Monday, November 30, 2015

Trading Notes: Week of November 30th

Friday, December 4th

*  Well, ECB did end up giving us a surprise and it was as much in the tone of the press conference as the content of the decision.  My take is that the central bank sent a message that they will not be bullied by markets and all the commentary on how the bank "needs to deliver."  The message from the press conference was that they are delivering the promised monetary stimulus, that this is enough, and that we should be patient and let it work.  Markets were positioned for more aggressive action and we had quite the selloff in the euro and in stocks and bonds.  We have the payrolls report this AM and then the Fed enters a quiet period ahead of its meeting.  All in all, with a moderate ECB and a Fed poised to hike, there isn't a big central bank tailwind for stocks.

*  Yesterday I noted the deterioration in breadth and that clearly extended yesterday.  We had 350 stocks across all exchanges register fresh monthly highs against 699 lows.  That was the highest number of stocks making monthly lows since November 16th.  We're extended to the downside on a short-term basis with fewer than 20% of stocks trading above their 3, 5, and 10-day moving averages (raw data from Index Indicators), so a short-term bounce is quite possible.  As the chart of overbought/oversold SPX stocks indicates below, however, we are not yet at an intermediate-term oversold point.  That has me in the mode of selling market bounces.

Thursday, December 3rd

*  So far, no great surprises from ECB; press conference coming up.  I'm not sure there's anything to change the broader dynamic of low rates and weak currency in Europe.  If we see a dovish rate hike from Fed, 2016 could bring more QE-style trade to stocks and shares with yield could find some support.  It's a theme I'm mulling over for the new year.

*  That being said, yesterday traded quite weak.  Note on the relative volume chart of yesterday's trade below how the attempted bounce from the early selling found little interest.  We bounced overnight, but we're overbought on an intermediate-term basis.  That has me selling bounces that cannot take out overnight and prior day's highs.

*  I was struck yesterday by the fact that we had 54 stocks make 52-week highs and 78 register annual lows.  Not impressive breadth.
Wednesday, December 2nd

*  From the start of Tuesday's session we could see fresh buying flows enter the market, with elevated NYSE TICK readings.  This was a clear break from recent action and ultimately led the market to new price highs for this move.  The number of stocks closing above their upper Bollinger Bands hit their highest level since November 2nd and breadth was solid (see chart below).  If this is the start of a genuine leg up, we should stay above the recent trading range and add to yesterday's gains.  The response to tomorrow's ECB action may play a role in that.  Given generally overbought levels in my cycle measures, I'm not wedded to the upside breakout idea, but will be watching breadth closely.

*  I continue to implement the change in my trading in which I view the hours in Asia, Europe, and U.S. as distinct trading "days".  All positions are opened and closed within their "days", so that there is no assumption of continuity across time zones.  I find the flows and price patterns to be quite different from one time period to the next, but do find consistency within each zone.  This has helped risk management and has also helped me become more flexible in trading ranges.  The emergence of the buying flows early in yesterday's U.S. session was a good case in point.

Tuesday, December 1st

*  We saw weakness in stocks yesterday, followed by late day strength, only to fall back into the range in overnight trade.  During this extended range, we're seeing overbought levels in my cycle measures and breadth has been waning (see chart below; raw data from the excellent Index Indicators site).  Trading the range (fading short-term overbought/oversold readings) has been what's been making money so far and it's been a make it/take it market.  With all eyes on ECB on Thursday and payrolls on Friday, I suspect we'll have plenty of volatility to break the range.  As we get to the upper end of the recent range, I'm not enamored with the risk/reward.  I'm also not inclined to take big bets ahead of events later this week, which might be the sentiment of other market participants...and that could keep us in the range near term.

*  Here's a study that I've undertaken that I believe will be of value in 2016 performance.  I'm looking at the trajectory of my winning and losing trades.  How quickly do the winners turn into winners?  How quickly do losers become losers?  If a trade is not profitable after X minutes, what is the likelihood it will be profitable at all?  If a trade is under water after X minutes, what is the likelihood it will come back?  What is the trajectory of the market after my exits?  Is my entry and exit execution providing value?  My initial findings are that losing trades pretty much start out as losing trades.  If I don't get stopped out after a period of time, the best course of action is to add to the trade.  Winning trades don't always start as winning trades, but often start as not-losing trades.  In other words, a market may bounce around in a range before going my way.  That does give opportunities for adding to positions.  Tracking the added value of those added positions is yet another study I will be undertaking.  More on this soon to come--

Monday, November 30th

How far can we take performance if we work with very tuned minds and bodies?  Most of us assume that we have to work hard and work long hours and this means work must take a toll on mind and body.  But if we prioritize mind and body, might we work much better and smarter?  Might we live happier and more fulfilled lives?  Perhaps we're going about development and performance in entirely the wrong way...

*  Stocks bounced off early lows in Friday's partial session, but remained below recent highs.  I continue to be underwhelmed by market breadth thus far.  The maximum number of new monthly highs registered last week was 589 on Wednesday, well below the 953 achieved in the first week of the month.  We have ECB on Thursday and the last jobs numbers on Friday before the Fed meeting this month.  I will be watching closely for evidence of the recent market strength broadening vs. rolling over.  My measure of intermediate-term market strength has not yet crested for the current cycle, per the chart below.

 *  High yield bonds continue to struggle per the chart of JNK below.  At some point, I suspect this will take front and center stage.  It's not a bull market dynamic.

Sunday, November 29, 2015

Lasting Change: It's About the Hardware

Following the wisdom of Napoleon, research provides the bayonets for revolutionary ideas in science.  Those ideas begin as heresies and only become received wisdom when the status quo becomes untenable.

The status quo in the helping professions is that change is a function of talk processes (counseling, therapy, coaching) and/or self-help methods.  In either case, change results from reprogramming the mind's software:  our ideas and approaches to life.

Evidence is growing, however, for a very different vision of growth and development.  Perhaps it's not about the software, but expanding our hardware.

