Investor.Gambler.Economist.

50/200 Moving Average Crossover

By Philip K. on July 6, 2010 12:40 AM | 0 Comments

The 50/200 SMA crossover is one of those few technical signals that I value above fundamentals. Some people are quite sensationalist in calling this technical indicator the death cross, but they're not too fall off. The basic principle behind the 50/200 crossover is to buy the market when the "short term averages" are higher than the "long term averages". You'd sell vice versa.

It's not my purpose to make the internet reader rich, but if you work out the historical results to such a simple system you'd find that in cold hard percentage terms, this system will help you avoid the worst of the market.

Last Friday was the day the 50 SMA crossed the 200 SMA. It means get the hell out of the market. Despite the string of losing days, the predictive value of 50/200 says things will get worse.

Even though my Economist hat says things are actually improving like the slightly dropping unemployment rate, positive ISM, and positive quarterly GDP, these measurements are a bit slower than the predictive value of technical signals like the 50/200 crossover.

Because of the positive economic signals, I assumed the poor results from the last two months were from seasonal factors. The summertime months are just slow months for economic activity in general. The 50/200 cross is making me re-consider the seasonal explanation; and the poor economic output and stock performance will last just a bit longer.

I officially close my 2010 predictions from the beginning of the year. I'll call the predicted 10% rise in the market an actual loss of about -7%.

Rates will not go up this year. That's wrong. While the dollar has risen as predicted and offset some of my loss, I'll call this a lucky guess. The dollar rose for reasons that I did not mention. I"m still undecided about gold.

As much as I believe in the recovering market, Friday's move has reluctantly changed my mind.

So Slow You Can't See It

By Philip K. on July 3, 2010 4:21 AM | 0 Comments

The I.G.E. has been gone for a while, because I've been busy getting married. I have been unable to write or devote much time to thinking about writing, because of wedding planning and trip details. Anyway. The wedding was very beautiful. I can honestly say my $10000 Maui wedding looked like a $50000 wedding.

Informalities aside... On the flight over to Maui they were showing a time lapse video of plant growth.

Ask yourself this question. Do plants move? Most people will respond no, because plants don't get up and walk around in that sense. You can't really see them move, except when the wind is blowing and in that example the wind is moving it. Can plants move by themselves? Watch this little clip and the answer is obvious.

In many, many ways, the profitable strategies in the stock market are not transparent. They're just as slow as the movement of plants. Each trade/data point can be months apart. So slow is the process, people can't be sure it's working. They can't be sure it's moving in the right direction.

When card counting, one hand of blackjack can be as short as 15 seconds. Trading just one technical signal can take 3 months. Imagine if one hand of blackjack took 3 months. How sure can the gambler be? What if he was making mistakes, or the dealer was cheating? A larger sample size would be required to draw any degree of certainty.

Unfortunately for the majority of people, this plant-like patience to see the slow movement requires more gifted talent than they have.

If you're so fortunate to have this rare plant zen-like patience, then start seeing the world in a longer time frame.

Mid-Term Review

By Philip K. on May 19, 2010 2:21 AM | 0 Comments

About half of the trading year is over and now is a good time to see how my economic forecasts from the beginning of the year are doing.

1. The FOMC to set higher Interest Rates

I'm sweating a bit about this prediction. I was so confident I expressed very little doubt about this outcome. According to the minutes from the latest Fed meetings, they're committed to keeping interest rates low. I'm going to stick to my guns on this prediction. It hasn't come to fruition, but the economy is getting better, employment figures are starting to get better, and inflation is around 2.3%. These marginal factors lean towards the Fed to start raising rates. If they don't, I'll just have to swallow my pride about this one.

2. The Dollar will rise

I'll call this prediction a $$$. While the Euro insecurity is a large reason for the rising dollar, something is to be said about the positive growth of the US economy being the explanation. Inherent in my expectations of rising interest rates was the stronger US economy forcing the rising interest rates. Okay, maybe I'll just call this a half-win.

