Sunday, May 22, 2016

The Surprising Reason We're Not In The Zone When We Trade

If you click on the graphical display above, you'll see the results of a very simple demonstration using heart rate variability biofeedback.  (I used the Heart Math Freeze Framer biofeedback system for the demonstration; the newer version is called em-Wave.) 
In the demonstration, I first attempted to enter and stay "in the zone" by regulating my breathing and sustaining focused concentration.  Notice the regular sine-wave rhythms in the top display.  The finger sensor to the biofeedback unit is picking up a high degree of "coherence" in the variability of my heart beats.  This coherence has been associated with greater emotional well being, improved cognitive performance, and enhanced access to intuition.  

The bottom left display shows that I am functioning "in the zone" during this period of coherence.  Over that period, almost all my scores fall into the green (high) coherence category (bottom right frame).  When hooked to the unit, you can see your rhythms, whether you're in the zone, and whether you're scoring in the green area.  All of these give you instantaneous feedback to let you know if your self-control efforts are succeeding.

Notice the change in my rhythms (top panel) about midway through the demonstration.  At that point, I began talking aloud about financial markets in a stream of consciousness fashion.  I was *not* talking about anything stressful, but notice that simply taking my mind off the self-control efforts was sufficient to get me out of the zone (bottom left panel) and put my readings in the red zone.

This is very important, because it suggests that it doesn't take frustrations and losing trades to nudge us out of our zones.  Our normal daily routines take us out of our optimal states of consciousness.  Once we begin talking, walking, watching screens, etc., we are no longer in that heightened state of focus and self-control that represents our performance zone.  

You can see that I was in the zone from the very beginning of the demonstration.  It takes me little time to get into the zone, because of years of practice.  Note, however, that even this practice was not sufficient to keep me from leaving the zone once I went into the talk-aloud mode.  Where the practice has helped is in returning to the zone once I find myself distracted, frustrated, etc.  That is useful, but it doesn't address the more basic problem:  our daily work routines are incompatible with our optimal performance zone.  

If this is the case, taking trading breaks and preceding work days with meditation are helpful, but the real challenge is sustaining the zone while we are making decisions in financial markets.  This would require a very different work routine: one in which we are minimally distracted, minimally active, and highly self-controlled in our breathing and focus.  Online chat?  Switching from screen to screen to see what is moving?  Little to none of what we usually do when we're trading keep us in a zone and indeed take us out of our ideal state.

Nor would writing in journals or talking with trading coaches help the situation.  Only a change in our trading process and training to sustain the zone in real time would enable us to make decisions from an optimal state.  This is truly a frontier of trading psychology.

Further Reading:  Heart Rate Variability and Self Control in Trading

Saturday, May 21, 2016

Leaving Your Comfort Zone and Entering the Performance Zone

We've all heard about performing "in the zone", that state of being in which we are so absorbed in our activity that we lose self-awareness and awareness of things around us.  This has been called the flow state, and it's been linked to creativity and emotional well-being.  When we perform in the zone, we operate in a different state of mind and body--an altered state of consciousness.  We enter that state as the result of intense, sustained concentration fueled by deep interest.

Therein lies the challenge for traders.  What we do to stay in our comfort zones keeps us out of the performance zone.  We cannot stay in our usual states of mind and hope to be unusually focused and in flow.  Our normal states of mind are not optimal states of mind:  we are too distracted, too self-focused, too broadly aware to be deeply aware.

To be sure, those normal states of mind are useful for normal living.  Broad awareness and high sensitivity to events around us can be useful when we're driving a car or navigating party conversations.  Normal life does not call for immersion and optimal performance, and normal life becomes our norm--what becomes our comfort zone.

We prepare for trading by studying market patterns, and we prepare for trading by writing in journals, creating our plans, and anticipating market scenarios.  Rarely, however, do we prepare for trading by preparing our state of awareness.  If we don't train ourselves to sustain flow states in our preparation, can we really expect to access them in the heat of market activity?

In coming weeks, I will be revisiting biofeedback as a training tool for preparing the day's trading.  The idea is to train ourselves to sustain focused awareness during our market preparation so that we are more likely to achieve that focus during the day's activity.  It may be the case that brain training is the best psychological training of all, enabling us to operate in the zone more consistently and for longer periods of time.  More to come re: this project.

Further Reading:  Three Uses for Biofeedback in Trading

Sunday, May 15, 2016

Seeing Beneath The Market Surface

Markets move higher, markets move lower.  The question worth continually posing is, "Is the market getting stronger or weaker?"  This is a meaningful question because a market that moves higher can be getting weaker and a market that moves lower can be getting stronger.  Perhaps momentum is waning.  Perhaps fewer shares are participating in the move.  Very, very often markets will get weaker before they put in a top and will get stronger before a bottom is in place.  Is the dollar index moving lower?  How many dollar crosses are actually participating in that move?  Are stocks moving higher?  How many sectors are driving the move?  Oil is moving higher.  Are we seeing a growing number of contracts trading at offer vs. bid price, or are we seeing size starting to hit bids?

Long before the tree falls, the trunk has weakened.  Sports teams build rosters before the wins show up on the scorecard.  A political candidate loses support with a couple of constituencies before losing the election.  We look beneath the surface of events to gauge possible directions and outcomes.

Perhaps we seek a long-term romantic relationship.  We are attracted to a person's looks and demeanor, but ultimately we look beneath the surface to determine if the fit is there.  Do they share our values?  Are they caring, responsible people?  Do they complement my strengths or merely compliment them?  What looks attractive is not necessarily a good relationship; what doesn't initially grab us can dazzle us with beauty as we look more deeply.

Too often we focus on price action alone, failing to look beneath the surface.  Stocks in the U.S. are making new highs, but across the globe buying is failing to generate new highs.  We're making new lows on concerns of economic weakness, but commodities are no longer making fresh lows.  When we deepen and broaden our perception, we see what isn't immediately apparent.  The quarterback who sees the entire field is more likely to make the right decision than the quarterback with tunnel vision.

When we plan a trade and ground ourselves in that plan, we can unwittingly create tunnel vision.  When we develop conviction in a view, we can blind ourselves to fresh evidence that contradicts that view.  Having multiple lenses by which we can view strength and weakness allows perception to stay fresh.

Below we see a moving average-based measure of breadth among the FTSE 100 stocks.  (Raw data from Index Indicators).  We can see when breadth strength leads to higher and lower prices and vice versa.  We can see most recently that buying activity has barely moved shares higher--a distinct change from action since February.  That same shift can be observed among DAX 30 shares and SPX 500 stocks.

But only if we take the time to step back and look at markets afresh, from multiple perspectives.

Further Reading:  Creativity is the New Discipline

Saturday, May 14, 2016

The Deepest Motivation Fueling Trading Success

Consider the above quote.

Note that it is *not* saying that the future belongs to those who believe in their dreams.  Rather, the future belongs to those who tap into the beauty of their dreams.

When something is beautiful, we are inspired by it; we're raised to a new level of awareness and feeling.  I recall seeing breathtaking icescapes on a boat trip through the Alaskan glacier region; I think of marveling at the beauty of my child as a baby; I love immersing myself in the beauty of music.  Beauty is transformative, taking the normal and making it extraordinary.

Dreams without beauty are tasks.  They lose their power to motivate.  Think of procrastinators:  they may very well have dreams, but there is no beauty.  Adding something to a to-do list is the surest sign that the activity lacks beauty.  No one needs a calendar reminder to ogle their baby, gaze at an icescape, or enjoy a finely crafted work of music.  

A great way to kill the soul is to start the day with chores--the knocking of items off a to-do list.  When we start a day without beauty, we live the day without inspiration.  And then we wonder why we don't generate brilliant ideas or see beneath the surface of market activity.  Perception and reasoning become rote when we no longer tap into the beauty of our dreams.

A wise rabbi pointed out to me that observant Jews recite a prayer called the Shema twice daily: in the morning and evening.  But the prayer is no mere recitation; it is meant to be a deeply felt emotional connection to the divine.  In order to achieve that deeply felt state, there are warm-up prayers, as it were, that evoke inspirational imagery.  The deep appreciation of beauty cannot be turned on and off like a light switch.  It needs to be cultivated, evoked.

