"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Thursday, May 14, 2009

Market Commentary: Back to Fear?

Market sentiment can change quite rapidly these days. We saw that on March 12 2009, when the S&P turned and started rallying 37% in nine weeks. The speed of mood change was simply astonishing. I'm not surprised, since the market to me is a manic-depressive alcoholic, who considers the (whiskey) glass to be half full on one day and half empty on the next.

It is quite interesting for me to observe that certain headlines seem to dominate during distinct market moves. I try to distill certain "dominant trading themes" from the news and subsequent price action. These themes can usually be tagged with simple psychological attributes such as fear, panic, hope and mania. Uncertainty plays a big role when trying to determine if e.g. a "hope" rally has the potential to last (as long as there actually IS uncertainty, we can expect the market to move up, "buy the rumor, sell the fact").

I added the dominant trading themes to following chart with recent price action:

The market might fall back into depressive mood again. A negative outlook is justified, given all the recent economic data. There are simply no signs of a recovery. Many leading economists have warned in recent weeks that we are nowhere near a bottom. Yesterdays reaction on the weak consumer spending data showed that 10%+ US unemployment rate is not priced into stocks. More warning signs:
- housing prices keep declining

- mortgage rates started to go up again(!)
- commodity prices keep going up (are we seeing the first signs of inflation here, despite weak
economy? I wouldn't be surprised to see the stagflation word coming up soon in the press)
- China: are they buying all these commodities? Are they actually converting their dollar holdings to oil, soybeans and all the other stuff because they don't trust the Dollar anymore (scary thought)

- earnings were NOT possitive: companies did beat earning because of cost reduction, not on revenue!

From a technical standpoint, the S&P is close to strong support at 875. Should we brake that, I will definetly trade from the short side. Until then, I try to stay market neutral.

Sunday, May 3, 2009

Beauty in Nature and Trading

One of the most powerful invention of Nature is the concept of Beauty. According to Wikipedia, Beauty is "a characteristic of something that provides a perceptional experience of pleasure, meaning and satisfaction". Nature created the concept of Beauty to make it is easy for creatures to find a mate with superior genes. When looking for a mate, the entire selection process becomes more efficient. The beautiest one gets the most mates and can spread his genes.

For some reason, the concept of Beauty also seems to exist in trading. The following chart is an example of a "beautiful" stock:

We can recognize very clear structures and follow-through moves. Here is an example for an ugly chart:
Trends are changing often, The concept of support and resistance seems to be almost absent, gaps a frequent.
I have no idea, why some stocks tend to move in nicer structures than others. Maybe it has to do with the relative number of short term traders vs. long term investors in a stock. Or the style of the few key traders, who drive a stock on a day to day basis. For a discretionary trader, it is perfectly fine to incorporate Beauty into the decision making process. The concept of Beauty is another reason, why I do not believe in mechanical trading systems: it is extremly difficult (but not impossible, you maybe could use a neural network to find an astetic chart, and then use some basic trend following to trade that stock).

Friday, May 1, 2009

Bumpy Ride

OK, we expected the market to get a little bit bumpy around 875. Upward drift (note: I don't use the word "trend" here) still intact, though. Sellers obviously come in at that level. I don't believe they are strong enough, but price action will tell us the next days. Also note that the up drift is accelerating since two days: