Neural Market Trends

Via CNN. I love the "stealth stimulus" term which is probably code for bank bonuses.   

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After having 8 of my 12 open stock and ETF positions stopped out this week, I'd say the market is starting to roll over.  It could be because of Obama's bank tax or something else.  Who knows and who cares!

All I know is that my trend system took me out as it was designed to do.  Of course it was sooner than I expected but I guess that's the way the cookie crumbles.

I got my ass spanked in the markets over the last year.  My 401k portfolios are surviving after some severe drawdowns (25%) between 2008 and 2009 and my trading capital in my Forex and Stock accounts got destroyed.  Luckily it was only risk capital, money I could afford to lose, but it still hurts anway.  So what did I learn from this hell of a market?  I learned that I’m not as smart as the market and that I tried to second guess it too much.  When times were good my system worked, when times got bad It hammered me. 

Perhaps the biggest thing I learned in this market crash is that nearly all my neural net trading models FAILED.  Yes, the models that were designed to alert me to impending market doom failed for the most part.  My volatility and timing model did OK but they had some major issues as well which I’ll discuss below. 

So today’s post is really a cathartic one for me.  It’s a mea cupla of sorts, a post in which I take my lumps and start to exorcise my trading demons.  It’s about the things I did wrong over the past year and hopefully a reminder to never repeat again.  Plus, it’s another way to ease myself into trading and posting to this blog again. 

As I rebuild my portfolios in 2010, I expect not to solely rely on neural net models again.  I realized that in a crazy market, neural nets can’t adjust fast enough.  As the market was crashing, my models were generating BUY signals when the market was obviously telling me they were wrong.  If only I had listened to the market instead of the models!  I learned that my biggest mistake was something called “confirmation bias.”  I wanted to believe what my models were telling and I traded accordingly.  Why?  Well it always seemed to have worked in the past, so why should this time be different? 

By the time I realized that there was a discontinuity between what the market was TRYING to tell me and what my models were generating, it was too late.  I had to unwind many positions at a big loss. 

I also made some severe psychological mistakes like not following strict money management rules and getting caught up in the market hype.  I thought it would never happen to me but it did.  In the end, I loosely followed money management rules and leveraged myself too much.  I didn’t honor all stops and threw caution to the wind.  In the end, I got what I deserved.

However, a few of my models performed OK.  My market timing and volatility models held up surprisingly well in the face of this Armageddon. A few wheels came off of them when the $VIX hit 80+ but it managed to generate signals at all upcoming market inflection points.  The problem with the timing model was that it generated too many BUY signals, not necessarily at the wrong time, but not at the optimal time.  The timing model hit all the turning points in the market but it couldn’t differentiate which ones were the major ones, the ones where I should’ve moved more money into the markets.  

So I got trapped in positions that in a normal market pullback made sense, but not in a market crash.  As a result of this shotgun approach, my 401K is up 20% for they year, as opposed to the 60% that the market has rebounded too.  Oh well, I guess I’ll have to refine or rebuild those models. 

This learning lesson doesn’t mean that I’m abandoning neural net models completely, I’m just reassessing how they’ll fit into my overall trading system.  I’m also sticking with a trend approach to trading but severely simplifying it.  I’m not as smart as the market and why should I spend time building sophisticated trend models when I can just look at Price and Volume, and trade accordingly.  I will listen to what the market is telling me and avoid the hype in the news.  Money talks, Bullshit walks.

In the end, this market crash taught me many BIG lessons and that I’m taking to heart.  I’m a bit older and hopefully wiser now and look forward to a new year, filled with trading opportunities no matter if we’re in Depression, Recession, or Bull Market. 

In closing this post, I wanted to thank all my readers who stuck around.  My feedburner stats have keep relatively stable since I posted about closing down this blog.  I do plan on returning to posting in 2010 but the frequency and content is still up for grabs, and I plan on providing a separate subscription service (separate newsletter of sorts) in the future. 

Thanks for reading.  I want to wish each and every one of you a Happy Holiday season and a Happy New Year, may 2010 be profitable for you!

Everyone is so hoping that the market is bottoming because they all want to recoup their losses from last year, especially us 401k holders.  For some strange reason, corporate profits appear to be beating expectations and everyone is hoping (wishing) that the market has bottomed and turned the corner.

