Tuesday, December 29, 2020

When systems die: The Rise and Fall Richard Dennis

We have been cleaning files and came across the remarkable story of Richard Dennis and his turtles.

For those who don't know it, here is a good recap:

Salient notes:

When his experiment ended five years later, his Turtles reportedly had earned an aggregate profit of $175 million.[6] The exact system taught to the Turtles by Dennis has been published in at least two books and can be back-tested to check its performance in recent years. The result of such back-test shows a drastic drop in performance after 1986, and even a flat performance from 1996 to 2009.[7] However, a number of turtles (e.g., Jerry Parker of Chesapeake Capital, Liz Cheval of EMC, Paul Rabar of Rabar Market Research, Tom Shanks of Hawksbill Capital Management, Howard Seidler of Saxon Investment Corporation, Jim DiMaria of JPD Enterprises, Inc.) began and continued careers as successful commodity trading managers, using techniques similar, but not identical, to the Turtle System.

Dennis managed pools of capital for others in the markets for a while, but withdrew from such management in the spring of 1988 after his clients suffered heavy losses. In the Black Monday stock market crash of 1987, he reportedly lost $10 million,[8] with a total of $50 million reportedly lost in 1987–1988.[2] In 1990 his firm settled investor complaints of his failure to follow his own rules, for over $2.5 million, without admitting or denying any wrongdoing.[9] He also managed funds for some time in the mid and late 1990s, closing these operations after losses in the summer of 2000.

The trader conundrum:  your system can go stone cold dead, and/or you can stop following your own system, for a number of reasons.

Tuesday, December 1, 2020

VIX Follow Up

 VIX trended down to close the day before Thanksgiving at 21.25.

Saturday, November 14, 2020

Here’s Where VIX is Going - Option Pit

Here’s Where VIX is Going - Option Pit

I think we could see a 18-19 VIX by Thanksgiving.

There is potential,  that if things calm down and we get more clarity in covid we could have a sub 15 VIX before December expiration.

This is the most bearish volatility the VIX has been in 9 months

Tuesday, June 16, 2020

Trading and Persistence: the lethal combination

The Way of the World:  People with enormous persistence are usually rewarded:  they do hard things, go to medical or law school, build sterling careers, build businesses, become sports stars, etc.


Traders with enormous persistence -- get crushed.  The art of trading is to keep losses small.  This is exceedingly difficult for one with drive and ego, for one who doesn't like to admit they were wrong, and then worse, capitulate, take a loss.

Doctors usually have big egos, and are especially prone to failure as traders.  Ironically, doctors are attracted to market speculation like children to hot dogs on the Fourth of July.......it may be that there is a part of the brain that continually puts out the message:  "you know more than anyone else about everything....because you are a doctor."

Why these notes?  We heard the story of a doctor who made a killing shorting Wayfair.  The doctor projected it would go to 0, so kept shorting it at 80, then 40.  You know what happened next: rebound, 100, 130....now 200.  Last update was that the doctor was committed to a long-term short on the stock.

We told the storyteller there was no such thing as a "long term" short, stocks tend to rise over the long term.

We also relayed that a short position in a volatile stock should be covered with long calls.  That was about 100 points ago.  The trader, being a doctor, of course knew better.  "Nothing done," as they say in markets.

It's a sad story, and didn't have to be.

Tuesday, June 2, 2020

Rising market, sideways VIX spells

....potential for big drop, straight ahead, according to options guru, Mark Sebastian....

His words:

What you are seeing is a chart, on top is the S&P 500 rising all month...About 200 points.  
What you are seeing on the bottom is a chart of the VIX index over the same period of time.  
Over the last month it is lower.
BUT over the last couple of weeks we have seen the VIX index do NOTHING.  
For long time readers of mine, you know that one of the 4 major factors I look at in my traffic light is VIX correlation.
Right now VIX correlation is the only major indicator in VIX that is not in the Red, it is yellow.
I can have the traffic light be red with 3 reds and a yellow.
If we start to see the VIX actually rally (this is something that DID happen in February 2020 and in January 2018) then my stock market signal could quickly warn us of danger ahead by changing to yellow or even green.
VIX correlation is about as important as the structure of the curve when formulating my traffic signal.
With the run we have had, the disconnect between the real economy/ the stock market,  US-China tensions, AND civil unrest in the United States…
I think we have a tinderbox, we have thrown a BUNCH of matches at it and nothing has lit...YET!
We are pressing our luck.
The VIX Traffic Light is Red..Your Only Option,


