Crude Oil on 6/7/13 - Popped up 1% and then another 1%

Today, crude oil was trading lower by about -1%, then bounced to about even -- and is now up almost +1%.  This is all within about 45 minutes -- and happened by about 10:15am EST.

Just an observation about market action and why traders oftentimes need to think about time-frames and how various triggers react to volatility.

Fat Fingers, Phony Tweets and Today's Markets

A few years back, we had the "Flash Crash" due to the "fat finger..."  This past week -- on Tuesday -- if you looked at the price chart for the day, and didn't know what was going on, you might think that there was a data error (see circled area).  However, what you see is the real price action -- moving markets down 1% and then up 1%, within minutes -- due to false rumors of an explosion near the White House.

The DJIA dropped 120 points in just one minute due to the fake tweet!  Tory Capital reports below:

For a few surreal minutes, a mere 12 words on Twitter caused the world's mightiest stock market to tremble.

No sooner did hackers send a false Associated Press tweet reporting explosions at the White House on Tuesday than investors started dumping stocks eventually unloading $134 billion worth. Turns out, some investors are not only gullible, they're impossibly fast stock traders.

Except most of the investors weren't human. They were computers, selling on autopilot beyond the control of humans, like a scene from a sci-fi horror film.

"Before you could blink, it was over," said Joe Saluzzi, co-founder of Themis Trading and an outspoken critic of high-speed computerized trading. "With people, you wouldn't have this type of reaction."

For decades, computers have been sorting through data and news to help investment funds decide whether to buy or sell. But that's old school. Now "algorithmic" trading programs sift through data, news, even tweets, and execute trades by themselves in fractions of a second, without slowpoke humans getting in the way. More than half of stock trading every day is done this way.

Read more here:
http://www.ino.com/blog/2013/04/how-a-phony-tweet-and-computer-trades-sank-stocks/

Stock Signal Update (4/24/12)

The recent stock market decline let some of the air out of the stock market's steady rise over the past several months.  Our stock market indicators switched to positive with the stock market currently trading at about 1371.

• Our long-term model are now bullish.
• Our oversold/overbought models are also bullish, after the recent downdraft.  

Our last update was in December, when the S&P stood at 1254.  Since that time, our models unfortunately had us underweighted in the stock market.  Systematic trading strategies are not always correct, but following disciplined methodologies helps in terms of repeatability, managing risk, and managing emotions.  

Gold at a Crossroads

Here's an excerpt from an article on Commodities & Gold:


As gold surged towards the $1900 per ounce price level over the past few months, there has been growing interest in gold as part of a well-diversified portfolio – and as a safe-haven investment. Indeed, the gold positions of large and well-respected institutional investors such as the University of Texas endowment, and hedge fund manager, Paulson & Company, have been in the news.

Interestingly, many of these headlines came around the time when gold was rallying towards its all-time highs in the $1900 range. We note that many of these large investors have already profited from their stakes in the precious metal. Since peaking at around $1900 per ounce in September 2011, gold sold off rapidly to $1550 within a few weeks. Gold has been consolidating mainly in the $1600-$1800 range since that time. Where will gold head from here? In this article, we look at gold – which stands at a crossroads, as we prepare for 2012.

...

Our CTA’s proprietary trading models cover the gamut of time-frames, which include long-term and short-term trend-following. Briefly, our futures trading strategy can be described as:

• intermediate to long-term trend following, with
• pattern recognition and machine-learning components, and
• (short-term) risk management approaches that help set us apart from others.

In particular, some industry professionals like the fact that our pattern recognition and short-term risk management components have a slight mean-reversion flavor.

As intermediate-to-long-term futures traders, our outlook remains bullish, but the bullish case has started to crumble. As usual, we will follow our computer models and trading strategies to give us direction.

As our clients and investors know, we apply a “barbell” approach to help us maximize “forward information.” Systematic and computerized trading strategies keep us disciplined – and market action will dictate our positions. 

