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In Part II, “Big Positions On,” Deep Alpha described her monster grain trade in the epic drought of 1988. Now, in Part III, we follow her journey off the floor, beyond grains and into the world of position, swing and day trading… global markets… and Market Profile. This interview series is part of the Mercenary Vault, an archive of exclusive high quality materials available to Mercenary Dispatch subscribers. The Dispatch is our means of direct communication (via email) with Mercenary community members — and it’s free! Sign up here and don’t miss out on future exclusives. And now to Part III… Continue reading The Journey, Part III: Embracing Market Profile
JPMorgan Chase & Co. (JPM) announced quarterly earnings which included a surprise $2 billion trading loss. The news sent the stock spiraling 10% lower and raises significant questions about the company’s ability to manage risk. On the surface, the trading loss could be brushed aside as a “one-time” mistake, that doesn’t really affect the overall market. Aside from the trade, JPMorgan’s “ongoing” business was relatively stable for the quarter But in reality, the loss is a startling reminder of how vulnerable the global financial industry has become, as a result of a number of factors:
In a ZIRP (Zero Interest Rate Policy) world, investors have to become more and more creative to generate income – and that is true for corporations as well as individuals. Banks in particular have an irresistible incentive to take more trading or business risks in order to generate returns on capital they can access for nearly zero cost. So whether Jamie Dimon categorizes the loss as a poorly executed hedge or a flat out speculative position (or even “hedging their hedge” as the WSJ reports), the bottom line is that risks are accumulating to the point where it is impossible to determine the potential outcome scenarios – which by definition increases the risks for the industry, and in turn the entire market. Even without the JPM trading loss, equities have been weakening throughout this quarter’s earnings season. Industry leaders like Apple Corp. (AAPL) are failing to hold key support lines, and more speculative growth stocks with high multiples are particularly vulnerable. Below are a few trading areas we are watching this week… Continue reading View From the Turret: JPMorgan Touches Off A New Risk Firestorm
Within the charting community — especially among the practitioners of “pure” technical analysis, i.e. no fundamentals allowed — there is a new meme going around. That meme is as follows: High Frequency Trading (HFT) has ruined the markets. Thanks to those damn robots and their wicked brutalization of support and resistance levels, this meme says, it’s just hard for a chart trader to make a buck anymore. It’s a frustrated rallying cry — and an effort to place blame. You can almost picture the laid off mill worker slumped heavily at the bar, muttering into his beer… the machines — damn those machines… This meme was crystallized for me by Mike Harris of Price Action Lab (whom I had never heard of, but discovered via Josh Brown). Continue reading Attention Frustrated Chartists: It ain’t HFT – it’s the Macro! The bears were out in full force as we wrapped up last week. You could almost smell the fear as investors lightened exposure and bailed out of positions, and short-sellers stepped up to the plate. While the selling got started midway through the week, the intensity really picked up following the April jobs report which was a major disappointment. For the month, payrolls rose by 115,000 – well below the 165,000 that economists had expected. April marked the third month of decelerating job growth… In the ‘lies, damned lies, and statistics’ category, the official unemployment rate actually dropped from 8.2% to 8.1% as the US workforce shrank for the second month. According to the BLS, 342,000 people left the labor force last month. Apparently, the market saw through the government charade as the S&P dropped 1.6%, the Nasdaq Composite lost 2.2%, and every single Dow component traded lower. With the majority of recent global economic reports showing weakness (particularly in manufacturing, employment, housing, and consumer measurements), bullish investors are finding fewer data points to support their posture. First quarter corporate earnings reports have held up as one of the last remaining bullish areas – thanks to the majority of companies beating expectations. But according to Bespoke Investment Group the rate at which individual companies are beating expectations has declined steadily throughout the season.
It’s becoming harder to justify bullish positions as the market rolls over, and we’ve been methodically adding bearish exposure to our trading book. With plenty of economic land mines still threatening investors, we’re growing more confident in methodically adding more exposure while still carefully managing our risk. Below are a few of the specific opportunities that we are tracking this week…  click to enlarge I recently had the opportunity to go out for drinks during the week. I turned it down, saying I can’t consume alcohol on a school night. Friend’s response: “You mean a work night?” “Nope. For traders they are school nights — because if you don’t rest up and do your homework, the market schools you good.” Within the context of the Mercenary trading style, doing our homework means staying on top of key developments, both fundamental and technical. And not just somewhat on top of things, but COMPLETELY on top of things — “like Pamela Anderson on a can of spam,” as an old colleague used to say. (Not sure what that means exactly, but it stuck…) Anyway, in the interest of maximum awareness, we recently added a feature to our flagship advisory service — the Live Feed Trend Tracker, as shown on right. (Click image to enlarge.) In addition to the market analysis and top down perspectives you see in the main post stream (and receive via the Mercenary Dispatch), we regularly broadcast more portfolio-specific and trade-action specific material — including real time trade executions, position sizing guidelines, portfolio dynamics, and more — within the Live Feed. Below is an example of our open book thought processes, posted to the feed stream early this morning (prior to the day’s carnage). To find out more about the Live Feed — or get a free 14-day trial — go here.
While the primary bullish trend lines were clearly broken earlier the month, the price action has rebounded – putting key indices back above important EMA support areas. But at the same time the market has been pushing higher, the fundamental data has been less than encouraging. The first quarter GDP report came in at 2.2% annual growth – well below expectations – as business investment showed particular weakness. This “bad news” was essentially shrugged off by equity traders, who saw the weakness as a great opportunity for the Fed to renew its promises of ample liquidity with essentially zero interest charges for the foreseeable future. Incidentally, treasuries posted their 6th straight positive week despite a modestly more “hawkish” FOMC announcement this week. Midway through April, we had the chance to take a solid shot on some attractive R (reward to risk) bear scenarios. A few of these trades resulted in quick profits. And a few hit our tightened risk points during the rally last week. The net result is that our overall exposure has been whittled down quite a bit in response to the market environment. This type of situation is normal… There are times when you get the chance to step on the gas, and then quickly have to maneuver around new obstacles. Considering the cross currents that were introduced last week, the waters are a bit more muddy for short-term trades. At the same time, there are a number of sectors and industries that look very promising. More data this week in the form of earnings announcements and economic reports should help to clarify the action – giving us opportunities to set up new trades along the way. Below are some of the area’s we’re watching this week…
Equipment stocks showed their true colors Wednesday (04/25), failing to keep pace with the major market indices… While Apple’s positive earnings announcement sent the bulls into a buying frenzy, the major equipment stocks failed to show up at the party. Bearish action in an otherwise positive environment is definitely a red flag worth digging into (no pun intended)… There were two primary catalysts that drove equipment stocks lower.
First, the earnings announcement from CAT. On the surface, the report was fairly positive. Q1 EPS rose 29% over last year due to strong domestic sales and healthy demand from mining equipment. Management even raised full-year guidance – although not as much as Wall Street was expecting. Instead of focusing on the strong quarter and higher guidance, investors worried about weakening demand in China, Brazil and Europe – and dumped the stock on heavy volume. Continue reading Caterpillar Ignites Fear for Equipment Stocks
Part I further covered DA’s early educational background… her deep interest in cognitive biology and human networks… and the story of how she discovered grains and made her way up at the Board of Trade. In Part II we pick up where the conversation left off — the transition to the trading floor, just in time for one of the wildest grain markets ever. This interview series is part of the Mercenary Vault, an archive of exclusive high quality materials available to Mercenary Dispatch subscribers. The Dispatch is our means of direct communication (via email) with Mercenary community members — and it’s free! Sign up here and don’t miss out on future exclusives. And now to Part II…
- “Welcome Back Kotter” This week kicked off with more political crisis in Europe. I know, we’ve heard all we can stand on Europe… but now things are getting serious again (hence the market’s non-trivial reaction on Monday). It’s a good time to revisit the basics of the situation. In France, Nicolas Sarkozy lost the first election round to a socialist, even as the far-right party saw a historic showing; in the Netherlands, a budget crisis led to resignation. Both these items are directly related to the eurozone crisis, and a growing disgust on the part of the populace in respect to current policies. Some quick recaps: Last week’s action brought some welcome relief to the bulls as the major indices broke a two-week losing streak. The good news is that both the Dow and S&P 500 posted gains for the week. But the bad news is that more growth oriented indices like the IBD 50 actually declined on the week. Even after a positive week, the primary US equity benchmark looks pretty ominous. After four straight months of low vol – advancing action (six months of positive movement off the October low), the S&P has clearly broken its trend line and is now consolidating recent losses…
This week promises to be a busy one with plenty of catalysts that could set the next wave of price action in motion. On Tuesday, macro traders will be watching bond offerings from both Italy and Spain, and after the close we have an earnings report from mighty Apple Inc. (AAPL). The bellwether has broken its three-month bullish trend and has been pulling the broad technology sector down as it corrects. Wednesday, we have the completion of the Federal Open Market Committee meeting – including both the standard press release as well as a press conference with Ben Bernanke. With the most recent economic reports offering a more negative picture for the domestic economic recovery, this will be an important event. Heading into the week, our current exposure is about 2-1 bearish to bullish – with just a handful of profitable bullish scenarios and a growing roster of areas that are trading lower. More importantly, our pending setups are nearly all bearish as the technical picture looks ominous and the reward-to-risk metrics favors setups that will profit as markets fall. Below are a few of the areas that we’re tracking for the week… Continue reading View From the Turret: The Drift Before the Storm…
Well, if Peter’s interview blew you away, prepare to get blown away again… because now we’re excited to introduce “Deep Alpha,” or DA for short. Deep Alpha is the code name for a female trader (still notable in this male-dominated world) with more than three decades of experience in markets. DA is remarkable not just for her performance, but the depth and range of her journey. She began as a commercial hedging liaison at the Board of Trade, then moved on to financial futures and day trading. As a floor trader in the grain pits, she rode thousands of contracts limit-up (for days on end) in the great North American drought of 1988. As a hedge fund manager, employing primarily short-term strategies, she booked an incredible 280% annual return for her investors (that’s two-hundred-eighty, not a typo) in 2010. Over the course of this multi-part series, she’ll tell you how she did it. Continue reading The Journey: From Floor Trader to Family Office Manager
A cognitive bias describes a replicable pattern in perceptual distortion, inaccurate judgment, illogical interpretation, or what is broadly called irrationality. In many professions, bias does not create a problem. In some it can even help. A defense attorney, for example, could be well served by the notion that “all my clients are innocent.” In many circumstances, biases and beliefs — even irrational ones — can help performance (or at least not degrade it). For traders, though, cognitive bias can be deadly. A lack of objectivity in markets will inevitably cost you money… only question being whether it is a little, a lot, or your whole wad. How to guard against cognitive bias? Awareness is half the battle — so this comprehensive list of biases is a good place to start. If you haven’t seen that list before, scan through it. Dwell on those items you suspect might impact your own trading. You could discover leakage that you didn’t even know existed! Continue reading Who’s Driving the Bus? (Reflections on Cognitive Bias)
You can see the evidence, pulling up a chart of the iShares Russell 2000 Index (IWM). The small caps ETF failed after breaking to a new high midway through March, and the chart pattern is now flirting with full-fledged technical breakdown. Using traditional technology proxies, the warning signs are more difficult to pick up on. The Powershares QQQ Trust (QQQ) and even the SPDR Technology ETF (XLK) are both within a few daily trading ranges of their 52-week highs. But digging into the composition of these ETFs explains most of the technology strength away. How so? Because both QQQ and XLK have an enormous concentration in Apple Corp. (AAPL). Apple represents a full 17.5% of QQQ, and nearly 20% of XLK. So the strength in this largely consumer-driven momentum stock represents the prominent driving force behind the positive price action in these two technology ETFs. Networkers Breaking Lower The networking sub-sector is looking particularly vulnerable with a number of key components running into overhead resistance. The more speculative names in the group appear prone to a sharp selloff. Analysts are ratcheting down projections for the Q1 earnings season, and while it is still early, disappointments from the likes of Google Inc. (GOOG) and Intel Corp. (INTC) are having an effect on the group.
Equities had to deal with a disappointing jobs report, an underwhelming bond auction in Spain, a handful of disappointing key earnings reports, and less-than-encouraging consumer confidence data. For the week, the S&P 500 dropped 2%, the Nasdaq composite was down 2.2%, and the Russell 2000 small-cap index was down 2.5%. Even mighty Apple Corp. (AAPL) posted poor weekly performance, challenging a bullish trendline that has been in place since the stock went vertical at the beginning of 2012. Selling pressure has knocked the bulls back on their heels, with the major indices (S&P 500, Dow, Nasdaq Composite etc.) threatening to break below the key 50 day Exponential Moving Average – a key variable for many mechanical trading systems…
The broad averages are hitting critical technical levels at the same time that we enter the heart of earnings season. Analysts and media outlets have already begun to characterize this earnings season as “disappointing”, paving the way for a significant sentiment shift over the next few weeks. Focus now, focus. You’ve got to FOCUS! How many times have you heard some version of that? How many times have you said it to yourself? Focus is indeed important, as the following quotes remind us:
But here is an idea worth exploring: Is it possible to focus too much or too often? Can excess focus degrade performance? And if so, what can you do about it? |
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Today we serve up Part III of “The Journey: From Floor Trader to Family Office Manager,” in which Jack interviews Deep Alpha, a close friend and seasoned trader of 30+ years. (If you haven’t read Part I, 
Roughly speaking, traders come in two classes: Those who use charts and those who don’t.
Welcome back,
As you likely know, it is critically important to guard against cognitive bias. Via Wikipedia:
As we head into first quarter earnings season, institutional managers are becoming more risk averse – with allocations to speculative stocks (technology and small-caps specifically) drying up.
Concentrate all your thoughts on the work at hand. The sun’s rays do not burn until brought to a focus.