Feb

3

Percival and the Holy GrailTo know whether the market is currently trending, you have to accumulate a database of intraday progression over at least 30 trading days; then continue to add to your database and trade concurrently. Let's first discuss "intraday progression".

For each stock, currency or futures contract, you need to define the day's "opening range". For a typical stock or commodity: it may be daytime opening 15min "hi/lo box". For internationally-flavored futures contract, the day may well be starting overnight. For FX currency-pairs: I recommend first 30-60min range of domestic time-zone (e.g. Far East open for AUD and JPY crosses, but N. Am. open for $/CAD). Exercise discretion and make provisions for markets that would commonly tread water in advance of crucial regularly-scheduled news releases, and then significantly gap. Award a score to each day, ranging between -4 and +4, grading intraday price progression out of optimized (consistent) "opening box". A day (will occur less than once a week) that never significantly traded out of the opening-range all the way through the close will get zero. -4, -3, -2 and -1 are bearish mirror progressions of intraday events described below as bullish +1, +2, +3, +4.

The most typical day (about twice a week) will be a 2-pointer, where market will break its opening box to the upside and end anywhere up there. +1 is awarded to a day (about once a week) that didn't close that high; but it did manage to overcome an earlier short-lived break-down and ended back within the box. +3 is given following same weak start but stronger close well above the box (about once a week). +4 is the case of prolonged trading well below the box, surprisingly reversed by a blistering second-half rally ending well above the box (less than once a week). An extremely rare (once-twice monthly) case would be very late failure of +4 attempt rolling-back into the box and thus getting a zero. You must be very cognizant of the fact that automatic grading of each instrument under the sun, each day, has shown to be somewhat deficient (understandably, those funds who have succeeded and coded at that level of proficiency will never disclose their secrets). Thus, it remains partly discretionary domain (albeit using consistent set of rules and optimized boxes) to assign those -4 through +4 daily grades to each instrument on the trading board of hundreds! Yes, it requires a lot of market-savvy manual labor.

For each instrument, a black box then accumulates running totals as summation of the latest 30 trading days. Although theoretical maximum reading would be 120 either way, we hardly ever see liquid widely-traded markets conquer the seemingly magic 30 level. The key discovery is that a market that just advanced from lower-sum area to over 10 area (positive or negative) is a market beginning to reliably trend! Once beyond 23, such a run will be getting frothy, and we would commence faze out of profitable position. Having rolled back 10 points off the high (say back to 17 from 27) would cause us to abandon trend bias altogether. It should be understood, however, that a new, down-trending bias would only be assumed way later, once the 30-day summation crosses below -10! So it is obvious, that our summation trend-indicator is a laggard. Well, trend-following is a lagging trading concept!

In my over 20 year real-time market experience, I've observed traders disciplined enough to put on biggest exposure exclusively at points of acceleration from 11 to 23 end up as undisputed winners! With decades of steady gains, they would handily outperform a value-investor or a contrarian. These trading programs were hugely favored by macro hedge fund managers and their clients, as lowest drawdown systems and quarterly results that maximized popular yardstick ratios. I will note that large futures positions taken promptly in accordance with above-described signals were roughly corresponding to riding the right side of wave three of three in a typical Elliott Wave impulse, and thus were yielding upwards to 100% return on margin deposit in just one day of trading! That was because commodity exchange margin requirements under SPAN would still be relatively low at that point, as a newly-recognized gapping trend would suddenly begin accelerating.

A necessary postscript is that only a part of the total program was described above, and quite briefly at that. At its best implementation, the program is multi-dimensional and will not (and arguably should not) be fully described in open forum.

Misan Thrope objects:

Holy Grails are mythical. It is philosophically impossible to determine whether tomorrow you will be trending or range-bound.

Rocky Humbert replies:

On your first sentence, arguing that The Holy Grail is mythical is a religious argument – I'll leave it to greater minds.

On your second sentence, if one uses certain physical and/or information models as a guide to financial market behavior, one can reach different conclusions. I respect many people who both agree and disagree with this view. For some, this is a religious debate too!

Lastly, while the Holy Grail may be a myth, the Hole-ly Grail is not. I keep one on my desk. My secretary filled it with coffee once and it made a terrible mess.

Rocky Humbert, quantitative analyst, speculator and master chef, blogs as OneHonestMan.