Wednesday, May 6, 2020

Tuesday, April 28, 2020

Expert who called the 2008 crisis says the signal to sell stocks is coming soon - MarketWatch

Expert who called the 2008 crisis says the signal to sell stocks is coming soon - MarketWatch: However, former Goldman Sachs hedge-fund manager Raoul Pal said the dollar was the world’s “biggest problem” and that the signal to sell equities was coming soon.

He said the narrative that the Fed printing money would causes a dollar collapse was “very wrong.”

The chief executive of Global Macro Investor, who predicted the 2008 financial crisis, said: “You see the biggest problem the world faces is the dollar. We are in a vicious doom loop where slowing growth causes the dollar to rise, which causes slower growth, which causes the dollar to rise, as all borrowers play musical chairs to get access to the dollar to service debts.

“Dollar swap lines, QE, jawboning, etc. have done nothing to stop this,” he added in a post on Twitter.

He said no printing of money — by the Federal Reserve — would solve what he described as a “structural” problem. “All attempts to create more money to solve the dollar standard issue tend to devalue all fiat versus gold. Gold is rallying on debt deflation probabilities.”

Thursday, April 2, 2020

Risks of Legging In

Tom writes:

I was trading Iron Condors in the EUR/USD in 2008.

I had just started a new position and I got the calls on and the short puts, but the long puts didn't fill. It was the end of the day so I figured I would get them filled in the morning.


If you weren't following that currency pair, you might not be aware that the EUR/USD moved down seven standard deviations in a single day.

Because my long puts were not in place yet, I had a terrible loss.

I considered this a great learning opportunity. Here are a few lessons:
  • I vowed never to partially fill a defined-risk trade without the long puts in place again.
  • If I trade at the end of the session, I make sure I have no unintended short options.
  • I am more aware of the true risk I am taking. I don't over leverage SPAN margin.
  • I learned the value of having a portfolio hedge in place
See aeromir.com for more.

Tuesday, March 24, 2020

Bill Ackman Buys SBUX, LOW, HLT, BRK in $2.5 Billion Recovery Bet - Bloomberg

Bill Ackman Buys SBUX, LOW, HLT, BRK in $2.5 Billion Recovery Bet - Bloomberg: Activist investor Bill Ackman said he has made a “recovery bet” on the economy, investing $2.5 billion in equities, including upping his positions in several of his portfolio companies and reinvesting in others like Starbucks Corp.

Sunday, March 22, 2020

The Thinking on Closing the Markets

Coronavirus News: Philippines Is First Country to Shut Markets - Bloomberg: The Philippine stock exchange chief said he plans to reopen the $188 billion market on Thursday, seeking a quick resumption of trading after the country became the first to shut financial markets in response to the widening coronavirus pandemic.

We spoke to a savvy market veteran at TDAmeritrade last week, and he said he thought it was considered here, but that U.S. officials did not want to allow other markets to dictate our prices.  So the concept of market close in a nutshell:  either everyone stays open or everyone closes.  Since other markets wished to remain open, so did the U.S.

Saturday, March 21, 2020

Looking for the lows that no one knows: 2280, 2137, 1900, 1600, 800

A savvy market observer wrote yesterday that the Spanish Flu, 1918, took the stock market down 37%.  "And this isn't the Spanish Flu," he wrote.  He has turned bullish.  Is he right?  Too early?  Dead wrong?  No one knows.

So.  Let's do some math.

Our recent high came just a relative few days (and 100 light years of consciousness) ago @ 3393.52, Feb. 19, 2020.  Just 31 days ago.  What a difference a day makes.

