Investing and Trading Decisions

Most professional and non-professional trader/investors do not have a clue on how to look at market data and make choices without cognitive biases rationalizing insignificant information.

Investing is not easy. Improving the probability of success in trading and investments requires having strategies which are adaptive to price direction. Shortcuts and attempts to simplify wealth management by herding investors into passive ETFs is part of a narrow approach.  Broader more adaptive algorithmic solutions improve the probability of success.

The lack of success of most investors is due to perceptions of risks and misconceptions on how they apply to investments. Most investors are risk adverse. They would rather avoid a loss than seek a gain. Most investors act as if small risks are the same as big risks. This near proportionality identifies the flaw in modern portfolio theory where notions of market efficiency expose investors to large downside events.

Stock and Interest Rate Markets

Where are we.  Stocks, interest rates. 

Still uncharted territory as far as Fed intervention.  Bears in both markets have been repeatedly face planted and have had to rely on global macro events to rescue them from bull charges.

Somethings are obvious however and consumers have developed a supported bias where they perceive the future economic world to be one full of jobs that don't pay.  Economies of declining opportunities blunted by advancing technologies reshaping traditional employment.    

Random events will intersect at the point of where investments seeking return will reach well beyond where risk has value.   

Volatility like 2011

There is a similarity between our strategic model performance currently and that of the same period in July - August 2011.  In 2011, the SP500 had started out at 1253, ran up to 1373 in the first week of May only to fall over 21%  to 1077 into the first week of August.  While the volatility is not nearly as dramatic as 2011, strategic model performances can pick up patterns in price discovery where chart patterns look comparatively different.  

The pick up in recent volatility may have to do with the potential significant impact anticipated from the Jackson Hole conference stating August, 21. 

Back in 2011, the market had rolled over and was gaining downside momentum.  Bernanke's speech from the conference then was the hand tipping in front of the Fed's September move in what would come to be known as Operation Twist.   And while the markets initially reacted negatively to OT, new lows (1068), that low became the foundation of the current rally. 

Yellen is facing a different market with much higher price levels in the SP500, yet she has used much of the same dovish analytics as Bernanke did back in 2011.  Rates at that time had just fallen to around 2% in the 10 year so the game of choice in yield then as now favored equities. 

Look for volatility to pick up with swings from one end of the range to the other beyond Yellen's speech.  Direction will come in October.

Where you should be on your investment return today?

Markets have been tentative with a big bear tease going on since July 24th.  Global events beating up the bulls but any good news brings in short covering.  The underlying bid has been there just like the past which shows continued interest in owning the Bernanke/Yellen carry trade. 

Hedge boys continue to have tough time in general. 

So where should you be on each $20,000 slice of your investment equity index pie; net +30% to +45%.

CoverRisk, the business arm of QRiskValue and this blog says that it where you should be, not much different than the last 6.5 years.  

Q8 Latest

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	95.12	15.00	565.07	169.42	187.10	43.08	16.87	28.41
Change	-0.47	-0.05	-8.08	-2.27	-2.54	-0.29	-0.15	-0.34
YTD	14.97	-0.57	4.72	-7.84	-0.47	5.67	1.44	-2.22
%YTD	18.68%	-3.66%	0.84%	-4.42%	-0.25%	15.16%	9.33%	-7.25%

Q8 once again has 4 of the 8 stocks lower on the year with GOOG hanging on.

Only two of the Q8 currently underwater though 2 others just hold on the upside. 

Bottom section shows where buying $20,000 of each of the Q8 last trading day 2013 would be as of today.  CoverRisk looks at segments of the market in terms of per unit risk margin or capital. Site soon available to non subscribers.

Rally Problems

Five out of the eight stocks of the Q8 are now lower on the year despite the S&P 500 on all time highs.

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	91.81	15.51	549.91	168.96	183.58	41.48	16.78	29.55
Change	-0.38	-0.14	-3.46	-0.90	-0.02	-0.17	-0.05	-0.16
YTD	11.66	-0.06	-10.45	-8.30	-3.99	4.07	1.35	-1.08
%YTD	15%	0%	-2%	-5%	-2%	11%	9%	-4%

VIX Bear Action

VIX on the monthly charts is currently at the third lowest closing point since January of 1990.  The VIX is never really good at measuring anything other than bear stress levels.  It does demonstrate the out of selling ammo condition the market seems to experiencing.   Going up lightly offered is the current mode with inter day selling coming from option maneuvering into the futures as well as some hedging positions.   Otherwise don't under estimate the damage that has been done to the option environment as every downside reach point and all upside readjustments have been re scripted.   Little priced now for a no net circus accident. 

Q8 June 5th

Q8 Latest Performance as of 14:15 Central

	AAPL	BAC	GOOG	GS	IBM	MSFT	F	PFE
Last	645.96	15.44	554.86	162.96	185.96	41.15	16.67	29.74
Change	1.14	0.23	10.20	0.57	1.45	0.83	-0.13	0.10
YTD	84.94	-0.14	-5.50	-14.30	-1.61	3.74	1.24	-0.89
%YTD	15%	-1%	-1%	-8%	-1%	10%	8%	-3%

Markets Inching

Over the coming years, the Bernanke and Geithner era will be studied as much for it failures as it will be for its successes.  One cannot help but feel they have unleashed a mechanism distorted by the carry.  A constant supply of money turned into risk capital as returns needed to beat inflation and competing fixed income benches have a extremely low bar.

Markets are always unpredictable and the mechanics in place are rarely perceivable.  Current daily low volumes and ranges remind me of years ago in the pits where the adage was never sell a quiet one.  No one is sure of the score on that rule but quiet moves inching on daily new highs or new lows usually explode into wild stop-loss ranges.  Reversals dwell on those explosive days and just when victory is claimed from the momentum side, the battle is lost.