Friday, September 4th
* We showed early strength yesterday, but volume flows were suspiciously weak for much of the morning and failed to confirm the highs of the day (see chart below). Volume flow is a proprietary volume-weighted measure of upticks vs. downticks for all stocks traded across all exchanges and tells us whether size is generally leaning to the buy side or sell side. Volume weighting the NYSE TICK achieves much of this purpose. Once we began to come off the highs, we saw a steady decline in volume flows, as we quickly turned negative on the day. Tracking such flows is my favorite way of "reading the tape": when the tape does not confirm signals from quant models, I want to listen to the tape. It generally means that something idiosyncratic is moving the market: something models aren't accounting for.
* We're trading significantly off yesterday's highs so far this morning, with fresh selling in premarket. All of this is consistent with the idea of an extended bottoming process following a potential momentum low registered last week. As mentioned yesterday, during these high volatility periods, the percentage of stocks trading above their short-term moving averages ends up being a helpful overbought/oversold gauge. Yesterday, well over 80% of SPX stocks were above their 3-day moving averages.
* My general game plan is to sell bounces, especially on tepid volume flows, but we're quite short-term oversold here, so I'm prepared to wait for a reasonable bounce in price and/or time.
Thursday, September 3rd
* Buying weakness per yesterday's post worked reasonably well yesterday, though a close look at NYSE TICK showed a two-way market with active participation from both buyers and sellers. We continue to be oversold on intermediate-term measures and we still have only a little over 20% of SPX stocks trading above their five-day moving averages. My game plan remains to buy weakness that remains above the overnight lows.
* One of the better decisions I've made in trading recently has been to turn my models off once it became clear that we were trading in a different volatility regime from the one that has persisted for much of the last two or so years. My latest project is building models specific to defined volatility regimes. Early days, but results look promising. One intriguing finding is distinct short-term mean reversion effects in SPY for the current regime. For example, when the number of five-day new highs minus new lows for SPX stocks is zero or above, the next five days in SPY have averaged a loss of -.12%. When the five-day new highs minus lows have been below zero, the next five days have averaged a gain of +.49%. In general, chasing short-term strength or weakness has not been a winning strategy; higher volatility does not imply greater trending. (Raw data from the excellent Index Indicators site).
* I'm concurrently working on the best ways of defining volatility regimes, using realized volatility, implied volatility, and more esoteric measures of vol based on published research in quant finance. This strikes me as a fruitful area of research. Also on the docket is a definition of correlation regimes and investigation of how returns may vary as a function of higher and lower correlations among stocks. The goal is to have a suite of models built out for a range of regimes, so that there are clear rules for turning off one source of trading signals and turning on another. I am not at all convinced that a single model can accurately capture a high proportion of variance in forward returns for stocks, which is another way of saying that stocks behave differently in higher and lower volatility and correlation regimes. Having a set of models to capture those differences could help discretionary traders adapt to their environments more quickly.
Wednesday, September 2nd
* Many thanks to Sean McLaughlin for hosting this podcast on taking your trading to the next level. I'll be elaborating many of these ideas and more at the excellent Stocktoberfest gathering.
* Once again, the selling of bounces has worked well in trading the ES. We're now at an oversold point, however, where I am mindful of the possibility of putting in a short-term bottom. Fewer than 1% of SPX stocks are trading above their 3-day moving averages and my intermediate-term strength measure is very oversold. Although we saw weakness yesterday with 111 new monthly highs and 431 lows, that is nowhere near the weakness last week, when we registered 35 highs and 3553 monthly lows on the big spike down. My game plan is to buy weakness that holds above yesterday's lows and especially that successfully tests yesterday's lows.
* VIX is over 30 and my pure volatility measure is significantly elevated. I expect vol to continue in the near term, which has large implications for sizing of positions and calculations of stops and targets on trades. The inability to adapt to changes in volatility--especially when we have high vol of vol--is a major source of problems for traders in the current market.
