Sep

11

Momentum trading is often dubbed speculative behavior. Too often specs jump on the bandwagon (arguably) late in the game. Some are content with day-trading profit - where they ride futures contract or stock strictly inside of the North American session, biased to prevailing longer-term trend/sentiment. Others keep positions overnight, sometimes pyramiding profits - in anticipation of a blow-off grand finale! My discussion will include entirely different sort of speculation, more akin to "value investing" or contrarian play. In my conclusion, going over a number of modern markets, I either felt that a recent move has been grossly overdone - inviting a significant price reaction, or I sensed an upcoming event - the possibility of which the market has not discounted.

Throughout trading history, there have been arguments on behalf of both styles. Trend-followers argued that the race is naturally easier with tail wind. Contrarians would say: in zero-sum game, how can you shoot for a disproportionately large gain, while siding with disproportionately large camp? Then the 64K question would arise: when and where is market a zero-sum game? How much difference does leverage make? In my opinion: a lot.

I have entered commodity futures trading in 1986. I was intrigued: in the course of the 1987, strong up-trends were playing out in most futures and in stocks - with prevailing laissez faire MO at most infrastructure firms, who allowed customers extraordinary risks via leverage. The kind of environment, where "everybody made money" - obviously not a zero-sum game. I lacked experience and under-rated my stupendous million-dollar gain (from small seed capital) accumulated on precious metals positions - and surely the bubble burst, gobbling up my entire stake. The irony: I'm not sure that those Short-from-the-top have collected all of their gain on April 28, 1987 - as some locals disappeared, their trading cards rumored burned. Not sure what went on behind the clearing house curtains… That market was so inflated by locals using 1,000-10,000% intraday margin leverage; and also by many specs allowed 200% overnight leverage - on top of 50:1 exchange-margin requirement! So obviously, conditions were set-up for parabolic blow-off. Current precious metals market is enigmatic: many claim that derivative contracts and even ETF's deem much more gold and silver exists than is physically true. Is it a zero-sum market? It so happened, that every time gold spiked over $1260 this year - I would get extremely alarmed by sloppy attitude of the Longs. Glance at the daily and weekly charts - and you reach a starkling conclusion: most Bulls would surely convert into Bears on any break below $1160. Is this wise planning: to be Long at 1260, only to reverse to Short at 1160??

Remember an un-backed trade in the infamous $13/bu wheat market of 2008? One Man branch associate electronically entered Long position exceeding reasonable broker limits by 1,000%. Controls subsequently got overdone the other way, eventually deflating Wheat futures back to sub-$5… CFTC's "Niederhoffer rule", to boost option-writing margin requirements, was another example of leverage-busting. Overall, I feel that market conversion to electronic execution significantly decreased historical patterns of blow-off reversals. Throughout the 80's and 90's futures trading, I have empirically observed: trends almost never reversed before holidays, weekends, etc. The adage "turn-around Tuesday"; losers procrastinate, failing to surrender in advance of Fri bell. Lo'n'behold, carnage persists Mon; and this time losers, who had the luxury of weekend time to design their exit orders - execute them. And only in the course of Tue - with all of the hapless banished by now - the market embarks on proverbial Lobagola the other way… This pattern might have broken, since electronic futures trading limits don't allow as much over-leverage to begin with, and liquidating orders get triggered sooner rather than later… And those are the reasons that make the opening argument in favor of not being scared as in the yester-year, and do anticipate potential contrarian plays!

Going through archives, I see just how outraged I was at market participant indifference at start of 2009 in regard to 80-cent Gasoline, 1.30 Copper, 40c Cotton (those commodities subsequently rose to 2.40, 3.60, 90c by 2010!). Spring 2010 sported 4.50 Wheat, 3.50 Corn, 13c Sugar (8.00, 4.60, 23c about 2 Quarters later!) I didn't have to predict Russian Wheat embargo by name - but certain price action always triggers logical alarms… Today's participants are disinterested in $3.70 Natural Gas (but many followed Cramer cheering them on at $13.70, looking to "inevitable" $16 two years ago!) To round up this brief market survey, we can expect Cramer and such to lure their audience into "safe" 2.5% long-treasuries– just wait for a momentary equity market spell.v


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