Don Chu writes:

A very sensible 'hand-count'. Very much like Mark Fisher's work — his opening range AC/BD classifications and rolling multiple day pivot count, a la his The Logical Trader.

Anatoly Veltman replies:

Correct, Don! Mark practiced (and taught) this methodology for decades. I was at first a sceptical participant in his late 80s after-hour weekly group; but listening to the finer points over the next few years (and markets were always discussed in real-time), I ended up incorporating dozens of his ideas into an overall approach. He deserves tremendous credit!

Sep

30

TricoteuseListening to the mainstream media, with all of the hyperbole, could cause one to think that the sky is falling. Partisan bickering, grandstanding, and strong invective by our elected officials has spilled over to the already roiled markets, especially since we're so close to the election. More than a few of my mystic, non-thinking acquaintances have been advocating revolution, with Capitalism being replaced by a kinder, gentler Socialist system. Their true desire is to punish the evil greedy speculators, hold all the rascals accountable, who with the minority party have decided to ruin this great country. Their anger is palpable, and their ultimate dream is to become a tricoteuse. Theirs is only a dream, as sitting at the guillotine would require courage.

Misan Thrope is incredulous:

Didn't Lehman, Washington Mutual, Wachovia, AIG, Freddie, Fannie, Merrill Lynch and Bear Stearns just go down the tubes? Or is it a figment of the MSM's imagination? Might not [insert your favorite name here] get in trouble next if nothing is done?

Stefan Jovanovich explains:

The hyperbole is in the argument that but for the bailout payroll-checks will bounce. I did a Google search, and I could not find a news article about a single company that had been unable to make its payroll because the Federal government had failed to reflate the real estate asset-backed securities market. The connections between the "financial system" and the actual private business being done in the country may once have been real, but they are now largely a fiction. Small businesses that I know operate on a cash basis and don't need/aren't granted bank loans nowadays.

Eastsider concurs:

I think we're seeing a classic availability heuristic bias in the public analysis. The clients of DC looter-lawyers need the bailout, and engineer hysterical media coverage of the problems. The press is now just a firehose of bull____, drowning out all competing viewpoints.

It's a tired cliche to say we're racing toward the world Orwell and Rand forecast, but that analysis seems increasingly, depressingly, apt.

Laurel Kenner adds:

The American Enterprise Institute, W. Isaacs and  others fingered the so-called "Fair Value Accounting" rule as a post-Enron creation run amok, a major cause of the credit freeze.
 
Up until tonight, the SEC said no, the rule just reveals what lousy investments the firms had made. They just announced sensible modifications to the rule.
 
I can only wonder what can the SEC possibly say to the seven major U.S. firms that have fallen because of this rule? Sorry, we were a little too enthusiastic… too bad about you.
 
In any case, I'm sure the new Tricots will love this one.

It seems we are in agreement, when Clive Burlin intervenes:

Ms. Kenner, that you, of all people, would say  that! The whole issue of FASB Statement 157 is a total waste of time; from start to finish.

George Parkanyi ponders:

The news about Fair Value Accounting is interesting, especially to see to what extent it moves the log-jam in the credit system.

With foreign aid, sometimes you can have nasty unintended consequences. For example, when food aid is distributed for free for too long, local agriculture (and self-sufficiency) can crash because the farmers can’t compete with the free food.

In observing the behaviour of LIBOR lately, one wonders if institutions are simply waiting for the government (the patsy) to sell to at relatively inflated prices rather put in the effort to value the securities and try to trade with each other? Could the government’s presence actually be detrimental to a resolution?

An Anonymous Contributor Adds:  

While I am not an accountant, I believe both type of "Guidance" ("active market" and "distressed sales")  just raises the hierarchy of guiding to a higher level. (Could someone enlighten me if I am wrong). I believe FAS 157 pamphlets originally used both these cases as examples of when to use "intrinsic value" versus "market values". What is really new?

Because "active markets" and "distressed sales" are both judgement calls, rather than defined terms, good luck getting your auditor to sign off on them. They remember Arthur Andersen too well and seem sure that there are no penalties for being too strict on interpretation, but get busted for being too liberal.

SEC seem to be taking the stance that "some accounting mistakes were made, but not by me". So they are willing to sell their brother to save themselves. Perhaps as close to an admission of guilt as you can expect to get from a government regulator. 

Jul

16

NigelHaving recently abandoned the barbaric practice of shaving in the morning I've been looking into the history of facial hair. It seems that the killer blow was dealt by Gillette in 1903 when they started making razors with replaceable blades that could easily be used by anyone at home. This certainly made shaving easier and more convenient (not to mention safer), and when you add in a modern obsession with youth the clean-shaven look was bound to win out. But will this continue into the future? Who knows.

The impact Gillette had on beards got me thinking about what higher energy costs and ever greater wonders on the technology front might do. I think there may be many different effects, not least of which will be to make home based working a lot easier and commuting a lot more difficult to justify. So perhaps a new paradigm will govern the property market with people wanting to live in either the city (no commute) or genuinely pleasant places whilst 'commuter towns' will become an anachronism.

What does this mean in practical terms; bullish on York, bearish on Milton Keynes. And the coming viability of working remotely via tech might also explain the relative strength of the Naz, despite the fact that conventional wisdom would have us believe it should lead any decline.

Misan Thrope adds, somewhat off topic:

Shaving a 'barbaric act'? Until I recently I thought a 'barbarian' was someone who did not shave (from the Latin Barba = Beard).  However it seems that there is some controversy on this point and some say barbarian derives from the term ba-ba-ba which the Greeks used to caricature those who spoke any foreign (i.e. non Greek) language. You learn something new from Daily Speculations every day.

Riz Din remarks:

I have spent most of my life in Milton Keynes and am living in the town at present. It is a strange place, made up of extremely straight roads intersected by endless roundabouts. In my childhood, I would often venture to Birmingham or London to see my family, and for a long time, I thought these places were very strange, what with there bendy roads and the like. Over time, I realized it was Milton Keynes that was strange. Fortunately, the town managed to avoid the tidal wave of ugly concrete buildings that swept across the country in the 70s and so is relatively easy on the eye. It is still a somewhat sterile place though, and because the 'new city' was created by top-down city planners, it lacks any sense of organic evolution. Personally, I think it is a fine place to grow up as a child, or to retire if you want the quieter life with all the conveniences. For one's middle years, it isn't so much fun - the proximity to London maintains my sanity. That said, Milton Keynes is growing, and growing. Some people clearly like it. Technology reduces barriers and makes remote working possible, but the impact on the workplace has been less marked than many expected. It still pays to be in the thick of it.

P.S. I was disappointed to learn that the name Milton Keynes has nothing to do with the great economist and investor.

May

15

I had lunch in Mutare yesterday, a town in Zimbabwe on the Mozambique border.

To give you a benchmark — bread is currently over 110 million a loaf; on 22nd April it was 40 million per loaf. The lunch bill: soup — 50 million, oxtail — 600 million, coffee — 50 million, with no charge for the pink ice cream. During the meal, one of my mates was drinking beer — 750ml bottles of Castle Lager (fondly called bombers). He ordered a fifth one, was advised that the price, which when he ordered his first, second, third and fourth ones was 160 million per bottle, had gone up to 340 million per bottle. That's right — during lunch there was a price increase… He ordered no more beer! Aren't you glad you are not a beer drinker here in Zimbabwe!

Misan Thrope adds:

Hang in there, help is on the way:  Zimbabwe introduces half-a-billion dollar note.

Nov

17

A nice quote I want to share (not sure who wrote it) -

Be kinder than necessary, for everyone is fighting some kind of battle. Life isn't about waiting for the storm to pass, it's about learning how to dance in the rain. 

Many of us are fighting our own battles with the Market Mistress, real estate and rental problems, etc. One thing we can do on Vic and Laurel's site is to listen to each other's problems and offer sound advice when warranted. Football is back and forth for control of the playing field just as the market is back and forth for many attempting to gain control of the big board. I look at 'dancing in the rain' as learning to cope with the many troubles facing us today.

Misan Thrope writes:

This is a hodgepodge of separate quotations: "Be kinder than necessary" is attributed to J. M. Barrie 1860-1937 (the author of Peter Pan), "be kind, for every one you meet is fighting a great battle" is attributed to either the greek philosopher Plato (427 BCE - 347 BCE) or (more likely) Philo of Alexandria (20 BCE - 50 CE) depending which web site you believe. Finally "life isn't .. dance in the rain" is from an anonymous source. A good example of Internet junk that gets transmitted like a virus through repetition and random recombination of disparate elements. 

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