So it is in many faiths.  We fast before a major religious event; we hear music and sing at a wedding ceremony.  We evoke beauty, because that is what connects us to the power of our deepest beliefs and aspirations.

We often will start a day with physical exercise, recognizing that energizing the body can help energize our day.  Rarely, however, will we perform emotional exercise and cultivate the states in which we have greatest drive and resilience.  It's great to set goals and organize our day.  Unless we connect to the beauty of our dreams, however, we'll be like cars operating on half its engine cylinders.  There's a world of difference between setting goals in a journal and immersing ourselves in the beauty of our dreams.

Further Reading:  Achieving Our Trading Dreams

Sunday, May 08, 2016

How To Separate Frustration From Your Trading

A successful developing trader recently wrote to me about a psychological obstacle in his trading.  I'll quote him, so that you can appreciate the problem as he is experiencing it:

"What is the biggest challenge I face after gaining a solid technical knowledge and skill base?  I think it's frustration.  Most often:  1) frustration of not being able to explain to myself what's going on with the market's price action at a given time; 2) frustration driven by understanding what's going on in the market, but not being able to make an execution because of poor risk/reward and/or absence of proper setup to enter; 3) frustration after making a dumb mistake and/or acting wrong while not in 100% mental shape.

Based on the 3 points above, it seems that part of myself is acting as a perfectionist...while another part of me does not have the confidence that will allow me to be more flawless and move to the next level...

I have developed decent self-observation and can relatively quickly determine when I am not 100%.  You know:  the tension, the accelerated breathing...that feeling in the stomach...Although I realize in real time that something is off, that same feeling makes me uncomfortable and is also harming my concentration...Let me add that I do not always feel that way when some of the triggers occur, so I would NOT describe it as a critical and uncontrolled situation.  But, yes, it is a barrier I am struggling with..."

This situation will be familiar to many active traders:  frustration intrudes during the trading process and threatens to interfere with our best decision-making.  As the perceptive reader notices, this can even occur when we are relatively self-aware and in touch with that frustration.  How can we move past frustration?

The key is recognizing that frustration occurs when we have a need and that need is thwarted.  If we eliminate or change the need, the frustration melts away.  If I'm a perfectionist, I create many artificial needs.  Perhaps I feel a need to be 10 minutes early for every appointment on my calendar.  That will create frustration when I am caught in traffic.  If I can accept that I will be just on time or even a bit late once in a while, the traffic is no fun, but it's also no threat.  Frustration is a function of expectation--and perfectionism creates excessive expectations.

So what is our trader's need?  It's the need to trade, the need to make money.  If the market isn't making sense, there's no trade to put on and no money to be made.  If the setup isn't there, the trade isn't there and neither are the profits.  If a bad trade is placed, the fruits of a good trade are erased and there go profits.  That same dynamic can also make it difficult to step away from screens, even though the trader recognizes in real time the signs of frustration.  It's not OK to miss opportunity.

Our trader recognizes that there are occasions in which he finds himself thwarted but is not dominated by frustration.  Those solution occasions are important to figure out.  The capacity to tolerate frustration as an observer and not act on the frustration is true self-control.  It is also true self-confidence to recognize that one doesn't always have to trade and make money to be a successful trader.  The need to trade and make money, ironically, *feeds* a lack of confidence because it reinforces the notion that we're never good enough, we always have to do more and better.

I suspect those exception situations where the triggers occur but the frustrated trading does not are occasions in which there is a degree of genuine contentment and peace with oneself.  That is the antidote to frustration.  If you can accept where you're at now and accept that it's OK to not be trading or to make a mistake, you eliminate the expectation that drives the frustration.  "I know my best setups, I know how to make money, I'll know what to do when the opportunities present themselves"--that is real confidence.  You no longer have to *make* things happen; you have the confidence that, if you do the right things, they will happen over time.