3. Gold prices will Decline

This one is currently an unequivocal fail. Interest rates hasn't risen yet and gold prices are making new 52 week highs. That's the thing with trends. They can sometimes stay out of whack of their fundamentals. I am still going to stand by my prediction. I have a shit load of cash ready to pull the trigger on this gold bubble the instant I see downward momentum. I am still forecasting it will happen this year when and if the Fed starts raising interest rates.

The Death of Macro Man

By Philip K. on May 12, 2010 2:19 AM | 0 Comments

Macro Man has officially announced his retirement from the blogosphere. That's terrible news, because I regularly read his well thought out posts. I subscribe to maybe three blogs from financial individuals because not many can be trusted. They all have their ulterior motives. Some just want to plug their funds. Others to build their deity status, so that they can be the dispenser of ultimate knowledge. Many are quick to trump their correct 50/50 guesses and simultaneously ignore their mistakes.

Macro Man was one of those rare, honest and intelligent bloggers.

The ultimate demise of MM is left to speculation. He asserts the capital flight from his trading fund was what exacerbated his decision to throw in the towel.

Reading between the lines, capital flight was common in 2009, but the largely successful funds didn't have so much flight that they needed to close their doors. IMO, MM probably blew up. He lost more than the market and his investors are punishing him for it. From his previous posts, it sounded like MM was an international trader, playing the currency game. Maybe the Euro did him in.

If an intelligent fund manager such as MM can blow up, then success for the individual is even more elusive. That's the thing about this dog eat dog money game world. Sometimes, even the good players get cut up.

It ain't easy making money. If it were easy, the other players would dry it up.

Head Scratching 1000

By Philip K. on May 6, 2010 1:59 PM | 0 Comments

The almost 1000 point swing was hard not to notice. All of the news pundits are now backfitting explanations as to why this swing happened. I might as well join the party, because today's sharp drop and recovery is a head scratcher.

My initial impression was there was an error in my ticker feed. The normal relationship between some of my trading pairs had price divergence that were 6 or 7 standard deviations from my data set.

There was nothing wrong with my stock feed. People are now discovering that there might have been a technical glitch in Proctor and Gamble (a large component of the Dow) and that explains some of the drop. The P&G errors were maybe 200 pts and a few hundred or so pts were the result of computer systems cascading this glitch.

The DOW was trending around a 200 pt loss before the glitch, so the daily animal spirits would probably say a 100 to 300 or so pt loss was the 'norm'.

If about 300 pts was normal animal spirits, 200 pts was the result of PG error. That leaves us with about 500 pts that were quite possibly the result of computer systems cascading on the trading errors? I reserve doubt about what caused the other 500 pt drop, because I don't have nearly enough information to make any solid conclusions.

The quick recovery immediately to the normal 300 pt loss does strongly suggest errors were what caused today's head scratcher. I've seen maybe 10 case studies on individual stock companies where there were false reports (wrong information about bankruptcy, incorrect financial statements, etc.) and the patterns are all quick drops and quick recovery like the pattern that we saw. All of these case studies were based on individual stocks.

Broad based markets can theoretically have quick drops and recoveries from errors if this incorrect information is macro oriented like ISM or unemployment reports, but today's errors do not appear to be macro oriented. Can just a few errors in a few securities cause the broad market reaction that we saw? Apparently yes, but this one is still a head scratcher.

The Brilliant Timing of the Goldman Witch-Hunt

By Philip K. on May 1, 2010 5:18 AM | 0 Comments

The financial news bomb of the SEC campaign against Goldman is hard to ignore. There have been two common themes about the Goldman witch-hunt in the media.

(1) The populist opinion that Goldman are greedy scumbags (they are) and they lied to their customers to whom they owe a legal and fiduciary duty.
(2) The free market opinion that Goldman was doing what every other investment bank does, make profit.

There's another theme to the witch-hunt that has not seen much spin in the media. The SEC witch-hunt is a brilliant move that was pre-meditated, at least subconsciously, to further government interests with the noble goal of curbing moral hazard. The decision to take action against Goldman was likely decided in late 2008 during the worse of the recession. Actions might have been taken recently, but the heads must have stayed up at night pondering this through. No severe action could have been taken in 2008, because of the "confidence" factor the in the market. Pursuing legal action against such a huge player like GS would have definitely rattle the nerves of investor and suck the juices out of the animal spirit.

