Capitalogix

Some Links for Your Weekend Reading

So proud of our 'solution' to the debt ceiling issue ...

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• What a Big-Data Business Model Looks Like. (Harvard Business Review)
• Everything You’ll Ever Need To Know About Gamification. (TechCrunch)
• Google Gives $5M To Build Drones That Hunt Poachers - Forbes. (Forbes)
• The 10 Greatest National Anthem Performances in Super Bowl history. (The Week)
• Compare Cities Instantly With VERSUS IO. Actually, this tool compares many things (Mashable)

 

Trading Links:

• Online Banking Attacks Were Work of Iran, U.S. Officials Say. (NYTimes)
• PIMCO's El-Erian. Game Theory Predicts More Can-Kicking in Washington (AdvisorOne)
• Kleiner Partners' View of the Future of Tech. (Wall Street Journal)
• Own the Robots, Bro, Trust Me. (ReformedBroker)
• Is Quantitative Easing Still Necessary? Direct Benefit versus Gain from the Signal Sent. (Forbes)

What Knee Surgery Reminded Me About Technology

What ... Me Worry?

Before knee surgery, I wasn't enjoying the prospect of the needles, the knock-out drugs, the cutting, or the recovery process.

 

 

History is littered with tales of once-rare resources made plentiful by innovation. The reason is pretty straightforward ... scarcity is often contextual.

Imagine a giant orange tree packed with fruit. If you pluck all the oranges from the lower branches, you are effectively out of accessible fruit. From that limited perspective, oranges are now scarce. But once someone invents a piece of technology called a ladder, the problem is solved.

Here is a picture from inside my knee (unlike years ago, they didn't have to rip me open to to gain access for the picture or the repair). Less damage, less time, less drugs, less recovery.

 

 

Bottom-Line: I walked over 2,500 steps the day after the surgery.

Whether it is minimally invasive surgical instruments, or linking big data and elastic computing ... Technology is a resource-liberating mechanism. It can make the 'once scarce' the 'now abundant' (or 'readily accessible') ... and a lot less painful.

Pretty Cool!

Preparing for a Rally? Big Inflow Into Equity Funds

What a dazzling week for mutual funds and ETFs.

$22.2 billion flowed into equity funds this week, marking the second-largest weekly inflow in history.

 

 

Inflows into emerging market equity funds this week were the largest – at $7.4 billion – of all time.  Other big winners were long-only mutual funds, which recorded $8.9 billion in inflows this week – the largest since March 2000.

Does this make you feel more bullish than buying based on Fed-funded liquidity?

 

Related articles

Here's Who Owns The Stock Market

The Most Amazing Thing About This Week's Historic Shift Into Equities

Steven Colbert's Take on High Frequency Trading

Stephen Colbert interviewed Christopher Steiner, author of "Automate This: How Algorithms Came To Rule Our World".

As you'd expect in a Colbert segment, there is lot's of 'truthiness' mixed in with the humor.

For example:

 

Some say all this computer trading is dangerous, but I say it's actually safer. Because if the stock market ever crashes again, instead of brokers jumping out of windows in a panic they'll simply turn on their computer and see the soothing message, 'error 404, economy not found.'  What's the worst that could happen? 

 

To hear the worst that could happen, watch this video.

 

The Colbert Report
Get More: Colbert Report Full Episodes,Political Humor & Satire Blog,Video Archive

 

Here is a link to Steiner's Twitter feed.

 

Best CyberMonday Deal on Apple - Perhaps Apple Itself?

There we were at the Cowboys game. It was a beautiful day.  I was feeling terrific because I was with my two sons. The crowd was cheering ... and I had a great thought: 'Let's get a picture of this'.

 

Perfect ... a random series of events had led to a satisfying crescendo ... and I captured the moment.

 

 

It wasn't so random.  Despite a difference of four years and two stadiums - the result was similar (if not predictable).

History doesn't necessarily repeat itself. But it often rhymes.

 

It Is True In Trading As Well.

 

The Hype Curve is an interesting map of human emotion.  Below is an idealized version.

 

 

Here is a chart of Apple going back to 2004. Note the similarities. 

 

For a deeper analysis, see this post by Market Oracle.  Here is an excerpt explaining the framework.

