my philosophy/strategy

My philosophy…

They say “no one can time the market.”  I went to a top business school, worked for some of the biggest and best Wall Street firms, earned my CFA, dealt with some of the largest institutional investors and most sophisticated consultants in the world.  I can’t remember anyone ever advocating market timing.  Clearly it must not work, right?

When I returned to closely following the markets in 2010, it was out of frustration.  The 2007-2009 crash was explainable from an economic standpoint.  But, where were the warning signs that I and many others had missed?  Was there a better way than watching the perennial cheerleaders on CNBC and reading the fundamental tea leaves?

I spent a year in deep dive mode, studying everything from Elliott Wave to Chart Patterns, Harmonics and traditional Technical Analysis. I tossed out most of what I (and, nearly everyone on Wall Street) had been taught, and focused on what would have worked if only I had been paying attention.

In the end, I found a combination of outside-the-box techniques that made sense. On May 2, 2011 I published my first forecast, suggesting that a major turning point and significant decline was at hand.

Price target if the longer term wedge plays out is 46 – 100% of the rise, indicating 320-700 points on the SPX. Rising wedges can and do fail to break down as predicted, but given the presence of long term resistance (20+ years, no less), the Fibonacci and what looks like topping MACD and RSI, my money’s on a significant decline.

As it turned out, May 2 was the 2011 top.  SPX declined 296 points, most of it in a vicious twelve session plunge that an analog I developed two months earlier forecast to the day and the dollar.  It was an otherworldly experience, watching the talking heads gnash their teeth over something that was “completely unpredictable” when we had predicted it so precisely months in advance.


Sure it works in practice, but will it work in theory?

My strategy is fairly straight-forward: focus on determining where markets are going (the hard part) over the next few hours, days or weeks and invest accordingly.  That means being direction-neutral; not caring whether the market is going up or down.  Be on the right side of it and capture most of the moves most of the time.

We can question whether stocks should be going up.  But, there’s no profit in shaking your fist or screaming at your computer.  Invest according to what stocks are doing and square it with the Grand Unified Theory later.  Using the above tools can be quite helpful.

The trick is in figuring out when they will work and when they won’t.  As everybody knows, the Fed, BOJ, BOE and ECB became increasingly involved in equity markets beginning in 2009.  There have been times when it was very difficult to make money shorting stocks and one was much better off following momentum and buying the dips.

The key was in studying how central bankers and their proxies move markets. In the early days, it was through very expensive blunt instruments such as QE: flood the markets with trillions of dollars and stand back. As the years went by, however, the tools became much more sophisticated and precise.

Only 10% of trading volume is conducted by fundamentally-driven, discretionary traders according to JPMorgan estimates. This means that 90% is passive or quantitatively-driven. The passive activity is, by definition, trend-following. Quantitative techniques such as Risk Parity, Smart Beta and Factors, vary greatly in their execution but are generally rules-based algorithms.  That is, they make purchase/sale decisions by interpreting data they collect.

A very simple example would be a trading strategy based on moving averages (e.g. short when 50-DMA passes below the 200-DMA and purchase when it rises back above.) There are countless such rules in use, many of which were quite reliable until 2015.

In 2011, for instance, we saw the impressive resurrection of the yen carry trade in the wake of the Fukushima disaster. Between October 2011 and February 2016, equity prices were driven largely by changes in the value of the USDJPY.

Between February 2016 and October 2018, crude oil became much more important in driving equity prices.  Other drivers have included moves in the bond markets, equity futures, VIX and that old standby: comments made by central bankers and politicians such as Jim Bullard’s timely suggestion in 2014 that the Fed should delay ending QE.

The premise is straightforward: instead of spending hundreds of billions on buying up the overall market, give the market a strategic nudge when necessary by manipulating the drivers of the algorithms (usually, a few billion…tops.)

In October 2014, for instance, SPX had plunged 200 points and was backtesting a critical level of support.  Bullard’s comments, which should have weakened the US dollar and sent USDJPY tumbling, were accompanied by a massive spike in USDJPY.  SPX had no trouble holding the important support and went on to make new highs within two weeks.

