* Playing a Bit of Catch Up - The market has been giving some interesting readings over the last several days. Small cap stocks, which had been lagging, have recently outperformed their larger counterparts. We now see a relatively even percentage of large caps (38%) and small caps (35%) trading above their 50-day moving averages. We've also seen renewed interest in the NASDAQ 100 issues, 43% of which are now trading above their 50-day benchmark. We have 53% of Dow Industrial stocks trading above their averages, but that number has hardly budged in the last few trading sessions. Rather, we've seen some catch up from those other sectors.
* Not a Robust Rise So Far - We have some good overnight strength this morning on the heels of strong international markets, so I'll be looking to see if that broadly lifts stocks today. One measure I'll be following is the Cumulative Adjusted NYSE TICK, which has actually been negative during this recent market bounce. That bias in selling sentiment has shown up in other measures as well, including tepid advance-decline numbers and persistent high levels in the number of stocks making fresh 20-day lows. On Thursday we saw 480 stocks make 20-day highs, but also 1262 register new 20-day lows. Momentum figures were good for Thursday (Demand was 101, Supply 48) and that seems to be carrying forward this AM. We need to be seeing rising numbers of stocks making new highs, but also fewer stocks making new lows. If we just look at common stocks traded on the NYSE, new lows actually increased on Thursday over Wednesday.
* Carry Trade Comeback - Some chatter this AM regarding economic weakness in Japan and prospects for an interest rate cut. That has renewed interest in the carry trade, with the Yen hovering at multiday lows. The recent decline has also corresponded to this morning's bounce in stocks, so it's a theme I'm tracking.
* Checking Out the Blogosphere - Trader Mike's link update includes some very interesting perspectives on daytrading and subprime implosion, plus an interview with a trading coach. Abnormal Returns weighs in with views on counterparty risk--a major bank concern right now--and rising volatility in equities.
* Historical Trading Patterns - Bespoke Investment Group finds a bearish pattern when the 50 day MA crosses the 200 day MA and also looks at bullish seasonal trends from Christmas to New Year. Trader's Narrative finds a pattern in the market's new highs and lows that has worked out well lately. My recent post found subnormal returns following market dips during periods of falling volatility.
* Training the Brain - Sharp Brains offers an interview perspective on cognitive fitness, including its relationship to physical fitness. See also 10 habits of effective brains.
* Market Direction and Volume - Ray Barros offers worthwhile views from Wyckoff and Market Delta.
Friday, December 21, 2007
Thursday, December 20, 2007
Stocks Down, Option Volatility (VIX) Down: What Happens Next
Interestingly, over the past five trading sessions, the S&P 500 Index ($SPX) has been down about 1.9%, but the VIX has also been down 8.8%. I went back to the start of 2004 (N = 995 trading days) and found that the average VIX change when the five-day $SPX has been down more than 1% has been +16.46%. We've only had six occasions during that time in which $SPX has been down more than 1% over a five-day period and VIX has also been down. The S&P 500 Index was lower five days later on four of those six occasions, for an average loss of -.77%.
Indeed, when $SPX has been down more than 1% over a five-day period and VIX has been up less than 4% during that same time (N = 29), the S&P 500 Index has been higher only 7 times and lower 22 times over the next five trading days (average loss = -.84%). When stocks have been lower but options participants are displaying relative complacency, short-term returns have been subnormal.
RELEVANT POSTS:
* VIX and Daytrading Opportunity
* Volatility of the VIX
.
Indeed, when $SPX has been down more than 1% over a five-day period and VIX has been up less than 4% during that same time (N = 29), the S&P 500 Index has been higher only 7 times and lower 22 times over the next five trading days (average loss = -.84%). When stocks have been lower but options participants are displaying relative complacency, short-term returns have been subnormal.
RELEVANT POSTS:
* VIX and Daytrading Opportunity
* Volatility of the VIX
.
Macro Themes for a Thursday
* Central Bank Cross-Currents - Very interesting dynamics among the central banks. China is raising interest rates to fight inflation; the ECB is dismissing calls for lower rates also due to inflation concerns, but faces pressure to reduce rates in the face of economic slowdown. Inflation is on the rise in Brazil, where rates have been kept steady after a lengthy period of easing. The BOJ has refrained from raising rates due to signs of economic slowdown. The markets are anticipating a Fed interest rate cut on Jan. 30th (86% odds), but 10-yr yields have been staying above 4% due to inflation concerns in the U.S. Meanwhile, I'm looking to the commodity markets for indications of whether the economic slowdown meme might be trumping concerns over inflation.
* Currency Cross-Currents - As stocks have bounced from their November lows, we've also seen a dollar bounce vs. Yen and Euro despite those recent nasty inflation figures in the U.S. Ironically, in a global slowdown scenario--particularly one in which growth is more threatened in Japan and Europe than in the U.S. due, in part, to overseas credit concerns--the dollar could wind up as a safer haven despite the multitude of dollar concerns. A U.S. slowdown appears to be hurting Asian issues, adding to those international credit concerns. Concerns over an overvalued Euro could lead to renewed interest in dollar-based assets.
* Misunderstanding the Fed and ECB: A Dash of Insight has several excellent posts on how investors lack an understanding of LIBOR and how the Fed and ECB are not out of touch with financial markets, despite concerns over the pace of their response to credit concerns.
* Tough to Be Rich - Barry Ritholtz chronicles the high cost of living well, as inflation hits the upper end of the economic spectrum.
* Currency Cross-Currents - As stocks have bounced from their November lows, we've also seen a dollar bounce vs. Yen and Euro despite those recent nasty inflation figures in the U.S. Ironically, in a global slowdown scenario--particularly one in which growth is more threatened in Japan and Europe than in the U.S. due, in part, to overseas credit concerns--the dollar could wind up as a safer haven despite the multitude of dollar concerns. A U.S. slowdown appears to be hurting Asian issues, adding to those international credit concerns. Concerns over an overvalued Euro could lead to renewed interest in dollar-based assets.
* Misunderstanding the Fed and ECB: A Dash of Insight has several excellent posts on how investors lack an understanding of LIBOR and how the Fed and ECB are not out of touch with financial markets, despite concerns over the pace of their response to credit concerns.
* Tough to Be Rich - Barry Ritholtz chronicles the high cost of living well, as inflation hits the upper end of the economic spectrum.
Wednesday, December 19, 2007
Greatness, Happiness, and Performance: What Contributes to Success
What It Takes To Be An Elite Performer: It's not something you're born with; greatness develops over time. Intensive skill rehearsal is a major component. I've gotten pretty good at identifying who will succeed in a trading career and who won't. The successes are those that work intensively on their trading--when they're making money.
Intelligence: Researcher Dean Keith Simonton hits it on the head: "My view of intelligence is basically a Darwinian one. It's based on sort of the old Functionalist notion that goes way back to Francis Galton, that says that there are a certain set of cognitive capacities that enable an individual to adapt and thrive in any given environment they find themselves in, and those cognitive capacities include things like memory and retrieval, and problem solving and so forth. There's a cluster of cognitive abilities that lead to successful adaptation to a wide range of environments." Successful traders are intelligent in Simonton's sense. They don't just master one pattern or market environment, but adapt to changing market conditions and thus build a career.
Well-Being: Historically, psychologists have spent more time and effort studying dysfunction than positive emotion. Recent studies have utilized a range of methods for evaluating the positive emotional states that people experience. One of the most interesting findings is that of adaptation: when people have good things happen to them (such as winning a lottery or getting a new home or job), they quickly adapt to the new circumstance and wind up with the same overall level of well-being that they experienced before. Similarly, people can experience sizable setbacks, including even the loss of a limb, and return to their prior level of well-being once they've adapted to the change. This helps explain the persistent motivation of successful traders. In an important sense, they never totally feel satisfied with their performance and wealth--they adapt to their new levels of profitability and return to their prior levels of well-being--so they're always trying to accomplish more and reach new levels.
What Makes You Happy: Research suggests that your base of comparison is an important element in your happiness. If you compare yourself to a reference group that makes your accomplishments seem small, you're more likely to be unhappy than if you have more realistic criteria for evaluating your performance. By comparing your current performance to your past, you can focus on the process on making improvements and manage your own well-being. Why is this important? Research finds that happy people are more likely to be successful.
RELEVANT POSTS:
Self-Confidence and Performance
What We Can Learn From Sport Psychology
Transforming Stress Into Well-Being
.
Intelligence: Researcher Dean Keith Simonton hits it on the head: "My view of intelligence is basically a Darwinian one. It's based on sort of the old Functionalist notion that goes way back to Francis Galton, that says that there are a certain set of cognitive capacities that enable an individual to adapt and thrive in any given environment they find themselves in, and those cognitive capacities include things like memory and retrieval, and problem solving and so forth. There's a cluster of cognitive abilities that lead to successful adaptation to a wide range of environments." Successful traders are intelligent in Simonton's sense. They don't just master one pattern or market environment, but adapt to changing market conditions and thus build a career.
Well-Being: Historically, psychologists have spent more time and effort studying dysfunction than positive emotion. Recent studies have utilized a range of methods for evaluating the positive emotional states that people experience. One of the most interesting findings is that of adaptation: when people have good things happen to them (such as winning a lottery or getting a new home or job), they quickly adapt to the new circumstance and wind up with the same overall level of well-being that they experienced before. Similarly, people can experience sizable setbacks, including even the loss of a limb, and return to their prior level of well-being once they've adapted to the change. This helps explain the persistent motivation of successful traders. In an important sense, they never totally feel satisfied with their performance and wealth--they adapt to their new levels of profitability and return to their prior levels of well-being--so they're always trying to accomplish more and reach new levels.
What Makes You Happy: Research suggests that your base of comparison is an important element in your happiness. If you compare yourself to a reference group that makes your accomplishments seem small, you're more likely to be unhappy than if you have more realistic criteria for evaluating your performance. By comparing your current performance to your past, you can focus on the process on making improvements and manage your own well-being. Why is this important? Research finds that happy people are more likely to be successful.
RELEVANT POSTS:
Self-Confidence and Performance
What We Can Learn From Sport Psychology
Transforming Stress Into Well-Being
.
Technical Strength Update, Sector by Sector
As I've described before, my measure of Technical Strength is a quantification of trending behavior over a short-to-intermediate time frame. I track 40 stocks within eight S&P 500 sectors to get a sense for the technical strength of the large cap market as a whole and the individual sectors. Here's how we're looking as of Tuesday, 12/18:
Materials: -340
Industrials: -240
Consumer Discretionary: -140
Consumer Staples: -120
Energy: -140
Health Care: -80
Financials: -380
Technology: -100
Technical Strength Index: -1540 (3 stocks technically strong, 11 neutral, 26 weak).
We see financial issues once again bringing up the rear, suggesting that credit concerns have not abated. What we also see is that weakness has spread to all the sectors, something we haven't seen in quite a while. Even the formerly strong consumer staples sector, which has been acting as a haven due to recession concerns, has turned negative. Interestingly, one of the stronger sectors during 2007, the materials shares, has turned quite bearish, also perhaps reflecting anticipated reduced demand due to economic slowdown.
Another way of tracking sector strength and weakness is to take a look at the S&P 500 stocks within each sector and create daily advance-decline lines specific to those sectors. What we find is that the AD line is in a consistent downtrend for Consumer Discretionary and Financial issues, an uptrend for Consumer Staples and Energy shares, and range bound for the other sectors. Interestingly, Technology stocks are hovering near their AD lows for the past several months despite being a strong sector through much of 2007.
In sum, we see a very mixed picture, but one in which even the strongest sectors are seeing some downside pressure due to concerns over economic weakness. The last two days, we've seen 20-day lows across the NYSE, NASDAQ, and AMEX exceed 1700 and the Banking Index ($BKX) touch an intraday low for the year. Until we see some signs that measures from the Fed and Treasury are renewing confidence in the financial sector, I am not quick to be buying this market, particularly when we see sector performance deteriorating.
