I started out in this business as a trader, and one of the first rules they teach you is "the Trend is your friend."
I was a decent trader, but always curious as to why this or that was happening. When the opportunity arose to explore these issues on the research side (many years ago), I jumped on it.
One of the more difficult aspects of transitioning from gunner to macro strategist is reconciling the short term technical aspects of the market (1-3-6 months) with the longer term macro environment. Since July, we have seen a decaying macro picture concurrent with a strong market trend. If you follow both, it can make you schizoid.
As a Trader, you don’t care about the macro — your timescale and benchmarks are much shorter. If you are an Economist or Equity Strategist, you are not supposed to care about the shorter term trend.
I try to use both disciplines. If I ignored the trend, then based on the macro picture, I would be totally short — and getting killed. If I ignored the decaying macro, then I would be leveraged totally long — and likely to get slaughtered sometime in the future.
Which leads us to today’s Word chart: The SPX and the Dow remain firmly in their trend channels, in place since July. Nasdaq, on the other hand, has broken its trend. That implies increasing potential near term for downside in the NDX.
Note also that yesterday was the last day for Mutual funds to make purchases that will show up on their books for 2006 (T+3). Wednesdays trades will clear by Friday; Anything bought today or tomorrow will not clear until 2007.
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SPX & Nasdaq, Equivolume Chart, 6 Months
chart courtesy of Dick Arms
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Note: Expect the markets to be closed — either a whole or half day — for President Ford’s funeral service likely to be Tuesday.
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Source:
Uptrend Hangs by a Thread
Dick Arms
RealMoney.com, 12/27/2006 9:09 AM EST
http://www.thestreet.com/p/rmoney/technicalanalysis/10329707.html
The markets won’t close for a whole day on Tuesday, as they never (deliberately) close for more than three days in a row (and Monday is the New Year’s Holiday).
Schizoid? That describes the mental state reconciling short and long term VIEW pretty well . Never heard a short term trader called a “gunner” before . Maybe like a ‘plunger’ . Nice to hear others share this same conflict of interestS . Good post Barry – Thank you -Bill
Wednesday’s trades clear Tuesday(T+3) of next week not this Friday(T+2) , and some funds have the opportunity to use Trade date not Settlement date as long as they are consistent with that usage
isn’t trading not suited for most people w/ other day jobs..the worst part is short term gains ~@30% (double of long term gains)..
for me trading is more in 3-6 month time frame.
I think PFE chart looks good (good dividend)… waiting for a break?
“If you follow both, it can make you schizoid”. I would add if you don’t follow both, it can make your bank account schizoid. Now you see it (the money), now you don’t.
So has the CRB.
The Nasdaq has led every correction so far since Oct 02. We are currently into the 28th week of this leg. That ties the Oct to May leg up. This leg up has gained 17% from the low also tieing the largest % gain for an upleg in this cyclical bull other than the intial thrust up from the end of the recession in 02. I have a feeling that this rally has nothing to do with fundamentals and everything to do with complacency. We have had 6 uplegs in this bull so far. Investors have been lured into a false sense of confidence. There is no fear in this market as evidenced by the VIX. This is exactly how market tops are made. The big players know that something is wrong with the economy otherwise they would be buying futures not selling them at a record pace.
Gary, just curious, what data source are you using to determine “big players selling futures at record pace”?
COT report http://www.cftc.gov comes out every Friday. Look at the S&P futures large and small contract.
The commercial positions are the big players. They are 75-80% of the market. When they move one way or the other they eventually turn the market. Cramer and the assorted bulls on CNBC make for interesting viewing but I put much more stock in what the real money in the market is doing. Right now they are selling.
It is tough love time.
With all due respect, it is fear of being wrong and fear of lose that is keeping you from taking a 100% long or short position in the market and not the short term technical or fundamental macro picture.
The fact of the matter is that it would take all of one second and one mouse click to completely hedge $100+ million of long or short exposure using the E-mini S&P 500 futures. So the idea of being “killed” or “slaughtered” is nonsense.
Make a decision, believe in it and take a position in the market.
What is the worst that will happen? You may lose 1 – 3% of equity?
I think the worst thing that could happen is you lose your confidence and courage to get 100% long or short. If that happens then you have real problems.
The thought that you will get “killed” or “slaughtered” is an excuse to do nothing. Stop making excuses and take a position. Believe in what you know and what the market is telling you. Remember, the bottom line is performance. Your clients expect you to perform better than the bench marks.