If we had an outdated personal computer, we could run the most sophisticated software available and still we'd find bottlenecks, poor performance, and error messages.  Only an updating of the hardware would enable us to process more information and make full use of the capabilities of our software.

The reason this article is important is that it points to specific ways in which we can expand our hardware through developing our bodies and our brains.  Evidence is mounting that we are operating with severely subnormal body and brain fitness.  With less energy, less clarity, less focus, less willpower, we simply do less. No amount of self-help methods or psychological techniques can help us if we're engines running on only half our cylinders.  

If we optimize our hardware and operate with truly fit bodies and brains, many of the traditional problems of trading psychology, from faulty discipline to challenges with emotional control, simply melt away.  Changing our doing won't help us if we lack the energy to sustain doing.  Changing our thinking won't help us if our flabby brains are susceptible to distractions and frustrations.  

With people, as with computers, better software only produces better outputs when it is run by better hardware.  The next great revolution in psychology will come from the mastery of our hardware.

Further Reading:  Maximizing Brain Fitness

Saturday, November 28, 2015

Energy, Well-Being, and Success: Four Steps to Energize Our Trading

An important concept is that our success depends just as much on managing our energy as managing our time and our tasks.  Indeed, if we prioritize our energy levels, we're likely to be happier and more productive: energy is a key link between well-being and productivity.

A while back, I suggested that the greatest performance mistake we can make is to prioritize our work, rather than prioritize the states in which we are most productive.  A great example of that is the person who doesn't feel they have the time to get into shape--and then loses far more time in a state of low energy.

Suppose we wanted to develop a program for boosting and sustaining our physical, emotional, and cognitive energy.  What positive habit patterns would we want to develop?  Here are four possibilities:

1)  Boost energy with exercise - Regular, challenging aerobic and strength training not only makes your body more efficient; it also helps you feel better and is associated with better overall health.

2)  Reduce energy drains with better sleep and nutrition - Both the quantity and quality of sleep profoundly impact mood levels, physical energy, and our ability to concentrate.  Weight gain decreases our energy level; managing our energy through sugar and caffeine puts us in an inefficient spiral of ups and downs.  

3)  Boost energy with positivity - We are most likely to be energized when we are engaged in meaningful personal, social, and work activity:  activities that affirm our deepest values, interests, and talents.  One of the best energy boosters is spend time with people we find inspiring and interesting.

4)  Reduce distractions and improve focus - Too often we waste our precious cognitive resources on processing information that we don't need and won't use.  Prioritizing our activities and using methods such as biofeedback and meditation to train ourselves to enter the zone can greatly improve the efficiency of our work and help us process information more effectively.

For traders, there is a synergistic benefit in developing these into habit patterns.  With more energy, greater positivity, and improved focus, we become better information processors.  We input information more effectively, gain improved access to the information, and combine the information better into new, creative outputs.  Equally important, when we're energized and free of distraction, we improve our implicit learning: our ability to apprehend patterns in noisy market information.  Our gut feel for markets crucially depends upon a clear mind, positive mood, and rested, energized body.

Further Reading:  Maximizing Personal Energy

Monday, November 23, 2015

Trading Notes: Week of November 23rd

Friday, November 27th

*  Not much changed from yesterday with respect to U.S. stocks, as we continue to hold important support in the lower 2080s in the front month ES contract.  I continue to be in the mode of buying weakness that holds above overnight lows, but expect trade to be slow today given the long holiday weekend that many U.S. traders will be taking.

*  So far, the number of stocks displaying unusual strength in the recent move higher has been modest.  Below is a chart of the number of NYSE issues closing above their upper Bollinger Bands minus the number closing below their lower bands.  (Data from the excellent site).  To this point, that measure of strength has been waning.

*  Another resource that I have found quite useful is the Stock Spotter site.  They provide buy and sell signals for individual stocks based upon their cycle models.  They also have price forecasts for each stock and ETF.  I've found those forecasts for SPY to have value and have backtested them for the better part of two years.  At present, their forecast is bullish for stocks over a next two-week horizon.

Thursday, November 26th

*  Happy Thanksgiving and many thanks to TraderFeed readers!  I look forward to a great 2016.  This latest article describes a structured process for dealing positively with setbacks and failure.  So much of the difference between the successful trader and the unsuccessful one is how they deal with the inevitable losses dealt by markets (and by our faulty processing of market-generated information).

*  We've continued modestly higher in overnight trade, as the basic strategy of buying weakness that holds above key prior day and overnight levels has been a good one.  The relative outperformance of small caps is something I'm watching.  Utility stocks, faced with the prospect of rising rates in the U.S., have been relatively weak.  Below, the graphic from the excellent FinViz site shows mixed performance among U.S. sectors.  It continues to be a rotational environment.

*  On a more global scale, I'm watching the relative performance of China, emerging markets, Japan, and European stocks, given the prospect of further easing from overseas central banks and a rate hike from the Fed.  Note the relative strength of the U.S. dollar of late; that is also a theme that is impacting U.S. shares.  I know too many traders who are so busy looking for short-term setups that they completely miss larger themes that are driving stocks on the longer time frame. 

Wednesday, November 25th

*  We tested the overnight lows in early trade yesterday and found strong buying off the lows, bringing us back toward the upper end of the recent range.  The inability to sustain weakness is consistent with a market in a rising cycle, though I do notice tepid breadth thus far in the move higher.  For example, the past couple of days, we've seen more stocks register fresh 52-week lows than highs.  While I do think we have a good opportunity to test recent highs, I am far from convinced that we're launching to a fresh bull leg from here.  

*  December promises to be an eventful month, with ECB and Fed meetings that could lead to monetary easing and an interest rate hike, respectively.  I think it's possible that, with a dovish Fed hike and monetary ease in Japan and Europe, we could see a renewed "QE" trade in stocks.

*  The chart of cumulative upticks vs. downticks among all listed stocks (red line below) has been heading to new highs.  That reflects relative strength recently among smaller cap issues.  Interestingly, the cumulative upticks vs. downticks for Dow stocks only is in a recent downtrend.  This rotational trade could well continue through this holiday period.