RELEVANT POST:
Sector Performance Turns Negative
.
Materials: -340
Industrials: -240
Consumer Discretionary: -140
Consumer Staples: -120
Energy: -140
Health Care: -80
Financials: -380
Technology: -100
Technical Strength Index: -1540 (3 stocks technically strong, 11 neutral, 26 weak).
We see financial issues once again bringing up the rear, suggesting that credit concerns have not abated. What we also see is that weakness has spread to all the sectors, something we haven't seen in quite a while. Even the formerly strong consumer staples sector, which has been acting as a haven due to recession concerns, has turned negative. Interestingly, one of the stronger sectors during 2007, the materials shares, has turned quite bearish, also perhaps reflecting anticipated reduced demand due to economic slowdown.
Another way of tracking sector strength and weakness is to take a look at the S&P 500 stocks within each sector and create daily advance-decline lines specific to those sectors. What we find is that the AD line is in a consistent downtrend for Consumer Discretionary and Financial issues, an uptrend for Consumer Staples and Energy shares, and range bound for the other sectors. Interestingly, Technology stocks are hovering near their AD lows for the past several months despite being a strong sector through much of 2007.
In sum, we see a very mixed picture, but one in which even the strongest sectors are seeing some downside pressure due to concerns over economic weakness. The last two days, we've seen 20-day lows across the NYSE, NASDAQ, and AMEX exceed 1700 and the Banking Index ($BKX) touch an intraday low for the year. Until we see some signs that measures from the Fed and Treasury are renewing confidence in the financial sector, I am not quick to be buying this market, particularly when we see sector performance deteriorating.
RELEVANT POST:
Sector Performance Turns Negative
.
Tuesday, December 18, 2007
Three Predictors of Coaching Success
When a trader or trading firm hires a coach, there is a significant investment of time, effort, and (often) money. Coaches are generally sought when trading results are substandard, which means that time is at a premium. Hiring the wrong coach or seeking the wrong goals with the right coach is thus more than a missed opportunity. It can dig traders further into a hole and reduce the odds of eventual success.
So how do we know if coaching will be helpful to a trader? The psychology research on change processes in counseling and therapy, as well as my own experience across a variety of trading settings, suggest three predictors of coaching success:
1) Relationship Between Coach and Trader - It's the quality of the relationship that often gets people through the inevitable "two steps forward, one step back" frustrations of change. In a good helping relationship, the coach sees the trader's potential, demonstrates a concrete understanding and empathy for the trader's situation, and is seen by the trader as both caring and competent. Very often, I find, the good helping relationship is one that transcends the pure business relationship. Every trader I work with gets my email address and home phone number; I do not charge for those contacts and, indeed, strongly encourage those. It's one way of demonstrating that my level of commitment will match that of the trader. Too, when traders make significant progress, I get excited; it's a real rush for me. I think traders can sense that. They know when a coach is emotionally invested in their success. If the coaching relationship lacks that commitment and spark, the odds of it being successful are meaningfully reduced.
2) Readiness For Change - Research in psychology finds that change is most likely to occur when people are prepared to take actions necessary to make changes. Many times, traders are aware of problems but don't know what to do--or aren't emotionally prepared to take action--to change those problems. A good example is a trader who might need to alter his trading style to adapt to changing market conditions. He might be reluctant to tackle the uncertainty of remaking his trading, which will necessarily extend the length of time it takes to make changes. The traders who are most ready to make changes are often those who are in some discomfort and who have tried all the easy fixes. They are prepared to do what it takes to turn things around. If you're seeking a coach and aren't ready to work on yourself every day and week, you might be best off saving time and money and waiting until the readiness is higher.
3) Involvement In Change - When I reviewed the research literature on change in counseling and therapy some years back, the brief conclusion that I came to is that "talk is cheap". Coaching needs to be more than talk: it needs to produce new skills and new experiences. Good coaching is hands on and goal-focused; it targets specific areas for change and introduces concrete strategies for accomplishing those changes. Too often, coaching talks about trading rather than works directly on trading. Some of my best work has occurred while I was watching a trader trade and could make very specific suggestions about improvements. That made the change work very immediate and involving. The more emotionally and behaviorally involved a trader is in the change process, the more successful that process is likely to be.
One interesting study found that, if positive changes and a solid relationship had not materialized by the third meeting, the counseling was unlikely to be successful--ever. Within a short time, you should have a good feel for the quality of the working relationship, the specific goals you'd be working on, and the concrete ways you'll be tackling those. Within those first few meetings, you should already be feeling that you're on a promising path. If you don't experience all the above with a new trading coach, treat the coaching like a trade and quickly exit the losers.
RELEVANT POSTS:
A Consumer Guide to Coaching
When Coaching Works--and Doesn't
.
So how do we know if coaching will be helpful to a trader? The psychology research on change processes in counseling and therapy, as well as my own experience across a variety of trading settings, suggest three predictors of coaching success:
1) Relationship Between Coach and Trader - It's the quality of the relationship that often gets people through the inevitable "two steps forward, one step back" frustrations of change. In a good helping relationship, the coach sees the trader's potential, demonstrates a concrete understanding and empathy for the trader's situation, and is seen by the trader as both caring and competent. Very often, I find, the good helping relationship is one that transcends the pure business relationship. Every trader I work with gets my email address and home phone number; I do not charge for those contacts and, indeed, strongly encourage those. It's one way of demonstrating that my level of commitment will match that of the trader. Too, when traders make significant progress, I get excited; it's a real rush for me. I think traders can sense that. They know when a coach is emotionally invested in their success. If the coaching relationship lacks that commitment and spark, the odds of it being successful are meaningfully reduced.
2) Readiness For Change - Research in psychology finds that change is most likely to occur when people are prepared to take actions necessary to make changes. Many times, traders are aware of problems but don't know what to do--or aren't emotionally prepared to take action--to change those problems. A good example is a trader who might need to alter his trading style to adapt to changing market conditions. He might be reluctant to tackle the uncertainty of remaking his trading, which will necessarily extend the length of time it takes to make changes. The traders who are most ready to make changes are often those who are in some discomfort and who have tried all the easy fixes. They are prepared to do what it takes to turn things around. If you're seeking a coach and aren't ready to work on yourself every day and week, you might be best off saving time and money and waiting until the readiness is higher.
3) Involvement In Change - When I reviewed the research literature on change in counseling and therapy some years back, the brief conclusion that I came to is that "talk is cheap". Coaching needs to be more than talk: it needs to produce new skills and new experiences. Good coaching is hands on and goal-focused; it targets specific areas for change and introduces concrete strategies for accomplishing those changes. Too often, coaching talks about trading rather than works directly on trading. Some of my best work has occurred while I was watching a trader trade and could make very specific suggestions about improvements. That made the change work very immediate and involving. The more emotionally and behaviorally involved a trader is in the change process, the more successful that process is likely to be.
One interesting study found that, if positive changes and a solid relationship had not materialized by the third meeting, the counseling was unlikely to be successful--ever. Within a short time, you should have a good feel for the quality of the working relationship, the specific goals you'd be working on, and the concrete ways you'll be tackling those. Within those first few meetings, you should already be feeling that you're on a promising path. If you don't experience all the above with a new trading coach, treat the coaching like a trade and quickly exit the losers.
RELEVANT POSTS:
A Consumer Guide to Coaching
When Coaching Works--and Doesn't
.
A Buying/Selling Index, Sentiment, and Other Ideas for Tuesday
* Buying/Selling Index - In my recent post, I mentioned research that treats buying and selling as independent variables. My first stab at this research has been with the NYSE TICK, breaking uptick and downtick readings into separate categories for analysis. By doing this, we find that Monday's action was over one standard deviation below the 30-day median in buying activity and about .8 SD above the median in selling. Compared with the decline in November, the recent drop has been more about weak buying than strong selling, though selling has certainly exceeded buying for the last five trading sessions.
* Blog Traffic Indicator - I wrote earlier about how traffic on this blog has tended to expand during periods of market weakness. August and November were the strongest traffic months of the year, for example, and the days of the market lows were the most trafficked days. Uncertainty seems to lead to a seeking of information across the blogosphere. So I find it interesting that traffic has not expanded over the past five days of weakness. On the contrary, traffic is more similar to the patterns seen at the October and recent December market highs.
* Problems With Self Report - People are not especially good self-observers, which causes problems for surveys. For example, 80-90% of people will rate themselves as "above average" across a whole range of virtues. (Perhaps they are all progeny of Lake Wobegon residents). So it's in that vein that Barry Ritholtz finds that bullish retail survey data have not translated into robust retail activity. What we say and what we do can be quite different.
* Trading More Profitably - Trade Ideas asks for some guidelines from two experienced traders. Turning "best practices" into firm rules that can be made explicit and rehearsed is a valuable meta-strategy for success.
* Current Market Themes - Abnormal Returns finds a number of themes in the market, including the meltdown of quant funds and strong performance of growth stocks; problems with bond insurers and systemic risks; and negative real interest rates.
* Opening Gaps - Trader Mike notes that cash indexes do not accurately reflect opening gaps; a better picture is obtained from futures. This is very relevant to testing out trading systems that might, for example, buy or sell at the market open.
* Best Posts - Charles Kirk has archived his best posts from previous years. Year end is a great time to reflect on personal bests, step back, reassess, set goals, and revitalize for the new year. It's also a great time to view and review fresh ideas. I'll be listing "best of 2007" TraderFeed posts during the last week of the year.
* Blog Traffic Indicator - I wrote earlier about how traffic on this blog has tended to expand during periods of market weakness. August and November were the strongest traffic months of the year, for example, and the days of the market lows were the most trafficked days. Uncertainty seems to lead to a seeking of information across the blogosphere. So I find it interesting that traffic has not expanded over the past five days of weakness. On the contrary, traffic is more similar to the patterns seen at the October and recent December market highs.
* Problems With Self Report - People are not especially good self-observers, which causes problems for surveys. For example, 80-90% of people will rate themselves as "above average" across a whole range of virtues. (Perhaps they are all progeny of Lake Wobegon residents). So it's in that vein that Barry Ritholtz finds that bullish retail survey data have not translated into robust retail activity. What we say and what we do can be quite different.
* Trading More Profitably - Trade Ideas asks for some guidelines from two experienced traders. Turning "best practices" into firm rules that can be made explicit and rehearsed is a valuable meta-strategy for success.
* Current Market Themes - Abnormal Returns finds a number of themes in the market, including the meltdown of quant funds and strong performance of growth stocks; problems with bond insurers and systemic risks; and negative real interest rates.
* Opening Gaps - Trader Mike notes that cash indexes do not accurately reflect opening gaps; a better picture is obtained from futures. This is very relevant to testing out trading systems that might, for example, buy or sell at the market open.
* Best Posts - Charles Kirk has archived his best posts from previous years. Year end is a great time to reflect on personal bests, step back, reassess, set goals, and revitalize for the new year. It's also a great time to view and review fresh ideas. I'll be listing "best of 2007" TraderFeed posts during the last week of the year.
Monday, December 17, 2007
Gauging Market Strength and Weakness: Buying and Selling Events as Independent Variables
Most of what we look at is the summing or averaging of buying and selling events. Price moves higher during a given time period, and it moves lower at other periods. Bar charts sum these price movements over a longer period to show us overall price movement and change. Similarly, we sum buying and selling events via such indicators as advance-decline lines, NYSE TICK, moving averages, and oscillators.
Suppose, however, we adopt a different framework and view buying and selling events as orthogonal. Instead of summing and averaging them, we treat them as independent variables. Thus, for instance, any given time period might display very strong buying *and* very strong selling; very weak buying *and* very weak selling; or any permutation thereof.
Once we conceptually separate strong/weak buying from strong/weak selling, we're then in a position to ask interesting empirical questions:
* Do weak/strong buying days have different implications for future price change than weak/strong selling days?
