Category Archives: Market Commentary
What a time to be alive. The trading these days has been absurd, a veritable hat full of money. Uncle Ben is cuckoo for silly bucks, and the price of tea in china is skyrocketing as we speak.
After thousands of hours of trading and coding and reading books and the whole thing, I know the setups I like to trade, what the edge I have in those trades are, and how to best utilize this info for my own financial gain. There is no ambivalence. That’s what separates it from normal TA on stocks, or scanning for any old criteria. The information you are screening for has to mean something, it has to have an edge. You cannot have a positive edge when the info you are using doesn’t give you one.
The compression breakouts and buypoints scan the market for the opportunities where I have an edge. I find the best ones, set a bracket order or two for stop out / profit targets, drink a large cup of black, coffee wait a few sessions, and collect coins / hit stops as necessary.
Obviously things rarely stay easy, right when you find yourself writing a post such as this, you get slapped back to reality, but hey, as long as you don’t ascribe to an idealogical trading model, then periods such as now when the market rewards momentum are great times to take on some risk, and provided you can take the risk off, you’ll be fine.
In honor of risk off trading here is a video where every single trade I made lately was a loser.
CLICK TO WATCH VIDEO
I tend to agree with the linked author’s points, at least with respect to how edges change over time, and how the POMO effect is waning. As soon as people were circulating the POMO schedule, the POMO effect would be more widely gamed.
Think of price in a vacuum. If few know about the POMO, they wouldn’t buy after the POMO, they’d buy before and sell into the POMO’s bid. If more and more traders play this, the edge will flatten because more people will be vying to get in early and sell to the POMO.
Edges changing over time is a very interesting topic and one I’ve been thinking about.
For example, there’s the recent subject of seasonality.
A similarity between this POMO example and Seasonality analysis occurred to me.
First a quick history. Seasonality trading began in the commodities markets. There was/is an actual lag time between “I need me some lean hog” and the actual raising and subsequent de-ribbing of a succulent pig. Same thing with orange juice or soybeans.
Coupled with seasonal differences in output, weather, what-have-you, speculators could buy ahead of a cold winter, or whatever, and thus you had seasonality trends. Similarly, there was gamesmanship among retailers who were known to generate most of the year’s sales/profits in Nov/Dec.
This begs two questions…
Is seasonality, at this point, a classic case of correlation confused for causation?
Similarly, if it’s widely known when the driving season starts, or that winter means more heating and thus more natty gas usage, or that retailers have big X-mas sales, how does that edge (if there is one) persist?
If other words, is it the season, really, that caused XYZ stock to rise, or is it whatever million other ancillary factors? Or can you point to a sector, or event related cause?
Since seasonality doesn’t include the order of data points, or the identification of outlier events, I argue that simply counting up months and down months will not give the real picture with respect to why the notable move occurred.
Here are my best devil’s advocate answer that yes, seasonality is a case of correlation confused for causation.
1.) The BP oil spill.
This was an ancillary event that decimated the whole entire sector, notwithstanding the flash crash incident occurring over the same period. It could have happened in August or November, but it happened in April. There’s no rhyme or reason to the timing of a sudden explosion, but forevermore, Oil related stocks will have big negative data points for April / May 2010.
Suppose you used seasonality analysis to justify selling short an oil related stock next spring, you’d be basing the trade on faulty premise, unless you believe the BP oil spill was a seasonally related matter.
Here’s BP, which fell 55% over two months:
And the Sub-sector BP is in:
And the whole energy sector:
Prices moved way lower.
One the flipside of the coin, we have the exact same period two years earlier, where there was a huge run in oil that ultimately topped out at 140 in July. This was attributed to hedgefunds chasing hot stocks, or the commodity boom, or whatever the ascribed reason was at the time.
Over that time, 10% of the 305 stocks in the Energy group (including all sub-sectors) went up over 50%.
Going forward from 2008 into 2009, the data would be skewed positive by events having really nothing to do with an actual month in time but with huge sector moves related to geopolitical events/political climates/hedgefunds.
Then, in 2009, we were coming off of a “generational low” in stocks.
Again, was it explicitly the summer season that caused the sector to rise nearly 19%?
Or broad market conditions, inasmuch that everything was ripping?
I believe these are valid points, that broadly apply to other months, sectors, and incidents.
If it isn’t the season, then is looking at seasonal returns, aside from being intellectually satisfying, worth it? With free time, sure. Why not. However the analysis is flawed.
What if, instead of seasonality, you just said “stocks in the 90th percentile of outperformance?” Then you could point to how over the past 11 months, they outperformed 90% of all stocks and therefore are “in season” and primed for a higher December, which already tends to show positive returns.
But that’s not seasonality, that’s called buying outperfoming stocks.
These are my thoughts I put them out there in the interest of discussion, I’d love to hear points/counterpoints to my argument. Since some people are quick to catch feelings, I’m not goading people who are making seasonal trades, and really could care less if one does (I hope they prove successful, in fact). Personally though, I don’t buy it.