Tuesday, November 24th

*  Yesterday's trade was interesting in that we saw considerable buying interest in early trade, as tracked by NYSE TICK, but much of the strength centered on smaller cap issues and not the NASDAQ and SPX large caps.  What turns a bull, rising phase of a market cycle into a topping phase is that buying interest fails to take prices meaningfully higher, as some segments of the market display weakness as others hold up.  In yesterday's trade, it was the NASDAQ index--and AAPL specifically--displaying weakness.  As buying failed to push indexes higher, sellers came in during the afternoon and took us lower.  Yesterday's trade was a nice illustration of how markets turn on a short time frame.  It was also a nice illustration of how it's important to track multiple market sectors, not just the index you're trading.

*  Painful experience has taught me to not be long stocks with pure volatility (volatility per unit of trading volume) is low.  Forward returns just aren't positive on average.  As you can see below, pure vol had gotten quite low recently, a yellow caution light.  With the downing of the Russian jet overnight in Turkey, stocks have fallen back and taken out stops in the 2070s in the ES futures.  Pure vol has expanded meaningfully.  Adjusting volatility expectations and risk/reward is key here.  On one hand, corrections that elevate pure vol offer good entry points on the long side.  On the other hand, we now have a situation where idiosyncratic (geopolitical) factors are moving markets.  It is difficult to successfully trade historical patterns when idiosyncratic risk factors dominate.  I'm open to buying weakness that cannot take out the overnight lows, but in no rush to get involved.  

Monday, November 23rd

*  How much time do we waste and how much mental clutter do we create by staring at screens, opening superfluous email, and reading material irrelevant to our decision making?  How does that clutter clog creative processes and interfere with generating new and better ideas and trades?  This post on media consumption tackles a very important topic: we can't assemble good ideas if we're not collecting the right puzzle pieces.

*  We're trading in a relatively sideways range in the ES futures, correcting more in time than in price.  That is generally what markets do when they're trading in a good uptrend, and that's how I'm treating this market until proven otherwise.  The only flies in the ointment are low levels of implied correlation and pure volatility, both of which are associated with subnormal near-term returns.  My basic strategy, as has been the case recently, is to buy weakness that holds above overnight and prior day's lows.

*  I generally like to buy oversold levels in rising markets and sell overbought levels in falling ones.  A large portion of profitability comes from good entry execution.  The same applies to exit execution.  When positions go our way but are stretched to the upside or downside, it generally pays to take at least some of our position off in markets that display short-term mean reversion.  I look at a medium term rate of change measure on bars created every 500 price changes to provide perspective on overbought and oversold.  It's not something I trade off of directly, but use to generally guide good and bad trade location.

Sunday, November 22, 2015

How To Fail Successfully

If you're going to be a skillful sailor, you have to weather some storms.  We build and expand skills by testing them, and that means that failure is an essential ingredient of success.  It's the weight that we lift for one set of repetitions but not three that we should be tackling in the gym.  After we succeed at one weight, we seek the next weight that will ensure our failure.

Here are two insightful posts that deal with the path to trading success:

1)  Thanks to Bella from SMB for pointing out this post from @kroyrunner89 on the work it takes to break a slump.  It's a great example of how awareness of our mistakes can overcome trading-by-ego.  I spoke with a trader a while back who went from unprofitable to profitable simply by changing one thing.  Instead of getting bigger as trades went his way, he scaled out of his positions.  That's it.  He updated risk/reward in a clear headed way and became protective of profits instead of greedy for more.  He replaced overconfidence with a realistic picture of how far a move is likely to extend.  When you trade by rules, you suppress the ego and make doing the right thing more and more automatic.

2)    Thanks to the eminiplayer site for posting this excellent analysis from Ziad on learning to become a successful trader.  It's a true gem.  A key point is that trading success requires far more than finding setups that "work".  Whether a pattern is profitable is not just a function of that pattern, but of the context in which the pattern is embedded.  The single greatest step forward in my trading this year occurred when I stopped making "trend" my unit of analysis and instead focused on "cycle".  That opened the door to a simple recognition:  the patterns that are profitable are a function of where we're at in a market cycle.  In topping and bottoming phases, markets display mean reversion.  In rising and falling phases, markets display momentum.  The successful trader adapts to market cycles.  Imposing our trading style on markets is a formula for guaranteed drawdown and frustration.

The key to mastery is failing successfully.  We fail successfully when failure does not take us out of the game (risk management) and when failure sparks adaptation and innovation.  If we want to become a world class skier, we can't remain content with tackling small hills.  But we also can't start at the highest peaks.  In conquering trading hills we prepare ourselves to master the mountains.

Further Reading:  Why 90% of the Mental Game is Trading

Saturday, November 21, 2015

What We Can Learn From An Amazing Cat

Flower (aka Flora) is an amazing cat.  What makes her amazing is that she's not only a survivor, but a cat that has managed to thrive in adversity.  She has never really known a home, as her family kept her outdoors almost all the time.  When the family moved, they just left Flower behind.  She spent 2-1/2 months on the streets until we learned that Animal Control was going to pick her up.  They said they would give her a week to be adopted before they'd have to put her down, since all shelters were filled.  Margie and I drove to southern New Jersey, picked up Flower (called her Flora after the fragrance Flora Danica, because she was so sweet) and brought her home.

Now we're looking for a permanent home for the little girl, as the cat we adopted as an abused and traumatized kitten has literal panic attacks seeing a new cat.  There's a lot we can learn from Flower, and my hope is that her inspiration will inspire a family to take her in.

So how did Flower survive months of abandonment?  The first secret to her success was that she was super outgoing and went to people whenever she had a chance.  No one in the area could adopt her, but they did feed her and make a garage available for shelter.  When someone was walking their dog, Flower would come join them.  When someone left their home to go to work, Flower would trot over to say hi.  She had no reason to trust people, given her abandonment, but she never lost the desire to connect.  

