Oct

30

FOMC, from Paolo Pezzutti

October 30, 2013 |

The FOMC announcement for the policy meeting is expected to leave rates unchanged. As Bloomberg reports "market focus will be on the FOMC's characterization of the economy-especially the labor market-and on any hints on timing of the start of reducing quantitative easing".

It seems markets are anticipating the release of the minutes expecting another hurrah: let's print some more money….! Markets have been printing new record highs day after day, and I completely missed this move losing instead my hard earned money trying to counter the impressive ongoing uptrend.

I have always wondered if my being contrarian has something to do solely with counting. I continue to see every day bearish patterns that miss their expectations, although I am aware that euphoria may invalidate typical mean reversion behaviors. I think there is something about being a contrarian by nature, like someone who is not willing to be part of a herd. Or to conform to stereotypes.

Extending the concept to its limits, being a contrarian could be also related to the inability (or unwillingness) to fully integrate oneself in the established common set of values of social contexts. As herd behaviors take a long time to exhaust their thrust, often times it would be better anyway to be less dogmatic.

Ed Stewart adds: 

A few thoughts about your post with an admission of little expertise.

Sometimes I truly feel that in spite of all the intelligence applied to it, trading is not much more complicated that other types of commerce where consumer tastes are fickle. As someone else said, it is the art of "what works now" or "what can I buy now to resell at a higher price".

To me, the best of counting is in studying, "what is our market is doing now" and "can i find a profit in it". I find when I get to far away from this basic notion my counting (limited as my abilities are) stops working.

In terms of contrarianism, I don't see it as a technical strategy or a need to always be fading price, so much as a mindset that recognizes that the great loss from the public shows up in money weighted returns, not just transaction costs. If you do what the public does you lose more than you rightfully should, as Vic has said many times.

I see much of trading as playing the forward curve of expectations. The easiest trade to me is shorter term fear against longer term drift or an expected value — and not to "dig in ones heals" but to stay nimble and play for a blip, at least in futures. And not massive fear but just the many little fears that show up regularly and give the other side a chance to exit or initiate at a poor price - and if it turns out out wrong adjust and move on quickly. Make the money back somewhere else.

The worst thing about shorting stocks to me is that it gets you thinking about covering when a more profitable thought at that moment might be to get long - So often on a short trade one squeezes out with a small profit right before the market blasts off again. And when you evaluate it you see that it was indeed a good time to get long, but you were oriented the wrong way and lose out.

One analogy that I liked a great deal in Practical Speculations is that energy dissipates through an ordered flow. That idea and its relation to studying price behavior and economic things like the impact of QE has been very useful to me. QE and similar is potential energy, the markets turn it into kinetic energy. Subsidized cost of capital lead to share buybacks, shrinking float. Shorts crushed. The entire market thermodynamics chapter is highly useful and one of my favorites.


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