Imagine starting each trading day with a meditation that emphasizes imagery based on peace, contentment, and gratitude for where one is at in trading--and in life.  Imagine taking a trading break midday to clear one's head (fatigue is a great breeding ground for frustration) and come back to markets refreshed.  Imagine stepping away from the screens each time frustration appears and returning to a few deep, slow breaths and the images from the meditation.  Frustrations will always be part of our experience, but they don't have to become drivers of our actions.  The capacity to step away from self-demands gives us control and expresses genuine confidence.

Further Reading:  Overcoming Frustration in Trading

Saturday, May 07, 2016

Why The Path Is As Important As The Move

Let's think about the views that traders express.  Traders look for price movement: a change from one level to another level.  That potential movement we could call the numerator; it's what most traders focus upon.

There is another variable, the denominator, that most traders do not focus upon.  The denominator is the path between the first and second price levels.  It is equally important.

Let's do a thought experiment:  I might expect a stock index to move from 2000 to 2100, a 5% move.  Let's say the index remained nearly unchanged in value for six months before shooting higher to 2100 in the seventh month.  How many traders would have stuck with this trade?

Let's consider a different scenario:  The index moves from 2000 to 2100 in one month, but only after having dropped to 1940 in the first week.  How many traders would have stuck with this trade?

The point, of course, is that path matters.  When we expect a movement, we expect it in a certain time period and we expect the path to the target to have a certain degree of smoothness.  Our one concession to path is the establishment of stop levels, but rarely do we think of path as something to investigate in its own right.

Is the path getting smoother or more choppy?  Does the market's level of volatility support the likelihood of the desired move in a shorter or longer time period?  Is that volatility increasing or waning?

In short, it's easy to focus on what markets will do, but not place enough weight about how that movement is likely to occur.  Intellectually, we identify targets and stops, but what impacts us emotionally are paths.  It's easy to prepare for the trade and remain unprepared for the path of the trade.  

At any time frame, we can identify the amount of net movement between two points (how much price has risen or fallen) as a function of the total movement between two points.  Such a measure of trendiness versus choppiness itself waxes and wanes: trendiness is itself a phenomenon that trends.  Placing a trade in a low trending environment--and one where trending itself has been declining--is quite different from placing a trade in a high trending environment in which trending is itself trending. 

Thinking through the denominator is one way we can deploy capital smarter, deciding when environments are right for our ideas and when environments are more conducive to shorter-term, tactical trading and when they are conducive to longer-term, thematic views.

Further Reading:  Why So Many Traders Lose

Monday, May 02, 2016

Trading Notes for the Week of May 2, 2016

Thursday, May 5th

*  I will be taking a sabbatical during May and June to work on my next book project, which is the third volume of a textbook and an updating of short-term approaches to behavior change.  The blog will be updated on weekends and I'll continue to write the Forbes blog.

Worthwhile perspective on spotting your best trades from SMB.

*  Stocks continued weak yesterday, before bouncing in late and overnight trading.  Breadth continued to weaken, with new monthly highs expanding to 382, but fresh monthly lows also expanding to 834.  We're seeing particular weakness among Asian stock markets, with the strong currencies weighing on shares there. 

*  We continue short-term oversold, with roughly 30% of SPX shares closing above their short-term moving averages (see below).  The recent inability to rally off these oversold levels is making the current market situation different from what we've seen during the rally off the February lows, as macro weakness weighs on the rally.  Payrolls tomorrow will be a major focus.

Wednesday, May 4th

*  Looking to find new and useful books, apps, podcasts, and more?  Excellent resource: Josh Brown will offer his list on Product Hunt LIVE.

*  Stocks continued their weakness yesterday and in overnight trade today, with notable weakness among small caps contributing to negative breadth.  New monthly highs across all exchanges dropped to 304; new lows expanded to 619.  VIX once again jumped and closed above 16.  Global economic weakness has become a dominant market theme, with falling stocks and rising bonds.  Short-term we're oversold, with roughly a third of stocks closing above their 3, 5, and 10-day moving averages; on an intermediate-term basis, I still am not getting oversold readings, but market strength is waning.