Classic economic theory dissects the economic cycle into four distinct stages: expansion, trough, decline and recovery. A stock is no different, and proceeds through the following cycle:

• Stage 1 - After a period of decline a stock consolidates at a contracted price range as buyers step into the market and fight for control over the exhausted sellers. Price action is neutral as sellers exit their positions and buyers begin to accumulate the stock.
• Stage 2 - Upon gaining control of price movement, buyers overwhelm sellers and a stock enters a period of higher highs and higher lows. A bull market begins and the path of least resistance is higher. Traders should aggressively trade the long side, taking advantage of any pullback or dips in the stock's price.
• Stage 3 - After a prolonged increase in share price the buyers now become exhausted and the sellers again move in. This period of consolidation and distribution produces neutral price action and precedes a decline in the stock's price.
• Stage 4 - When the lows of Stage 3 are breached a stock enters a decline as sellers overwhelm buyers. A pattern of lower highs and lower lows emerges as a stock enters into a bear market. A well-positioned trader would be aggressively trading the short side and taking advantage of the often quick declines in the stock's price. More times than not all of stage 2 gains are given back in a short period of time.

While these stages are historically defined over long time periods they actually exists in all time frames, allowing traders to take advantage of a cycle regardless of their trading time frame. Fortunately this phenomenon, known as a "fractal", exists within all security markets. A fractal is simply a rough geometric shape that can be subdivided into smaller parts that have the same properties; a smaller version of the whole.

This is important to understand because through technical analysis as we are often analyzing multiple time frames. In the short term, the four stage model may repeat itself many times. The combination of these short term cycles form a medium term cycle, and the combination of multiple medium term cycles form a long term cycle.

Related articles

Will Apple's Rebound Continue Next Week?

Is Apple Inc. (AAPL)'s Price Action Really 'Insane'?

Are Apple Owners Panicking?

The S&P 500 Index Just Broke a Long Term Up Trend - Do You Care?

Trading doesn't have to complex.

Sometimes simple indicators are better.  Trend lines are easy to follow and often meaningful.

Below is a weekly chart of the S&P 500 Index showing the recent break of an up-trend in place since 2009.  If price stays beneath this level, it will likely be tough for Bulls.

 

 

In addition to the trend line break, there is a negative divergence (where recent price highs happened with lower momentum).  Technicians often take this to be sign of weakness.

Let's see what happens.

Related articles

A Quick Look at S&P 500 and It's Likely Next Move

Is the S&P 500 Index at Its Likely Bounce Point?

Flight to Safety for Markets?

Many traders expected a sell-off after the election.  We got that, and now the market is pretty oversold. So, is it time to jump back in ... or should you pay attention to signs that we are still in a "Risk-Off" trading environment?

Traders know it is tough to call a meaningful 'Market Top' because you have to be right about both price and time.  Adding to the difficulty is that humans seem to be wired to focus on what they missed, so it doesn't take much to trigger buying behavior. 

With that said, sometimes it makes sense to pay attention to warning signs.  In this post, we'll look at a technical warning pattern some traders call  "the four horsemen of the apocalypse".  As you probably guessed, it involves four components.

 

• US Dollar
• US Treasuries
• Gold
• VIX Volatility Index

 

Why are they called the four horsemen? Because when you see all four of these rise at the same time, the underlying message is ominous.

Under normal circumstances, these market symbols are not correlated. In other words, the "horsemen" generally do not ride in the same direction. For example, when gold is going up, the dollar and USTs are normally going down, or vice versa.

When they all rise together, however, it indicates an extreme correlation of "risk-off" and diminished risk appetite across the board.

Here is a composite of all four charts.  The yellow highlit areas show the coordinated move higher.

 

 

According to Mercenary Trader, U.S. Treasuries rise via their designation as the ultimate deep liquidity safe haven instrument.

Gold rises as the "alternative currency" not subject to a printing press -- the safe haven for those who fear U.S. Treasuries are booby-trapped.

The Dollar rises as US investor capital is repatriated from emerging markets (and foreign investor capital flows into bonds).

And the VIX rises as equity risk assets are being shunned ...

Why is this happening now? 

