CNBC Explains: New Feature

Some good videos describing financial terms.  This features some of the work of Salman Khan -- and terms like contango, backwardation, mark-to-market & futures curves:

http://www.cnbc.com/id/41585735/

Volatile Commodities & Futures Markets

Just a quick report on the volatility in the commodities & futures markets.  Our risk management approaches got us out of oil and gold before the steep declines today.  On the other hand, the downdraft crept into many other markets (industrial metals, agriculturals, foreign currencies, US Dollar) -- and reversed long-standing trends in early May.  This caused us to give up much of the recent profits we have earned over the past several weeks.  Our Diversified Programs are down about -3.5% this month.

As reported by MarketWatch, commodities suffered their worst decline since 2009.  Please read more here:

http://www.marketwatch.com/story/commodities-suffer-worst-slide-since-2009-2011-05-05?dist=afterbell

CRB Index Past 3 months (as of 5/5/11; see the last bar on the right...)

Thank you to INO.com for the chart.

***

Today alone, crude oil declined $10/barrel to below $100 and gold declined about $50/ounce to below $1500.  The Liquid Commodity Index reflected the recent volatility -- declining -5% today (May 5, 2011); and is down -8.6% for the month, after rising to new highs in April.   

We currently have relatively small positions, reflecting the reversals and volatility in the futures markets.  We will, of course, continue to "do what we do" -- and will follow our trading system/risk management strategies. (Unfortunately, this kind of market action is not unprecedented.)

Please let us know if you have any questions.

Managed Futures Program and Risk

Our managed futures program, zFutures, has been appearing on the leaderboards at Collective2 for a while. There seems to be a glitch, but the program is still appearing on their System Finder filter:

http://www.collective2.com/cgi-perl/t200.mpl?want=finder

zFutures averages more than 2 weeks per trade, which helps its "realism," "slippage" stats -- as well as longer-term performance with respect to commissions. zFutures' components (z-Trader Financials and z-Trader Commodities) will have similar results in the long-term -- although this month, commodities have been profitable while financials have been consolidating / reversing.

With the recent volatility in financials, there has been a lot of chatter about risk management. We like Collective2's analytical tools. We note that zFutures has "Low" (or na) risk in every single trade it has made - except one, which was "Normal." In addition, the less-diversified Commodities & Financial components have "Low" to "Normal" risk levels. These programs are slightly more aggressive to achieve lower account sizes, but use the same trading approach.

Risk management and preventing losses from accumulating are key parts of all of our programs -- and are key to "surviving volatility" and good long-term performance.

AN INVESTMENT IN FUTURES MAY RESULT IN LOSSES.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

THESE RESULTS SHOULD BE CONSIDERED HYPOTHETICAL, WHICH CARRIES MANY INHERENT LIMITATIONS.

Intermediate Stock Indicators - Moderately Long

As the market nears the close, our intermediate-term stock market indicators are moving to an increasingly bullish position -- going from a slightly-long reading to a moderately-long position. Our long-term indicators remain strongly bullish.

We do not post indications from our short-term indicators, but our overall S&P positions are dictated by the combination of all time frames. Our S&P models are part of a z-Trader Short-Term System monitored at Collective2.

We also use Collective2 to track our Diversified Futures program, zFutures.

Trading Systems: Managing the Ebb & Flow of Futures Markets

Here are some excerpts from an article Carlton Chin of Adamah Capital wrote at SeekingAlpha on the recent sharp reversals in the futures markets -- and how trading systems need to find balance between profit opportunities, risk management, and potential losses (drawdown).

...The futures markets (both financials and commodities) -- and in particular, currencies, metals, energy, agriculture, and several softs -- have presented profit opportunities to futures traders. However, after a strong December, early January has seen some sharp reversals in the future markets.

...

Back in November, we wrote about the sharp reversal in the futures markets. At the time, we saw severe reversals even sharper than this week's moves... However, at the time (back in November), traders had to manage their risk -- and protect profits from potentially severe drops.

...

Managing the Ebb & Flow of Markets

There is a trade-off between "potential profit opportunities" versus losses -- and a "decline or drawdown" for any trading strategy. In a nutshell, traders must "surf" the waves of the markets -- and manage their positions and strategies through the inevitable "ebbs and flows" of the markets.

...

There are always risk and return trade-offs, but good research can help traders and investors capture profit opportunities in the financial markets. We have studied and developed trading methodologies that attempt to capture profits while managing risk. Please check out the results in this FX/Forex trading challenge (top few percent). In addition, several of our trading strategies can be tracked at this third-party tracker, Collective2.

