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Markets Don’t Dwell on Bad News

Following on from my post on the Dow following the events of last week comes this analysis by the WSJ on how investors react to bad news.

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I agree with the general sentiment however I think the 13.5% experienced during the Israeli invasion of Gaza owes more to the market being in the last throes of the GFC than to a single political event.

How To Speak Like A Land Rat

Sometimes its good to look at the participants in other asset classes just to get an idea that it is not only people involved in finance who are useless. I have to admit I find real estate fascinating in the ability of agents to be successful despite their absolute and total incompetence. For example I am currently on a land rats alert service for properties. I have strict criteria as to what I am interested in and yet not one of the alerts I have received match what I am looking for. Its somewhat akin to ringing your broker asking to buy BHP and being given CBA and then receiving a blank look when you tell them they are peanuts.

In the midst of the latest national property boom, our thoughts naturally turn to the happy figure of the estate agent. You might idly wonder if it isn’t too late to switch careers in order to stand in the same blizzard of made-up money long enough that quite a lot of it sticks to you. But in order to succeed, you will have to master the jargon. Estate agents communicate in a dialect renowned for its strangulated syntax, peculiar vocabulary and breathtaking insouciance, dancing on a rhetorical knife-edge between salesmanship and fraudulence. Here are some tips to get you started. All examples are drawn from actual recent estate-agent “literature”.

More here – The Guardian

PS: All you need to know about real estate agents can be seen in the fact that they hired Jordan Belfort to speak at the Australian Real Estate Conference. Not even stockbrokers would be that dim…..

Motivation Monday

 

 
 

Everything Should Be Made As Simple As Possible But Not Simpler

The quote in the title is attributed to Albert Einstein and I was reminded of it for two reasons. Firstly, I came across the following exchange last night -

Thoreau to Emerson:

“Simplify, simplify.”

Emerson to Thoreau:

“You didn’t need the second “simplify.”

Secondly, our current crop of mentors are struggling through my part of the course and like all people who come to the Mentor Program they do so with a large number of bad habits and a collection of extraneous baggage they have picked up along the way. The most common problem we have in the program is the desire of attending to make trading so much harder than it actually is. To be blunt for many this is simply wank value, they want it to appear difficult so they can both bolster their own psyche and impress their friends with the usual look how hard this is and only I can do it bullshit.  For others it is a desire to cope with the unknown nature of trading environments. When you place a trade in any market you have no idea how it is going to turn it, it could go to the moon, it could sink like a stone or it could sit there like a stunned mullet for months. The drive to complexity is an attempt to control this uncertainty.

Humans like structure, our days are structured and we have a vague idea how they are going to proceed the majority of the time. This structure brings both comfort and productivity. Knowing what you are going to do when you are going to do it is comforting. On a day to day basis we know the outcome of most of our decisions. In trading we don’t have this luxury, so we try and compensate by generating the illusion of control. If you want a practical example of this illusion of control in action outside of the arena of trading go to your local lottery outlet and watch people agonise over what numbers to pick. The majority of people will pick numbers they are familiar with such as birthdays or anniversaries – these add to the illusion of control despite the fact that the chance of them coming up is exactly the same as picking random numbers.

Trading is the same – traders attempt to generate an illusion of control by adding layer upon layer of complexity into their analysis in the hope that this will tell them something about the future.  Unfortunately the solution to this problem is emotional rather than technical. It lies in the acceptance of the unknown and the possibilities that this brings. This is why indicators are largely panacea’s and the true nature of trading lies within dealing with your own weaknesses which seems to be a life long journey.

Apollo 11

I have been enjoying the 45th anniversary celebrations of the flight of Apollo 11. My favourite to date has been this piece by The Atlantic, simply because of the quality of the images. To view them in all their magnificence make certain you click the little 1280 px radio button above the first image.

 
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Dow Analysis

In light of the appalling events of last week it is instructive to look at the markets reaction to such news and to see what can be learnt about the psychology of markets. In analysing what went on in the least two days of the week it is necessary to set aside ones emotions about the terrible loss of life and look solely at the markets reaction and to try and work out why it behaved the way it did and what this might mean for our trading.

I want to begin with a simple observation, markets at present are boring from the perspective of event driven price moves. US markets have been relentlessly moving to new highs and very little is dissuading them from that course. In my mind this establishes a backdrop of lethargy where volatility is craved for. This can be seen in the continual calls for a correction/crash that come from all the bears who happen to have completely missed the five year swing up in the market. Many market participants, particularly talking heads cannot get their brains around the fact that the US market has just been marching on and it has done so in a relatively low volatility environment. In part they confuse volatility with trend, a mistake most make. Hoever, it is the  paralysingly short attention span of market pundits that cause them to believe that something must happen to drive markets one way or another. The simple refrain that markets go up and markets go down is too subtle for them to understand.

If we look at a chart of the Dow, we can see the spike down that market had with news of the downing of MH17. In some quarters this event was being treated as being akin to the sinking of the Luisitania in 1915 which was one of the defining events of the First World War and which began the long road towards US involvement in the conflict. Note the market doesn’t think so because it immediately recovered.

Dow

As you can see price slipped to both mid term and short term support and then recovered. By the open on Friday the hysteria had slipped out of the market and price bounced.

The reason this event was not as detrimental to markets can be seen in the following charts.

Crude

Gold

Within markets there are two barometer commodities that move in concert with political crisis’s – they are crude oil and gold. Gold simply because it is a safe haven and crude because it is inextricably linked to the emotions of traders. The basic mantra is – something bad happens these two go up. Whilst, I claim no great geopolitical insights or  knowledge it would seem obvious to me that if the world were moving to a much wider conflict as opposed to a shocking local tragedy then these two instruments would have moved sharply.

What we do see is a market where volatility is still below its long term average and had barely spiked as seem below.

Dow with 30 day HV

This raises the question of the hysterics that surround a relative versus absolute move. The Dows reaction in absolute terms seemed large but in relative terms is actually quite modest. Consider the chart below on which I have plotted 1% moves on the Dow. The chart however comes with a caveat – the indicator used is called Zig Zag and it cannot be used for new moves because of its doubtful validity. This problem occurs because of the setting of a threshold value – in this case 1%. If a move does not continue then the current move will disappear and the previous trend appear to be uninterputed.

Dow with ZZ

The Dow has in the past few months had a multiple moves of 1% or more  – absolute and relative are two different things to traders.

The lessons to be learnt in event driven markets are I feel very simple. Firslty, you need to ask yourself a strategic question. Has anything occurred that changes your fundamental approach in th market at present? If not then there is no need to take any action. If yes then you default to what your plan is for a significant trend change. The second question is one of trade management or is tactical in nature. Have you been tipped out of any trades by the event? If you have what are your plans for re-entering the trade?

As a personal dislaimer I remain long the Dow because nothing has happened either strategically or tactially to move me from that course.

 

 

Its Friday

Time to be a little bit geeky – if you don’t know who these people are GIYF.

 

what-is-love

 

And for those who don’t get the cultural reference here is the somewhat forgettable song by Haddaway

 

 

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