Read more here:

http://seekingalpha.com/article/315072-commodities-gold-at-a-crossroads

Carlton Chin, CFA, is the portfolio manager for ADAMAH Capital, which specializes in Computer Aided Research & Advanced Technology (CARAT). He is a specialist in quantitative investment strategies, managed futures, alternative assets, global macro & strategic asset allocation. Carlton combines a CTA hedge fund background with portfolio optimization work for institutional investors. He founded Adamah with his long-time friend and associate, George Parr. Carlton has been quoted and featured in the Wall St. Journal, NY Times, MARhedge, Futures Magazine, and Financial Trader. He holds both undergraduate and graduate degrees from MIT.

AN INVESTMENT IN FUTURES CAN RESULT IN LOSSES.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Holiday Shopping List: Investing Books

Some of our readers asked us about our favorite investment books (after our last post on "What Works on Wall Street.")...  Here are some of our favorites:

What Works on Wall Street

One of our favorite websites, CXO Advisory, had a nice summary of O'Shaughnessy's Book.

From Chapter 21, “Using Multifactor Models to Improve Performance” (Page 470): “…you can do vastly better than a passive investment…by using more than one factor to select a portfolio of stocks. …Investors are best served by buying stocks that have jumped a series of hurdles rather than just one.”

From Chapter 24, “Sector Analysis” (Page 545): “…what works in the All Stocks universe also works quite well at the sector level. …what we should avoid investing in at the All Stocks universe level should also be avoided at the sector level.”

From Chapter 25, “Searching for the Ideal Growth Strategy” (Page 567): “One of the very best ways to use price momentum is to marry it to a value constraint [composited value factors]. …six-month price appreciation is a more effective final momentum filter than 12-month price appreciation.”

While the author takes steps to mitigate data snooping bias, there are so many characteristics/combinations tested on the same data sets in search of best portfolio strategies that discrimination among strategies/variations may derive materially from luck.

http://www.cxoadvisory.com/17768/fundamental-valuation/a-few-notes-on-what-works-on-wall-street/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cxo+%28CXO+Advisory+Blog+-+Investing+Notes%29

The Example of Kodak (Trend is your friend)

The sad story of Kodak, once a powerhouse and film monopoly, has made the rounds lately, as the stock has dropped to around a dollar a share, from the mid-teens just 3 years ago, and the mid-20's 4 years ago.  The stock peaked at around 80 in 1999.

With a large cash hoard just a few years ago, and such a good brand name, many investors are surprised that Kodak declined so much over the past few years (even with the rise of the digital camera).

Click here to look at the chart.  The 3 or 5 year chart shows the big decline.
http://data.cnbc.com/quotes/EK/tab/2

Forbes had a good article on some of the history about Kodak -- why some believed they would succeed, and the story of some of their failures:

When Kodak was founded in 1888, quality was its “fighting argument.” It gladly gave away cameras in exchange for getting people hooked on paying to have their photos developed  — yielding Kodak a nice annuity in the form of 80% of the market for the chemicals and paper used to develop and print those photos.

Inside Kodak, this was known as the “silver halide” strategy — named after the chemical compounds in its film. Kodak had a fantastic success formula that keyed off of international distribution, mass production to lower unit costs, R&D investment to introduce better products, and extensive advertising to make sure consumers knew about Kodak’s superior quality.

Read more here:
http://www.forbes.com/sites/petercohan/2011/10/01/how-success-killed-eastman-kodak/

Many believed that Kodak, with it's cash flow and cash supply, would be able to recover from digital cameras.  One of the most highly-respected investment gurus, legendary Bill Miller of Legg Mason also believed in Kodak.

Maverick value investor Bill Miller has apparently sold his stake in Kodak (EK). Filings show that the manager of the Legg Mason Capital Management Value Trust (LMVTX), who put together a 15-year winning streak against the S&P 500 through 2005, sold 18.2 million Kodak shares late last year and during this year’s first-quarter for about $3.89 each on average.

The fund realized a $551 million loss through the divestiture, according to a report by Bloomberg.

At one time, Miller owned nearly a quarter of Kodak’s shares. He and other Legg Mason fund managers reportedly held onto the shares for more than a decade, even after Kodak suffered big losses.

Read more here:

http://blogs.barrons.com/focusonfunds/2011/06/28/legg-masons-bill-miller-unloads-kodak-buys-apple-pfizer/

It's actually interesting to us -- how different types of investors and traders can outperform the markets using various strategies.

One moral of the story, for us -- is that no matter what we "think," we will follow our trading systems and trading strategies (that we have researched, based on decades worth of data).  We generally follow trends, and use tight risk management controls.  In this case, following the trend may have helped some Kodak investors...

A Z-Trader's Thoughts on Recent "Vol" 9/25/11

Excerpt from one of our contributor's articles at SeekingAlpha:

Here are a few quick thoughts for these volatile conditions, during these difficult economic times:

• Don’t try and catch a falling knife. Most good trading systems will minimize risk and “stop losses” from accumulating. You can never tell how far emotions will carry a large market move.
• When “contagion” spreads, it is sometimes best to step aside and reduce positions because psychology and emotions can also spread – causing markets to move past any "reasonable" level.
• Many portfolio managers are reducing positions, so markets become more "correlated" to one another.
• “Diversification helps until it no longer helps.”
• Trade down to the level that lets you "sleep at night."
• From a trader's perspective, once the markets find footing, these "dislocations" may offer opportunities.

Read more here:
http://seekingalpha.com/article/295688-a-trader-s-thoughts-on-recent-market-volatility

Market Update; Trader Thoughts (9/23 - 7am)

The stock market has dropped swiftly and viciously the past few days.  This has impacted most other markets -- including crude oil, precious metals, commodities, currencies and fixed income.  A few quick thoughts from the blog's contributors who are traders and investors:

• Don't try and catch a falling knife.  We had a blog post recently about this...
• Trade down to the level that lets you "sleep at night."
• Stick to your trading plan and/or system.  Systematic approaches maintain discipline and reduce the impact of emotion and psychology.

We are writing an article for Seeking Alpha on some of these topics.  And in case you were wondering:

• Our stock market indicators are currently "overall" bearish.
• Our short-term indicators have dictated our stock market positions because the other indicators (long-term and intermediate-term) were neutral.  
• As our readers know, our intermediate-term and long-term indicators went to neutral on our last post on stock market indicators -- when the S&P was at 1216.  
• Currently, however, our long-term model flipped to bearish (depending on market action, this may change; we will keep you posted).  In addition the intermediate-term indicators are moderately bearish (but a look-ahead shows that the oversold indicator may flip to bullish in the near-term). 
• The S&P closed Thursday at 1130. 

Quick reminder: "falling knife"

Just a quick blog post about the old saying, "Don't try to catch a falling knife."  Most good trading systems will use this kind of approach -- because you can never tell how far emotions will carry a big market move.

Although our intermediate and long-term stock market indicators are long, our short-term model has us on the sideline (although not before taking some losses -- less than the general market's decline.).

We will continue to follow our trading models -- and depending on how the signals are -- will trade accordingly. Long-term investors may look to add to their positions at some point -- and traders should be cautious due to the high volatility.

Indy 500 and Risk Management

Yesterday's Indianapolis 500 race was a reminder about the importance of risk management -- and weighing the risks versus the returns of every action and trade. The leader of the race with one turn to go crashed -- and lost the race -- due to one lapse in judgment.

INDIANAPOLIS – One turn. One stinkin’ turn.

JR Hildebrand made it through 799 of ’em without any trouble. As the young Californian approached that final left, all he had to do was keep his car off the wall, speed down the main straightaway and collect a win in the Indianapolis 500 on his very first try.

Instead, Hildebrand made the sort of colossal blunder that will forever link him to the Jean Van de Veldes of the sporting world.
...
Hildebrand was faced with a choice when he came up on another rookie, Charlie Kimball, going much slower as they approached the fourth turn.

The prudent thing would’ve been to back off and tuck in behind Kimball until they were on the main straightaway. Then Hildebrand could’ve gone on by to take the checkered flag.

Instead, showing his inexperience, Hildebrand decided to stay on the gas and go around on the outside. That put him into “the marbles,” the tiny particles of rubber that gather near the wall, making that part of the track especially slick.

He never had a chance.

“Is it a move that I would do again?” Hildebrand said. “No.”