This is an important learning lesson.  So often, we respond to setbacks by setting back.  We retreat and withdraw.  We berate ourselves and lapse into a funk.  Yet it's precisely when we're at lowest ebb that reaching out to others can provide the greatest support and inspiration.  When my trading hit a rocky patch earlier this year, I made a point of initiating conversations with some of the most creative traders I know.  Instead of hiding my "failures", I spoke openly of them and brainstormed ways of addressing them.  One conversation led to a revolutionary insight that reorganized my decision-making process.  Since that time, my hit rate has increased meaningfully and I've recently hit my high water mark for the year.

Instead of hiding her vulnerabilities, Flower put them on display for all to see.  That made her stronger.

Flower's second strength is that she is unusually expressive.  She is so appreciative of any attention that she purrs and purrs and flops over whenever someone pets her.  She loves to have her belly rubbed--almost like a dog in her trusting of others.  Many nights I've stayed in the upstairs bedroom to keep Flower company and she'll curl beside me, purr, knead, and drift off to sleep.  In her expressiveness, she is a walking model of gratitude.

How many of us, if we were abandoned and rejected, would approach the world loudly expressing appreciation and gratitude?  Flower is a happy cat, not because of her situation, but in spite of it.  This past week, when I had a setback in my work, I thought of Flower purring and immediately felt better.  If she can express positivity in her situation, I surely can connect to all that is right in my life.

Reaching out to others in the worst of times.  Digging deep, connecting with all that is right in our world, and expressing gratitude and positive attitude.  Those two strengths are a great formulation for resilience.  When all is going wrong, that's when it's most important to find what's right and use that to build a network.

So now it's the shrink's turn to ask for help.  If you know someone in the northeast U.S. who would love an amazing cat, please drop me a line via Twitter (@steenbab) or email (brett dot steenbarger at gmail dot com).  Flower has all her vet papers, is completely healthy and spayed, and is fully litter trained.  She's three years old and would love a family as amazing as she is.  Thanks--


Monday, November 16, 2015

Trading Notes: Week of November 16th

Friday, November 20th

*  We moved higher during the morning trade on Thursday, staying above the overnight lows, but then something interesting happened.  Volume fizzled and we wound up with a slow range day.  This highlights the importance of tracking volume in real time.  My favorite way of doing that is with "relative volume":  a measure of current volume versus the normal volume for that particular time of day.  Below is a chart for yesterday's relative volume.  Values below 1.0 represent subnormal volume.  You can see how volume became subnormal as the day progressed.  That means directional participants are taking the sidelines.  And that leads, more often than not, to range days.

*  The possible good news is that we're getting low volume, flattish corrections following moves higher off the recent oversold levels.  That is consistent with the scenario of testing the recent highs and has me continuing to buy weakness that stays above prior day and overnight lows.  I'm currently working on a suite of innovative cycle indicators; as you can see below, we're coming off an intermediate-term cycle low and are nowhere near levels associated with cycle peaks.

 Thursday, November 19th

*  The strategy of buying weakness that stayed above the overnight lows--and then buying weakness that stayed above morning lows--worked well on Wednesday, as stocks rallied strongly with the release of Fed minutes.  We've bounced off oversold levels (see chart below of short-term breadth in SPX shares) and now are beginning to see short-term overbought levels.  I continue to expect a test of recent highs and look to implement by buying weakness that stays above key levels.

*  The release of the Fed minutes led to fresh volume entering the market, with well-above levels of volume for that time of day.  Such expansion of volume indicates that new participants have entered the marketplace and it's key to see which way they're leaning, as these are generally directional traders running large size. By tracking NYSE TICK, we can see the degree to which the new volume is leaning to the buy or sell side.  When there is a distinct buying or selling bias among these participants, it can turn what started as a fairly normal day into a robust trend day. 

Wednesday, November 18th

*  We held overnight lows in early trade and moved nicely higher, taking out Monday's highs, but then fell back into the range and have stayed there in overnight trading so far today.  The inability to sustain the strength has me treating this as a potential bottoming process, which is clearest when you look at the Russell 2000 Index and retail stocks (XRT).  We are oversold on an intermediate-term basis; I'm looking to buy weakness that stays above the overnight lows.

*  The aligning of shorter and longer-term perspectives that I like is using overnight and previous day's highs and lows as reference points and buying weakness that stays above overnight and prior day's highs and lows and selling strength that stays below highs for the overnight and prior day's sessions.  When keying off levels in this way, it's relatively easy to identify stop levels.  Those levels also help me differentiate price action based on U.S. flows from price action based on flows from Asia and Europe.

*  I'm also keeping a close eye on commodities.  Hard to believe we can sustain a broad rally if there continues to be deflationary dynamics in markets.

Tuesday, November 17th

*  Once again we saw a good example of how flows in stocks are entirely different during adjacent time zones.  Weakness in the index futures when they opened for the weekend was followed by buying interest in Asian and European hours and then an explosion of buying at the NY open.  The buying occurred on strong NYSE TICK, volume, and volatility, confirming a rejection of the opening lows and setting up an upside trend day.  Here are four things I look for in an upside trend day.

*  What has worked well for me is viewing each of the major time periods (Asian trade, European trade, US trade) as separate days and not necessarily expecting continuity from one time period to another.  In a sense, each day offers three daytrading periods, with the lion's share of movement in U.S. indices occurring during London and NY hours.

*  Buying interest has followed through in the overnight market; my leaning is to buy weakness that holds above the overnight lows.  As mentioned yesterday, my intermediate term measures had not yet reached typical oversold levels; still, given the thrust of the recent move higher, my leaning is to use any further weakness as an opportunity to buy.

Monday, November 16th

This is one of the more important posts I've written of late and helps explain why trying to eliminate our trading mistakes and bad trading practices is often the wrong way to develop ourselves as traders.  It also helps explain why the harder we try to become disciplined, the less disciplined we can become. 

*  Stocks fell in late trade and overnight in response to the Paris attacks, but have bounced well off lows as I write.  As long as we put in lower price highs, I think it's premature to assume we'll rally simply because we've been oversold.  As the posts last week indicated, we have not yet been at oversold levels that have recently corresponded with intermediate-term market lows, per the chart below that tracks new highs versus new lows among the SPX shares.