“Corporate profits are beating expectations by their widest margins in a year, pushing most equity markets within a whisker of new year-to-date highs and the dollar toward its 2009 lows,” John Normand, head of global currency strategy at JPMorgan Chase & Co. in London, wrote in a research note. [via Bloomberg]

What everyone forgets is that these corporate earnings, especially if you are a bank, are based on the backs of the American taxpayer and bailouts. Sure some corporate earnings are legitimate but most of these earnings defy common sense and logic.  That’s why the US Dollar is heading lower, we’re going to destroy our greenback at the expense of trying to stabilize the markets with phony earnings.

Call me an old cranky fart but we’ll be in for one more decent run in the S&P500 before it takes another big dump.  Things are lining up for a classic short squeeze where we’ll see the S&P500 run up between the 1131 and 1210 levels. This time I’ll be dumping before that and rotating some of my recent 401k profits into cash, waiting for the capitulation in the markets (which hasn’t happened BTW) to go on a buying spree.

I was, and still am, against any governmental stimulus plan.  The plain and simple answer as to why is because they don’t work and usually create noise in the economy.  The only way things will get better is when the mal-investment is worked out of the system and assets flow from the weak hands to strong hands. 

Now with talks of another stimulus plan floating around, on the heels of this year’s $787 Billion stimulation, I can’t help but wonder if we would make the same mistake twice?

The stimulus plan passed in February “is executing pretty much as expected,” yet it “won’t affect the economy’s primary problems, which are falling values of assets like homes and stocks,” said Doug Holtz-Eakin, who was director of the Congressional Budget Office from 2003 to 2006 and is now president at DHE Consulting LLC in Washington. [via Bloomberg]

Executing pretty much as expected? Wait, and it won’t affect the economy’s primary problems?  Why the hell should we dream of stimulating a second time? 

Want to know how to really help the situation and truly firm up the economy FAST.  Have the government bailout all middle to lower class residential property owners by forgiving their second mortgages.  A large chunk of foreclosures will go away immediately, people will have debt relief and the ability to spend again, and all those subprime portfolios will start to perform again.

I agree with fund manager Mobius that derivatives are a bad thing but banks love them because they make a lot of money from them.  The problem I see is that all the recent acqusitions of failing derivative portfolios (Bear Stearns, Lehman Bros) by other firms, such as JP Morgan, allows fewer and fewer firms to have more and more derivatives.  All you need now is one large financial institution to go down and you’ll drag the entire system down.

Here’s what Mobius has to say about derivatives:

“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” he said.

Remember, too big to fail is very dangerous because large complex systems have to fight really hard to remain organized in the face of some large negative events.  In Nature, the more complex and organism is, the quicker it can destabilize.

Regarding the stimulus money.  First off I love the stimulus money because my engineering industry is benefiting greatly from it and its preventing a lot of my friends from being laid off.  However, the long term danger I see is that we’re either going to create another inflation boom or spend ourselves broke, maybe both.

Here’s what Mobius as to say about being stimulated:

A “very bad” crisis may emerge within five to seven years as stimulus money adds to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.[via Bloomberg]

Most likely he’s right but I’m not too sure about the timing of it.  I guess we’ll have to wait and see.

I came across a Bloomberg article that I found absolutely tantalizing. Apple Inc. is forcing Chinese companies that make their Ipods and other products, to pay workers overtime that they deserve.  It seems that some Chinese companies routinely agree to pay their workers overtime when they negotiate with Western partners but then "forget" about it.

Apple Inc., which relies on Chinese manufacturers for its iPhones and iPod music players, found 45 of the 83 factories it audited last year didn’t pay proper overtime and 23 provided less than minimum wage, according to its 2009 progress report on supplier responsibility. The Cupertino, California-based company required them to adjust practices to ensure correct payments, it said in the report. [via Bloomberg]

Almost half of the companies that Apple deals with have been promising to pay overtime and then scamming their employees.  Now Apple is getting pissed and forcing those companies to make good on their promises.  I suspect at first the companies won’t comply so Apple will have to pull out and move their manufacturing elsewhere.  Once that happens, the other Chinese companies will likely comply rather quickly.

Everyone always complains that China is too strong, have crappy products, poison their food, and manipulate the world politically and economically, forget that we feed them lots of money for their products. If you hit them in their money belt, just a wee bit, they’ll listen really fast and do whatever it takes to earn your money.