* Do particular combinations of buying/selling levels identify trending days?
* Can we profile average levels of buying/selling at various times of day to gauge the market's current strength/weakness?
* Do topping markets show early signs of reduced buying and bottoming markets show early signs of reduced selling?
I'm just in the early phases of this research, but results to date look promising. I hope to have concrete results to report by year's end, resulting in a useful and unique market indicator.
RELEVANT POSTS:
Trend and Trajectory
Sentiment Trends
.
Suppose, however, we adopt a different framework and view buying and selling events as orthogonal. Instead of summing and averaging them, we treat them as independent variables. Thus, for instance, any given time period might display very strong buying *and* very strong selling; very weak buying *and* very weak selling; or any permutation thereof.
Once we conceptually separate strong/weak buying from strong/weak selling, we're then in a position to ask interesting empirical questions:
* Do weak/strong buying days have different implications for future price change than weak/strong selling days?
* Do particular combinations of buying/selling levels identify trending days?
* Can we profile average levels of buying/selling at various times of day to gauge the market's current strength/weakness?
* Do topping markets show early signs of reduced buying and bottoming markets show early signs of reduced selling?
I'm just in the early phases of this research, but results to date look promising. I hope to have concrete results to report by year's end, resulting in a useful and unique market indicator.
RELEVANT POSTS:
Trend and Trajectory
Sentiment Trends
.
Ray Barros on The Nature of Trends
Ray Barros is a trading mentor I both respect and admire. He is a successful trader and a teacher, intensively sharing his methods with students. Indeed, he only mentors a small number of students at one time to ensure hands-on skills-building. His Trading Success Blog covers a wide range of topics, including exit strategies, psychology, and buy/sell zones.
Now we have a new book from Ray, entitled The Nature of Trends. He made it clear in his introduction that one goal that has yet eluded him is the leaving of a legacy. By sharing many of his methods and ways of viewing markets, Ray takes a large step toward that goal.
Ray's book begins with a definition of trends and an emphasis upon the importance of understanding trending and non-trending on multiple time frames. His understanding is grounded in Market Profile, but includes an extensive discussion of chart and wave patterns. In this, his methods are highly visual. He uses diagrams and chart/examples to illustrate his points, as he moves from trends to discussions of trend changes and the impact of time frames.
Later in the text, Ray presents his ideas on entries and trade management, followed by risk management and trading psychology. He concludes with a section on swing patterns, which clearly is his love as a teacher and trader. I particularly like the structured questions that he lays out as a template for studying markets and enhancing one's learning curve.
I found Ray's book to be well-written and very well organized, but I can't say it's a casual read. Many of the patterns involved careful labeling and understanding within the context of the previous material. My sense is that such an approach requires considerable market observation and study, so that these patterns can stand out clearly. Their advantage is that they help organize traders' thoughts regarding trending and rangebound markets at specific, well-defined time frames. In short, this is a book to be studied, not skimmed. Those who know me well will know that this is a compliment, as well as a warning to grail-seekers.
I believe this book is of greatest potential benefit for those who trade visual/chart patterns and who wish to greatly tighten and structure their trade selection and management. While Ray's presentation is not statistical, it is far more systematic than most presentations of chart-based trading. It helps a trader turn pattern recognition into trading rules, and that aids discipline and consistency.
And, by the way, if you're interested in book reviews, the Value Blog Review has some excellent ones. I receive many, many books from publishers and authors for review purposes and will be passing along thoughts about my favorites from time to time. (Disclaimer: I do not accept promotional consideration or compensation from any authors or publishers with respect to anything mentioned or reviewed herein.)
RELEVANT POST:
Book Review: Markets in Profile
.
Now we have a new book from Ray, entitled The Nature of Trends. He made it clear in his introduction that one goal that has yet eluded him is the leaving of a legacy. By sharing many of his methods and ways of viewing markets, Ray takes a large step toward that goal.
Ray's book begins with a definition of trends and an emphasis upon the importance of understanding trending and non-trending on multiple time frames. His understanding is grounded in Market Profile, but includes an extensive discussion of chart and wave patterns. In this, his methods are highly visual. He uses diagrams and chart/examples to illustrate his points, as he moves from trends to discussions of trend changes and the impact of time frames.
Later in the text, Ray presents his ideas on entries and trade management, followed by risk management and trading psychology. He concludes with a section on swing patterns, which clearly is his love as a teacher and trader. I particularly like the structured questions that he lays out as a template for studying markets and enhancing one's learning curve.
I found Ray's book to be well-written and very well organized, but I can't say it's a casual read. Many of the patterns involved careful labeling and understanding within the context of the previous material. My sense is that such an approach requires considerable market observation and study, so that these patterns can stand out clearly. Their advantage is that they help organize traders' thoughts regarding trending and rangebound markets at specific, well-defined time frames. In short, this is a book to be studied, not skimmed. Those who know me well will know that this is a compliment, as well as a warning to grail-seekers.
I believe this book is of greatest potential benefit for those who trade visual/chart patterns and who wish to greatly tighten and structure their trade selection and management. While Ray's presentation is not statistical, it is far more systematic than most presentations of chart-based trading. It helps a trader turn pattern recognition into trading rules, and that aids discipline and consistency.
And, by the way, if you're interested in book reviews, the Value Blog Review has some excellent ones. I receive many, many books from publishers and authors for review purposes and will be passing along thoughts about my favorites from time to time. (Disclaimer: I do not accept promotional consideration or compensation from any authors or publishers with respect to anything mentioned or reviewed herein.)
RELEVANT POST:
Book Review: Markets in Profile
.
Sunday, December 16, 2007
What Investment Style and 2007 Returns Tell us About Stock Market Sentiment
In recent posts, we've seen how 2007 returns have varied widely as a function of sector and international market exposure. Now we turn to investment style, where we see equally dramatic differences in returns.
Here are year-to-date percentage returns for the i-Shares Russell 1000 (Large Cap) and 2000 (Small Cap) growth and value ETFs:
Large Cap Growth (IWF): 11.12%
Large Cap Value (IWD): -2.46%
Small Cap Growth (IWO): 4.70%
Small Cap Value (IWN): -12.69%
We can see that style has been the difference between quite a profitable year and quite a losing one. Large caps have handily outpaced small caps and growth has trounced value.
If we look at returns since the October market top, we see a similar pattern:
Large Cap Growth (IWF): -3.18%
Large Cap Value (IWD): -8.52%
Small Cap Growth (IWO): -9.01%
Small Cap Value (IWN): -13.01%
Here we can see that small caps and value are behaving as though we're in the midst of a bear market. Large caps and growth act more in a corrective mode. As the odds of recession have grown and credit concerns have not diminished, large cap growth has been a haven for those seeking stability and earnings. Even in the last week, the loss in large cap growth was less than half that in small cap value. Such a defensive mindset does not speak well for overall market sentiment.
RELEVANT POST:
Shift in the Style Box
.
Here are year-to-date percentage returns for the i-Shares Russell 1000 (Large Cap) and 2000 (Small Cap) growth and value ETFs:
Large Cap Growth (IWF): 11.12%
Large Cap Value (IWD): -2.46%
Small Cap Growth (IWO): 4.70%
Small Cap Value (IWN): -12.69%
We can see that style has been the difference between quite a profitable year and quite a losing one. Large caps have handily outpaced small caps and growth has trounced value.
If we look at returns since the October market top, we see a similar pattern:
Large Cap Growth (IWF): -3.18%
Large Cap Value (IWD): -8.52%
Small Cap Growth (IWO): -9.01%
Small Cap Value (IWN): -13.01%
Here we can see that small caps and value are behaving as though we're in the midst of a bear market. Large caps and growth act more in a corrective mode. As the odds of recession have grown and credit concerns have not diminished, large cap growth has been a haven for those seeking stability and earnings. Even in the last week, the loss in large cap growth was less than half that in small cap value. Such a defensive mindset does not speak well for overall market sentiment.
RELEVANT POST:
Shift in the Style Box
.
Saturday, December 15, 2007
International Returns for 2007: The Impact of Where You Invest
What we saw in my last post is that U.S. investor performance for 2007 was highly dependent upon the sectors one chose. Financial stocks and consumer discretionary issues posted double-digit losses on the year; energy and materials stocks yielded double-digit gains.
Above we can see that returns have also been highly dependent on where one was invested. The cash S&P 500 Index, as a proxy for U.S. returns, is up about 3.5% on the year. The DAX in Germany, however, has returned about 20.5% over that same period. The year-to-date returns in London's FTSE were only 2.83%, but we saw an eye-popping return of 38% from Hong Kong's Hang Seng Index. Bringing up the rear was Japan's Nikkei, down almost 10% on the year.
What you invest in (sectors) and where you invest (world markets) are every bit as important to performance as when you invest (timing). In my next post, we'll look at the impact of investment style on 2007 returns.
Meanwhile, I note that, since the S&P 500 market top in October, we've lost about 6% in the U.S. index; 1% in the DAX; 5% in the FTSE; 4.5% in the Hang Seng; and 10% in the Nikkei. Offhand, it appears that countries with the weaker currencies and lower interest rates have been lagging their peers recently and during much of the year.
Stock Sector Performance: A Mixed Bag Turns Negative
Here are some of the major stock sectors within the S&P 500 universe and their performance during two time periods: 2007 to date and (since the October market top). All values are expressed as percentage changes:
S&P 500 Index, SPY: 3.92 (-5.95)
Materials, XLB: 20.54 (-3.54)
Industrials, XLI: 12.71 (-5.82)
Consumer Discretionary, XLY: -13.32 (-12.41)
Consumer Staples, XLP: 11.10 (3.72)
Energy, XLE: 30.39 (.79)
Health Care, XLV: 6.60 (-1.65)
Financial, XLF: -20.11 (-17.79)
Technology, XLK: 15.05 (-3.22)
What we find is quite a mixed bag: soaring performance over the course of the year from energy and materials and horrendous performance from financial and consumer discretionary shares. Since the October market top, it's been more of the same: very weak financials and consumer discretionaries and relatively strong consumer staples and energy.
Sectors that benefit from the weak dollar and that are perceived as recession resistant have been among the winners. Sectors affected by housing and credit crises have been among the big losers.
This past week here's how our sectors have shaped up:
S&P 500 Index, SPY: -2.48
Materials, XLB: -2.46
Industrials, XLI: -2.08
Consumer Discretionary, XLY: -4.73
Consumer Staples, XLP: -1.49
Energy, XLE: .35
Health Care, XLV: -2.86
Financial, XLF: -5.93
Technology, XLK: -.52
Financials and consumer discretionary shares continue to lead the downside, suggesting that the Fed's actions and those of the Treasury have not been sufficient to ease those housing and credit concerns. For the most part, however, the other sectors turned tail and went south as well. I found the end of week performance particularly interesting in that the weak Yen was no longer correlated with either falling bond yields or rising stock prices. The carry trade wasn't carrying the stock market higher, and that--along with expanding sector weakness--caught my attention.
RELEVANT POSTS:
Carry Trade Carries Stocks
A Recent Look at the Sectors
.
S&P 500 Index, SPY: 3.92 (-5.95)
Materials, XLB: 20.54 (-3.54)
Industrials, XLI: 12.71 (-5.82)
Consumer Discretionary, XLY: -13.32 (-12.41)
Consumer Staples, XLP: 11.10 (3.72)
Energy, XLE: 30.39 (.79)
Health Care, XLV: 6.60 (-1.65)
Financial, XLF: -20.11 (-17.79)
Technology, XLK: 15.05 (-3.22)
What we find is quite a mixed bag: soaring performance over the course of the year from energy and materials and horrendous performance from financial and consumer discretionary shares. Since the October market top, it's been more of the same: very weak financials and consumer discretionaries and relatively strong consumer staples and energy.