*  The cumulative indicators measure tracks buy vs. sell signals for all NYSE issues across a variety of technical trading systems, such as Bollinger Bands, CCI, etc.  Throughout the rally since February, buy signals have handily outnumbered sell signals.  That looks to be changing, given the recent weakness.

*  I'm keeping a close eye on commodities, as yet another possible indication of global economic weakness.  Specifically, I want to see how commodities are behaving vis a vis a variety of currencies, not just USD.

Tuesday, May 3rd

*  Thanks to the Benzinga pre-market prep show for the opportunity to offer a few trading perspectives.

Unusually thoughtful post from Dash of Insight on the importance of understanding analyses that we read.

*  Stocks held above their Friday lows yesterday and rallied to the Friday highs before selling off again in overnight trade.  We continue a consolidation mode; new monthly highs rose to 563 and lows dropped to 397.  About 50% of SPX shares closed above their 20-day moving averages and 60% above their 50-day averages (Data from Index Indicators).  I expect those numbers to reach more oversold levels before the correction has run its course.  Note how we have been making lower highs on the breadth measure tracking the percentages of SPX shares above their short-term moving averages.

*  Sentiment, as measured by share creation versus redemption for the SPY ETF, has turned more bearish for the past three sessions, with net redemptions.  I'm watching that closely.

*  We saw buying pressure nicely exceed selling pressure yesterday on the upticks/downticks measure.  Thus far, net selling and short-term oversold conditions in the market have become near-term buying opportunities for market participants.  My continued leaning is to sell market bounces that fail to take out prior day's highs.

Monday, May 2nd

*  The best model for making trading improvements comes from understanding the drivers of your most successful trades.  Re-engineering your best trading makes you your own guru.

*  We saw a sharp selloff on Friday, with NASDAQ shares taking out their early April lows and new monthly lows outnumbering new highs, 583 to 513.  VIX hit 17 during the session before dropping on a late rally.  That rally has continued modestly in overnight trading.  On a short-term basis, we're oversold, with fewer than 30% of SPX shares trading above their 3- and 5-day moving averages.  My intermediate measures, however, are not yet in oversold territory.  My leaning is to sell bounces that cannot take out Friday's highs.

*  One concern I have about the market is the change of regimes in recent sessions.  The weak dollar is buoying commodities but not stocks, and it's growth stocks (SPYG) underperforming value ones (SPYV).  Earnings have not been impressive and we seem to be pricing in economic weakness.  It's far from clear that the move to negative interest rates has sparked either economic optimism or growth.  All that being said, I am treating this as a correction within a larger upward cycle, not as the start of a bear market.

*  Note how the realized volatility of VIX (implied vol) has hit low levels at relative market peaks and has peaked at relative market bottoms.  We are coming off a very low vol of VIX.

Sunday, May 01, 2016

The Most Powerful Principle In Trading Psychology

Is there a change you would like to make in your trading?  In your trading psychology?  In your personal life?

If you're looking to improve yourself, to continually develop as a person, change will become your norm.  But how do we make changes, and why do so many of the changes we attempt never stick?

A powerful and radically different perspective on the change process is offered by the recent article on finding your solutions. It emphasizes that change is self-directed evolution.  This is a very important concept.

The mistake we make is that we perceive change as doing something new, something different.  That leads us to seek change outside of ourselves, through gurus or therapists or experts.  Indeed, would-be gurus and shrinks have every incentive to encourage that external focus.

If, however, we start from the premise that we are always making changes--some smaller, some greater--we can begin to learn from our own experience.  Change isn't something we need to initiate or motivate ourselves toward.  Change happens every day, in the subtle differences through which we develop ideas, make decisions, interact with people, and process information.  If we only notice, those subtle differences often make a difference.  When we are more effective, it's because we're doing something more effectively.  The change we desire is already occurring within us.

Once we realize that we are the source of our own solutions, we can become more intentional about the changes we make and more attentive to their outcomes.  In short, we can become better agents of our own evolution. 

Is frustration interfering with your trading decisions?  Look to those occasions when you don't experience frustration and identify what you're doing differently.  Scout for examples of times when you *are* frustrated, but manage to make good decisions.  How are you able to do that?  

