Our Critique of Niederhoffer TurtleTrader comments in red. The Speculator Why the trend is not your friend Many technical traders stake their futures on following the crowd. But every trend can turn on you, because what goes up usually comes back down -- and vice versa. By Victor Niederhoffer and Laurel Kenner TurtleTrader: Sure trends turn. The point is? Do you think trend following doesn't account for such? Trend followers don't follow crowds. They take advantage of crowds. And profit. The stock market has been a trend-follower's dream for the last few weeks. TurtleTrader: The last few weeks? Is that the time horizon one should have? A few weeks? Would that be a similar time horizon to the one used when you blew out and lost all? On March 22, a close below 1,150 in the SP 500 futures set all the bearish indicators in motion. Confirmations of a downward trend through regression lines, moving averages, pivots, Bollinger bands, you name it, were triggered. Over the next 24 trading days, the market closed 10 times at 20-day lows. Rule No. 1, carved in stone for all technical analysts, is that the trend is your friend. If ever there were a time that we could, along with the Cabot Market Letter, report the beauty of using a simple trend-following indicator that makes it virtually impossible to miss a major market move, this would surely be that time. TurtleTrader: So now is different? This time is different? Why is that? No wonder that 830 aspiring chart-readers, the most ever, registered for the Market Technicians Association's annual competency exams on April 26 in Jupiter Beach, Fla. Granted that some users of trend following have achieved success. Doubtless their intelligence and insights are quite superior to our own. But it's at times like this, TurtleTrader: What is unique about this time? Have markets now changed? when everything seems to be coming up roses for the trend followers' theories and reputations, that it's worthwhile to step back and consider some fundamental questions: Is their central rule, The trend is your friend, valid? Might their reported results, good or bad, be best explained as due to chance? But first, a warning: We do not believe in trend-following. TurtleTrader: The existence of Ed Seykota and Bill Dunn are optical illusions? Better yet their 30 years of trend following results are chance? We are not members of the Market Technicians Association, or the International Federation of Technical Analysts or the TurtleTrader Trend Followers Hall of Fame. In fact, we are on the enemies list of such organizations. TurtleTrader: We are not your enemy. But your comments are off the wall. These posts on the TurtleTrader site, which describes itself as the world's No. 1 source for trend-following, referring to an April 2001 interview with Vic in Technical Analysis of Stocks and Commodities are typical: Niederhoffer says that trend following doesn't work, and is doomed to failure. Here's a guy who blew up his own trading account in a spectacular fashion, and he's knocking systematic trend following Niederhoffer, like so many, ignores the bottom line success of trend following. To accept any of what Niederhoffer says is to ignore the existence of Bill Dunn, Jerry Parker, Richard Dennis, John W. Henry and all of the many Turtles. But trends always turn TurtleTrader: It's why trend followers make money. How could trend following win if it did not account for a trend turning? Normally, after showing that all the evidence is against a theory, we would be content to end with a snappy conclusion to the effect of "the trend is not your friend." Yet no fixed rule can be expected to last forever. TurtleTrader: Trend following wins for it is flexible. It adapts to change. Too many smart people are around to anticipate and dissipate the effect. Thus, the cycles are always changing, TurtleTrader: A brick wall of understanding it appears! as racetrack expert Robert Bacon first documented in his classic, "Secrets of Professional Turf Betting." Given that the evidence over the last 60 or 70 years is antithetical to the trend-followers on individual stocks -- and that recent evidence on trends in the averages is equally unfavorable -- is there any evidence that things are about to change? TurtleTrader: We should expect the market to change into something that no one has ever seen before? Looking at the performance of these stocks over the subsequent 16 months, through April 29, 2002, we found that the 20 best stocks of 2000 returned an average of -11%. Calpine (CPN, news, msgs), down 76%, PerkinElmer (PKI, news, msgs), down 76%, and Allergan (AGN, news, msgs), down 32%, were among the bests that stumbled. (The situation would have been even worse if such stocks as Enron, a stalwart member and top performer of the SP in 2000, had been included. Enron was delisted in November 2001, so we had to drop its bad results, which would have taken an additional 5 percentage points from the 20 best.) TurtleTrader: It's sound like Victor is a long only guy? Enron was a great short. Those were great trading results. Putting one consideration with another, however, there is no recent evidence of a regime shift. TurtleTrader: Regime shift? The weight of academic findings and practical results indicates that the tendency to mean reversion is intact. We conclude that evidence for all periods, all