Q is in an uptrend. For over a year. It’s doubled. Why not trade higher through December, it’s already moving in that direction?
Is it the last year’s worth of price action that portends more upside? Or the magicks of December?
Hopefully you guys see the comparison I am trying to draw.
POMO went from obscure to near-fully gamed.
If seasonality is known, and it is, it too will be/has been gamed such that there is not a strong edge.
If there is an edge, it is likely not caused explicitly by seasonality, but a coincidental sector or market in play. It would better behoove you to figure out which sectors are moving and trade stocks in that sector.
Further, the data mining involved will never show the order or actual reason for a move which as shown can be wholly unrelated to a monthly timeframe.
Less dots, less bullish.
Presenting a new indicator, Blue Balls*.
*Literally though, see the blue balls? Jokes in poor taste are sometimes the best jokes. But in reality this is three short term moving averages and 4 conditions that give you 4 balls as a measure of trend.
Bet let not the levity here fool you, only 1 dot and no blue ball means the market is not bullish here, per this measure of trend.
Late Night Update:
The other important point to consider is that momentum stocks are being rewarded by the market, as evidenced in the prior post. It is very rare that you have it both ways.
The way I am positioned in light of this is long 8 positions because they were the best of the best setups, for a total risk of 3%. The risk is so low because some of these positions are already in the black. The most I can lose is 3%. If the market looks weak, but momentum stocks are still moving well, it portends a bounce. With that premise, my current longs should trade up further.
Alternatively, the blue balls trend indicator is pointing at a bearish situation. All my longs are stopped out, I lose 3%.
As long as the momentum stocks are working, I’m inclined to trade them. One day of strong selling coupled with the bearish trend is all I would need to be fully negative on momentum stocks again.
This is an insurance policy for free. No hedging or puts. If we bounce, great. Money. If I stop out I lose money but I’m happy to lose because it would mean the market is likely entering a period that would be unfavorable to those positions, so why would I hold them in the face of that? That’s pointless, and it’s preferable to get out with small losses, when you know you’re wrong, which I defined for each stock prior to entry.
This AM before the open I posted my Top Actionable Ideas Video for the day. This is the list of stocks I will be trading / just bought. A welcome back from Turkey day gift, if you will, before the open, so you can position and consider if interested.
Out of those trades, here are the 1-day returns:
Today the S&P was negative for the day by -14%, and as low almost a percent.
This list averaged a 2.89% gain, outperforming the S&P by a pretty ludicrous margin. Again, you can watch the video linked above detailing my rationale or lack-thereof for each one.
Like I do everyday after the close, I do a post mortem analysis of the results of the list. Even if I don’t post this everyday, I do it everyday for my own review.
The purpose of these lists is threefold.
1.) It saves you time, because you are focusing on the top momentum opportunities each day instead of spending hours clicking through charts looking.
2.) All the symbols in the lists meet quantitative criteria shown to increase your edge
3.) Even if you were to apply no other analysis (not recc’d) you would improve your odds over random stock picking as evidenced today and on the other review days.
I chose not to publish the complete list, as mentioned, I thought I’d do just my picks, and judging from the response in the comments, it was a wild hit. I jest, I kid.
Anyway, looking at the raw lists and comparing them to the broad market:
370/975 or 38% of stocks closed positive.
38/975 or 4% of stocks closed up > 2%
11/18 or 61% of stocks closed positive.
8/18 or 44% of stocks closed up > 2%
6/12 or 50% of stocks closed positive.
6/12 or 50% of stocks closed up > 2%
Yup! Trounced the market. Much more important than that, however, is that they achieved their purported goals as stated #1-3.
How many can say that?! Very few.
At time of typing (11:15 PST) the S&P futures are up over 10 points, or nearly a percent.
Gaps of > 1 – 1.5 % tend to be gap and go days, not fill the gap days. Watch for a consolidation then a new high for a very easy intraday trade. I’ve made money on this exact trade to the upside and downside many times and will be watching for it tomorrow.
About two weeks ago I put out an article called BuyPoint Stocks to Checkout.
Everyday, after I run my Compression Breakout and BuyPoint Scans, I go through the list and generate my best trade ideas. This gives me a realtime entry into stocks exhibiting criteria actually proven to have an edge.
Again, the purpose of running these scans and making these Actionable Ideas lists are threefold:
1.) It saves me time, because I am focusing on the top opportunities each day instead of spending hours clicking through charts looking.
2.) All the symbols in the lists meet quantitative criteria shown to increase your edge. No apophenia here or paralysis from analysis.
3.) Even if you were to apply no other analysis (not recc’d) you would improve your odds over random stock picking as evidenced below and on the other review days.
How’d the picks pan out?
All good, all winners.
What’s the point of this?
Finding stocks with an actual edge giving you a realtime entry to low risk trades. Review points 1-3.
By sticking to this, I generate consistent winning trades, on the right side of the market. I understand each time why I’m taking a trade, and they are all my own. I know the entry, I know the exit, and I know why.
Then I review.
This is the process that makes you a better trader.