Solutions are found in the exceptions to our problem patterns, not in trying to be someone we're not.  If there's a change you're looking to make, don't look to do wholly new and different things.  Look to do more of the change you're already enacting when problems aren't occurring.  In all of trading psychology, there is no more powerful principle.

Further Reading:  Putting Positive Psychology to Work For You

Saturday, April 30, 2016

Perfecting The Pause: From Emotions To Emotional Intelligence

Wouldn't it be nice if we could rewind the good times and fast forward when things aren't so good?  While life doesn't (yet) come with a game console, we do have the ability to pause the action in our life.  It turns out that ability to hit "pause" makes all the psychological difference in the world.

Traders commonly make the mistake of treating their emotions as problems.  They want to banish frustration, greed, fear, and boredom from their experience.  The reality is that these emotions provide information: they are there for a reason.  We can either become aware of emotional experience and make use of it, or we can try to banish it and run the risk of having those emotions drive our next decisions.  The problem occurs, you see, when we are not fully aware of our emotional experience, when we're not mindful.  That's when frustration or boredom can drive actions that we would never take otherwise.

Hence the value of the pause function.

Pause provides us with the opportunity for mindfulness.  When we pause and interrupt our activity flow, our attention can switch from external to internal and we can gain self-awareness.  This enables us to identify what we're feeling and why we might be feeling it.  For example, I noticed earlier in the week that I was feeling a bit antsy, wanting to put on a trade that seemed to be setting up.  Long (and sometimes painful!) experience has taught me that trades placed when antsy are as likely to be those notorious Fear Of Missing Out trades as well-conceived ones.  Indeed, in the incident this past week, all my signals had not lined up.  The trade was setting up on short-term criteria (buy an oversold condition), but made absolutely no sense on the higher time frame (weakening market; inability to make new highs on buying pressure).  Pausing allowed me to nix the trade--and save a good amount of money.

Music that was all played notes and no pauses would lose its ability to move us.  Speech that is all words and no pauses would be near incoherent.  Pauses are as much a part of meaning as actions and expressions.  A life lived without pause is a life lived mindlessly.  Creating pauses during the day and week allows us to stand apart from ourselves and ask the important questions.  Pauses give us control, allowing us to be truly active and not merely reactive.

Pause is what turns emotions into emotional intelligence.

Further Reading:  Training The Brain For Mindfulness

Monday, April 25, 2016

Trading Notes for the Week of April 25, 2016

Friday, April 29th

*  I'll be talking with the Benzinga pre-market prep show at 8:35 AM today.  We'll take a look at the psychology of the current market.

*  I love this post regarding innovating and finding new trade setups from Ivanhoff.

*  Stocks bounced nicely from overnight weakness yesterday but then stalled at prior peak levels and sold off sharply into the close.  Breadth was not especially poor; fresh monthly new highs dropped to 915 and new lows rose a bit to 235.  Technology/NASDAQ shares broke below their earlier April lows; housing stocks (XHB) also took a hit.  That's not the kind of action you'd expect if the market was pricing in economic strength.  Fewer than 50% of SPX shares are trading above their 3, 5, and 10-day moving averages.  Let's see if that can bring in buyers, as prior short-term corrections have been able to do.

*  A few things different about this most recent market drop:  1) higher volatility on the decline, with extreme selling on the NYSE TICK measure; 2) the market's inability to rally during USD weakness and commodity firmness; and 3) continued breakdown of correlations among market sectors.  It's when we see shifts in volatility and correlation that we want to entertain notions of regime change.

*  My intermediate-term measures are still nowhere near oversold levels.  I'm quite open to toppy market action here and an intermediate-term correction within the bull cycle.  I'm not expecting a sudden reversal to bear market mode.  Note the sharp rise in VIX.  My Pure VIX model has turned neutral; not yet in "fearful" territory.

Thursday, April 28th

A look at the recent move to higher interest rates, which has affected the trading of higher yielding stocks and stock sectors.