Sectors that benefit from the weak dollar and that are perceived as recession resistant have been among the winners. Sectors affected by housing and credit crises have been among the big losers.
This past week here's how our sectors have shaped up:
S&P 500 Index, SPY: -2.48
Materials, XLB: -2.46
Industrials, XLI: -2.08
Consumer Discretionary, XLY: -4.73
Consumer Staples, XLP: -1.49
Energy, XLE: .35
Health Care, XLV: -2.86
Financial, XLF: -5.93
Technology, XLK: -.52
Financials and consumer discretionary shares continue to lead the downside, suggesting that the Fed's actions and those of the Treasury have not been sufficient to ease those housing and credit concerns. For the most part, however, the other sectors turned tail and went south as well. I found the end of week performance particularly interesting in that the weak Yen was no longer correlated with either falling bond yields or rising stock prices. The carry trade wasn't carrying the stock market higher, and that--along with expanding sector weakness--caught my attention.
RELEVANT POSTS:
Carry Trade Carries Stocks
A Recent Look at the Sectors
.
Friday, December 14, 2007
More on the Stock Market's Multiple Personality
In my last post, we saw how much of the stock market's strength was attributable to the first hour of trading. The first hour data, however, really includes two components: overnight action and trading during the first 60 minutes of a session.
In the chart above, we look at the S&P 500 Index (SPY; yellow line) and the changes during 2007 that are attributable to the overnight session (blue line) and the day session (pink line).
What we find is that the S&P 500 Index has been broadly range bound through most the year. This overall performance masks quite a difference, however, between the day and night sessions. The overnight action has had a distinctly bullish leaning; the day session has lost money over time. Indeed, we've gained the equivalent of about 158 S&P 500 Index points during the overnight hours and lost the equivalent of 102 points during day hours!
The correlation between price changes during the overnight and day hours has been about .17 during 2007, suggesting that less than 3% of the variance in price change is shared between the two. In essence, these behave as separate markets. Indeed, all of the gains in the S&P 500 Index since the start of 2006 are attributable to overnight action. Daytraders may limit their risk with intraday trading, but they have also missed out on much of the bull market's reward.
RELEVANT POST:
The Multiple Personality of the Market
.
Daytraders' Challenge: Stock Market Performance by Time of Day
Many times short-term traders struggle because they don't realize how their market is trading at the times of day in which they are active.
Here we see the Dow Jones Industrial Average for 2007 broken down by time of day performance. The blue line represents the cumulative performance of the first hour of trading; the pink line is the performance for the middle hours (end of first hour to beginning of the last hour); and the yellow line is the performance for the final hour of trading.
What we can see is that these seem to be different markets. Indeed, the daily correlations among the three range from .12 to .18, suggesting that what the market does during one time period is only very weakly related to what it will do in the next one.
Moreover, we can see that essentially all of the market's upward trend has taken place during the first hour of trading. The first hour has accounted for about 1116 points of gain during 2007; the middle hours have lost about 780 points; and the last hour has gained about 719 points. What that means is that daytraders who sit out the first hour of trading have not, as a whole, benefited from the upward market trend. Indeed, there has been something of a downward trend to the market's middle hours.
We can see that, during the market's recent weakness, there has been relatively little selling in the last hour. Much of the market's bounce from November lows has occurred during the first hour--and most likely during overnight action in response to strength in Asia and Europe. Too often, short-term traders look at a daily chart and try to go with a trend, not realizing that the trend may not pertain to the hours of day in which they're trading.
RELEVANT POST:
Stock Market Performance by Hour of Day
.
Thursday, December 13, 2007
Spikes in the Equity Put/Call Ratio: A Signal With an Impressive Track Record
Here we see the daily action since the start of 2007; the pink line is an adjusted, relative put/call ratio, and the blue line is the Dow Jones Industrial Average (cash close). The adjusted put/call ratio is the five-day equity put-call ratio divided by the 50-day equity put-call ratio. We can see in the chart above how spikes in this adjusted ratio--occasions in which the five-day put/call ratio soars above the 50-day average--have corresponded to intermediate-term market lows.
I went back to 1998 (N = 2483 trading days) and computed the daily adjusted ratio and what happened in the Dow 20 days later. We had 188 occasions in which the adjusted put/call ratio was above 1.20 (meaning that the five-day put/call ratio exceeded the 50-day ratio by more than 20%). Twenty days later, the Dow averaged a whopping gain of 2.28% (143 up, 45 down). That is much stronger than the average 20-day gain of .39% (1346 up, 949 down) for the remainder of the sample.
I find these results impressive, as they cover a number of bull and bear market conditions. Spikes in the equity put/call ratio have been excellent signals over the past year, but have a much longer track record of success.
RELEVANT POSTS:
Equity and Index Put/Call Ratios
VIX and Put/Call Ratio
.
Using Short-Term Sentiment to Avoid Market Head Fakes
The most basic unit of sentiment for the short-term trader is whether a given trade occurs at the market bid or the offer. When a trade occurs at the bid price, it means that a seller was willing to give up the edge in order to exit his or her position. Similarly, when a transaction occurs at the offer price, it means that a buyer was willing to pay up in order to enter the market.
Over time, by correlating the size of trades with their location within the bid-offer matrix, we can detect how large traders are leaning: to the buy or sell side. This is the concept that underlies the Market Delta program. Similarly, by observing how many stocks at one time are trading at their offer vs. bid price, we can see if the broad market is tilted toward buyers or sellers. This is the logic underlying the NYSE TICK measure.
By cumulating the volume at offer vs. bid over the course of the day and by cumulating the NYSE TICK values through the course of a market session, we can see how market sentiment is shifting over time.
When we rose sharply yesterday in response to the Fed announcement of coordinated action, the market looked very bullish. As Rennie Yang observed in his excellent Market Tells newsletter, however, the NYSE TICK action was telling a different story. Relative to the 20-day average, we were actually seeing reduced buying interest. The TICK told us that traders were selling into the strength, which ended up being a great market tell.
I like to sit out the first 15 or so minutes of price action and see how the Market Delta and TICK are unfolding. Rennie uses extreme TICK action to anticipate a trend day; his trend-catcher strategy has performed admirably of late. By watching the sentiment underneath price action we gain valuable short term information that keeps us out of head fake markets.
RELATED POSTS:
Using Market Delta in Trading
NYSE TICK Volume
.
Over time, by correlating the size of trades with their location within the bid-offer matrix, we can detect how large traders are leaning: to the buy or sell side. This is the concept that underlies the Market Delta program. Similarly, by observing how many stocks at one time are trading at their offer vs. bid price, we can see if the broad market is tilted toward buyers or sellers. This is the logic underlying the NYSE TICK measure.
By cumulating the volume at offer vs. bid over the course of the day and by cumulating the NYSE TICK values through the course of a market session, we can see how market sentiment is shifting over time.
When we rose sharply yesterday in response to the Fed announcement of coordinated action, the market looked very bullish. As Rennie Yang observed in his excellent Market Tells newsletter, however, the NYSE TICK action was telling a different story. Relative to the 20-day average, we were actually seeing reduced buying interest. The TICK told us that traders were selling into the strength, which ended up being a great market tell.
I like to sit out the first 15 or so minutes of price action and see how the Market Delta and TICK are unfolding. Rennie uses extreme TICK action to anticipate a trend day; his trend-catcher strategy has performed admirably of late. By watching the sentiment underneath price action we gain valuable short term information that keeps us out of head fake markets.
RELATED POSTS:
Using Market Delta in Trading
NYSE TICK Volume
.
Wednesday, December 12, 2007
Emotions as Information
Start with a premise: Suppose you were empathic and could experience the emotions of the trading crowd.
You could feel their fear.
You could sense their greed.
What they felt, you felt.
If that premise were true, then emotion would not be something you would fight, ignore, or minimize.
Nor would emotion be something you'd blindly follow.
For the empath, emotion would be information: valuable information. It would be an indicator no less than market price or volume.
How would it change your trading to view every trading emotion as information to be scrutinized? How would it change your experience of your trading?
Amazing what a difference a premise can make.
RELATED POSTS:
The Fallacy of Controlling Emotion
Somatic Markers and Trading Decisions
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You could feel their fear.
You could sense their greed.
What they felt, you felt.
If that premise were true, then emotion would not be something you would fight, ignore, or minimize.
Nor would emotion be something you'd blindly follow.
For the empath, emotion would be information: valuable information. It would be an indicator no less than market price or volume.
How would it change your trading to view every trading emotion as information to be scrutinized? How would it change your experience of your trading?
Amazing what a difference a premise can make.
RELATED POSTS:
The Fallacy of Controlling Emotion
Somatic Markers and Trading Decisions
.
Tuesday, December 11, 2007
Tracking Intraday Sentiment and Other Ideas for a Fed Day
* Growing Pessimism: Here's a five-minute chart of the CBOE put/call ratio for Fed day on Tuesday. Note how the ratio expanded going into the announcement, but really took off as the afternoon progressed, reflecting growing bearishness. This was a nice tell for the afternoon price weakness across the stock indexes. Combining the intraday put/call ratio with the TICK provides a helpful view of sentiment shifts.
* Reaction to Fed Decision: Charles Kirk has compiled a variety of views. See also his most recent links post, including Fed perspectives.
* Trading Sentiment: Jeff has some interesting ideas regarding sentiment-based trading.
* Recap: Trader Mike recaps the wild Fed day and finds trendline breaks and violations of moving average lines.
* Tuesday Insights: Abnormal Returns finds worthy posts on sovereign wealth funds, momentum trading strategies, and a longer-term variant of the VIX.
* Gratitude: Nice to see Alvaro's thoughtful post on gratitude and happiness picked up by Huffington.
* Online Filing Systems: Interesting compendium of resources for organizing your files. I use Mozy for backup; love it.
* E*Trade Insight: Todd Chalem offers a unique view of Citadel's rescue of the online broker.
A Review of Market Indicators Ahead of the Fed
* Advance-Decline Review - The Advance-Decline line specific to the NYSE common stocks is at a lower high relative to October. October was also at a lower high relative to July. We've additionally seen lower lows over that period. This clearly reflects the relative weakness of the small and mid-cap stocks. The pattern is a little different in the advance-decline line for the S&P 500 stocks, where we see the lower highs, but also a higher A-D Line low at the end of November. This fits with the observation from my prior post regarding relative strength among large caps during the recent decline. When we look at the advance-decline line specific to the NASDAQ 100 stocks, we see a pattern of higher highs and higher lows. The line for the Dow 30 stocks not only shows higher highs and higher lows, but has already hit a bull market peak, having more than retraced the losses from October. The advance-decline line for the S&P 600 small cap stocks is in a clear downtrend, having hardly budged from its recent lows. All in all, this tells us that we're in a very selective (and probably latter) phase of a bull market.
* New High/New Low Review - If we look at 52-week highs and lows among the NYSE common stocks, we also see a pattern of lower new highs and expanded new lows over the course of 2007. On Monday, we saw 102 new annual highs and 9 new lows. In October, we had over 200 new highs; in June/July we had over 300 new highs. Interestingly, this pattern of lower new highs and higher new lows also is present among the S&P 500 stocks. On Monday, we had 34 new annual highs among the S&P 500 large caps, against 5 new lows. We had 70 new highs in October; 90 in July. Among S&P 600 stocks, we had only 16 new 52-week highs on Monday and 3 new lows; in October we had over 40, and in June we had 80 new highs. Despite relative strength in the NASDAQ 100, the same pattern of dwindling new highs is evident. In June we had 24 new highs; in October we had 17; on Monday we had 7. So far this indicator is painting a picture of increasing selectivity over time.