Tuesday, September 1st
* Selling bounces has worked well and we've come off hard after hours, resuming the decline in the face of Asia weakness. Volume flows were bearish all day on Tuesday, helping set up the weakness. (Volume flow is a volume-weighted measure of upticks vs. downticks for all exchange-listed shares). The pure volatility measure remains elevated, and I continue to anticipate highly volatile trading. It is not clear to me that we simply head lower in a straight line; intermediate-term measures are quite oversold. I have been treating each time zone as a separate day--Asia, Europe, U.S.--and that has been helpful in framing short-term trades. There are considerable discontinuities of flows from one time zone to the next; greater continuity within each time zone.
* Below is a chart of a simple five-period rate of change, where each bar in the ES futures represents 500 price changes. It is one tool among many that I use to frame whether the market is short-term overbought or oversold. One of my execution rules is to wait for short-term overbought conditions to sell and short-term oversold ones to buy. In volatile markets, that can save a lot of messiness. Many a good idea is undermined by poor entry and exit execution. I'll be discussing my use of such tools in the Las Vegas conference for Trader4ACause.
* I continue to watch commodity markets, as well as Asian stocks, for indications of the economic weakness that is impacting stocks. This is another area in which monitoring action by time zone has been helpful. I continue to lean toward selling bounces, but am mindful that we're short-term oversold here, so am content to wait for shorts to be squeezed before taking any swing positions.
Monday, August 31st
* We focus on setting goals and tracking our progress toward those goals, but a wealth of evidence suggests that a process focus is much more likely to lead to positive outcomes. When we emphasize doing the right things, we are most apt to do things right. This is a very important topic, as much of the flight-and-fight disruption of information processing and decision-making occurs when we're P/L focused and not truly trading focused.
* My pure volatility measure has been percolating higher, so I'm prepared for a good amount of movement in stocks. A great routine is to compare intraday volume of SPY with the volume at the same time of day for the past several sessions. Because volume and volatility correlate highly, the real-time tracking of relative volume helps us intelligently estimate the likely range for the day.
* We've come off Friday's highs in overnight trading, with weakness in Asia and Europe. My game plan is to sell ES on bounces that fail to take out overnight highs. I'm not at all sure we're done hearing about EM and China weakness and associated commodity weakness; the idea of an effective quantitative tightening raised by Deutsche Bank last week is one worth pondering for implications.
* We showed early strength yesterday, but volume flows were suspiciously weak for much of the morning and failed to confirm the highs of the day (see chart below). Volume flow is a proprietary volume-weighted measure of upticks vs. downticks for all stocks traded across all exchanges and tells us whether size is generally leaning to the buy side or sell side. Volume weighting the NYSE TICK achieves much of this purpose. Once we began to come off the highs, we saw a steady decline in volume flows, as we quickly turned negative on the day. Tracking such flows is my favorite way of "reading the tape": when the tape does not confirm signals from quant models, I want to listen to the tape. It generally means that something idiosyncratic is moving the market: something models aren't accounting for.
* We're trading significantly off yesterday's highs so far this morning, with fresh selling in premarket. All of this is consistent with the idea of an extended bottoming process following a potential momentum low registered last week. As mentioned yesterday, during these high volatility periods, the percentage of stocks trading above their short-term moving averages ends up being a helpful overbought/oversold gauge. Yesterday, well over 80% of SPX stocks were above their 3-day moving averages.
* My general game plan is to sell bounces, especially on tepid volume flows, but we're quite short-term oversold here, so I'm prepared to wait for a reasonable bounce in price and/or time.
Thursday, September 3rd
* Buying weakness per yesterday's post worked reasonably well yesterday, though a close look at NYSE TICK showed a two-way market with active participation from both buyers and sellers. We continue to be oversold on intermediate-term measures and we still have only a little over 20% of SPX stocks trading above their five-day moving averages. My game plan remains to buy weakness that remains above the overnight lows.
* One of the better decisions I've made in trading recently has been to turn my models off once it became clear that we were trading in a different volatility regime from the one that has persisted for much of the last two or so years. My latest project is building models specific to defined volatility regimes. Early days, but results look promising. One intriguing finding is distinct short-term mean reversion effects in SPY for the current regime. For example, when the number of five-day new highs minus new lows for SPX stocks is zero or above, the next five days in SPY have averaged a loss of -.12%. When the five-day new highs minus lows have been below zero, the next five days have averaged a gain of +.49%. In general, chasing short-term strength or weakness has not been a winning strategy; higher volatility does not imply greater trending. (Raw data from the excellent Index Indicators site).
* I'm concurrently working on the best ways of defining volatility regimes, using realized volatility, implied volatility, and more esoteric measures of vol based on published research in quant finance. This strikes me as a fruitful area of research. Also on the docket is a definition of correlation regimes and investigation of how returns may vary as a function of higher and lower correlations among stocks. The goal is to have a suite of models built out for a range of regimes, so that there are clear rules for turning off one source of trading signals and turning on another. I am not at all convinced that a single model can accurately capture a high proportion of variance in forward returns for stocks, which is another way of saying that stocks behave differently in higher and lower volatility and correlation regimes. Having a set of models to capture those differences could help discretionary traders adapt to their environments more quickly.
Wednesday, September 2nd
* Many thanks to Sean McLaughlin for hosting this podcast on taking your trading to the next level. I'll be elaborating many of these ideas and more at the excellent Stocktoberfest gathering.
* Once again, the selling of bounces has worked well in trading the ES. We're now at an oversold point, however, where I am mindful of the possibility of putting in a short-term bottom. Fewer than 1% of SPX stocks are trading above their 3-day moving averages and my intermediate-term strength measure is very oversold. Although we saw weakness yesterday with 111 new monthly highs and 431 lows, that is nowhere near the weakness last week, when we registered 35 highs and 3553 monthly lows on the big spike down. My game plan is to buy weakness that holds above yesterday's lows and especially that successfully tests yesterday's lows.
* VIX is over 30 and my pure volatility measure is significantly elevated. I expect vol to continue in the near term, which has large implications for sizing of positions and calculations of stops and targets on trades. The inability to adapt to changes in volatility--especially when we have high vol of vol--is a major source of problems for traders in the current market.
Tuesday, September 1st
* Selling bounces has worked well and we've come off hard after hours, resuming the decline in the face of Asia weakness. Volume flows were bearish all day on Tuesday, helping set up the weakness. (Volume flow is a volume-weighted measure of upticks vs. downticks for all exchange-listed shares). The pure volatility measure remains elevated, and I continue to anticipate highly volatile trading. It is not clear to me that we simply head lower in a straight line; intermediate-term measures are quite oversold. I have been treating each time zone as a separate day--Asia, Europe, U.S.--and that has been helpful in framing short-term trades. There are considerable discontinuities of flows from one time zone to the next; greater continuity within each time zone.
* Below is a chart of a simple five-period rate of change, where each bar in the ES futures represents 500 price changes. It is one tool among many that I use to frame whether the market is short-term overbought or oversold. One of my execution rules is to wait for short-term overbought conditions to sell and short-term oversold ones to buy. In volatile markets, that can save a lot of messiness. Many a good idea is undermined by poor entry and exit execution. I'll be discussing my use of such tools in the Las Vegas conference for Trader4ACause.
* I continue to watch commodity markets, as well as Asian stocks, for indications of the economic weakness that is impacting stocks. This is another area in which monitoring action by time zone has been helpful. I continue to lean toward selling bounces, but am mindful that we're short-term oversold here, so am content to wait for shorts to be squeezed before taking any swing positions.
Monday, August 31st
* We focus on setting goals and tracking our progress toward those goals, but a wealth of evidence suggests that a process focus is much more likely to lead to positive outcomes. When we emphasize doing the right things, we are most apt to do things right. This is a very important topic, as much of the flight-and-fight disruption of information processing and decision-making occurs when we're P/L focused and not truly trading focused.
* My pure volatility measure has been percolating higher, so I'm prepared for a good amount of movement in stocks. A great routine is to compare intraday volume of SPY with the volume at the same time of day for the past several sessions. Because volume and volatility correlate highly, the real-time tracking of relative volume helps us intelligently estimate the likely range for the day.
* We've come off Friday's highs in overnight trading, with weakness in Asia and Europe. My game plan is to sell ES on bounces that fail to take out overnight highs. I'm not at all sure we're done hearing about EM and China weakness and associated commodity weakness; the idea of an effective quantitative tightening raised by Deutsche Bank last week is one worth pondering for implications.
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