Trading bot results for today: -1.91% (S&P 500: -4.78%) My concern has been validated today, a huge down day for the markets. The trading bot fared very well on a relative basis, but my discretionary position trades have gotten hammered. Most of the profits on my EUR/AUD short are gone, and I am now underwater in AGQ. I'm not adjusting these positions at the moment, but I do have another chunk of money (around $2.5k) on the way to my account. I will probably just hold the cash to backstop the EUR/AUD carry trade for the time being. I'm not anxious to be a buyer because I want to see how the market bounces. We might be nowhere near a bottom. I expect much higher yield from corporate bonds before this downdraft is over. My business partner and I spent the afterhours assembling a few new trading systems to go live tomorrow on the bot. They are just variations of existing systems, but give us a little extra diversification. We have reduced the capital that some of our similar existing systems earmarked to make room for these new variants, so the net exposure won't change much.
Closed out the EUR/AUD short at 1.3574. Call it capitulation if you want, but it a winner was about to turn into a loser for me, and volatility just keeps on rising. I don't want the uncertainty right now. So, result is no leverage in my portfolio now, and I don't need to use the capital inflow as a backstop anymore so I can put it to use buying something cheap
Here is an assessment of the market that will be the basis of my discretionary trading decisions for next week. Note that the trading bot operates in its own separate account, so none of the trading decisions that come from this analysis will have anything to do with the daily trading bot results I post here. Factor: VIX is 32 and just slightly off its highs for the move. I have no reason to suspect it has topped out. Factor: JNK yield over the past year at the current market price is 9.987%. With gold being up between 20% and 30% YoY at almost all times for the last decade, HY rates are far too low to compensate for the extra risk over bullion. And with short treasury rates at 0%, monetary policy is far too loose to reverse the gold trend. I am expecting much higher HY rates (and by implication, a much lower stock market). Factor: IEF yield over the past year at the current market price is 2.857%. This is a much lower yield than a few months ago. Short rates are basically 0, thus steep yield curve and loose monetary policy. Factor: Spread between JNK and IEF (junk bonds to 10 year treasury "credit spread") is 7.13%. When volatility is very high and this spread reaches close to 10%, historically it has marked a good time to buy HY. We are not close enough by a long shot for me to be an aggressive buyer. Factor: SPY to IWM ratio is around 1.6. When this is around 2, risk aversion is at its highest and marked a good time to buy in 2008 and 2009. Note the further back you go, the more this ratio distorts, so the hard ratio numbers like 2 don't hold at all times. Factor: SPY to GLD ratio has suffered a major technical breakdown and is likely heading much lower. This argues for a defensive posture. The DOW to gold ratio is presently at 6.88, well above most long-term targets projected by gold analysts. Factor: Platinum to gold ratio is very close to 1, it is presently 1.03. Historic lows are around 0.8. This puts platinum solidly in the "value" camp, but the ratio is around 25% above historic lows. Compared to gold and silver, platinum has a much stronger correlation to oil and stock indexes. In a sense, platinum is the bullion investor's stock market proxy. Factor: Oil (WTI) priced in terms of gold is 0.0521. This is also solidly in the value camp, but a new 2 year low and technical breakdown this week. The ratio low from 2009 when oil was around $35 a barrel was below 0.4. This is roughly 25% above the historic low, just like platinum! Factor: Some of the BDC's are in total meltdown. In particular BKCC, AINV, and PSEC. These are the highest yielding BDC's right now (15%, 13.8%, and 13.2% respectively). If you price them in terms of IWM or JNK, you will see that they are hyper sensitive to business conditions and will underperform in a bear market. The AINV/IWM ratio chart is of particular interest because it shows a nasty breakdown this week on explosive volatility.
I do a lot of ratio charts, so here is a quick "how to" for anyone who wants to follow along and doesn't know how to make them. Go to stockcharts.com and for the symbol, enter both symbols separated by a : So to get a AINV/IWM ratio chart, use AINV:IWM as the symbol. Here is an example:
I was going back through some old notes this morning and found a relevant passage for next week's trading: Obviously that is advise I wrote for myself, and not intended to be advise to anyone else.
The world's top professional gamer, Johnathan "fatal1ty" Wendel, identified 5 catagories as important areas that the pros master. Here's a quote from the interview: In the same interview he also mentions physical health as being very important: To emulate fatal1ty's approach to training for pro gaming by using 5 categories, I thought I would list the 5 important categories for traders that I feel to be the most important. A significant gap in even one of these categories will eventually create an opening for the pros to eat your lunch. The idea is that a trader can improve by deliberate practice in any of these categories, and all of them should be studied. In order to keep it to only 5 categories, they are extremely broad. For each category I included some examples, but I do not consider it a complete description. 1) Finance Funding costs, yield curve, interest rate risk modeling, bullion, carry trading, loan structure variants, tranches, securitization, handling capital inflows, position sizing, risk of ruin 2) Investment Vehicles Etfs, sectors, currencies, equities, indexes, futures, options, domestic vs foreign, real estate, sovereign bonds fixed income, corporate bonds fixed income, bullion, business models 3) Analysis Finance history, technical analysis and price history, fundamental analysis, prospectus, annual reports, quarterly reports, SEC filings, relative pricing, opportunity cost, backtesting, modern portfolio theory, options pricing theory, algorithms, parsing news 4) Structure Quotes, order types, exchanges, market hours, politics, brokers, transaction costs, tax structure, central banking, SEC, other regulators, volatility, price limits, price gaps, liquidity, busted trades, futures forward curves, lawsuits, bankruptcy, index composition changes, dividends, stock splits, closed end fund net asset value, automation, constraints on mutual funds and hedge funds, constraints on banks 5) Life Outside of Trading Health, nutrition, exercise, family, daily lifestyle, monthly expenses, monthly income, reliability of income, social life, goals
Here's my pair trade idea for next week: LQD/KIE The idea is that we want to have short exposure in the insurance companies who have large portfolios of municipal and high yield debt, which are going to be downgraded en mass tomorrow. The adverse impact to the short position by insurance companies in KIE who hold mostly investment grade corporate debt will be hedged by the long LQD leg of the pair trade. LQD should also wash the beta out of the trade. Finally, when junk yields are high enough to be attractive, that would be a great time to unwind this trade and load up with junk and BDC's.
Trading bot results for today: -1.8% (S&P 500: -6.66%) I implemented the LQD/KIE pair trade at the open today with $2.5k for each leg. I'm still carrying the trade with -0.5% loss on the LQD long leg and +7% gain on the KIE short leg. I am quite exhausted now because I check prices and news so much more frequently in the high volatility environment. I'll probably post again later tonight with a market assessment before I go to sleep.
Closed out the LQD leg of the LQD/KIE pair trade and replaced it with PBT to make PBT/KIE. Entry price for PBT was $20.00 at the open today. The reason for the repositioning is that we didn't see the rush to IG yesterday like I anticipated, and oil has really fallen to a great valuation here. Last night I saw WTI as low as $76.5, but it is now above $80. My plan is to keep the PBT for income, but close out the KIE short leg strategically over the next week or two. Mission accomplished: capital inflow allocation. As I type this, my wife is on the way to the local coin dealer with one of my son's 1 oz gold coins. She is trading it for a 1 oz platinum they are holding for her.