Like patient hunters, the SEC waited patiently until the economy recovered from the brink of disaster. With the stock market largely recovering and the job situation to follow soon, government interests are at play to strengthen their own bureaucratic powers and at the same time attempt to curb the morally hazardous investing of the past decade.

Breaking it down further, I was in a securities law class that was taught by a high level SEC attorney in California. He mentioned that at cocktail parties prior to the melt, people viewed the SEC as knights, protectorates of the little guy. After the melt, people would wag their fingers at him and mention the SEC let the economy and the country down. Imagine the ego of going from heroes to scapegoat.

It's too simplistic to say that SEC witch-hunt is the result of pre-meditated planning from damaged egos to expand government involvement, but it sure smells like it.

The Fear of Being Left Behind

By Philip K. on April 5, 2010 1:33 PM | 0 Comments

One of the strongest emotions and most primal fear is the feeling of abandonment. Perhaps it stems from the fear of mother's abandonment before we reach survivability. The genetic wiring that ensures survivability compels us to keep pace with the herd and to stick with others. Do not stray too far from the pack or some apex predator will make a quick meal of you.

People in power are well aware of this fear. Religions know this. Politics make you think you have to join a political party or you have no voice. The fundamental idea of some religions is to join their pack or you will be Left Behind, abandoned to fend for yourself.

Recently, the investor in me has been feeling left behind in the market. My market neutral activities have placed me out of the market for a few weeks. During these weeks, some of my primary instruments have jumped in value. I can't help but feel isolated, because everyone else is enjoying the gain and I'm stuck on the sidelines. While everyone is partying up at the prom, I'm at home online. As cold and calculating as I can be, even this feeling of abandonment can wreak with my trading psychology.

To better understand this complexity, let's turn to a more simplistic model. One thing you quickly learn as a card counter is that grinding out a profit is a wild ride. There are immense swings of elation and desperation. These entirely reasonable and likely swings happen all the time. What you have to do is stick with the almost absolute truth. Stick with your system and if it's a legitimate system, it will carry you upwards.

The positive swings are happening in the market and being on the sideline may evoke a terrible feeling of abandonment, but I know my almost absolute truths. I just have to be patient and follow my guidelines, because I have no basis to chase after other people's good fortunes. I should only be concerned with my own.

Too Soon, Too Soon

By Philip K. on February 18, 2010 3:40 PM | 0 Comments

Oh chit. The Fed is raising the discount rate for emergency loans (Bloomberg). It's beginning to sound like my 2010 forecasts might be on the right track.

Too soon to call it, son.

Sometimes A Law is Not Really A Law

By Philip K. on January 29, 2010 1:18 PM | 0 Comments

Brad Delong has posed an excellent question. With today's release of quarterly GDP growth at 5.7%, we'd expect unemployment to go down per Okun's law. Unemployment figures, however, haven't gone down about 2% as predicted. Instead of 10% unemployment, it should be 8%. What's up?

First and foremost, I believe the relationship of Okun's law to still hold true. Calling it a law is a misnomer. It's more of a highly correlated relationship, but Okun's law sounds much better than Okun's Highly Correlated Relationship between GDP and unemployment. The lack of the predicted 2% drop in unemployment still falls well within the the range of the linear relationship. A little variance never hurt anybody.

The lack of corresponding drop between GDP and Unemployment doesn't mean Okun's Law is invalid, especially when it's still within the variance. For the same reason that the best quarterbacks still throw interceptions, we can still see figures like these. We shouldn't worry too much about such flukes unless they're systematic enough to create a pattern, or they're such complete weirdos that defy all expectations. The current GDP/unemployment relationship would not fit in either category.

Give the economy a few more quarters of growth and it would be hard for unemployment to resist falling.

2010 Forecasts

By Philip K. on January 5, 2010 7:07 AM | 0 Comments

My three months absence here is inexcusable. I've been trying to shake off a World of Warcraft addiction that has been detrimental to my trading. It created slippage in the neighborhood of about 25% reduction in my expected profits. I kept on playing the game ignoring my end of day signals.

