk and reward if the balance is to take on a fresh long here one should. Exercise left to the commentator to update his stats and report back to the site if he likes.

    However, if we look at the descriptive arguments at the two ends it is actually the action of the underbought at the 700 or sub 700 area on SPX that would drive the game hereon. If they choose to come and try to destroy this rally (as if anyone set of people could ever make or break a market, except for the mythical Japanese taxi drivers who broke the Yen/Dollar inadvertently) they would from their underbought state become deeply underbought and strengthen the rally. If they came into reduce their underbought state and pick up longs here they would have given the opportunity to unload the bullets of those who had the loaded gun then and have it now.

    So, depending on how much is the tolerance for an adverse incursion in between now and the next ninety days one can choose to find this bullish. But then for those who did have the loaded gun a 10% drop is enough for them to shoot as well. So, it depends.

  6. André René Roussimoff on April 19, 2009 5:18 pm

    "Now what do you say to this?"

    Will you treat me to dinner at Red Lobster first? I'll go with you at 4 o'clock so you can save a dollar or two.

  7. Hans on April 19, 2009 6:41 pm

    LOL… I am very sorry…overbought indeed…

    G_d, please kill me…

  8. Hans on April 19, 2009 7:03 pm

    Dear Mr. Kedia,

    Thanks for your remarks. If I understand you correctly, you would like to know what the biggest drawdown was (of the 70 data points) before turning positive after 90 trading days? I’ll be back with my findings…interesting indeed.

    PS:It was a Freudian slip indeed, since I was planning to add massive longs on monday…:-)

    PS2: just some extra info:90 days = 90 trading days. So the 3 month mentioning was not so correct since it skips weekend days.

    best regards

  9. Hans on April 19, 2009 7:25 pm

    I’m back (hopefully without a freudian slip this time):

    For all the 70 datapoints, what were the biggest drawdowns between entry (start of the period when the reading was > 9,5 %) and after 90 trading days:

    biggest drawdown: -7,05 %
    smallest drawdown: 0 %
    mean drawdown: - 2,59 %
    median drawdown: - 2,35 %

    here are all the 70 drawdowns (ranked)

    -7,05%
    -6,96%
    -6,58%
    -6,49%
    -6,29%
    -5,51%
    -5,41%
    -4,69%
    -4,52%
    -4,41%
    -4,29%
    -4,25%
    -4,23%
    -3,99%
    -3,96%
    -3,85%
    -3,84%
    -3,74%
    -3,57%
    -3,53%
    -3,26%
    -3,23%
    -3,11%
    -2,78%
    -2,76%
    -2,71%
    -2,69%
    -2,67%
    -2,42%
    -2,35%
    -2,35%
    -2,18%
    -2,04%
    -1,84%
    -1,83%
    -1,78%
    -1,73%
    -1,69%
    -1,68%
    -1,57%
    -1,46%
    -1,36%
    -1,27%
    -1,22%
    -1,15%
    -1,12%
    -0,78%
    -0,75%
    -0,74%
    -0,49%
    -0,48%
    -0,34%
    -0,27%
    -0,25%
    0,00%
    0,00%
    0,00%
    0,00%
    0,00%
    0,00%

    I can’t wait untill the 90 tr.days are over to see what this stat has given us…:-)

    best regards
    Hans

  10. Hans on April 19, 2009 7:37 pm

    Now, here is another question. How would you play these stats correctly…

    1) Go immediately long and scale into the position if the S&P drops below the entry price with a stop? where? (historical biggest drawdown)?

    2)go immediately long without scaling when sp500 drops, with a stop

    3) wait and scale into longs when (if) Sp500 drops…

    3) just go short and ignore the whole stat :-)

    best regards
    Hans

  11. Joey Biden, 1 Observatory Circle, Wash. D.C. on April 19, 2009 9:04 pm

    I don't understand why you guys think it's implausible that Steve Leslie could have only big winning trades. I've been doing that my entire career. Here are some of my recent trades:

    –sold MER in the triple digits in '07

    –bought GOOG at the IPO; sold in late '07 at >$600 (I could have swing-traded it for more profit, but I like Steve's advice to hang on for the really big gains–it's more elegant, and more favorable tax-wise.)

    –shorted CSCO in March 2000; covered October 2002 (There were many other stocks I considered as shorts, but CSCO had the capacity needed for my scale of trading.)

    My other trades are all big winners as well, just like these.

    Here are some other things that I've done:

    –ghost-wrote most of the songs attributed to Lennon and McCartney (although I must give credit to Sir Paul on "Yesterday"–that one was a keeper.)

    –saved the lives of drowning victims on two separate occasions (although the ungrateful bastards went on to lead unproductive lives)

    –through backdoor diplomacy, prevented the U.S. and USSR from exchanging ICBMs over disputed fishing rights in the Arctic Sea

    –moved entirely into bonds (along with my clients) in early September 2008

    –taught John Travolta how to dance for "Saturday Night Fever"

  12. Sushil Kedia on April 20, 2009 2:45 am

    Hi Hans,

    The ranked negative incursions by mere observation can be said to be leptokurtic since mean<median. If the probability of larger drops is larger than the smaller ones, I would like to find a way to figure out if the next negative incursion is not going to be largest so far. Since that cannot be done with any accuracy and whatever methods one would use it is still taking chances, howsoever well calculated. Thus, the next trade whichever direction you or I are inclined to take depending on our different time horizons, risk tolerances and what movement defines opportunity for us etc. etc. will have to bear this in mind. Also there are three states any one trader can be on a contract at any given point in time: Bought, Sold or sitting on null. Given three possible existing states and three new states one can move to there are thus a total of 9 decision pairs. Money is made or lost once the open and close decisions are both taken. So there are total of 8 decision pairs worth studying. Depending thus on what each trader's current state is on the market he will have a unique set of risk or reward facing him of the 8different possible outcome types. Hence, I would say that Merely based on these statistics and without really testing them on how significant they are at or away from a specific value(mean is not necessarily the significant expectation) each will have to choose what is a risk for one and what may be an opportunity for the other.

  13. hans on April 20, 2009 9:08 am

    Hi Sushil,

    I agree. If the SP500 closes -2 % of today (it just openened -2%), we are already getting much closer to the historical worst drawdown. Of course, all the datapoints in the world still would give no certainty.

    But it is getting to look very attractive to add positions…

    Let's see within 3 months.

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