But then maybe I am wrong. Prove it me, yourself, your blog readers and your clients and make me wrong Barry.
I wish you and all Big Picture readers a happy, healthy and prosperous new year.
Sincerely,
GS
P.S. Everything you just read applies to me also. I remind myself everyday to let go of fear and trust in what I know and what the market is telling me. Then I go about managing my money with discipline, courage, consistency and confidence.
The current market from Nov-Dec looks curiously like the market from Apr-May. Just sayin’…
GS,
are you advocating investing with a strong 100% position without fear of the technicals or just trading the trend 100% without the fear from the fundamentals?
Always dicey to reconcile the macro and the micro. I like to make a (very hazy) assesment of how much money is on each, then you know how much to weigh the different time horizons to see how the market reconciles the micro and the macro…
http://the-ts-maven.blogspot.com
this debate is odd stuff to me…. you have to look at all the signs.
macro is like reading a map to make a decision on where to drive, technicals (and news events that may drive them) etc is like keeping your eyes on the road as you drive…
made a great trade on CAL recently – knew (macro) fundamentals were there based on research & homework, anticipated M&A (s-t news), educated guesses on oil (s-t trends) and it played out. (tho, got out too early – but no one loses money making profit).
conversely, when I’m thinking too macro or too micro (getting the “single thesis blinders”) and not looking at a vareity of factors – I have gotten burned…. ouch.
..not an argument for analysis-paralysis, just a more complete view….IMHO you have to read all the signs…
BTW – the only guy I know who doesnt take it all in who is succesful is a NYMEX crude trader; he deliberately shuts him self off from the “news” and looks into the whites of his peers eyes when trading. but thats a totally different animal…
AH
Hi,
Firstly, this is my first comment. I stumbled upon the site about a month and a half ago. I’ve been glued to it ever since! I’d just like to thank Barry for all his work and everyone for their contributions via comments too. I’ve learned so much from all of you! As a young person starting out in IT (and hoping to get into trading) hopefully I will benefit from all your wisdom.
But more to the point! How is the trend line in the graph located? I can see its a tangent to the candlesticks back in mid November. But why couldn’t the trend line just be made a tangent to the lower candlesticks in December? Or is it a 45 degree line? Might seem like a stupid question – but its puzzling me as a newbie!
Thanks again
Gary,
Your recent comments on the blog re: the commitment of trader (COT) reports have made me curious as to how you follow them. I’ve been trying to educate myself by reading Larry William’s and Floyd Upperman’s books on this subject. However, it’s been a real struggle since neither are very well written.
The format for the COT data I get from Trade Navigator seems to be best timing wise in an index form rather than the raw numbers. Also curious to see if you follow the COT open interest.
Thanks…
Ben,
I do follow open interest but only as it pertains to the net long or short position of the commercial players. If you look at the history of the COT report you will notice that the open interest gradually increases peaking on the week of Quadruple witching. If you look at the history of the COT report several things stand out. First during the period from 1986-2000 the net position of the Commercial contracts was consistently positive. Meaning the big boys were almost always buying more than they were selling. From 2000 till the present the bias has been consistently negative with one short period of positive readings from Mar 03 till July 03 ( the begining of this bull market) This leads me to believe that the smartest & most capitalized traders think we are in a secular bear market. The way the commercials use the futures market is evolving ex. the e-mini contract has a lot more open interest than it did 3 years ago. So I now combine the nominal value of both contracts instead of just looking at the large contract pre 03. I look for extreme positions either long or short as timing bands for possible trend changes. ex. for the last several years when the commercial net position is somewhere around -15,000 or smaller it has been a pretty good indication that a rally is eminient and when they reach an extreme short position of around -40,000 or more then a correction is soon to follow. These large traders don’t trade on emotion and they play a regression to the mean game so they typically just add to their positions as the market goes against them. I also pay attention to typical cycle lengths and percentage moves. So when the commercials reached a large short position in Dec of 05 the odds favored they were early and it was best to wait before shorting. This move is both very long in duration and percentage gain, the market is very overbought and we are getting quite a few bearish divergences. So I would rather play the odds and be short at this time than try and fight the big money. If you wish I can e-mail you the historical data on a spread sheet and you can do a little research.
Gary,
Quadruple witching day. Thanks for solving the mystery of the 4 huge spikes I was seeing each year for the open interest. Looking forward to seeing the spreadsheet you mentioned.