*  Stocks have fallen back after the Bank of Japan disappointment last night.  We're now near the lower end of the recent trading range.  I haven't noticed particular breadth weakness.  Indeed, smaller cap indexes moved to new highs yesterday, as did a number of large cap sectors.  Much of the index weakness has come from technology shares and the higher yielding sectors.  New monthly highs rose to 1112; new lows rose a bit to 209.  My intermediate-term cycle measures are stretched to the upside, however, so I would not be surprised to see further consolidation.

*  Most of the corrective activity we've seen in stocks since the February low has consisted of sector rotation; hence no meaningful deterioration in the breadth numbers.  Below we can see a chart of stocks across all US exchanges making fresh 3-month highs versus 3-month lows.  It has stayed healthy throughout the recent move.  One of the things I'm tracking going forward is the degree to which we see across the board weakness on pullbacks versus rotational movement. 

Wednesday, April 27th

*  Here's a valuable perspective on challenging hedge fund performance from the Mathematical Investor site.

*  My measure of breadth volatility has reached low levels last reached in late November, 2015 before the market drop.  Volume in stocks has also been lagging, which has been associated with subnormal forward returns.  That being said, breadth improved yesterday, with 876 fresh monthly new highs and 189 new lows.

*  Note the divergent sector performance in the past week, with higher yielding shares underperforming and commodity-related shares outperforming.  (Graphic from FinViz).  Rates have been rising ahead of the Fed; I'm keeping a close eye on this.  Note also how technology has been lagging.  Rising rates?  Higher commodities?  Low growth?  Can't imagine a stagflation scenario would be a great one...

Tuesday, April 26th

Excellent research links from Abnormal Returns.  A great aggregation of quant research comes from Quantocracy.  Lots of new ideas in these sources and lots of good blogs to follow.

*  So far my trading experiment has been interesting.  I've been placing far fewer trades, only trading when the market lines up on three time frames and a short-term signal is triggered.  The signal comes from volatility bands drawn around event bars, so the bands reflect what I've been calling pure volatility (volatility per unit of market volume).  The target is also based upon a movement in pure volatility units.  The very structured nature of the risk taking has led to zero overtrading and a higher hit rate on trades.  I'm placing only a tenth of the trades I was placing before, overall profitability in dollar terms has not been hurt, and of course risk-adjusted profitability has increased greatly.  It is not clear to me that much of the trading we do adds value.  By structuring rules around our best trades, we can create significant free time for research and life outside of markets.

*  We saw increased selling pressure in yesterday's trade, but price held relatively well and has bounced a bit in overnight trade.  New monthly highs dropped to 586 and monthly lows also dipped to 208.  I'm still not seeing significant weakness across sectors; the central bank focus the rest of the week will dominate trade.  

*  We can see the market's strength in the cycle measure below.  My long-term cycle research suggests that we made an important cycle low in February (the prior cycle low was October, 2014) and have been in a momentum phase of the new cycle.  I ultimately expect the current cycle to take us to new highs, driven as much by dovish central banks and the need for yield as growth per se.

Monday, April 25th

There is a psychological process that underlies self-confidence--and more specifically a cognitive process.  Key is the recognition is that confidence is an expression of optimism--and optimism comes from finding structural similarities between present challenges and past ones that have been mastered.  This is very relevant to the capacity to stick with one's ideas and weather drawdowns.

*  I'm currently working on a project that tracks long-term cycles in the stock market.  These cycles extend for months, not minutes or days.  It is at this horizon that momentum effects most clearly emerge.  For example, if we go back to 2006 and track the percentage of SPX shares that close above their 100-day moving averages, we find that the top half of readings (those in which there has been strongest breadth) result in an average next 50-day gain of +2.15%.  The bottom half of readings average a next 50-day gain of only +.33%.  The lion's share of the performance differential occurs after a 20-day holding period.  Think about what that means for traders who develop longer-term ideas but have to trade them on short time frames and what that means for short-term traders.  Also think about the implications for the current market.

*  Stocks have pulled back in overnight trading, continuing to consolidate recent gains.  None of my breadth measures suggest that we're yet at an oversold level, as can be seen below.  This measure tracks SPX shares trading above their 3, 5, 10, and 20-day moving averages.  (Raw data from Index Indicators).