*  My measure of pure volatility shows relatively little spike during this decline compared with the elevated volatility per unit of volume we saw during the August and September drops.  This would be consistent with a market making an intermediate term correction rather than an actual fresh bear leg down.  My base case continues to be a test of the recent market highs, but it would not surprise me to see quite a few divergences on any such test.

Sunday, November 15, 2015

What Is Your Coping Style?

The most recent post took a look at how current problems are often a function of past coping.  Now let's take a look at how we cope with stressful situations in the present.

Coping strategies represent efforts we make to deal with stressful situations.  When we employ combinations of strategies across situations, these are part of coping styles.  Research suggests that active coping styles--ways of coping that directly address stressful situations--are more effective than avoidant coping styles.  Active coping methods can be broken down into problem-focused strategies (ones that attempt to directly address problematic situations through analysis, planning, cooperation, restraint of extraneous activity) and emotion-focused strategies (ones that attempt to seek social support, positively reinterpret situations, use humor, accept situations).  Avoidant coping can be avoidant both in behavioral and emotional ways (disengaging from stressful situations, suppressing emotions associated with stressful situations) and includes the use of drugs and alcohol to escape stress.

An exercise I like is to jot down five recent stressful situations in markets and the specific ways in which you dealt with those situations.  Very often, a detailed look at your best coping will reveal how you string together coping strategies into an effective coping style.

For example, I recently took a loss on a short-term position when I became focused on longer-term market behavior and failed to enter the trade at a favorable short-term level.  When the position went against me, I immediately became hyper-focused and pushed aside any emotional reaction.  My entire focus was on whether the move against me was broad based, with increasing momentum or whether it was a weak move that could be expected to reverse.  As soon as I determined that this was, indeed, a broad and strong move, I exited and took a small loss.

Upon taking the loss, I sat back and pulled away from the screen.  My emotional reaction was "ouch".  I also had the emotional reaction of "I'm not going to let this happen again."  I reviewed the shorter term measures of strength and weakness that I track and identified the information that I had failed to integrate.  I discussed this information with a trading friend and we agreed to monitor the information going forward.  That monitoring became useful in entering the next trade, which was profitable.  I revised my routine to ensure that I completed a review of short-term information prior to any future trade entry.

Notice how there is a sequencing of strategies in the coping.  First, there is a suppression of emotional response and problem focused efforts.  Then there is acceptance of emotional response and a channeling of the emotions in a constructive direction.  That leads to larger efforts at solution and social strategies to run my ideas by others.  Finally, the new problem solving and lessons learned are applied in real time.

My most successful coping in trading situations follows this pattern closely.  My least successful coping occurs when I sit back, pull away from the screen, and simply withdraw from trading.  That is what the previous post talked about.  Withdrawing from problem situations was how I (successfully) coped as a child.  It does not work in mature relationships; nor does it work in dealing constructively with markets.  

No doubt, you have sequences of coping strategies--coping styles--different from mine.  The important idea is not to adopt the coping styles of others, but to identify how you best handle adversity.  By breaking down your successful coping into sequences of steps, you can create a "best practice" template that can powerfully prepare you for the next market setback.

Further Reading:  Embracing Stress

Saturday, November 14, 2015

Every Problem Is An Outdated Solution

One of the first lessons I learned as a psychologist is that our problems generally represent coping efforts that have long since lost their usefulness and that now bring unwanted consequences.  This is a powerful concept, and one that is not well appreciated by traders.

A classic example would be a person who is emotionally or physically abused as a child.  Good coping for the child is to keep safe distance from others and avoid getting hurt.  Good coping might also be blaming oneself for the abuse to stay in the good graces of parents who are the care providers.  Later in life, keeping a distance from others and blaming oneself for negative outcomes become problems, interfering with relationships and happiness.  But problems are not the problem; the problem is overlearned coping that no longer fits your life situation.

This is why psychological change is not so simple as calling upon motivation, positive thinking, mindfulness, etc. etc. in ridding ourselves of problem patterns.  If our problems represent coping efforts, we'll only change if we find superior, substitute coping strategies.  The person who was hurt in childhood needs to find new, constructive ways of finding safety and closeness.  Until there is new coping, there will be no ability or willingness to part ways with what worked in the past.

A second thing I learned early in my career as a shrink was that most people don't have lots of problems, though it often feels that way.  Rather, they have a single issue that impacts multiple areas of life.  If they can resolve that issue, the resolution brings positive gains at work, in relationships, in mood, etc.  

If you have a recurring problem in your trading, it may show up in different ways in different market conditions and it may seem as though you have dozens of problems. Consider the possibility that there is one main issue--and that issue is not a problem, but an effort at coping that is not working for you in trading situations.

For instance, pulling away from situations that are stressful is a great way to avoid vulnerability.  I instinctively withdraw from situations that I find to be dysfunctional.  If I can't physically leave, I withdraw emotionally and become distant.  I can feel that wall go up.  In many situations, putting up the wall has worked very well.  At several situations in my career, when office politics became hugely dysfunctional, I kept the wall up for an extended time and was able to make the most of my job.  I engaged people in a cordial manner, but otherwise had nothing to do with them.

In markets, however, you can't just pull back when things hit the fan.  It's one thing to pull away from uncooperative people; another thing to bail from an uncooperative market!  Using the coping from the job situation leads to all sorts of problems in markets, including exiting markets at the wrong time and failing to enter markets when there's opportunity.  In my own trading, I had to learn new ways of coping with stressful markets before I could consistently act upon my best-laid plans.  Clearly defining my downside in advance and mentally rehearsing the loss scenario so that I knew I could live with a bad outcome enabled me to tolerate stress without resorting to the old, avoidant ways.

So here are a few good questions for self-assessment:

1)  What are the problems that recur in your trading?
2)  What negative outcomes are your problems trying to avoid?
3)  In your best trading, how do you manage to find better ways of dealing with those potential negative outcomes?
4)  How can you rehearse those better ways of coping in real-time trading situations so that you won't fall into old, outdated coping modes?