We will follow our trading methodologies and continue to monitor and research the markets. Ongoing research and a systematic, disciplined, approach can help put the numbers -- and market action -- on your side.

__________

For the complete article at SeekingAlpha, please click here.

Recent Market Action; Near Top in FX (Forex) Trading Challenge

This continues to be a good period for many markets. Stocks continue to reach recent highs. In addition, the markets we focus on -- futures and commodities -- continue to trend. In particular, the currencies, metals, energies, and agriculturals -- have led to profitable trades. Our trading approaches won't always work -- but we should capture the profit opportunities that present themselves in the futures markets.

We entered a Forex (FX) contest -- and currently rank # 46 out of well over 1000 entrants. The contest has an interesting slant -- and ranks traders by risk-adjusted performance (return / daily standard deviation).

Please click here for a look at the leaderboard:

https://sites.google.com/site/caratcapital/contact-us/media

In addition, several of our programs are tracked on Collective2 as a third-party tracker:

http://www.collective2.com/cgi-perl/system51201525 -- zFutures

http://www.collective2.com/cgi-perl/system56282350 -- z-Trader Financials

Happy New Year!

Managed Futures: Performance & Diversification

Some of our readers know that our specialty is "alternative investments." We believe that alternative investments such as commodities, managed futures, and other diversifying strategies offer good diversification benefits to a traditional portfolio of stocks and bonds.

CARAT Capital was originally started to combine concepts of Modern Portfolio Theory, downside measures of risk, and robust trading systems. CARAT is an acronym for Computer Aided Research & Advanced Technology. Today, all money management activities are handled byAdamah Capital, a firm founded by Carlton Chin, CFA and his long-time friend and associate, George Parr.

Managed Futures have had a nice run over the past several months. Please check out the performance of our Diversified Program, tracked by a third-party firm. Carlton Chin, has a solid longer-term track record. Over time, managed futures have proven to earn returns from opportunities in the futures markets -- that are non-correlated to traditional assets such as stocks and bonds.

Please visit our websites and contact us for more information.

New Stock Signal; Recap of Markets

As mentioned in our Twitter earlier today at 3:30 pm, our intermediate stock signal is turning mildly bullish from a mildly bearish stance. Our overall long-term (LT) signal remains bullish, so that we have been net long during this rally.

It's been a few weeks since our last blog post because our stock signals have remained the same since that time. We'll see how the stock market reacts now that it's reached recent highs...

In other markets, the futures markets have been fairly choppy. The currencies, US dollar, and precious metals can't seem to make up their mind if the dollar will weaken further. Some futures positions:

• Long Gold
• Long Energy
• Long Aussie / Canadian $

Market Update: Stocks and Futures

The stock market saw its first big drop in months, with stocks dropping about -5.5% from their recent peak. We avoided part of the early decline in stocks, but our stock market models went long as "some of the air was let out of the recent balloon." Both Long-term and Intermediate-Term (overbought/oversold) models are currently long.

Futures Markets

After a nice run early in January for our futures portfolio, the dollar's recent strength and weakness in commodities caused whipsaw losses. As a result, we currently have small positions in the currency markets. We are still long several commodities markets, including metals and energy -- as well as several softs.

Traders need to monitor these positions because a deeper decline means positions should be closed out. Traders have to manage that risk...

Stock & Futures Markets Overview Near Year-End

Stock Market

Our stock market indicators remain relatively neutral. Our long-term models remain bullish while our overbought/oversold indicators are slightly bearish. Short-term models have kept us generally on the long side as the market continues to gently rise.

We have talked about the continuing rise in the markets with respect to the "Wall of Worry" as well as other contrarian indicators. At some point, we may give back some ground -- but we also believe that we might also see a melt-up (or freeze-up as some like to call it!) -- as shorts finally throw in the towel. During this sustained rise to recent highs, we have yet to see a +2%-3% rise.

Futures Markets

On the futures side, various markets gave back recent gains in well-entrenched trends -- so that trend-followers suffered a bit during December. This is part of "volatility" of futures trading; if it were too easy -- everyone would be doing it! However, good trading systems cut some losses short and will continue to follow the trends. Longer-term trends continue to be:

• Long gold
• Long energy
• Short dollar
• Long bonds
• Long soft commodities like sugar, cotton, OJ, coffee

Wishing you a happy holiday -- and a happy & healthy 2010!

Oversold Indicator likes long side

Quick blog post. As mentioned on our Twitter, we currently have a gap fade (going short) trade on right now.

