Global Macro Trading Journal

Discussion in 'Journals' started by Daal, Feb 25, 2011.

  1. I have some sympathy with your logic. However, I do believe that we need to see quite a bit more pain in the mkt before it becomes safe to go in the water, Fed or no Fed. There's a lot of trapped longs out there, IMHO. Still, like I said, I can't fault the premise.
     
    #5051     Sep 5, 2013
  2. Daal

    Daal

    Looks like Hatzius from GS also thinks the Fed might put out a dovish guidance
    "
    "While the August employment report was a moderate disappointment, we believe it is probably not weak enough to prevent the FOMC from tapering in September. However, it does raise the likelihood of a "dovish taper," which could include a small size of the overall adjustment to purchases, and which we think would likely coincide with an enhancement of the forward guidance. The continued decline in the participation rate further highlights the justification for maintaining the fed funds rate at an exceptionally low level even after unemployment reaches 6.5%.""

    http://www.zerohedge.com/news/2013-09-06/goldman-jobs-report-not-weak-enough-delay-taper
     
    #5052     Sep 6, 2013
  3. As I understand the mid-curve options, they allow trade in later years, but the options themselves expire within the next year. They seem more about trading the middle part of the Treasury curve (hence, their name).

    Something like a Dec 18 99 call likely isn't even quoted given the underlying is at 95.65 and the time decay would ensure it going to zero absent a very quick, very major change in the economic outlook or policy.
     
    #5053     Sep 8, 2013
  4. Daal

    Daal

  5. Daal

    Daal

    I'm tempted to sell some ZQ into this rally but I want to hold till the Fed meeting, I really think they will expand guidance in a way that is front end friendly. Specially with all the Summers talk, one way to tie his hands and prevent him from doing something crazy is to tie the Fed's hands first
     
    #5055     Sep 12, 2013
  6. If someone had called the market superbly, but their stock picks sucked, and their overall performance was mediocre, would you be praising them as a market beater? No. So why is it different the other way round? There are always excuses for underperformance - you don't get to pick, with hindsight, your good decisions only, you must include the bad ones also.

    In fact, this makes it even worse, because it means he's either too dumb or too stubborn to recognise his strengths and play to them, while abandoning what he's crap at. Instead he arrogantly continues doing something where the evidence shows he has zero or negative edge.

    If he wants lower risk - just keep 50% in cash and stock pick for alpha. Half the risk of the S&P, and similar performance. Now that would be a great approach - why doesn't he do it? Perhaps he is more concerned with proving he can time markets than with making money for his clients.
     
    #5056     Sep 13, 2013
  7. Nonsense - there are ways for the approach to fail even if valuation and fading extreme sentiment trends matter a huge amount. E.g.

    1. the trader could be mistaken in their assumptions about valuation. E.g. thinking things are expensive when they are not (like shorting stocks in the 50s when the dividend yield fell below bond yields; or staying hedged in early 2009), or cheap when they are not (e.g. buying after 1930 due to a 50% fall in prices).

    2. The trader could be mistaken about what an 'extreme sentiment trend' is. For example, not fading the overwhelming fear and panic in late 2008 or early 2009.

    3. The trader could avoid the mistakes above, but fail due to poor implementation, or adopting other flawed strategies which swamp the good side of their methodology.

    4. The market may price valuation correctly, and extreme sentiment trends may just be efficient odds-bets on secular/structural changes in the markets (I don't believe this, but it is a theoretical possibility).

    Hussman has *already made* mistakes 1, 2, and 3, so it is an absurd statement to say that his approach 'has to work'. You are just shooting from the hip and passing it off as serious analysis.
     
    #5057     Sep 13, 2013
  8. Wrong - there are many cases of pessimism, where prices later went much lower. E.g. early/mid 2007, 1929 crash, and so on. And sentiment is sometimes totally incorrect about true fundamental value. Sentiment could be terrible, but fundamentals might be even worse.
     
    #5058     Sep 13, 2013
  9. toolazy

    toolazy

    true, but on average this system wins.

    what was sentiment just before last crash ? Very positive. So RR was enormous.

    If markets are random and if strong sentiment exists, it pays to bet against because on average you will win as sentiment MOVES price out of step.

    Not saying that getting from this to structured approach is easy :)
     
    #5059     Sep 13, 2013
  10. Ok I am not trying to pick on you here, but I think your way of approaching this trade is flawed. Here's why:

    Firstly, perceived 'mispricing' alone is not a reason to do a trade. It is a necessary but not sufficient condition. The reason is that mispricing can get worse, or stay mispriced a long time, or (worst case) you can be incorrect and the 'mispricing' might be right. You need many other things too: very attractive trade odds; a high level of conviction; a way of knowing if and when you are wrong and must bail on the trade; and either a catalyst (reason to think the market will move in your favour within a given timeframe) or at the very least, no likely negative catalyst (reason for the market to squeeze you before it moves the way you expect). It is also good, but not essential, if your trade view is not widely perceived or accepted by the market.

    Reading your other posts on this trade, it looks problematic:

    "Frankly I'm just a little scared here." - i.e. you have little conviction or staying power, you are a weak hand. You will get either squeezed out if the market tests your position, or wiped out if you are unsqueezable due to stubborness, but turn out to be actually wrong this time. It is good trading technique to assume ALL positions you adopt will be seriously tested/squeezed at some point, even if you are 100% correct about the eventual result.

    "This is one of the trades that you can lose a lot if wrong" - not a good sign. Picking pennies up in front of steamrollers only works if i) you trade small size ii) you make a LOT of these trades, so you have high odds of collecting more in 'insurance premiums' than you lose in big payouts iii) your odds assessment is super accurate and super conservative. A moderate odds calculation error in a 5:1 risk/reward trade is not a big problem - maybe you make 3:1 instead. A moderate odds calculation error in a 1:10 risk/reward can turn a small net winning strategy into a huge loss-making strategy. There is simply no way to calculate trade odds that accurately on situations like this.

    "Only scenario where this trade can go bad is if the economy really takes off, beats all private and Fed forecasts, employment heats up and inflation surges." - no. It can also go bad if the market, or the Fed, THINKS this will happen and thus rates change. E.g. if the market fears inflation enough, not only will you take a lot of heat and maybe get squeezed out (and definitely have terrible trade timing), the Fed may even start hiking to allay these fears.

    The other problem with this trade is you neither have a true sentiment extreme to bet against, nor favourable market momentum to coat-tail. You are fading a trend in a fairly early or middle phase. That can sometimes work if the trend fails to develop, but it can also, as you point out, result in getting steamrollered.

    Overall this looks like a marginal trade, rather than a slam dunk. More importantly, your trade preparation is missing many critical factors that should be considered before placing any capital at risk.

    Trading on opinion is not a robust approach. You need to develop a trade strategy, and it must cover ALL feasible contingencies, not just the ones where your trade thesis works without being seriously tested, not just one where your assumptions all turn out to have been correct. Trading according to a soundly tested, robust, and comprehensive strategy or set of strategies, with proper planning for all contingencies, is a requirement.
     
    #5060     Sep 13, 2013