19-Feb-20 3,380.39 3,393.52 3,378.83 3,386.15 3,386.15 3,600,150,000

A 37% down move would take us to 2137.92.  We've already come pretty close.

Two days ago, we saw:

18-Mar-20 2,436.50 2,453.57 2,280.52 2,398.10 2,398.10 8,755,780,000

We weren't around in 1918, so can't comment directly, but in this age of 24/7, instantaneous news, and infection, recovery and death counts posted in near real-time courtesy Johns Hopkins for everyone to see and mull over, and fear, this feels worse.  The near-nationwide shutdown....also "feels" worse, hard on the psyche.  How will freedom-loving Americans fare, being in solitary or near-solitary confinement for a couple months?  Time will tell.

And then there's the entire matter of not enough hospital beds, not enough supplies, risks to our health workers -- truly apocalyptic.  To go from fat and happy to thoroughly stressed out -- in just 31 days.


To this observer, market will go lower than 1918-1919 lows, i.e., a bottom at 1600-1900, near 50% off (1696.76) to be exact, might absorb the horror.  For now.

Few things in our favor:
  • Most recover, though the "this isn't too bad" early descriptions seem to have fallen away
  • Death rates vary, but 1% seems average
  • Treatments being devised
  • Vaccine work being fast-tracked.
After it gets its footing back, the market will play "where the puck is going to be, not where it is.  So once the market senses the apex of the horror is already here or just ahead, (and things will get much, much worse in the next 14 to 28 days), engines will reverse hard.  They are variously talking about U or V shaped bottoms.

There will be a respite, but one perhaps with residual masks, gloves and "social distancing."

The real question comes in the fall. Spanish Flu took a toll in the spring, abated into the summer, and came back with a vengeance in the fall.  Is a similar fate ahead?  That might bring the market to three-digit levels, e.g., 800, a 75% decline.

In closing, nothing would please me more to be wrong about every word here, and that the situation miraculously reverses and in lightning speed.  To see so many suffering, and to fear that will be your own fate, is mentally wearing.

Stay safe, stay in, use the time as profitably as you can, keep faith and trust in the Lord, be of good courage, and here's hoping we all get through this together.....

Wednesday, March 18, 2020

History of the trading curb

Trading curb history from Bob Pisani, CNBC: It was 1997 and for the first and only time, systemwide circuit breakers shut the market before the official 4 p.m. close.

Wednesday, March 4, 2020

Great Quote

“I have long believed that bad investors think of ways to make money, and good investors think of ways to not lose money.” Steven Sears, StratiFi, formerly writer/editor of the options column, The Striking Price, Barrons.

Friday, February 21, 2020

How is the Value of the SP500 Calculated?

How is the Value of the SPX calculated

Free-Float Market Capitalization Methodology

S&P details the mathematical calculations of its free-float market capitalization methodology to lend transparency to its reporting value.
The calculation for the S&P 500 is:
\begin{aligned} &\text{Index Level} = \frac { \sum_{i = 1}^n P_i \times Q_i }{ \text{Divisor} } \\ &\textbf{where:} \\ &P_i = \text{Price} \\ &Q_i = \text{Free-float shares} \\ \end{aligned}

Monday, February 17, 2020

oftwominds-Charles Hugh Smith: The Fed Has Created a Monster Bubble It Can No Longer Control

The Fed Has Created a Monster Bubble It Can No Longer Control:

Advances that recently took years now take months. The 700 point advance that required 4.5 years back in the previous bubble of 2003-2007 now required only 4.5 months. The next iteration is 700 points in 4.5 weeks, then in 4.5 days, and then the oblivion of collapse.

Tuesday, January 28, 2020

Not an Option Wizard: Avenatti Googled "Nike Puts," ‘Insider Trading’ Before Nike Meeting

Avenatti Googled ‘Insider Trading’ Before Nike Meeting: (Bloomberg) -- Celebrity attorney Michael Avenatti did internet research on put options and insider trading before trying to extort millions of dollars from Nike Inc., federal prosecutors told a judge.Lawyers for the government on Monday told U.S. District Judge Paul Gardephe in Manhattan that they intend