However, as of the close on Friday, our Overbought / Oversold indicators switched from short to long. There has been chatter that the market is due for a big fall -- but contrarian investors often like to see "the markets climbing a wall of worry." The fact that there are some big-time bears out there gives us some comfort with the bullish indicator.

Our long-term and short term stock market indicators are both currently long -- so we are looking to enter the long side soon.

In other futures markets:

• The Japanese Yen has been wildly strong as traders believe that Japan will not intervene to slow the rise.
• The Gold rush has slowed for now -- but depending on market action, our systems will look to re-enter the long side at some point.
• Bonds continue to rally.

Stock Indicators, A Look at Futures

A quick update on our stock market indicators:

• Our overbought indicators are still flashing the warning signs we mentioned last week.
• Our long-term and short-term indicators remain bullish/long.

Overall, we have remained slightly long as the market has continued its rally -- albeit with relatively modest position sizes. Some other market sectors have been helping our portfolio recently -- namely some futures markets.

Gold has been in a sustained trend higher, rising from the mid 900-range (just a few weeks ago), breaking through the 1000 milestone mark -- and is now reaching contract highs around 1020. Gold is poised to spike through to new highs, or may consolidate before continuing its run.

In other futures markets:

• Sugar is reaching multi-year highs.
• ECU & Yen strong vs. US dollar.
• Bonds continue to move higher.
• Crude oil is volatile as usual, but is trending higher.
• Grains and meats are generally lower.
• And as we mentioned, gold is very bullish. Other precious metals and copper are also moving higher.

Sugar Market

The sugar market is hitting multi-year highs because of weather concerns (in India and other places) that are creating supply worries. This extreme move is helping our portfolio to edge higher as other markets churn at current levels. You can never tell which market sector might perk up -- so it's good to use trading systems that cover a wide range of market sectors.

In the meantime, other markets have been churning since they reached certain levels. The stock market has reached recent highs but is struggling in the 1000 range on the S&P. The bond market has been bouncing between recent support and resistance. Other markets such as currencies and other commodities have recently had similar market action as well.

Preview of Friday's Mkt Action & How We Trade Mkts

In AH (after-hours) on Thursday evening, MSFT missed their quarterly earnings and revenue estimates. The market is currently calling down a little more than -1%. What does that mean for our trading in Asia overnight -- and as we enter Friday? As computerized and systematic traders, we'll follow our systems -- which are currently positioned fairly neutral in the equities -- and are poised to take their cue from overnight and early market action on Friday.

Recently, the "futures" portion (namely, currencies and commodities) of our portfolio has been the leader, helping our diversified portfolio to near recent highs. We'll talk more about the futures sectors in another blog post.

Trading Approaches

In our posts and Twitter, we talk about various time-frames -- such as Long-term (LT), Intermediate-term (IT), and Short-Term (ST). We trade many liquid markets around the globe using multiple time-frames and various approaches. These systems are all profitable and robust as stand-alone systems -- and are meshed together to produce excess returns with an eye on risk and robustness. We will often refer to our models' views across various time frames. Our Members have access to our positions -- as well as database (if they want to research their own trading systems).

Markets

We trade everything from equities, futures, options, fixed income, currencies, and commodities. Our focus is on the futures markets where we trade all major sectors including global stock index futures, interest rates, currencies, and commodities (metals, energy, agriculture, meat, softs).

Other Diversifying Methods

In addition to this core of trading systems across diversified markets, we are able to capture positive returns that are great diversifiers for the rest of our portfolio -- and are particularly useful for more traditional stock (and bond) portfolios. We'll discuss this investment approach in a different post when we get a chance to publish some actual performance that we -- and our Members have earned.

Futures Sectors

We invest -- and trade -- in the major liquid futures markets, focusing on the US markets. Note that we have also traded international commodities such as London metals and Japanese Commodities (Tocom Rubber, Azuki Red Beans). Recently, we mentioned that many of these sectors have become correlated with the stock market during this recent sustained equity rally. Traders in these markets are probably aware of this -- but should make special note of this to avoid having undue concentrated risk in their portfolios.

Here is a look at the major futures market sectors in which we invest. We like to use the word "invest" because we believe that we extract risk premiums that are left in the marketplace by hedgers and other market participants.

• Stock Index Futures
• Interest Rates
• Currencies
• Metals (precious metals and industrials)
• Energy
• Grains
• Meats
• Soft Commodities (coffee, cotton, sugar, OJ, cocoa)

Markets we trade

We have traded just about every liquid futures market around the globe. Today, our focus is on the US markets, including all liquid futures markets (index futures, interest rates, currencies and commodities) as well as stocks and options.

We also trade foreign index futures such as the Nikkei.