Well nothing too exciting happened last week, my volatility market indicator remained elevated though but overall the volatility clusters seem to be on a downtrend. Now that October is almost over we can “assume” that a Santa Rally will begin. I’m still net long and will continue to be that way.
Although I’m pretty Bullish right now, we shouldn’t assume that the Santa Rally will materialize. Who knows how much more of the subprime mess is hidden on balance sheets. Oh we have to remember that most of those subprime mortgages are starting to reset next year. I think my initial guess that we’ll see a housing bottom at the end of 2008 might’ve been too premature. I think 2010-2011 might be more realistic.
I know that October isn't finished yet but unless something crazy happens over the next two days, I'm pretty much done for this month. I traded early in the month and took some hits but I finished strong and continued to grow my trading equity to its former peak. I'll post my transaction sheet at the end of this week so you can follow along.
I decided to download about 40 years of data on the S&P500 and analyze how many times the index made an explosive leap higher. The reason I did this was because of something I read in The (Mis)Behavior of Markets by Mandelbrot. In his book, Mandelbrot states that something like only 10 trading days account for some of the largest moves in market’s history.
Although he doesn’t provide the math for his claim, I decided to look at the positive % changes in the S&P500 and graph them. I looked at how many observations I had for the time period and then compiled them into positive ROC groups. The largest observation for positive ROC was for moves greater than 0% and less than 1%, which makes sense since we see lots of smaller moves over time.
As the long tail moves out, we see less greater ROC moves, with only 7 large moves of greater than 5% and less than 6%. What I didn’t plot was one observation of a 9%
10% or greater move, so we even have one of those.
In my opinion, and contrary to trading advice, it seems that if you want to catch large positive moves (and inadvertanely negative moves too), you’d have to remain invested for the long term. Maybe there is something to be said about this “Buy and Hold” strategy! :)
Good Morning! Here are this week's Forex and Futures forecasts. The forecast indicates that the closing price for Friday will either be UP or DOWN from today's opening.
- AUD – UP
- GBP – UP
- EUR – UP
- JPY – UP
- CHF – UP
- Gold – DOWN
- Oil – DOWN
What's interesting to note that all the currencies are forecasted to close higher this week, perhaps the market patterns are revealing another interest rate cut by the Fed this week.
Any US Dollar cross in the Forex markets has been on fire lately. Just look at the EURUSD pair, we’re seeing $1.44 and my guess is that $1.45 isn’t too far behind. AUDUSD is trading at $0.91 with its eyes probably on parity.
Thank goodness for the Forex markets! It’s the only place to where I can trend follow the Dollar’s demise into oblivion (sarcasm). Just last night I put in a AUDUSD and EURUSD trade last night and sold half of my AUDUSD position this morning. End result, 57 pip profit. My EURUSD position is sucking wind however but I remain long as the trend remains up.
I’ll be posting my trend forecasts later today in the members section, thanks to all for your patience.
Update: I just sold my remaining AUDUSD position, sometimes its better to take the money and run!
I admit, I first liked the guy at first but as time goes on and the more I learn about the Gold Standard, the more I feel the “Maestro” is truly a scumbag.Â From his own words in a 1967 eassy:
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.[Gold & Economic Freedom]
In 1971 we left the Gold Standard and Greenspan went to work for the Federal Reserve. After everything he believed in and everything he railed against, he just sells out to a non-audited, non-elected governing board that can create money out of thin air.Â For all the guff he spewed about the dangers of fiat money, he sure forgot about that during his tenure as Chairman.
I think Ayn Rand is turning in her grave.
I haven't forgotten about my member section, I'm just insanely busy. I picked up a few side gigs that are demanding my attention right now. I'll still post my forex and future weekly forecasts as well as my S&P500 volatility timing model, just not the daily breakout scans. They've been temporarily suspended pending my time availability. Anyway, I'm posting an intraweek volatility check for the S&P500, as you can see by the chart to the left of this paragraph, we did have a nice spike this past Friday. Although the severity was less so than in August, it still was significant. Still the trend for volatility seems to heading lower again. That would be nice if it continues in that direction, Daddy needs a Merry Christmas!
I decided to take the chart of actual observed values of Nasdaq ROC over the past 10 years and apply a power law curve to it. I remember reading somewhere that Mandlebrot estimated a power law shape factor of 2.7 for cotton prices when he was first fooling around with fractals. I found that the Nasdaq has a shape factor of 2.87 that mimics the selloffs.
This curve makes sense to me because most of the selloffs are minor and reside in the 0 to -1% range. The biggies, like a -9% selloff are very rare and reside in the “long tail” section. This can work to your advantage, if you are a long term investor. You should be a buyer when you see a long tail selloff!
This makes me consider making a few changes to my S&P500 Volatility Timing Model. Hmm.
The markets have been very volatile lately, can you guess why? It starts with the letter “s” and ends with “prime.” In the midst of this selloff and rumors of a market crash, I decided to see just how volatile the Nasdaq has been over the past 10 trading years (255 trading days per year) and compared the actual results with a Monte Carlo simulation using a standard Gaussian distribution.
I came up with 2513 observations over a 10 year period of the Nasdaq (figuring in holidays and subtracting one observation to calculate a daily Rate of Change (ROC)) and surprisingly enough the “Black Swans” of the Nasdaq weren’t captured effectively by the Monte Carlo simulation.
The first bar chart to the left is the actual observations of the ROC for the Nasdaq over the past 10 years. The value on the Y-axis is the number of observations per the X-axis interval. A value of -0.01 on the X-axis indicates a -1% or greater move in the Nasdaq (by greater I mean closer to zero). The observations for -0.02 indicates the total number of observations between -0.01 and -0.02, and so forth.
If you look closely at the actual results, you’ll see the Nasdaq experienced 44 observations less than -0.04 (by less than I mean the observations between -0.04 to -0.09). By contrast, the Monte Carlo simulation chart to the left (using a Gaussian distribution) estimated 34 observations. Its close but off by 10 observations. Those 10 “out of left field” observations must’ve made some money manager cry that day. :)
You know, I don’t know but it sure looks that way. My volatility indicator went wild on Friday and the S&P500 made a huge bearish engulfing candle that ate up the last three week’s gains!
I’m still net long but I’m wondering if all this stealth inflation we’re having is beginning to affect the consumer. This will kill this market recovery (bubble) and force the Fed to cut rates even further. Lower rates = even higher inflation = further erosion of the buying power of the Middle Class. I’m starting to agree with Ron Paul that we should abolish the Fed and go back to the Gold Standard.
Sure the Fed can inject liquidity at the drop of a hat in case an economic shock happens (with a Gold Standard its harder) but being able to print money willy-nilly creates a global economic house of cards!
Printing money is a great thing if you want to bring down a Superpower like the Soviet Union, after all Reagen built up the military by printing loads of money. It’s also a bad thing if an emerging Superpower (China) starts buying all your debt.
It shouldn’t come as a surprise but my scanner didn’t reveal any breakout’s from Friday!Â Â Who knows, maybe today?
Friday was a BUY but I didn’t do anything. Nope, I’m not biting till we drop (if) to the low 1400′s. Somehow I doubt that this will happen and Monday is likely to open higher. The returns based on my indicator and timing system are still very positive for the year, let’s hope we have a nice Santa Rally after Thanksgiving!
Anyway, attached is this week’s chart’s in PDF form. If you have keen eyes, you’ll notice that nice volatility spike on the Volatility Chart. Then you’ll notice my indicator shoot through 1. Have a great week all!
SP500 Volatility Chart 101907
SP500 Volatility Indicator 101907