my philosophy/strategy

My philosophy…

They say “no one can time the market.”  I went to a top business school, earned my CFA, worked for some of the biggest and best Wall Street firms, and counted as clients 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 2009, it was out of frustration.  The 2007-2009 crash was explainable from an economic standpoint.  But, where were the warning signs that I and so many others had missed?  Was there an alternative to perennially bullish fundamental research?

I spent two years in deep dive mode, studying everything from Elliott Wave to Chart Patterns, Harmonics and traditional Technical Analysis. I tried to ignore 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 goal is fairly straight-forward: determine turning points in equities, fixed income, currencies and commodities in advance in order to capture most of the moves most of the time.

I use a combination of techniques, many of which are fairly well-known: chart patterns, Fibonacci patterns, oscillators, moving averages, Bollinger Bands, Ichimoku Clouds, and fractals/analogs.  I have also developed a few proprietary techniques which have proven their worth over the years.  Last, I focus on identifying algorithmic patterns which have become increasingly important in driving markets.

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

Many of them are rooted in technical analysis and chart patterns. A simple example would be a trading strategy based on moving averages (e.g. short when the 50-DMA passes below the 200-DMA and go long when it rises back above.) There are countless such rules in use, many of which are quite reliable.Quantiative models are also frequently driven by factors such as oil prices, interest rates, currency pairs and volatility.  They became such a useful tool in my equity analysis toolkit that, in addition to providing a foundation for macro strategy, they evolved into very appealing investing sectors in their own right.

In late 2011, for instance, the impressive resurrection of the yen carry trade in the wake of the Fukushima disaster played an important role in the recovery and rally in equity prices.  When USDJPY finally broke down, however, crude oil became a much more prominent factor. 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.


Knowledge is power

Those who bought AAPL at $200/share on Aug 1, 2018 when it topped $1 trillion in market cap after beating on earnings and revenue 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.At no point during that slide did I feel the need to panic or wonder when/if the bleeding would stop. I was equally confident in calling a bottom on Jan 2, 2019 when it began a 50% rally.

Those who had enough confidence in AAPL’s long-term value to to have held long lost only 3.6% between Nov 2018 and May 2019.  But, it was much more satisfying to gained 83% by shorting at 222 and going long at 144.

Not everybody is interested in making such directional bets.  But, even buy-and-hold, quasi-index investors such as the $7 trillion manager to whom I pitched my short AAPL idea in November might easily have benefited by optimizing the timing of their purchases and sales of their largest holding.

My approach isn’t foolproof; markets are frequently managed to bust the more obvious patterns.  I see each forecast as an if-then proposition (e.g. go/stay long if it tops a certain level or sell/short if it falls below a certain level.)  By using stops, this approach offers the opportunity to get most of the trades right most of the time — which is, after all, the objective.


Is right for you?

Traders can benefit from knowing critical price levels and turning points on an intraday basis. Buy-and-hold investors might appreciate being able to fine tune their purchases and sales.  Macro investors might wish to capitalize by optimizing shifts between sectors and asset classes.

Regardless of their approach, most investors enjoy knowing what’s coming down the pike.  Our members were prepared, for instance, for the meltdowns in July 2011, Apr 2012, Sep 2012 and May 2013 and the rallies that began in June 2012 or Nov 2012 (click the dates for the actual posts.)

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