The gaming addiction was that strong! It was akin to the character Sam in the movie Avatar where he was more focused on the "virtual" world than his actual word. All of that is mostly behind me now as I believe I've moved on. I feel like I've already mastered the game and there's not much out of it.

Looking back at my forecasts for 2009, I've been pretty accurate and profitable. The experts at the time, January 2009, mostly predicted our economy will not recover. The prediction markets pegged positive GDP growth for 2009 at about 33% chance.

Buying the Dow at 8500 and even 8000 as I suggested might not have been such a bad move right?

To put it simply, I do not expect the positive returns this year to be as nice as last year. You know how the S&P averages about 10% a year with a whole lot of variance year-by-year? This year feels like a 10% year.

To draw from many sports analogies, we're in a rebuilding year. We're trying to find what works and doesn't work for our team. There are a host of systematic weaknesses that need to be addressed and we need to focus on the positive aspects that grow our economy.

My general economic forecasts are great if you're managing a large sum of money or into that intellectual hot air.

To break it down into a more usable form, I predict the FOMC to set higher interest rates. The Fed doesn't exactly set rates. They have interest rate targets, but you know what I mean. Rates will go up this year. There's very little doubt in my mind about this.

To play off the higher interest rates, US dollars will be an attractive option for 2010. If you don't see the relationship between higher interest rates and currency, then there's not much I can do to help.

What I've discovered in my statistical analysis is that the price of gold is about 60% negatively correlated with the US Dollar. Correlation does not imply causality, but that's the nature of the gold/dollar relationship. Be careful though, because I lost a slight bit of money betting against gold last year, but luckily my stop loss kept me safe.

I'm going to wager this year that the rising interest rates will make the dollar rise and pop the air out of gold.

Fistful of Gold

By Philip K. on October 20, 2009 11:32 AM | 0 Comments

I've developed a weird addiction of sorts. I've been busy playing World of Warcraft. I've been neglecting my real life and this website. Have I mentioned that I love to play games? Maybe to the level of dependency issues. :)

There's a fistful of gaming gold in World of Warcraft. Each online gold is worth about $.01. I've spent maybe a 100 hours and I've made a total of $.15. Fistful of gold, indeed.

I've also been really making a fistful of gold in the market run up. For those who keep tab, I've been very bullish on the overall market for the past few weeks and it has paid out well. Well enough to take a nice long vacation.

I won't be writing up any meaningful evaluation of my wagers/predictions until the end of the year, but 2009 has been an unusually good year. I was wrong about there not being a V-shaped recovery. It was V-shaped. I would have predicted a more gradual ascension.

Everything is getting back to business as usual. For those concerned about the everyman unemployment, economic growth will take care of it. No need to lose that much sleep over it.

If I were to sum up any business sentiment, everything just feels like business as usual. Business as usual doesn't really make for good writing posts.

Couple of Updates

By Philip K. on October 6, 2009 2:08 AM | 0 Comments

*MGM slashes CityCenter condo prices by 30%. Good move. (Bloomberg)

*Just like that --poof-- I will have to officially end my two day recommendation of longing the S&P by today's closing price. I'll consider Monday's 1%+ gain good enough. According to my system (you should be suspect whenever anyone mentions system), the market inefficiency has been quickly corrected. This doesn't mean I'm short. I'm definitely still long, but that's for various reasons that I just don't want to get into right now.

*The possibility of war with Iran is very real. Intrade has a proxy-ish estimate of about 7%. By my definition, an air strike against Iran is war. That old saying about war being good for the economy was a fluke of an instance to describe World War II. Any war with Iran will be bad for this fragile market and economy.

*Fuck you Robert Benmosche. AIG's CEO is thumbing his nose at the US Government. (Money). The problems of moral hazard has just got worse. Freerolling on limited liability and government guaranteed programs has lead to an unchangeable culture of moral hazard. 2008 Credit Crisis, LTCM, Bear Stearns. We'll be seeing these events again, if Bob's attitude is representative of other executives.

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