I think I came across an example last week, on April 2nd, in lean hog futures. The price dropped too much in the contract which expires in June.
By trading well, it's kind of like saying to play sports you need to be a good athlete to start. Talent won't help much if you don't have the fundamental skills needed. To me the basic raw fundamental skills of a good trader is one that is not emotional, very disciplined, patient, and opportunistic. These qualities are vague intentionally. But you must have them whether you are doing arbitrage, trend following, market making or swinging from the hips. Very few people have these of course just as very few people have the basic fundamentals to play sports. Regarding emotions specifically, this is the worst negative trait a trader can have. Trading is quantitative by nature. Either the trade works or it doesn't. Your feelings don't really matter. So if you hate Obama, Trump, The Fed, Mark Zuckerberg, BTC, Elites, or whoever your emotions are sensitive to, and not the data, it's not going to work. It's not just over trading, but for example, say you have a really bad month. You have to have the ability to understand some basic statistics. Bad months are suppose to happen, even bad years. You can prove this running a monte carlo on any strategy ever invented. They all get bad draws. You have to be able to see through that and keep going forward unhindered. If your P&L is providing a feedback loop you have a real problem. This means if you "change" your process simply because you are on a hot streak or "change" because you are on a bad streak, then you're done. This is much easier said than done, but again, it's why very few people pull money out of the market consistently.
The markets look very normal in ACD land. We made a monthly A down in Feb. We only made one monthly A down all of last year and that was in August. March was a consolidation month and I suspect April will be as well. Both the monthly and QTR A down are at 2500. I think it's a safe bet we touch those levels once. Both the monthly and QTR A up are also around 2700. I think we will touch that level as well but fail there in April but will break out to the upside by end of QTR. When I step back and look and look at the A levels and turn down the noise you see that we are trading in perfectly normal ranges. On the yearly levels we failed at the yearly A up almost to the tick and we failed at the yearly A down twice around 2500. The number lines are all normal as well. The ES, NQ are in chop mode. YM is confirmed negative mostly because of the tariff sensitive dow stocks. The Russell 2k is slightly negative but expected to get stronger over the next few weeks. Bonds are confirmed pos as expected. This is what I appreciate about ACD, it gives you a great macro framework to understand what is going on. If the markets were broken, you would see it very clearly. Vol has upticked for sure this year and the ranges are wider, but the A levels adjust to that. And with that adjustment we see a perfectly normal market that is consolidating with wider ranges. Longer term, I agree with Gundlach. I think we take out the all time highs this summer and selloff into the end of year closing the year near flat. The final stages of the bull market will most likely happen in 2019 and 2020. This consolidation year will provide a lot of fuel for the tail run which could be explosive to the upside. When we end this credit cycle, I suspect America will have it's lost decade where both risk asset and fixed income will see low to mid single digit returns.
If this view is correct (which I think it very well maybe, so does MS) how do you see the "next lost decade" play out volitility wise ? Thanks
Vol is cyclical. The next two years will see a return to a more normal vol structure but after the transition to the lost decade vol will start to bleed down again.
Hey @Maverick74 , you advised me a while back that diversification is the only free lunch in finance. I’ve heard you say a few times that commodities tend to ramp up as we get later into credit cycles as we are now. How would you recommend investors to get exposure to that area? I’ve heard DBC pointed out most often as the largest broad based ETF for commodities. But as I understand, individual “commodity indices” and DBC as an extension of that really just try to replicate exposure to the underlying through the use of futures, and the costs of rolling those constantly along with other nuances to that method create additional costs which constantly erode the returns. Is the drag on those instruments large enough make them infeasible as a positive-returning component of a relatively long term portfolio? Or should DBC and like instruments be regarded like 3x Bull shares—good for a short term objective but not capable of offering the genuine R:R profile of the thing they represent?
The biggest drag on commodity rolls is usually oil but oil is heavily backwardated now meaning you actually earn a nice rolling yield as a buy and holder and should for the duration of this cycle. This means DBC will have a positive carry.
Hello Mav, You mentioned that ACD can help in spotting rare opportunities. If you have time could you show an example of ACD doing this? Currently, this is a bit abstract to me and would like to see what this looks like from an ACD p.o.v. Any market - stock, future, spread - where your ACD analysis pointed out that it was a good point in time to buy/sell a given market in favor of other competing opportunities. Thanks