Every problem is a failed solution to a challenging situation.  Once we accept problems as coping efforts, we open ourselves to a search for new, better solutions.  We never really get rid of our problems.  We just substitute new coping efforts that lay the groundwork for tomorrow's problems.

Further Reading:  Madness and Trading

Monday, November 09, 2015

Trading Notes: Week of November 9th

Friday, November 13th

*  We started Thursday weak but not yet at levels corresponding to intermediate-term oversold.  The resulting strategy of selling bounces that could not take out prior (overnight) highs worked very well during the day, as we closed weak and now have traded lower during overnight hours. As I mentioned a while ago, I'm impressed  by the fact that many market moves are beginning during London hours and not during the U.S. day session.  My working hypothesis is that moves in stocks *will* be anchored in London during periods in which the primary drivers of stock prices are macro-related.  Recently, the trade in stocks has been less about earnings and U.S. economy and more about currencies, interest rates, and central bank dynamics.

*  With the recent weakness, we're much closer to intermediate-term oversold levels per the chart below, but not quite there across many indicators I track.  The risk with selling the bounces down here is that the short-covering rallies can be more violent.  Waiting for short-term overbought conditions that occur at lower highs and being nimble on exits makes sense as a day timeframe strategy.

*  One implication of the macro driver idea above is that tracking how other, correlated assets are trading (commodities, USD, rates, etc.) can give some clues as to how stocks may behave going forward.  The higher rates, stronger dollar, weaker commodity situation has not been good for stocks.

Thursday, November 12th

*  I'm spending the day at the trading desk accompanying a very accomplished trader.  Will most likely live tweet market observations.  Stock Twits handle is @steenbab.

*  We've made a couple of attempts to bounce off Monday's lows and none have been sustained.  Indeed, my breadth measures have modestly deteriorated during that time and I'm still not showing us at levels that have corresponded to intermediate-term oversold conditions.  All that suggests to me that we are vulnerable to a downside break.  My leaning is to sell bounces that cannot take out the overnight highs.

*  In general, we tend to see elevated levels of pure volatility (volatility per unit of market volume) at market lows and low levels at market peaks.  Interestingly, we're much closer to levels associated with tops than bottoms.

*  I continue to be impressed by how the vigorous rally in stocks has seemingly hit a wall in the wake of rising rates and a stronger dollar.  That dynamic is very much on my radar.

Wednesday, November 11th

*  Tuesday attempted follow-through on Monday's selling, but there were divergences among the sectors relative to being able to break Monday's lows.  The SPX held above those lows in a market noted yesterday to be short-term oversold.  That led to late day buying which has continued overnight.  I'm viewing this as part of a topping process and would be surprised to see a strong, fresh bull leg here.  Buying weakness that holds above overnight and previous day's lows in anticipation of testing recent highs makes sense as a short-term strategy.  I would lighten up on strength that leaves us with upside divergences.

*  Where I'm finding some of the best short-term trading opportunities in the stock indexes is when we get overbought or oversold conditions followed by an inability of stocks to continue their upward or downward trajectory.  At such points bulls or bears are committed and the market cannot move further in their direction.  That leads to selling or short covering that benefits traders buying at the oversold points that can't go lower or selling at the overbought points that can't go higher. 

Tuesday, November 10th

*  Monday's market was anything but rotational, as early, broad selling persisted through the morning. An important way of recognizing such a shift is by tracking the early distribution of NYSE TICK values, which gauge the number of upticks versus downticks among all NYSE shares.  When that distribution is skewed to the downside and SPX stays persistently below its opening price even during periods of upticking, it's an early sign that sellers are in control.  Another "tell" for weakness is tracking how the various sector ETFs are trading relative to their opening prices.  If they are dominantly trading down from their opens and advance-decline numbers are weak, you know that this is a broader selloff and not part of mere rotation.

*  The selling has left us short-term oversold, with fewer than 20% of SPX shares trading above their 3 and 5-day moving averages.  It is not at all unusual to get a bounce from such oversold levels.  Should we test yesterday's lows, I will be watching breadth and TICK values closely to see if selling pressure is continuing or waning.  Meanwhile, we are not oversold on an intermediate-term basis, per the chart below, which tracks the number of SPX stocks making fresh 5, 20, and 100-day new lows.  (Raw data from Index Indicators).  My working assumptions are that this correction has further to go but also that the bull leg from late September has further to go.  

Monday, November 9th

*  How do we make changes in our lives?  In our trading?  In our emotional responses to trading?  In our relationships?  If it was as easy as setting goals and motivating ourselves with positive thinking, the psychology and self-help sections of bookstores would be quite a bit smaller.  I believe the recent Forbes post is one of my more important ones.  The idea is that, in a sense, we never really change ourselves.  Instead, we learn to replace one set of motivations--the ones that lead to undesired actions and consequences--with an existing, stronger set of motivations.  In other words, we change by become more of who we already are.  

*  We continue with a rotational market, with some sectors recently strong (financials, small caps) and others weak (interest rate sensitive utilities and consumer staples shares).  (See the graphic from FinViz below).  Across all stocks, however, we're seeing an increasing number making short-term new lows.  Friday saw 752 stocks across all exchanges register fresh monthly highs, but also 540 make new monthly lows.  That's the most new lows since early October.  Longer term, a rotational correction that does minimal damage to the overall indexes would be a plus for stocks.  Short term, I suspect this correction has further to go.  My leaning is to sell bounces that cannot take out prior overnight and previous day's highs, but I also plan to fade weakness that cannot yield fresh price lows and expansion in the number of stocks making new lows.  In short, I'm treating this as a rotational, range market until demonstrated otherwise. 

