Category: Trade Log

So perhaps this is our summer scare… seems like it. Happy about it, even though it is costing money. If you believe in your process then relax. The money in your account will fluctuate with markets. If you don’t need it tomorrow, relax. If you did need it tomorrow you are silly to have risked it. Let price discovery be an ally not an enemy… volatility is the price of performance in a central bank driven world. I know where I’ll sell, and I’ll tell you. We aren’t there yet. 

We remain long the NASDAQ futures contracts. And have begun adding hedges to the portfolio. Currently we have a gold hedge and a 10 year bond hedge buffering our equity longs.

Of course the best protection is not in portfolio construction but in derivative construction. However the prices are much higher for that kind of protection. Even with the Vix at current lows. The house (cboe)  bid/ask spread is expensive.

We are continuing to expect a drawdown this summer. And I am doubtful that the recent selloff qualifies.  I am wishing I was long the biotech index. Because there is a lot of sizzle there and we may be seeing the start of the longer push upward. But the recent advance is somewhat too violent for me to chase. Yet when I say that I wonder if I am not like every other portfolio manager who misses something and then tries to pretend they are disciplined and that’s why they missed it. Oh the catacombs of self deception…

The biggest sign of my conviction that we are entering a high-risk summer is that I am seriously considering activating a long volatility algorithm that normally sits in the gun safe (so to speak) waiting for dangerous threats.  Going long volatility is a sure way to lose money in this central bank driven environment but it is also the absolute gold standard in hedging the unknown, unseen, vague risks that may be beyond our horizons.

Also, because we are sitting on almost 50% returns over the last 12 months, one must expect to catch the attention of Mt Olympus, which will dispatch humbling events to keep the mortals from hubris…

I’m not posting a weekend review this week. I’ve got various obligations, including a black-tie event, friends visiting, and I’m going fishing for Goliath-grouper. So I’ll be otherwise distracted. Anyway, the interesting thing is that I’ve been sitting more than trading. I’ve learned that I make more money sitting than trading. Yes, NDX is down 4.5%, but SPX is sitting still. Until it gets some momentum my systems are going to prefer NDX. No I don’t like being in drawdown mode… but as any algo trader will tell you, one is in drawdown most of the time. So I’m dead to it.

Option hedges are expensive at the moment. I’ll pass. I’m looking to get long bonds and gold when my systems say so. But as I’ve stated here multiple times, the market will test us all this summer. This is the test? The market will tell us.

Still long NDX, no hedges besides stops (which are terrible!). This is what trading is, boredom and misery, with the market occasionally flashing a little leg…

So yesterday was dramatic. As you know if you’ve been following I was long nq going into the day. With a few aapl puts as my only hedge. Half of the contracts had stops, half didn’t. That is due to trading different time-frames. So half of the positions stopped out down about 60 points. Interestingly, the aapl puts did fantastic, buffering the loss. However, the slow side of the system just held through the drama, as it is supposed to. So one side of the portfolio was only down about net 30 basis points. The other side was down close to 300 basis points.

All in all it was a great disciple-day on the market and bodes well for the future. I’m relieved. And looking to get long soon.

Congrats Market Player, you have leveled up another week.

What a relief. What am I talking about? The tech sell-off. Look, it was coming, right? Trees don’t grow up to the sky. And the fact that the tech market was broken by an opinion expressed by Andrew Left of Citron’s Research. Well, that’s just wonderful. Something structural, like a earnings miss or a product failure, that would have been worse. That would’ve wounded the underlying narrative –that AI and related exponential technologies are driving Industrial Revolution 4.0.

This Industrial Revolution 4.0 is really the only narrative in the investing world that normal people can grasp and pursue (just as they could understand the Internet narrative of the nineties). I believe the IR4 narrative has much further to go. And the market will reveal it. We ride the bus.

However, I am not suggesting to buy-the-dip. Why? Because that is more opinion based investing/trading. Get a process. Stick to it. With patience and fortitude.

Relative markets:

Relative summation strength. Momentum remains in NDX. Just remember that the McClellan Summations are fairly slow. One day is not going to make huge difference…

Look at that parabolic curve that was… Beautiful and nerve-racking… and broken!

However, beta-rotation model still votes utilities. And its a high probability that rates are rising. Interesting…

Look at the Russell! Reversion play in progress…

Notice below that the SPX is overtaking the NDX in terms of a relative comparison of the percent of stocks over the 50 day moving average.

Notice how the NYSE composite was not only up today. But it broke out! Strange happenings.

However, risk-respect is seeping back into the market. See the jump in Defensive stocks and financials.  But not in the junk market. Weird.

Below you can see gold vs gold miners. Truthfully, gold is a strange market. Because it is not just an asset, or currency of exchange, or store of value –it is a world religion. Most of its preachers and prophets will pretend to be cold-eyed economic-types. But just wait. The wild-eyes come through. “All bow down before the golden lord!” they cry. Here is the thing for me. Gold goes up when people get scared. No, it isn’t any good in a real apocalypse. The first guy stronger than you will take it (oh you have a gun, isn’t that cute! We are the government!).  But in the kind of geo-political drama that is more likely. Gold goes up. I want to get long gold at some point. Not yet.

Finally, I’m not selling all my positions in /NQ yet (half were stopped out down 60 points). Why? Well, my process says to be patient. Below you can see the TOR ratio doesn’t think you should close yet either.

Yield Curves:

USA:

No inversion. But clustering at the shorter maturites

China:

1y to 10y inversion
India: 

7y to 10y invert, but also a small 15y to 20y

Europe (We use Italy and Spain as canaries in the coal mine)
No inversion.

Brazil: no inversion

Have a great weekend.

I closed my financial short, ixm, because the regression trade seems to have awoken during the Comey textimony. It was particularly frustrating to have the only regression model I trade say I should be long ixm rather than short. So I closed. Update more on this soon.  I’m naked at the moment. Long nq with no hedges other than some puts on apple. The money I made on my bond hedges was lost to the ixm hedge.  However, that’s hedging. I expect to lose money on hedges. Net price on the hedge was about 90 basis points. That’s close to market rates with put hedging. I’m still modeling the sector hedging game. Not satisfied that I’m not the sucker. But to be fair shorting any market with a positive drift makes one feel stupid. Just as being long in a bull market makes fools feel like geniuses. I’ve been all of the above. Still believe the market will test our courage before the leaves fall. Looking to get long bonds and gold as some point. I need something to help me sleep with an intemperate man in the White House. “Why did we nuke Mexico? Because someone insulted Ivanka? That makes sense, sir.  Well done!” 

Closed my bond positions /zn for a nice profit. But I’m regretting it. Looking to get long again. Bonds are part of my hedge position so subject to some discretionary trading. Still long ndx and short ixm (financials) which is currently taxing me for the privilege of the hedge.  Alas, sufferings must come..