 

One possibility is rising concern over the "fiscal cliff," and the likelihood of partisan deadlock, as the threat of automatic tax hikes loom (via the expiration of time limited reductions). Some believe that the heavy selling we are seeing, especially in market bellwethers like Apple (AAPL), is at least partially the result of capital gains lock-in prior to a higher taxation period.

 

Regardless, it seems the safe move is to position for the worst and hope for the best.

 

Related articles

7 Unexpected Events That Could Blow Apart Investor Portfolios In 2013

The CBOE VIX Is Standing Between You and the Fiscal Cliff

Seasonally Strong Period for Gold is Coming

Gold is entering a seasonally strong period.  The chart below shows the predicted turning points based on the past five years of historical data. 

 

 

History does not typically repeat itself, exactly; but it often rhymes.  So, it makes sense to keep seasonal tendencies in mind.  With that said, some things potentially different this year include that this is an election year and world governments are coordinating central bank stimulus actions.

However, the chart below should serve as a reminder that there a lot other markets worth trading too.  For starters, Corn is up 34.3% so far this year.

The chart shows the top-ten performing markets, ranked by yearly performance, for the past few years.   The data is color coded based on sector. The first column posts the current year's open performance followed by six columns of closed yearly market performance.

 

 
Note how much diversification there has been in the top-ten throughout the years.  Click the chart to see an expanded version of this data (showing 40 global futures markets).

That is the funny thing about markets ... something is always working.  The trick is finding it while it's working.

Listen In as Michael Covel and David Stendahl Discuss Trading Strategies

Michael Covel is the President TrendFollowing.com and TurtleTrader.com. 

In addition, he has a popular interview series where he talks with great traders and about a wide range of topics.  We are honored that he chose to interview our portfolio manager, David Stendahl.  Here is a link to the Interview.

 

 

The interview is simple enough for a novice, but nuanced enough for advanced traders.  Some of the topics include:

• Stendahl's world is 100% systematic, and he has been involved in conceptualizing and thinking up systematic approaches to trading the market for decades. But what is a system? Stendahl's explanation may surprise you.
• Stendahl's approach is that a system should have as few moving parts as possible; it should be simple enough to be explained on the back of a cocktail napkin.
• Stendahl explains that your system doesn't have to be complex to work. Sometimes the best system can be only four lines of code.
• Covel and Stendahl make an analogy to cars, and how you can easily fix a simpler car in your garage as opposed to a complex Lexus.
• Stendahl explains that everyone is using a system in one way or another: every time you make a decision to buy or liquidate, whether it's based on a real system or based on advice from someone on the television, it's systematic in some regard.
• If you can talk it, you should be able to quantify it. If you can't quantify it, it might not really be there.
• Find out how Stendahl's dyslexia played a role in his technical trading, and how he turned this disadvantage into an advantage.
• Covel and Stendahl discuss Ray Dalio of Bridgewater, who says that he is 100% systematic, but doesn't use any technical information.
• Covel and Stendahl also discuss position sizing and money management, and how you can approach this systematically.

 

There is a lot of good stuff in the interview.  Hope you enjoy it.

Here is a review of Trend Following and the post on Trend Commandments.

See the list of all Covel's Trend Following Manifesto Podcasts in iTunes and here for a more complete description of each recording.  Check it out; he has produced a bunch of terrific interviews that are worth listening to because of their educational content, and because they will make you think.

 

Related articles

• Listen In As Michael Covel and Howard Getson Discuss Trading Strategies (capitalogix.typepad.com)

Procrastinate! Why Waiting to Decide May Be Better for You.

Frank Partnoy ex-Wall Street derivative trader and self-confessed procrastinator, reveals the science behind our decision-making disasters and successes, and argues that decisions of all kinds, whether 'snap' or long-term, benefit from being made at the last possible moment.

The art of knowing how long you can afford to delay before committing is at the heart of many a great decision.

 

 

Listen to the podcast of the full event including audience Q&A.

Related articles

• Procrastinate until your heart's content: we make better decisions when we take our time (blogs.lse.ac.uk)
• Book Review: Wait: The Art of Procrastination (blogs.lse.ac.uk)
• Wait: The Art and Science of Delay (ritholtz.com)