*  A large part of the rotational dynamic, of course, is the recent move higher in interest rates and in the U.S. dollar on the heels of strong economic numbers and growing conviction of a Fed rate hike.  Watching the currency and rates markets will be important in gauging moves for stocks overall and for the sectors most impacted by rates.  My best guess is that the markets are doing the Fed's hiking for it, that December will bring an uber-dovish hike, and that we will continue with central bank uncertainty into 2016.  It is not clear to me that the Fed will want an extended move higher in the dollar if a goal is to keep growth and inflation on target.

Sunday, November 08, 2015

Three Best Practices For Dealing With Trading Drawdowns

Perhaps the one most important takeaway from my recent book is to intensively study your successful trading, build a list of best practices unique to you, and then turn those best practices into ongoing habit patterns that, combined, become robust best processes. 

We can learn a great deal from the best practices of best traders.  One area that has struck me as especially valuable is the best practices of traders in the midst of drawdown.  Even the most successful traders encounter their periods of loss.  How they manage the losses--and how they manage themselves during the periods of loss--makes a huge difference in terms of their ability to come back.

Here are three best practices for dealing with drawdowns that I've observed among the most talented and successful traders I've personally worked with:

1)  Staying Constructive - Traders are often hardest on themselves just when they need to be picking themselves up.  They blame themselves for mistakes and undercut their own confidence.  When we first met Flora (shown above), she was an abandoned cat walking the neighborhood streets in New Jersey.  Some of the neighbors were helpful, and Flora quickly figured out who to go to for a little food and shelter.  She remained a homeless cat, but found a way to get by each day until we came along to adopt her.  Staying constructive means that you double down on the search for ideas and activities that will sustain you during the lean times.  One trader I work with was finding longer-term opportunities to be scarce, but found a way to successfully trade shorter-term patterns.  Like Flora, he's kept himself afloat during the worst times and positioned himself for success as opportunities appear.  The key is being able to become your own best support when times are tough.

2)  Stepping Back - For the best traders, losses provide information.  Maybe you're not seeing markets well; maybe markets are changing; maybe you're not trading well despite seeing opportunity.  When normal losses become drawdowns, something is amiss.  The answer is not, per the saying, redoubling your effort once you've lost sight of your aim.  Rather, stepping back from trading and engaging in careful assessment--assessment of you, assessment of your trading, assessment of markets--is a very helpful course of action.  Very often when good traders step back from markets, they return with new energy and new perspective.  That's in part because they've used the time to renew themselves, as well as their views.  Opportunity sets wax and wane.  A complete trading plan should map out your goals and activities for when you're *not* trading.  Without such a plan, you're more likely to overtrade--and extend the drawdown.

3)  Connecting - One thing I've learned from those who have sustained long-term success is the importance of solid personal, romantic, and spiritual connections.  If you're truly diversified in your life's activities, there will always be something paying you off even as the trading area is lean.  By connecting to the people and activities that are most meaningful, you make it easier to step back and stay constructive.  Think of your life as a diversified investment fund.  You are invested in different people, different values, different organizations, different activities.  The sum of those investments provides a relatively smooth upward emotional P/L curve.  Like any good asset manager, you're going to rebalance your life's portfolio at times.  Drawdowns in trading are often a great time to achieve that rebalancing.

Ultimately, the key question is whether we emerge from drawdown stronger or impaired.  If life is a gym, challenges are there to make us stronger.  That is why risk management is perhaps the best trading practice of all.  Without sound management of risk, we can take ourselves out of the game before we have an opportunity to learn from adversity.  As Flora has demonstrated, great things can happen if you can manage to stay in the game and persist in finding answers.

Further Reading:  Handling the Adversities of Trading

Saturday, November 07, 2015

Trading Your Best Decision Making

Why is it that I have valuable intuitive hunches about markets and not about fracking hydraulics or fly fishing?  Not a hard question:  I have no experience with fracking or fly fishing, but spend easily an hour or two each day reviewing recent markets and researching past markets.  The accumulated experience of the review and research creates an extensive database for noticing patterns that would otherwise be hidden.  It's that real time pattern recognition that manifests itself as intuition.  

To develop a keen intuition, we must first pay a tuition in terms of deep immersion, observation, and study.  We can't assemble the puzzle if we haven't first gathered the pieces.

I recently had an interesting idea:  What if I made my trading decisions the way I have made my best life decisions?

It's easy for me to identify my best life decisions, from selecting a career to taking certain jobs to finding the right spouse, to selecting cats to rescue and adopt.  I'm usually reasonably modest, but in those areas I've made some brilliant decisions.  

What's interesting is that I made those decisions the same way:  I focused on a few important things and then just put myself in positions of opportunity and waited for the right situations to present themselves.  The few things I focused upon were the things that make me fall in love:  factors that are deeply meaningful.  When those appear, I feel an immediate attraction.  I *know* this is the right choice.  That's the intuition--I've been so immersed in what's important that I get a powerful jolt when those factors line up.

When I've made bad decisions, it's been for one of two reasons:  1) I get into a pros and cons mode and start analyzing and overanalyzing the choice; or 2) I feel a need to make an immediate decision and accept a good alternative rather than one that I fall in love with.  The first approach--overanalysis--has led to tone deaf decisions:  ones that perhaps made sense on paper, but were altogether wrong for deeply personal reasons.  The second approach--compromise--has led to unfulfilling decisions because the decisions were made out of need, not out of a grounding in values.

Every great decision I've made is one where I've fallen in love with the selected alternative.  It's been the result of intensive focus on priorities (the tuition) followed by the sense of those priorities lining up (the intuition).  Every bad decision I've made has been made out of insecurity (the need to overanalyze) and need (the fear of not making a decision).

So back to the question:  What if I were to make trading decisions the way I make my best life decisions?  What I would do is focus on a few essentials, stand back, wait for those essentials to line up, and then fall in love with the idea before putting it on.  

I tried that this week:  3 winning trades, 1 loser.  The winning trades were much larger than the loser.  I traded much less often, but loved the trades when I put them on.  The losing trade turned out to provide the information that led to the next winner.  If a trade I loved didn't work out, I figured, perhaps the market was entering a new regime.