* 20-Day New Highs/Lows - The 20-day new highs/lows continue to show strength. On Monday we had 1628 new 20-day highs and 441 new lows across the major exchanges. As long as we continue to see expanding new highs in the short run, I don't expect a major correction. See my recent post on this topic for a historical analysis. In a nutshell, my primary scenario is for continued near-intermediate term strength in the face of a larger pattern of topping. Given some slowing of upside momentum in the last few days, I wouldn't be surprised to see some pullback from current levels. I also wouldn't be surprised to see such a pullback provide a buying opportunity that enables large caps to test their bull highs.
Much of the recent rally is catch-up action in sectors that had been beaten down. We've seen decent buying among small caps, which is reflected in the very strong NYSE TICK figures (see the Weblog) over the last two weeks. We're also seeing quite nice rebounding among homebuilders and financial stocks. As a whole, however, most of the market evidence for 2007 has suggests a weakening of the broad market over time, even as we've made highs in large cap indexes.
* New High/New Low Review - If we look at 52-week highs and lows among the NYSE common stocks, we also see a pattern of lower new highs and expanded new lows over the course of 2007. On Monday, we saw 102 new annual highs and 9 new lows. In October, we had over 200 new highs; in June/July we had over 300 new highs. Interestingly, this pattern of lower new highs and higher new lows also is present among the S&P 500 stocks. On Monday, we had 34 new annual highs among the S&P 500 large caps, against 5 new lows. We had 70 new highs in October; 90 in July. Among S&P 600 stocks, we had only 16 new 52-week highs on Monday and 3 new lows; in October we had over 40, and in June we had 80 new highs. Despite relative strength in the NASDAQ 100, the same pattern of dwindling new highs is evident. In June we had 24 new highs; in October we had 17; on Monday we had 7. So far this indicator is painting a picture of increasing selectivity over time.
* 20-Day New Highs/Lows - The 20-day new highs/lows continue to show strength. On Monday we had 1628 new 20-day highs and 441 new lows across the major exchanges. As long as we continue to see expanding new highs in the short run, I don't expect a major correction. See my recent post on this topic for a historical analysis. In a nutshell, my primary scenario is for continued near-intermediate term strength in the face of a larger pattern of topping. Given some slowing of upside momentum in the last few days, I wouldn't be surprised to see some pullback from current levels. I also wouldn't be surprised to see such a pullback provide a buying opportunity that enables large caps to test their bull highs.
Much of the recent rally is catch-up action in sectors that had been beaten down. We've seen decent buying among small caps, which is reflected in the very strong NYSE TICK figures (see the Weblog) over the last two weeks. We're also seeing quite nice rebounding among homebuilders and financial stocks. As a whole, however, most of the market evidence for 2007 has suggests a weakening of the broad market over time, even as we've made highs in large cap indexes.
Monday, December 10, 2007
Using a Basket of Stocks to Track the Stock Market
The Advance-Decline Line for my basket of 40 S&P stocks (five highly weighted issues across eight S&P 500 sectors) is now knocking at the door of bull market highs. Notice how the recent decline led to only a shallow pullback in the advance/decline numbers for these 40 super-caps.In my recent post, I emphasized the need for traders to filter information. One such filter is to limit the number of stocks you follow at one time to gauge sector/market strength and weakness.
A few readers have asked me for the composition of the 40 stocks in my basket. Here they are:
Materials: DD, DOW, AA, IP, WY
Industrials: GE, UPS, BA, UTX, MMM
Consumer Discretionary: CMCSK, TWX, HD, DIS, MCD
Consumer Staples: PG, MO, WMT, KO, WAG
Energy: XOM, CVX, COP, SLB, OXY
Health Care: PFE, JNJ, MRK, LLY, AMGN
Financial: C, AIG, BAC, WFC, JPM
Technology: MSFT, INTC, IBM, CSCO, VZ
I've also found that it's very helpful to track the new highs and lows among these stocks on a 5- and 10-day basis. Divergences frequently help to identify price movements that are likely to retrace. This is particularly the case when fewer than half of the stocks in the basket participate in a move to new highs or lows.
Surges in Stocks Making New Highs: What They Mean
One of the indicators I track most carefully is the number of stocks across the NYSE, AMEX, and NASDAQ that are making fresh 20-day highs and lows. This is more sensitive than the more common count of 52-week new highs and lows. Above we have the 20-day new highs minus lows on a daily basis during 2007. There's been a distinct tendency for this measure to top out ahead of price during cyclical swings; extreme negative values have represented good buying opportunities.As I noted in the Trading Psychology Weblog, we've had a surge in buying over the past two weeks, with the Adjusted NYSE TICK positive for 11 of the past 12 trading sessions. Over that same time, we've gone from a situation in which we've had over 1000 new 20-day lows to one in which we're now seeing more than 1000 new 20-day highs.
I went back to October, 2002 (N = 1279 trading days; which is when I began compiling data for 20-day new highs/lows) and examined situations in which we have surged from a surplus of new lows to one of new highs. Specifically, I looked for occasions in which the 20-day average of new lows has been above 1000, but the current day's reading of new highs has been over 1000. This captures a situation in which we've had a broad surge of strength following an oversold market.
There have been 32 instances of such surges in new highs since late 2002. Twenty days later, the S&P 500 Index (SPY) has averaged a gain of 1.90% (27 up, 5 down). That is much stronger than the average 20-day gain of .79% for the remainder of the sample (822 up, 425 down).
To be sure, there have been pullbacks along the way: 11 of the 32 instances were actually lower after five days. Nonetheless, broad surges in market strength have tended to be followed by further strength over the next month. On average, it's paid to use these pullbacks as buying opportunities.
RELATED POSTS:
What Happens After Short-Term Surges in New Highs
Stalking the Market With New Highs/Lows
Anticipating Market Turns With New Highs/Lows
.
Sunday, December 09, 2007
Information Overload and the Need for Filters
I'm sure you've experienced it: You go onto a message board, chat room, or news/blog aggregation site and 90% of the posts are either emotional rants, restatements of the obvious, or surface analyses. I find the same is true of the mainstream media (MSM), whether it's print, online, or broadcast: 90% of what I get out of it comes from 10% of the content.
Much of the problem in the MSM world is that the name of the game is to get as many readers and viewers as possible to justify advertising rates. That means that hardcore market analysis has to be leavened with human interest, that columnists have to take more extreme positions than the facts warrant, and that entertainment has to accompany information.
The aggregators, facing similar pressures to monetize their online efforts, also have to go after the most eyeballs. So they are driven to sign up as many contributors as possible--a formula guaranteed in the aggregate to yield mediocrity. Ironically, it's the bloggers and columnists with the most to contribute that will want to stay away from this homogenization.
With financial seminars and media (books, magazines), there is a parallel tendency to try to pull in as many people by offering the broadest possible array of speakers and the topics of greatest general interest. Think of all the seminars, books, and magazine articles that come out each year. How many have truly left a lasting impact on your trading? If anything, the 90-10 formulation understates the case.
One of the core skills I see among experienced, successful trader is the ability to filter information. Time is precious, and filling your head with the wrong information is worse than a waste of time: it can take you out of your game. If anything, trading requires disaggregation, a separating of wheat from chaff. Portals that throw dozens of articles at traders daily fail at this most basic task and inevitably must fail at it, given their commercial mandates.
Over time, this has been the great appeal of the Twitter application for this blog. If I read a good article, I can quickly summarize it and link in a way that will go out to interested people. Others can do the same, subscribe to each other's streams, and create a social knowledge network. To be sure, Web 2.0 has provided us with a variety of ways to share information socially. Many of these, however, just end up creating new portals, new aggregations, new fire hydrants to drink from. What I like about Twitter is that it is brief and selective. If an article says something new and relevant, I can send the link worldwide in seconds. Subscribers or blog visitors can then quickly determine if the topic is relevant for them.
I try to send Twitter "tweets" in clusters of five or less so that people can stay current just by looking at the blog home page occasionally through the day. The full set of posts, along with HTML links, is on my Twitter page and is available as an RSS feed. Many of the "tweets" link articles of interest, but before the market opens each day, I also try to summarize major indicators, upcoming economic reports, and overseas action. If there are ways I can adjust the Twitter app to filter information even more effectively, by all means feel free to add your comments and suggestions to this post. I take those very seriously and often learn a great deal from them. Thanks!
Brett
Much of the problem in the MSM world is that the name of the game is to get as many readers and viewers as possible to justify advertising rates. That means that hardcore market analysis has to be leavened with human interest, that columnists have to take more extreme positions than the facts warrant, and that entertainment has to accompany information.
The aggregators, facing similar pressures to monetize their online efforts, also have to go after the most eyeballs. So they are driven to sign up as many contributors as possible--a formula guaranteed in the aggregate to yield mediocrity. Ironically, it's the bloggers and columnists with the most to contribute that will want to stay away from this homogenization.
With financial seminars and media (books, magazines), there is a parallel tendency to try to pull in as many people by offering the broadest possible array of speakers and the topics of greatest general interest. Think of all the seminars, books, and magazine articles that come out each year. How many have truly left a lasting impact on your trading? If anything, the 90-10 formulation understates the case.
One of the core skills I see among experienced, successful trader is the ability to filter information. Time is precious, and filling your head with the wrong information is worse than a waste of time: it can take you out of your game. If anything, trading requires disaggregation, a separating of wheat from chaff. Portals that throw dozens of articles at traders daily fail at this most basic task and inevitably must fail at it, given their commercial mandates.
Over time, this has been the great appeal of the Twitter application for this blog. If I read a good article, I can quickly summarize it and link in a way that will go out to interested people. Others can do the same, subscribe to each other's streams, and create a social knowledge network. To be sure, Web 2.0 has provided us with a variety of ways to share information socially. Many of these, however, just end up creating new portals, new aggregations, new fire hydrants to drink from. What I like about Twitter is that it is brief and selective. If an article says something new and relevant, I can send the link worldwide in seconds. Subscribers or blog visitors can then quickly determine if the topic is relevant for them.
I try to send Twitter "tweets" in clusters of five or less so that people can stay current just by looking at the blog home page occasionally through the day. The full set of posts, along with HTML links, is on my Twitter page and is available as an RSS feed. Many of the "tweets" link articles of interest, but before the market opens each day, I also try to summarize major indicators, upcoming economic reports, and overseas action. If there are ways I can adjust the Twitter app to filter information even more effectively, by all means feel free to add your comments and suggestions to this post. I take those very seriously and often learn a great deal from them. Thanks!
Brett
Saturday, December 08, 2007
A Few Of My Favorite Things
* Infiniti G35 6MT coupe - Plenty of torque throughout the range; 295 horses. The last time I owned an automatic transmission as my personal car was 1984. Never again. This one's a pleasure on the open road. I was prepared to buy a BMW but this was the winner in my road tests.* Breitling SuperOcean - Not fancy at all, and I like that. Just performs well under pressure, as should any fine diving watch. I admire all things that perform well under pressure.
* Premier Massage Chair - Great after sitting hunched over all day. It kneads, taps, rolls from head to back to legs.
* The Roasterie - Great source for Cup of Excellence coffees, the equivalent of the world's finest wines. Real treat for the coffee drinker.
* Lenovo (IBM) ThinkPad X-Series - When you spend as much time on the road as I do (60,000 miles on one airline alone, and I ride several), a light, reliable laptop is golden. Great screen, good-size keyboard, long battery life. Love this one.
* Trumper Men's Products - If you can't get to Mayfair, this might be the next best thing. Skin products, scents, soaps, shaving products: all things for the English gentleman. Wild Fern is my favorite.
* The Economist - My constant companion on those plane rides. It provides a much more global perspective than we typically get in the States, which I find both helpful and refreshing.
* SunBox - This has been in my office for years, pumping out the equivalent of a sunny day every day of the year. Great when your day starts at 4 AM!
* Naperville, IL - Money Magazine named it the second best place to live in the U.S. A picture postcard downtown, complete with Riverwalk; first-rate public schools; low crime; and high family incomes, with a cost of living that won't kill you. Quite a few forest preserves and parks, yet less than an hour from downtown Chicago.