individual stocks, all averages and all new indexes that we might reasonably think of is against the trend-followers. Our market shrink, Dr. Brett Steenbarger, whose work is often featured on MSN Money, frames the issue this way: Technical analysis is like an X-ray; it generates pictures of market conditions. Accurate diagnosis, however, must determine exactly how far conditions deviate from the norm and perform tests that cannot be conducted by radiology. "For a trader to limit himself to technical analysis is like a physician limiting diagnosis and treatment to X-ray findings," he concludes. "A picture may be worth a thousand words, but a positive finding on a blood test will never show up on the picture." TurtleTrader: How can you take the above paragraph and determine what to buy along with when and how much? And then when do you sell? The beginning of a month is always a good time for a trend to change, and that's when we like to buy individual stocks. TurtleTrader: If this the tip of the day, how much of what do we buy? Will you call when it's time to sell? In view of the recent negative trends, TurtleTrader: What is a negative trend? this seems like a particularly salutary time to participate in the 1.5 million percent-a-century juggernaut. We are very bullish for this year and the next, and we have been purchasing shares of companies that announce buybacks and biotech stocks with a preponderance of recent insider buying. Our buys in both groups are based on statistical studies that we have reported on in detail here over the past few months. We will be pleased to send you our workout of the 20 companies in the SP 500 that were the worst in 2000, adjusted for survivorship bias. Please be free with your critiques and encomia, especially the latter, as we anticipate a deluge of vitriol from the trend-followers on this one. TurtleTrader: No vitriol Vic. You just make no sense. TurtleTrader comments in red. We welcome feedback from readers on this one. Feedback from Readers #1: "All I can say is how many times has Niederhoffer gone belly up and had to beg his friends to pony up some cash for him to start trading again? I'm guessing you read his book...a lot of pseudo-intellectualism clouded with enough inane "logic" to make the less secure think they're reading something really deep because they can't seem to understand it...whereas the more intelligent in the crowd realize it's just drivel that can't be understood [for useful trading]." #2: "By the way, the last time I checked Vic Niederhoffer was not the lead investor in the Boston Red Sox new ownership group [John Henry is]." #3: "I was very interested in reading your reply to Vic Niederhoffer's article. Unfortunately you did not respond to any of the statistical support that he gave in his column. Have you tested his claims and found them to be untrue? Why did you not put the full article on your site? I am very interested in buying your course, but am somewhat concerned by his arguments. They seem to be well tested." TurtleTrader: The full article is not on our site since the link is right there at the top of this page. The "statistical" work you heap praise on is hogwash. Niederhoffer doesn't have a clue as to what trend following is. He defines trend following as "technical analysis". That's it. With that limited (and wrong) definition in hand he pulls out academic studies that refute what? The existence of Ed Seykota, Rich Dennis and Bill Dunn? We forgot. They were all just an offshoot of chance. More Feedback on #3 Comment: "Statistical support? What statistical support? He statistically supported that 'prices tend to revert to the mean'. SO WHAT? That means trend following doesn't work? It's like saying 'you shouldn't buy a car because you'll have to keep refilling the tank with gasoline.' It has nothing to do with anything but it sounds good if you don't know better." --------------------------------------------------------------------------------
More Feedback on #3 Comment: "Statistical support? What statistical support? He statistically supported that 'prices tend to revert to the mean'. SO WHAT? That means trend following doesn't work? " Whoever says that statistical support does not work - well, that person has absolutely no idea what he is talking about. I would like to see the performance of a trend following trader after spending a good deal of time in a choppy, sideways market. Then I will show my results that are based on statistical support. There are endless numbers of "guru strategies" out there that are based on one thing: "no matter what, the trend will continue sooner or later." The problem is when the market goes sideways for longer than "desired". Have Fun Trading
I have spoke with VIC many times. Although he did blowout, and trust me, I bust his balls like any good Newyorker would, he has my respect. All of us, And i have faced this already, will face the day that we get hit hard for those of us that take risk. It is not the fact that you get hit, but how you come back. A true trader will be formed when the axe falls. Vic does have a un-orthadox way of trading with his, cycles of circuits, weatherpatterns, nature and cells. However, he is still trading and did not run. Making money is a bi-product of what we do. The trading aspect is the risk we take, the plays we make and how we recover from losses.