Overtrading is taking trades we don't love.  We overanalyze and we fear missed opportunity.  We push to find good trades, forgetting that the great trades come to us.  I suspect if you know how to fall in love--really fall in love--you know what it takes to trade well.

Further Reading:  Paying the Tuition for Your Intuition

Monday, November 02, 2015

Trading Notes: Week of November 2nd

Friday, November 6th

*  Today's early trade promises to be dominated by the payrolls data.  Trade overnight slowed down ahead of the release, but I expect it to generate a good deal of activity, given the focus on whether the Fed will hike rates in December.  What I'll be looking for out of the release is how rates, the dollar, and stocks respond--and whether they move thematically, in sympathy.  Any early move is more likely to be sustained if it's part of a thematic macro trade.

*  That being said, I don't have a great deal of conviction going into the report.  I thought the inability to sustain an overnight bounce yesterday was significant, as was the bounce off the morning lows.  All in all, we're overbought longer term, oversold shorter term.  I would need to see yesterday's lows hold on any selling pressure in order to be a buyer.

*  Most people are familiar with VIX, the measure of volatility implied by options markets.  Fewer people track implied correlations: the correlations reflected in options pricing.  While VIX has not moved tremendously from the start of the calendar year, the implied correlation among stocks has collapsed.  We're pricing in very low correlations, reflecting a relatively differentiated, rotational environment.  We had a decent sized drop in implied correlation yesterday, such large drops have generally been bullish 3-5 days out.  I'll be sharing more research on implied correlation in coming days.  The index symbol is $ICJ.

Thursday, November 5th

*  Yesterday's post noted concerns over risk/reward and Wednesday's trade offered a pullback, as we closed with fewer than 50% of SPX stocks above their three-day moving averages.  We closed near levels that have been associated with short-term buying opportunities (see chart below) and have bounced higher overnight, so buying weakness that holds above the overnight lows and at least testing the recent highs is a reasonable strategy.

*  Yesterday's move higher in rates in the wake of the Fed chair's statements contributed to USD strength, commodity weakness, and weakness in stocks.  That pattern is worth keeping an eye on going forward.  When markets trade thematically--multiple asset classes moving in a coherent pattern--that trade is generally supported by large institutions and will have some legs, short-term.  Only watching the instrument you're trading loses a lot of information.

*  I'm also increasingly cognizant of how many directional moves get off the ground during European and Asian hours.  Indeed, the median move from open to close in SPY has been about the same as the overnight move during 2015.  Anyone limiting stock index trading to U.S. hours effectively cuts the opportunity set in half.

Wednesday, November 4th

*  Stocks generally continued their strength on Tuesday, moving to new highs for this move.  I used the occasion to take profits.  It's not that I think the bull run has ended for good.  Rather, I'm not in love with the risk/reward here after a solid move higher.  Specifically, we are not only overbought on my breadth measures (more than 70% of stocks above their short and medium term moving averages), but yesterday displayed waning breadth relative to Monday for the SPX shares.

*  With respect to breadth, it's noteworthy that we registered 410 stocks making fresh three-month highs yesterday, which is still below the number of new highs seen last week.  One reason I'm not overly concerned by this seeming breadth divergence is that so few stocks are making fresh three month lows--only 65.  Returns in SPY tend to be best when the number of stocks making new lows are very high and very low.  You need to see an increasing number of shares displaying weakness before the market as a whole turns over.  We're not seeing that so far.  What we're seeing is a rotational market, with formerly weak sectors, such as energy shares, now perking up.

*  Below is a chart of breadth for the SPX stocks.  It captures the percentage of stocks trading above their 3, 5, 10, and 20-day moving averages.  (Raw data from Index Indicators).  Note that after a breadth thrust higher following the late September lows, we've generally stayed above 50%.  Pullbacks in the breadth measure have been good entries on the long side.  As long as we get dips in the breadth measure occurring at successively higher price lows, I consider the uptrend to be intact.

Tuesday, November 3rd

*  Yesterday's post noted the possibility of broadening buying in stocks and that is exactly what we got, with small caps catching up to larger caps and SPX making new highs for this move.  Indeed, yesterday was a poster child for an upside trend day, with a skewed positive distribution of NYSE TICK values through the day.  Here's a post that outlines four keys to an upside trend day.  Recognizing those days relatively early in the session can be very valuable.

*  Below you can see the breakout in the cumulative uptick/downtick line (red line; 9/25/15 - present), which represents upticks minus downticks for all stocks, all exchanges.  As long as we're making new highs on that measure, I continue to lean to the long side.

*  A breakdown of upticks vs. downticks for yesterday's trade found that what was so significant about the trend day was the near total absence of selling pressure, rather than a huge jump among buyers.  (This was also evident in yesterday's relatively modest volume).  Indeed, since 2012, I've seen only 21 days with similar levels of low selling.  Five days later, SPY was up 17 times, down 4 for an average gain of +.51%, though, interestingly, there was no particular edge for the next day.

Monday, November 2nd

*  Stocks experienced a late day selloff on Friday and extended the selling overnight before stabilizing a bit.  We continue to see large cap shares (SPX) make higher lows and higher highs and, so far, the recent selling does not change that pattern.  Meanwhile, the Russell 2000 Index of small and midcap shares has shown relative weakness, but all of that might be part of an extended, flattish correction (see below).  Should small cap strength join the larger caps, in keeping with year-end seasonals, we could see a melt-up in stocks.  I don't hear many people talking about that possibility.  My job as a trader is to be aware of a variety of scenarios and the evidence that would support each; not to impose my predilection on markets.  I have been operating with an assumption that we've already seen a momentum peak for stocks, but I'm open to revising that view--and renewed interest in smaller caps would certainly spark such a revision.

*  On a six month and one-year basis, raw materials shares--stocks related to the commodity sector--have been the weakest by quite a margin.  Interestingly, however, over the past month, those raw materials stocks have been market leaders, per the chart below from the excellent FinViz site.  Commodities are sensitive to patterns of global growth, so I'm watching those--and commodity related sectors such as XLB and XLE--quite closely.