Market Myopia
Does watching the market tick-by-tick improve your trading returns? Clearly, if you're scalping the market (trying to buy bids and sell offers), you have to be glued to the screen. If, however, you're trading over time frames lasting an hour or more, does it add value to be glued to the screen? Does watching each tick lead to better trading decisions or returns, or does it lead to a kind of myopia in which we become reactive and no longer follow our original trading ideas?
My sense is that watching markets tick-by-tick often stems from an illusion of control: that, by monitoring events tightly, we can somehow better control them. Research suggests, however, that getting more feedback about investments leads to risk aversion and reduced returns. This myopia stems from the fact that we tend to perceive meaningful patterns in events even when those aren't present. When we watch markets tick-by-tick, we begin to see patterns that we believe are indicative of shifting supply and demand. This perception leads us to exit positions before they've reached their target or delay entering positions that otherwise offer favorable reward:risk.
I also get the sense that some traders equate working hard with being glued to screens. In reality, the hard work of trading lies in what comes prior to putting the trade on: the research and analysis that pull together observations across markets and time frames to generate valid ideas. To the extent that tracking markets tick-by-tick is an expression of anxiety over one's position, it is not only not productive (in the research/analysis sense), but is actively destructive (keeping oneself in a mindset that is harmful to sound decision-making).
A very useful exercise is to define your trading rules so that you can clearly identify a stop and a target for each of your trades. Then you can see how your discretionary management of the position adds value to simply following those rules. By cutting winners short and delaying entries into good ideas, the trader glued to the screen reduces the risk:reward potential of each trade. Perhaps that is why frustrated traders who are "working hard" find that their trades are hardly working.
RELEVANT POSTS:
* Inside the Trader's Brain
* Four Insightful Studies
.
My sense is that watching markets tick-by-tick often stems from an illusion of control: that, by monitoring events tightly, we can somehow better control them. Research suggests, however, that getting more feedback about investments leads to risk aversion and reduced returns. This myopia stems from the fact that we tend to perceive meaningful patterns in events even when those aren't present. When we watch markets tick-by-tick, we begin to see patterns that we believe are indicative of shifting supply and demand. This perception leads us to exit positions before they've reached their target or delay entering positions that otherwise offer favorable reward:risk.
I also get the sense that some traders equate working hard with being glued to screens. In reality, the hard work of trading lies in what comes prior to putting the trade on: the research and analysis that pull together observations across markets and time frames to generate valid ideas. To the extent that tracking markets tick-by-tick is an expression of anxiety over one's position, it is not only not productive (in the research/analysis sense), but is actively destructive (keeping oneself in a mindset that is harmful to sound decision-making).
A very useful exercise is to define your trading rules so that you can clearly identify a stop and a target for each of your trades. Then you can see how your discretionary management of the position adds value to simply following those rules. By cutting winners short and delaying entries into good ideas, the trader glued to the screen reduces the risk:reward potential of each trade. Perhaps that is why frustrated traders who are "working hard" find that their trades are hardly working.
RELEVANT POSTS:
* Inside the Trader's Brain
* Four Insightful Studies
.
Friday, December 07, 2007
Technical Strength and Other Ideas for Week's End
* Technical Strength - We continue to see growing technical strength among the 40 S&P 500 stocks in my basket. These are among the most highly weighted issues in eight sectors; the technical strength measure is a quantification of their short-intermediate term trending. At present, we have 5 stocks qualifying as weak, 1 as neutral, and 34 as strong--a huge change from just a little while ago. The Technical Strength Index is a very strong +1500. This very much fits with the data I sector strength that I recently posted.
* Stock Picking Inspirations - The Kirk Report's latest links include a number of stock picking posts, including a perspective on high-yielding portfolios.
* Innovation, Complexity, and Crisis - This and other insights from Trader Mike's link updates.
* A Better Bet - Abnormal Returns finds more good market perspectives, including a better ETF for oil prices.
* Market Change? - Adam Warner finds volatility reverting to complacency.
* A Different Look - Eddy offers an alternative perspective on employment.
* Weekly Wrap - Larry Nusbaum summarizes the week that was in links.
* Triangulation - Corey tracks consolidation pattern in gold.
* Stock Screening - Chris Perruna shares his strategies.
* Stock Picking Inspirations - The Kirk Report's latest links include a number of stock picking posts, including a perspective on high-yielding portfolios.
* Innovation, Complexity, and Crisis - This and other insights from Trader Mike's link updates.
* A Better Bet - Abnormal Returns finds more good market perspectives, including a better ETF for oil prices.
* Market Change? - Adam Warner finds volatility reverting to complacency.
* A Different Look - Eddy offers an alternative perspective on employment.
* Weekly Wrap - Larry Nusbaum summarizes the week that was in links.
* Triangulation - Corey tracks consolidation pattern in gold.
* Stock Screening - Chris Perruna shares his strategies.
A Quick Look Sector by Sector
The market has rallied dramatically, as we indeed seem to be in a wide, rangebound mode. Which sectors are participating most in the strength? Here are the percentages of stocks trading above their 50-day moving averages, broken down by S&P 500 sector:
Materials: 55%
Industrials: 75%
Consumer Discretionary: 35%
Consumer Staples: 85%
Utilities: 97%
Energy: 79%
Health Care: 69%
Financial: 57%
Technology: 38%
Utilities are generating interest for safety and yield; consumer staples continue to outperform consumer discretionary in the face of a slowing economy. Financials have strengthened, and the big change is that technology is now lagging. Perhaps this is reflecting weaker growth prospects for tech due to that slowing economy.
Shout out to Decision Point for the helpful data. Here's my earlier look at the market turnaround by sectors.
Materials: 55%
Industrials: 75%
Consumer Discretionary: 35%
Consumer Staples: 85%
Utilities: 97%
Energy: 79%
Health Care: 69%
Financial: 57%
Technology: 38%
Utilities are generating interest for safety and yield; consumer staples continue to outperform consumer discretionary in the face of a slowing economy. Financials have strengthened, and the big change is that technology is now lagging. Perhaps this is reflecting weaker growth prospects for tech due to that slowing economy.
Shout out to Decision Point for the helpful data. Here's my earlier look at the market turnaround by sectors.
Thursday, December 06, 2007
When Trading Performance Falls Off a Cliff
“I’ve been a successful trader, but lately I’ve been losing money. Nothing I try seems to work. What should I do?”
I’ve heard variations of this problem quite a few times in recent months. Good traders are struggling, despite volatile markets that—on the surface—should offer opportunity. It’s a frustrating and demoralizing situation.
So what should a trader do?
The important thing here is that the trader has been successful over a period of years, not just months. The problem is not simply one of inexperience. This is what makes the problem so perplexing: the trader knows he or she has skills, but it’s as if all that experience has flown out the window.
Let’s take an analogous situation: Suppose you’ve had good health for years, but now feel persistently sick and run down. You’re just not your old self. What should you do?
Clearly, you would seek professional help for a thorough and objective evaluation and for an accurate diagnosis of the problem. What you would not do is let the situation continue to deteriorate. You would also not simply assume that the problem must be “in your head” and immediately seek psychological assistance.
Similarly, the experienced and successful trader whose performance has fallen off a cliff should not let the situation fester and should not assume that the problem is psychological. If health has deteriorated, there’s most likely a health problem that needs to be identified and treated. If the health of one’s portfolio has deteriorated, there’s most likely a trading problem that requires similar assessment and intervention.
Having worked with traders across a variety of markets and strategies—from market making and prop desks at banks to global macro portfolio managers and Chicago prop traders—I’ve found three common sources of performance decline:
1) Diminishing Opportunity in the Trader’s Market – Perhaps you’ve been making markets or trading spreads and the bid-offer has narrowed significantly. Perhaps your market has entered an extended period of reduced volatility. The market has changed significantly and your old strategies no longer work.
2) Altered Market Behavior – Perhaps you’re a short-term trader who looks for advantages in short-term price/volume patterns or in shifts within the order book (depth of market); perhaps you depend on execution (buying bids and selling offers, entering long on pullbacks, short on bounces) for much of your profitability. The presence of new large traders in your market, including automated trading systems/black boxes, has shifted how markets trade in the short-run, disrupting the patterns you’ve counted upon for your profitability.
3) Shifting Market Regimes – Markets that used to behave independently now are more correlated. Countertrend patterns that once ruled markets now are giving way to greater trending moves. Enhanced intraday volatility is making it difficult to participate in longer-term market moves. We’ve seen a variety of changes in market trading patterns and it has been difficult for traders and investors to adapt to these.
Notice that these are variations on a single theme: markets have changed in some ways and what once worked is no longer working. It’s no wonder that struggling traders feel as though they’ve “lost it”. In a sense, they have.
Does this mean that trading problems don’t have a psychological component? Not at all. When markets change and traders are caught in the transitions, the usual outcome is frustration, then self-doubt. These emotional reactions can interact with the trading problems to create vicious downward spirals, both in mood and P/L. What begins as a trading problem can escalate into emotional one. Frustrated, reactive trading can undermine serious efforts at adaptation.
My advice for traders in a prolonged tailspin is severalfold:
1) Cut Risk – It’s that “above all else, do no harm” principle. If you don’t have a feel for the market, trade small while you regain your feel. Preserve as much of your capital as possible to lay the foundation for your recovery;
2) Focus on Your Strengths – It’s not unusual for frustrated traders to try to make all kinds of changes in their trading in a frantic effort to gain some traction. These efforts can compound difficulties by getting traders further and further from their strengths. During rebuilding periods, you want to focus on the markets and strategies that you know most about, that represent your strengths.
3) Reach Out – It’s especially helpful to reach out to traders who trade markets and strategies similar to yours. Are they also struggling? If so, this suggests that market changes, indeed, may be at the root of the problem. If the traders you contact are succeeding, try to find out what they’re doing differently from you. It may well be that a simple tweaking of execution, holding times, and risk management could turn your performance around.
4) Stay Constructive – You may well be in a rebuilding period. This happens to the best athletes and sports franchises. It doesn’t mean you’ve lost all talent and skill. Identifying the kinds of trades that are working for you is a start toward rebuilding: you want to find the common denominators behind your successful trades so that you can emphasize these going forward.
5) Work on Your Self-Talk – Hard as it is, it’s important to stay positive during a rebuilding period. The last thing you want to do is create additional interference by beating up on yourself and dampening your motivation. This is one of the areas where coaching can be helpful. Setting attainable goals and creating plans for learning new patterns and trading strategies can fuel optimism, determination, and focus.
6) Control the Budget – It very much helps to have a cash cushion to weather these rainy day periods. Living within one’s means also helps greatly. I’ve generally found that traders can adapt to shifting markets if they have enough time to make the transition. It’s when the pressures of bringing in money month to month add to the performance pressures of a drawdown period that turnarounds become difficult to sustain.
Perhaps the best advice, however, is preventive. Identify slumps early and control losses before they get out of hand. Perform regular inventories of your winning and losing trades, so that you’re always on top of what’s working for you and minimizing what’s hurting performance. During your best times, remember that markets always change and keep powder dry to weather the inevitable lean times. Ironically, the best way to master declines in trading performance is to embrace them early and turn them into prods for learning and development.
RELEVANT POSTS:
The Most Important Question to Ask When You're in a Slump
Common Sources of Trader Stress
.
I’ve heard variations of this problem quite a few times in recent months. Good traders are struggling, despite volatile markets that—on the surface—should offer opportunity. It’s a frustrating and demoralizing situation.
So what should a trader do?
The important thing here is that the trader has been successful over a period of years, not just months. The problem is not simply one of inexperience. This is what makes the problem so perplexing: the trader knows he or she has skills, but it’s as if all that experience has flown out the window.
Let’s take an analogous situation: Suppose you’ve had good health for years, but now feel persistently sick and run down. You’re just not your old self. What should you do?