Studying how these tools are used has allowed me to essentially reverse engineer them. Quite often, I am able to accurately forecast equity price movements simply by evaluating what the prospects are for the algo drivers.

Equally interesting, the drivers themselves can be forecast quite accurately based on the presumed goal for equities. For example, if SPX is bumping up against overhead resistance and oil has topped out due to inflation concerns, I would expect one of the other drivers to help get SPX over the hump. This has enabled outstanding results in forecasting oil, gas, USDJPY, VIX and bonds.

I use these techniques every day and they rarely disappoint. In addition to providing outstanding trading signals, they prove quite useful in formulating longer-term macro forecasts. Calling a top in oil and gas prices in October 2018, for instance, allowed me to forecast the next leg down in equity prices, inflation and interest rates.


Making good decisions, ditching bad ones

If you bought AAPL at $200/share on Aug 1, 2018 when it topped $1 trillion in market cap after beating on earnings and revenue, you would have been thrilled as it rallied 16% over the next two months.

On Oct 3, the same day that oil and the overall market turned, AAPL topped out at 233 and began a precipitous decline that didn’t stop until reaching 142 — a stunning 39% decline to levels not seen since April 2017.

During this period, there was no shortage of talking heads discussing the average selling price of iPhones, the company’s guidance, Tim Cook’s sartorial choices, etc.  But, at no point did I hear anyone discuss the August breakout, the subsequent breakdown, the well-defined falling channel or the important Fibonacci and channel target that awaited at 144.48.

We documented and/or anticipated each of these very significant events, calling for a short position on Nov 1 at 222 and charting the 144 target on November 14 when AAPL broke below 194.I rarely advocate long option positions. But, on Dec 21, I sent the text below to a friend. I didn’t know at the time, but he was long 1,000 shares in his personal account.

Those 80 cent puts reached 9.55 three days later and 9.61 on Jan 3 when AAPL reached 144.48.  Pretty cheap protection and/or a pretty profitable trade, depending on your point of view.

At no point during that slide did I feel the need to panic or wonder when/if the bleeding would stop. The only thing more enjoyable than avoiding a correction is profiting from one.

My strategy isn’t foolproof; markets are frequently managed in such a way as to “bust” some of the more obvious patterns.  But, if you use stops and don’t get emotionally attached to a viewpoint, you have the opportunity to get most of the trades right most of the time — which is, after all, the objective.

Epilogue: The same day I recommended those puts to my friend, I gave a presentation to some very smart analysts at one of the biggest money managers in the world.  We’re talking trillions. They have a 12-ft high-def plasma monitor that cost four times as much as my first house. I shared my AAPL forecast and sat back, waiting for them to rush out of the room to place sell orders. They couldn’t.

Like many huge money managers, they’re prohibited from shorting stocks. Quickly dumping a bunch of AAPL shares, at the time the largest capitalization stock in the world, would have been nearly impossible.

They are typical of the 90% of investors discussed above who, whatever happens to the market, are along for the ride. While the Fed and Apple’s buyback program might ultimately restore the stock’s $1 trillion market cap, I sleep better knowing that I can step aside and avoid the next 39% decline.


Is right for you?

It depends on your goals and how much time and effort you want to devote.

If you’re a day trader who wants to know critical price levels with input on Chart Patterns, Harmonics, Analogs, RSI Channels and traditional Technical Analysis — we’ve got you covered, especially if you want to learn the techniques and not just get an occasional trade message.

If you’re a swing trader who wants to stay properly positioned relative to key patterns, Fib levels, etc., I post a “Current Forecast” page that outlines my current orientation.  The daily posts provide more detail and are the first to be updated in the event something changes.

If you’re a buy and hold type, you might still benefit from this site.  Wouldn’t it have been nice if someone had told you in advance about the meltdowns in July 2011, Apr 2012, Sep 2012 and May 2013 or the big rallies that began in June 2012 or Nov 2012?  Our members knew (click the dates for the actual posts.)

Again, I don’t get them all right.  No one can.  Some forecasted downturns never materialized, and some rallies fizzled sooner than expected.  Again, my goal is to be right on most of the moves most of the time and not get worked up over the inevitable misses.   Good luck, and good trading!

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