_______________

Similar analogies of experience, and weighing risk vs. returns can be made to investing and trading. We use computerized trading systems that take the emotions out of trading the financial markets. This keeps us disciplined and focused on idea generation and research.

Related info:
http://whowillwinthebiggame.blogspot.com/2011/05/indy-500-sport-psychology.html

March Recap 4/5/11

As usual, the financial markets were very interesting.  The month of March saw extreme volatility -- and weirdly enough, some markets remained relatively flat for the month.  U.S. stocks and bonds ended the month mostly flat, with the S&P 500 closing at 1326 after opening the month at 1327.

Events in Japan and Libya created extreme volatility and whipsaw-like market action for many markets.  The Japanese Nikkei index plummeted -20% before bouncing back to end the month down about -10%.  Many other markets such as sugar, oil, and grains also saw reversals in long-term trends and then a bounce-back.

Managed futures indices and benchmarks tabulated by Barclays and NewEdge were down about -2% to -5%.  Trading advisor performance was generally down, with performance in a wide range.  In general, the commodities sectors fared better than the financial sectors.

Anatomy of a Trade

I was talking to some friends and associates recently about market action and the "setup of a trade."  If you are interested in trading systems, below are some notes from our conversations.

By way of background, our quantitative trading systems are technical in nature and are tuned and researched for market action, time-frame, and execution.  We focus on the intermediate to long-term time horizon -- with shorter-term approaches "in the mix" for diversification and risk management reasons.

In particular, the notes focus on trade entry and execution.  We would all like to enter a trade at the best possible price/trade entry.  On the other hand, we have heard some great traders and "market wizards" such as Paul Tudor Jones, Bill Eckhardt, or Richard Dennis -- say they prefer trades and markets where execution seems bad; or markets that are "running away" from them.

In the long run (based on experience; also, data backs this up) -- our trading strategies are designed so that they can enter trades "at the market."  Sometimes, we'll be able to get a better price; other times, the trade will move away from us (along with profits) -- so going "at the market" is okay.  If we want to "be long" in a market, we should initiate the trade.    

Below is an example of why some market wizards PREFER buying markets that are running away from them. 

_____ 

Say, we want to buy Market X and the price is 100.00.

• (A) Trade Initiation -- at trade initiation, our trade expectations might be something like this.  
• 47% chance of Profitable Trade (yes, less than 1/2 the trades are profitable...)
• Avg Gain = 1700 (but avg gain is greater than avg loss); 
• Avg Loss = 1000
• In the long run, this kind of trade action will lead to profits, even with less than 50% of the trades profitable.
• (B) "Bargain" (?!) Trade -- if we wait a bit on pricing -- and the price is now 99.25, we might think, "Oh great, this is a good deal."  However, note that this is not the exact match of all trades in the bucket in category (A).  This "Bargain" trade is a subset of category (A).  
• Note that "noise" will sometimes work for trade entries and sometimes against trade entry.
• However, within the complete dataset of trades, there IS an area where "noise" becomes "information."  
• And roughly, the numbers for this trade might NOW be something like this: 
• 44% chance of Profitable Trade (market is moving against the desired long position)
• Avg Gain == 1600
• Avg Loss == 1100
• Note that this subset has slightly lesser trade parameters -- because there is "more information" based on the lower price. 

Although this example is simplified, our technical and quantitative trading strategies take these factors --  as well as other quant research and volatility / risk management -- into consideration.  

Newsletter on Trading Systems (from C2)

In case you missed this newsletter from Collective2 (C2), we thought it was an interesting look at why some trading systems ultimately fail. The recent volatility in the futures and currency markets in January and early February caused some losses for trading systems, and we recently wrote a related article. I use Collective2 as a third-party tracker for trading systems.

Here is an excerpt from the Collective2 newsletter. Please click here for the entire article.

Three trading systems that failed

and what we can learn from them

A lot of trading-system sites like to brag about how people made money on their site.

... Every now and then we review bad trading systems on our site.

Why our obsession with failure?

Because failure, more than success, is interesting. Not just in a snarky, let's-kick-people-when-they're-down kind of way. When trading systems fail, it gives investors a chance to ask questions. Were there warning signs that should have been heeded? Is there anything that these failed systems have in common?

...

Conclusion

The point of reviewing these three systems is to learn from mistakes. The best kind of mistakes to learn from are the ones that other people make. (Learning from your own mistakes, while a powerful pedagogical method, hurts like hell.)

So what did we learn today?

1. Trading systems that engage in Martingale strategies can look good for a long time. But they always end the same way, and it's never pretty.
2. System developers that talk about golden harmonics and astrology and bird entrails should be treated with skepticism.
3. Even supposedly "low-risk" strategies have risk. There is no such thing as a free lunch.

Risk / Return, Profit Stats & Trading Systems

Investors often talk about Trading System X vs. Trading System Y -- and how a certain approach has a steadier pattern of returns versus another.  Note, however, that even long-term performance can disguise or hide the potential pitfalls of some trading systems.  For instance, a trading approach can have a great 100% return over 12-months, but individual trades can possess some scary drawdowns.

Many of us have seen these types of systems, and they eventually have a bad decline that forces a "closed trade" and/or marked-to-market recognition of the risk that was always there.  There have been many stories like this over the years.  Some of these traders use a martingale-type of approach (letting losses accumulate or even increasing exposure and/or doubling losing trades).  These methods can "hide" risk in the short-term -- but if overused -- will lead to large losses at some point. 

Many analysts study the risk / return figures on individual trades -- as well as the percentage of profitable trades -- to get a handle on overall risk.  These statistics can yield information about a trader's overall risk management approach.  In addition, hopefully, there is a real edge to the trading system's approach.

I have been a trader for over 15 years, and recently started to post trades on third-party tracker, Collective2.  Our most-established program, zFutures, is a diversified futures program -- and now has almost 200 trades tracked and more than 6-months worth of history on Collective2.  It is notable that this has been a good period for the futures markets, but we are pleased that potential investors are happy with the program's trade statistics.  In particular:

• The ratio of Average Profit from (Winning Trades) / (Losing Trades) is close to 2.
• The percentage of winning trades is currently over 50%.   

We recently started publishing our z-Trader Short-Term System on Collective2 as well.  This program focuses on the S&P (e-mini) -- and we note that the trade statistics are similar to zFutures (profitable trades almost 2x losers; and winning trades around 50%).

We don't claim to have a magic formula, but we do believe that we have an edge in the futures markets.  Our programs are based on robust research methods, including machine learning, on many years of historical data.  We use a systematic and computerized approach to managing trades and managing risk.  The financial markets are a competitive arena -- and a disciplined approach, combined with constant diligence - and constant research - are all necessary to earn excess returns from the financial markets.

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!

Intermediate Stock Indicators Turn Slightly Bullish; A Bit on Time-Frames

Our intermediate-term stock indicators flipped from slightly bearish to slightly bullish at the close of trading for 2010. Our long-term indicators remain strongly bullish, as they have been for a while. As a result, our stock trading will be biased to the bullish side, with short-term trends -- and stock index movements, completing the picture.

Our trading strategies are diversified in terms of time-frame as well as technical trend-following approaches. Our typical approach focuses on the intermediate and long-term, with short-term approaches used for diversification.

Our Short-Term Program also uses the various time-frames, with a stronger emphasis on short-term research. Because of the focus on shorter-term systems -- this program targets liquid markets that show volatility -- such as financials and energy (with a focus on the S&P 500).

Adamah Capital uses Collective2 as a third-party tracker of trading strategies developed by Carlton Chin and George Parr.

Battle of the Stock Market Indicators 9/24 330pm

With the stock market's continued rise, our long-term indicators are turning to a "medium long" position from its neutral signal of a week ago.

Meanwhile, our intermediate-term models remain bearish -- with a moderate to medium bearish signal. We sometimes see indicators disagreeing, but we rarely see "medium-level" signals in the opposite direction.

The markets will dictate how this situation resolves itself, and our systematic models will keep us disciplined.

If you like these posts, please follow my blog at SeekingAlpha.com:

http://seekingalpha.com/author/carlton-chin-cfa/instablog/full_index