Clearly, you would seek professional help for a thorough and objective evaluation and for an accurate diagnosis of the problem. What you would not do is let the situation continue to deteriorate. You would also not simply assume that the problem must be “in your head” and immediately seek psychological assistance.
Similarly, the experienced and successful trader whose performance has fallen off a cliff should not let the situation fester and should not assume that the problem is psychological. If health has deteriorated, there’s most likely a health problem that needs to be identified and treated. If the health of one’s portfolio has deteriorated, there’s most likely a trading problem that requires similar assessment and intervention.
Having worked with traders across a variety of markets and strategies—from market making and prop desks at banks to global macro portfolio managers and Chicago prop traders—I’ve found three common sources of performance decline:
1) Diminishing Opportunity in the Trader’s Market – Perhaps you’ve been making markets or trading spreads and the bid-offer has narrowed significantly. Perhaps your market has entered an extended period of reduced volatility. The market has changed significantly and your old strategies no longer work.
2) Altered Market Behavior – Perhaps you’re a short-term trader who looks for advantages in short-term price/volume patterns or in shifts within the order book (depth of market); perhaps you depend on execution (buying bids and selling offers, entering long on pullbacks, short on bounces) for much of your profitability. The presence of new large traders in your market, including automated trading systems/black boxes, has shifted how markets trade in the short-run, disrupting the patterns you’ve counted upon for your profitability.
3) Shifting Market Regimes – Markets that used to behave independently now are more correlated. Countertrend patterns that once ruled markets now are giving way to greater trending moves. Enhanced intraday volatility is making it difficult to participate in longer-term market moves. We’ve seen a variety of changes in market trading patterns and it has been difficult for traders and investors to adapt to these.
Notice that these are variations on a single theme: markets have changed in some ways and what once worked is no longer working. It’s no wonder that struggling traders feel as though they’ve “lost it”. In a sense, they have.
Does this mean that trading problems don’t have a psychological component? Not at all. When markets change and traders are caught in the transitions, the usual outcome is frustration, then self-doubt. These emotional reactions can interact with the trading problems to create vicious downward spirals, both in mood and P/L. What begins as a trading problem can escalate into emotional one. Frustrated, reactive trading can undermine serious efforts at adaptation.
My advice for traders in a prolonged tailspin is severalfold:
1) Cut Risk – It’s that “above all else, do no harm” principle. If you don’t have a feel for the market, trade small while you regain your feel. Preserve as much of your capital as possible to lay the foundation for your recovery;
2) Focus on Your Strengths – It’s not unusual for frustrated traders to try to make all kinds of changes in their trading in a frantic effort to gain some traction. These efforts can compound difficulties by getting traders further and further from their strengths. During rebuilding periods, you want to focus on the markets and strategies that you know most about, that represent your strengths.
3) Reach Out – It’s especially helpful to reach out to traders who trade markets and strategies similar to yours. Are they also struggling? If so, this suggests that market changes, indeed, may be at the root of the problem. If the traders you contact are succeeding, try to find out what they’re doing differently from you. It may well be that a simple tweaking of execution, holding times, and risk management could turn your performance around.
4) Stay Constructive – You may well be in a rebuilding period. This happens to the best athletes and sports franchises. It doesn’t mean you’ve lost all talent and skill. Identifying the kinds of trades that are working for you is a start toward rebuilding: you want to find the common denominators behind your successful trades so that you can emphasize these going forward.
5) Work on Your Self-Talk – Hard as it is, it’s important to stay positive during a rebuilding period. The last thing you want to do is create additional interference by beating up on yourself and dampening your motivation. This is one of the areas where coaching can be helpful. Setting attainable goals and creating plans for learning new patterns and trading strategies can fuel optimism, determination, and focus.
6) Control the Budget – It very much helps to have a cash cushion to weather these rainy day periods. Living within one’s means also helps greatly. I’ve generally found that traders can adapt to shifting markets if they have enough time to make the transition. It’s when the pressures of bringing in money month to month add to the performance pressures of a drawdown period that turnarounds become difficult to sustain.
Perhaps the best advice, however, is preventive. Identify slumps early and control losses before they get out of hand. Perform regular inventories of your winning and losing trades, so that you’re always on top of what’s working for you and minimizing what’s hurting performance. During your best times, remember that markets always change and keep powder dry to weather the inevitable lean times. Ironically, the best way to master declines in trading performance is to embrace them early and turn them into prods for learning and development.
RELEVANT POSTS:
The Most Important Question to Ask When You're in a Slump
Common Sources of Trader Stress
.
A Note of Thanks From Dr. Brett
This month represents the two-year anniversary of the TraderFeed blog. Yesterday also marked the 1 millionth visit to the blog over the course of those two years. In two years, there have been over 1200 posts to the blog and an equal number to the Twitter application.
TraderFeed began simply as a vehicle for me to crystallize my thoughts about markets and psychology. In the first few months, daily visits were in the very low one hundreds. Visits now are in the thousands each day, and the blog has become a phenomenal means for meeting traders from around the world.
About 2/3 of all TraderFeed visits come from the U.S., and about a quarter of all visits are from outside North America. It is a marvel of recent technology that one can write a simple blog from one's home and reach a global audience of readers.
I want to thank readers and other bloggers for their support, and I want to encourage skilled traders to share their ideas through blogs. The thinking out loud and sharing of inspirations enriches us all. Special thanks to Trader Mike, Charles Kirk, Barry Ritholtz, Abnormal Returns, and the many other fine bloggers who have been supports and inspirations.
The most special thanks, however, goes to readers who have taken the time to comment on blog posts, adding valuable content and discussion to the posts. You're the best.
Brett
TraderFeed began simply as a vehicle for me to crystallize my thoughts about markets and psychology. In the first few months, daily visits were in the very low one hundreds. Visits now are in the thousands each day, and the blog has become a phenomenal means for meeting traders from around the world.
About 2/3 of all TraderFeed visits come from the U.S., and about a quarter of all visits are from outside North America. It is a marvel of recent technology that one can write a simple blog from one's home and reach a global audience of readers.
I want to thank readers and other bloggers for their support, and I want to encourage skilled traders to share their ideas through blogs. The thinking out loud and sharing of inspirations enriches us all. Special thanks to Trader Mike, Charles Kirk, Barry Ritholtz, Abnormal Returns, and the many other fine bloggers who have been supports and inspirations.
The most special thanks, however, goes to readers who have taken the time to comment on blog posts, adding valuable content and discussion to the posts. You're the best.
Brett
Tuesday, December 04, 2007
The Stock Index Futures Premium as a Sentiment Measure
A reader recently inquired about my use of the S&P emini stock index futures premium as a market indicator. The premium, which in e-Signal goes by the symbol $EPREM, represents the difference between the S&P 500 emini index and the S&P 500 cash index. When traders are bullish and buying the futures this premium will expand; when they're bearish and selling the futures, the premium collapses.In practice, there are bounds to how much the premium expands or collapses. If the premium goes too far above (below) fair value, arbitrageurs will sell (buy) the futures and buy(sell) a corresponding basket of stocks to capture the price differential.
The chart above, which depicts the last 90 minutes of trading for Tuesday, December 4, tracks what I call the Adjusted Premium. Here, instead of comparing the current premium value to fair value, I simply subtract a 2 hour moving median of the premium from each subsequent premium value. Hence, a negative number means that the current 1 minute closing premium is below the 120 minute O-H-L-C median; a positive number means that the current closing premium is above the 2-hour median value.
What I look for with the Adjusted Premium is:
a) How much time is spent above vs. below the zero line as an ongoing sentiment gauge. Readers will recognize that this is also how I evaluate the Adjusted NYSE TICK. I'm looking for shifts in sentiment over time--changes in the distribution of the Premium.
b) How strength or weakness in the Adjusted Premium is associated with price movement. Elsewhere, I've referred to this as "efficiency": the degree to which a unit of sentiment can move the market price directionally.
You can see that about midway on the chart, we had sustained positive Adjusted Premium readings followed by a price high that was not confirmed with a strong Adjusted Premium reading. We quickly returned to the prior trading range, suggesting inefficiency: the buying sentiment could not sustain a directional upward move.
The reason for this is that the buying of stock index futures may or may not represent a directional bet on the part of large traders. They might buy the futures because they're bullish on stocks. Alternatively, they could buy the futures (and temporarily raise the premium), but simultaneously sell stocks or specific stock sectors. When the buying or selling of futures does not express directional bets on the part of large traders, we typically won't see a trending move.
That's what happened with about 45 minutes left in Tuesday's session. There was buying in the futures, but the bullish sentiment could not sustain higher prices. We returned to the prior trading range and proceeded to retrace the day's range. As a rule, when we see extreme buying or selling sentiment (whether in the Adjusted Premium or Adjusted TICK) unable to bring the market to new highs or lows, it's worth fading that sentiment, as buyers/sellers are forced to cover their positions.
In a bull market, sentiment pullbacks will occur at successively higher lows. In a bear market, sentiment bursts will occur at successively lower highs. In a range market, such as we saw on Tuesday, we see sentiment bursts and pullbacks at range extremes, but unable to keep the market out of that range. It's those sentiment-based false breakouts from ranges and subsequent returns to the value areas of the Market Profile that make for some of the best countertrend trades.
RELEVANT POST:
S&P eMini Premium and Divergences
.
A Look at 2007 Stock Market Returns Thus Far
Here's an interesting look at how equity ETFs have fared thus far in 2007:
EFV (iShares EAFE Value): 7.15%
EFG (iShares EAFE Growth): 18.09%
IVE (iShares S&P 500 Index Value): 1.38%
IVW (iShares S&P 500 Index Growth): 7.21%
VBR (Vanguard Small Cap Value): -6.59%
VBK (Vanguard Small Cap Growth): 8.71%
Growth has trounced value across the world; the rest of the world has trounced the U.S.; and large caps have trounced small caps. The declining dollar appears to be making U.S. stocks less attractive to overseas investors, and it seems to be making large multinational companies with substantial export businesses more attractive than smaller, domestic companies. Financial issues have clearly weighed on the value indexes; relative strength among technology shares have benefited growth.
RELATED POSTS:
A Shift in the Style Box
A Shift Across the Style Cube
EFV (iShares EAFE Value): 7.15%
EFG (iShares EAFE Growth): 18.09%
IVE (iShares S&P 500 Index Value): 1.38%
IVW (iShares S&P 500 Index Growth): 7.21%
VBR (Vanguard Small Cap Value): -6.59%
VBK (Vanguard Small Cap Growth): 8.71%
Growth has trounced value across the world; the rest of the world has trounced the U.S.; and large caps have trounced small caps. The declining dollar appears to be making U.S. stocks less attractive to overseas investors, and it seems to be making large multinational companies with substantial export businesses more attractive than smaller, domestic companies. Financial issues have clearly weighed on the value indexes; relative strength among technology shares have benefited growth.
RELATED POSTS:
A Shift in the Style Box
A Shift Across the Style Cube
Monday, December 03, 2007
Research Worth a Look
* VIX Trading System Ideas - The MarketSci site uses moving averages to produce significant returns, albeit with some drawdown. Interesting starting point for a trading system. See also their moving average crossover ideas.
* Popular Vehicle - Fixed income ETFs are finding greater interest, according to Research Recap. See also their interesting post on why the subprime situation may be less of a mess than has been thought.
* Volatility and Stock Returns - CXO summarizes research that finds superior returns for volatility-based strategies. See also their recent research on the implications of big up and down days.
* Commodity Weakness? - Bespoke Investment Group takes a snapshot of commodities and recent price weakness. See also their post on what the elevated TED spread might mean.
* Interest Rates and Stock Prices - Here's my research from last year on implications of rising rates for stock prices. I'll be updating this in a coming post.
* Popular Vehicle - Fixed income ETFs are finding greater interest, according to Research Recap. See also their interesting post on why the subprime situation may be less of a mess than has been thought.
* Volatility and Stock Returns - CXO summarizes research that finds superior returns for volatility-based strategies. See also their recent research on the implications of big up and down days.
* Commodity Weakness? - Bespoke Investment Group takes a snapshot of commodities and recent price weakness. See also their post on what the elevated TED spread might mean.
* Interest Rates and Stock Prices - Here's my research from last year on implications of rising rates for stock prices. I'll be updating this in a coming post.
Advance-Decline Lines and More Thoughts for Monday
* Tracking the Advance/Decline Lines - We're only about 5% off the bull market highs in the NYSE Composite Index, but a look at the Advance/Decline specific to NYSE common stocks (just the operating companies, not including funds and preferred issues) shows us in a clear downtrend, with the line well below its previous peak, even after the recent market rebound. An even more evident downtrend in the A/D line can be found among the S&P 600 small cap issues. The A/D lines for the S&P 500 stocks and NASDAQ 100 issues held above their August lows during the market drop, despite a lower high at the prior market peak. Interestingly, the line for the Dow 30 stocks is very near its bull market high. In some ways this market reminds me of the 2000-early 2001 period, in which the large caps held their value while the formerly strong tech stocks entered a bear market. In the present market, of course, it's the financials taking the role of the tech stocks.
* A Collection of Market Themes - Abnormal Returns tracks a decline in global interest rates, increased stresses on the markets, and unusual bearishness among newsletter writers. Charles Kirk finds some very interesting themes, including the shadow banking system and why it's fragile. Trader Mike updates themes with views on selling tech and questioning the recent market rebound. The Big Picture follows up with a wide variety of views, including concerns over junk bonds, a fresh look at financial issues, and a contrarian view of markets.
* The Importance of Resilience - The Trade by Trend blog offers a great example of sticking with one's convictions through a drawdown.
* Gratitude - Interesting interview with Dr. Robert Emmons on the role of gratitude in personal happiness and positive psychology.
* Indicators Site - Many thanks to gangsTA for passing along this very useful site that compiles market indicators. Very helpful charts.
* Questioning Indicators - I'll be following up on this post shortly, questioning the value of many indicators for daytraders.
* A Collection of Market Themes - Abnormal Returns tracks a decline in global interest rates, increased stresses on the markets, and unusual bearishness among newsletter writers. Charles Kirk finds some very interesting themes, including the shadow banking system and why it's fragile. Trader Mike updates themes with views on selling tech and questioning the recent market rebound. The Big Picture follows up with a wide variety of views, including concerns over junk bonds, a fresh look at financial issues, and a contrarian view of markets.
* The Importance of Resilience - The Trade by Trend blog offers a great example of sticking with one's convictions through a drawdown.
* Gratitude - Interesting interview with Dr. Robert Emmons on the role of gratitude in personal happiness and positive psychology.
* Indicators Site - Many thanks to gangsTA for passing along this very useful site that compiles market indicators. Very helpful charts.
* Questioning Indicators - I'll be following up on this post shortly, questioning the value of many indicators for daytraders.
Sunday, December 02, 2007
Tracking a Stock Market Turnaround
We have bounced solidly off the market lows; Friday saw 865 new 20-day highs across the three exchanges, against 499 new lows. To give an idea of the magnitude of the turnaround, I looked at the 40 stocks in my basket and their Technical Strength (a quantification of trending). Interestingly, only 3 stocks are technically weak, 9 neutral, and 28 strong--quite a reversal of the weakness we had been seeing. Here's how it shapes up, sector by sector:
Materials: +120
Industrials: +100
Consumer Discretionary: +240
Consumer Staples: +180
Energy: +160
Health Care: +260
Financials: +180
Technology: -60
TOTAL: +1180
What is perhaps most fascinating is how one of the strongest sectors (technology) is now the weakest and how two of the weakest sectors (consumer discretionary, financial) are now stronger.
Meanwhile, we continue to see healthy upside momentum. My Demand/Supply measure, which is an index of the number of issues closing above the volatility envelopes surrounding their moving averages, was once again highly skewed to the bulls. Demand was 158 on Friday; Supply was 51. We're now seeing 44% of S&P 500 stocks trading above their 50-day moving averages, up from 20% at the market low. Small caps continue to lag, as only 33% of the S&P 600 stocks are above their 50-day MAs.
At least in the large cap indices, we appear to be in a wide trading range defined by the bull market highs and the August lows. Risk aversion in the credit markets has not disappeared, and we continue to see large caps outperforming the broad market. We are seeing signs of an accomodative Fed, however, and that has been an important ingredient in getting us out of jams in 1987 and 1998. It may, however, also be an ingredient in causing further dollar weakness and further bubble-like strength in commodities--a situation that cannot bode well for inflation and eventual Fed restraint.
RELEVANT POST:
My Previous Look at Technical Strength
.
Materials: +120
Industrials: +100
Consumer Discretionary: +240
Consumer Staples: +180
Energy: +160
Health Care: +260
Financials: +180
Technology: -60
TOTAL: +1180
What is perhaps most fascinating is how one of the strongest sectors (technology) is now the weakest and how two of the weakest sectors (consumer discretionary, financial) are now stronger.
Meanwhile, we continue to see healthy upside momentum. My Demand/Supply measure, which is an index of the number of issues closing above the volatility envelopes surrounding their moving averages, was once again highly skewed to the bulls. Demand was 158 on Friday; Supply was 51. We're now seeing 44% of S&P 500 stocks trading above their 50-day moving averages, up from 20% at the market low. Small caps continue to lag, as only 33% of the S&P 600 stocks are above their 50-day MAs.
At least in the large cap indices, we appear to be in a wide trading range defined by the bull market highs and the August lows. Risk aversion in the credit markets has not disappeared, and we continue to see large caps outperforming the broad market. We are seeing signs of an accomodative Fed, however, and that has been an important ingredient in getting us out of jams in 1987 and 1998. It may, however, also be an ingredient in causing further dollar weakness and further bubble-like strength in commodities--a situation that cannot bode well for inflation and eventual Fed restraint.
RELEVANT POST:
My Previous Look at Technical Strength
.
Saturday, December 01, 2007
A Dramaturgical Perspective on the Work of a Trading Coach
Beginning with the work of Erving Goffman, there has been an interest in dramaturgical views of human behavior. These liken daily life to theater, in which we all sustain performances, arrange our stagings, and enact various roles. Theodore Sarbin's work in social psychology, derived from the influence of Stephen Pepper's "World Hypotheses", emphasizes that we make sense of the world through metaphor: by finding similarities between what we see now and what we have experienced in the past. Much of that meaning-making takes the form of narratives: the organization of events into coherent stories.
Narratives are fundamental to human experience. Before there was writing, cultures possessed an oral tradition of story-telling. Such narratives tie together causes, effects, intentions, actions, and reactions. They lend coherence to our experiences. After all, what do we do when we want someone to truly understand us? We tell them our life stories.
Essential to any dramatic narrative are roles. We typically occupy multiple roles in our life stories: as spouses, parents, colleagues, employees, friends, etc. Others occupy roles in our life scripts as well. When the roles of two people fulfill mutual scripts, their relationship tends to be harmonious. There tends to be disharmony when a person cannot or will not fulfill the role assigned to him/her by the other.
Our life stories change when we adopt new roles. New roles require us to interact with others in fresh ways. They are novel interpretations of the self. Equally important, new roles require others to respond to us in fresh ways. When the feedback from new role enactments fulfills an emerging life story, that feedback is internalized. The new role increasingly becomes part of the self. We grow through the assumption of new social roles and the feedback generated from that assumption.
Conversely, we stagnate when we are locked into a limited set of roles. Though these roles, quite literally, are self-limiting, they are all we have to make sense of our world. We bring our scripts to new life situations, enacting the same dramas in diferent life arenas. Ironically, we avoid the disharmony of relationships that do not confirm our limited role definitions and seek the harmony of familiar role enactments. This locks us in scripts that may be unfulfilling: increasingly we live a life story that we do not like.
Therapy is effective to the degree that the helping relationship creates fresh social contexts for novel role enactments. The therapeutic relationship requires the individual to break out of stagnant dramas and enact new scripts. For example, someone who has grown up resentful of authority figures will have to find new ways to deal with a therapist who refuses to assume the mantle of authority. The altered scripts within therapy provide opportunities for feedback and revisions of the self.
Fantasies of success, hopes of winning fame and approval, fears of failure and rejection: we bring our life dramas to the markets. It is in this dramaturgical context that the most important questions we can ask when we're exploring psychological impediments to trading are: What has been my role in the trading narrative? What dramas am I enacting?
The successful trading coach, like the successful therapist, nudges the trader to interact with markets in fresh ways, internalizing new experiences and building new scripts. In dramaturgical terms, the coach and trader are both directors and authors in this enterprise, reworking scenes and developing fresh scripts.
The ultimate goal of coaching is for people to become authors and directors of their own life stories. The successful, fulfilled person lives an evolving narrative and guides that evolution. The unhappy individual is trapped in his or her own story. Talk cannot change a person in meaningful ways. Only novel experience that places us in fresh roles and new scripts can evoke the feedback that will lead us to internalize a different self.
RELEVANT POSTS:
The Devon Principle
How to Change Yourself
Becoming Your Own Trading Coach
.
Narratives are fundamental to human experience. Before there was writing, cultures possessed an oral tradition of story-telling. Such narratives tie together causes, effects, intentions, actions, and reactions. They lend coherence to our experiences. After all, what do we do when we want someone to truly understand us? We tell them our life stories.
Essential to any dramatic narrative are roles. We typically occupy multiple roles in our life stories: as spouses, parents, colleagues, employees, friends, etc. Others occupy roles in our life scripts as well. When the roles of two people fulfill mutual scripts, their relationship tends to be harmonious. There tends to be disharmony when a person cannot or will not fulfill the role assigned to him/her by the other.
Our life stories change when we adopt new roles. New roles require us to interact with others in fresh ways. They are novel interpretations of the self. Equally important, new roles require others to respond to us in fresh ways. When the feedback from new role enactments fulfills an emerging life story, that feedback is internalized. The new role increasingly becomes part of the self. We grow through the assumption of new social roles and the feedback generated from that assumption.
Conversely, we stagnate when we are locked into a limited set of roles. Though these roles, quite literally, are self-limiting, they are all we have to make sense of our world. We bring our scripts to new life situations, enacting the same dramas in diferent life arenas. Ironically, we avoid the disharmony of relationships that do not confirm our limited role definitions and seek the harmony of familiar role enactments. This locks us in scripts that may be unfulfilling: increasingly we live a life story that we do not like.
Therapy is effective to the degree that the helping relationship creates fresh social contexts for novel role enactments. The therapeutic relationship requires the individual to break out of stagnant dramas and enact new scripts. For example, someone who has grown up resentful of authority figures will have to find new ways to deal with a therapist who refuses to assume the mantle of authority. The altered scripts within therapy provide opportunities for feedback and revisions of the self.
Fantasies of success, hopes of winning fame and approval, fears of failure and rejection: we bring our life dramas to the markets. It is in this dramaturgical context that the most important questions we can ask when we're exploring psychological impediments to trading are: What has been my role in the trading narrative? What dramas am I enacting?
The successful trading coach, like the successful therapist, nudges the trader to interact with markets in fresh ways, internalizing new experiences and building new scripts. In dramaturgical terms, the coach and trader are both directors and authors in this enterprise, reworking scenes and developing fresh scripts.
The ultimate goal of coaching is for people to become authors and directors of their own life stories. The successful, fulfilled person lives an evolving narrative and guides that evolution. The unhappy individual is trapped in his or her own story. Talk cannot change a person in meaningful ways. Only novel experience that places us in fresh roles and new scripts can evoke the feedback that will lead us to internalize a different self.
RELEVANT POSTS:
The Devon Principle
How to Change Yourself
Becoming Your Own Trading Coach
.
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