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Fooled By Randomness


Fooled By Randomness

by THE MOLEJUNE 8, 2017

It is Mario Draghi’s turn to torment market participants this morning, which means a market overview will have to wait until the wave of volatility has washed over us and hopefully left some of our open campaigns intact. In the interim I decided to channel my inner Nicholas Taleb and ruin your collective day by singlehandedly smashing what you hold most dear as traders, i.e. your perspective on how markets function and your ability to anticipate what may come next. And if you think I am joking then you are most likely doubly mistaken. Read on at your own peril:


Still here? Very well then. Take a look at the chart above and then grab a piece of paper and write down your thoughts about what you are seeing. Would you trade this chart? What are your general impressions about it? Do you see any entry opportunities? Are we perhaps counting waves or looking at specific cycles? When you’re done please follow me to exhibit B:


I tell you what I think. Not a bad chart at first sight I’d say but it has its periods of sideways volatility. But when it gets going it really ramps so a trend trading system here may just work fine. Playing the swings may also work if you slap a Bollinger on it. Do you agree? Disagree? Make not of all that and then follow me to exhibit C:


Ouch, not a chart I would want to be trading – that looks pretty nasty. That’s usually the type of tape I try to avoid. Although it has trending periods it seems to turn on a dime at a moment’s notice. Agree – disagree? Take note.

It’s All Just Noise

I’m sure your curiosity has peaked by now and you wonder what the purpose of today’s exercise may be. And the sad truth of the matter is that it’s all nothing but noise. All three charts above were produced purely by the power of a simple python script using a vanilla random function:

import numpy as np
import pandas as pd

import statsmodels
import statsmodels.api as sm
from statsmodels.tsa.stattools import coint
# just set the seed for the random number generator

import matplotlib.pyplot as plt

X_returns = np.random.normal(0, 1, 10000) # Generate the daily returns
# sum them and shift all the prices up into a reasonable range
X = pd.Series(np.cumsum(X_returns), name=’X’) + 50 # so the chart starts at 50

Order And Chaos

Trust me, I know how you feel – it’s like the floor just gave way underneath you and took with it all the technical trading knowledge you’ve accumulated over the years. The good news is that it’s not as bad as you think, if that makes you feel any better. Let me explain. Over the past few years I spent quite a bit of time investigating fractal patterns in financial data series. A major aspect of my work was the use of machine learning tools in combination with time series classification parsers to find recurrent patterns, also called ‘motifs’. Some may call them fractals although technically speaking fractals are self-recurring on larger intervals, so I usually prefer the term motif as we normally look for the same recurring pattern within the same time window.

Turns out that I actually wrote a multiple-dimension parser and parsed for the same motif on a series of time windows, so in the end a fractal it is. What I learned in months of testing is that there are in fact recurring fractals in financial time series. However, the type and frequency significantly differ from one symbol to the next, plus the number of recurring patterns/fractals/motifs only account for about 5% of the series. Which means that 95% of it is noise, or more correctly what is known as a ‘random walk’.

All Models Are Wrong, But Some Are Useful

So is everything we have learned about the markets complete horse wash? Are there in fact no technical patterns and are we fooling ourselves? Well, yes but no. In the words of George Box (one of the great statistical minds of the 20th century): “all models are wrong, but some are useful.” In reality there is most definitely a significant amount of randomness to all financial markets. But I would call it ‘guided randomness’ because in between the noise are the actions of human traders who look at a chart and believe that buying or selling at a certain threshold makes a lot of sense. And as such it often becomes a self fulfilling prophecy, because just like water it seems that a random walk simply follows the path of least resistance and then finds its next level. Which of course may explain why ‘following the herd’ works so well until it doesn’t

Do Entries Matter?

But still two of those random charts I posted above look pretty tradeable, don’t they? Which makes one think of course whether or not the true key to profitability and success as a trader lies in picking entries. And of course we already know that it doesn’t because markets change all the time and so do the systems that operate successfully during any arbitrary trading period. Meaning you may be picking great entries like your nose one quarter and then lose it all back and then some doing the very same thing the next.

Van Tharp once stated that [successful trading is 40% risk control and 60% self-control. In turn, the risk control portion is one half money management and one half market analysis. Thus, market analysis is only about 20% of successful trading. Yet most traders emphasize market analysis while avoiding self-control and de-emphasizing risk control. To become successful, traders need to invert their priorities].

We’ve talked about self control many times here but let’s set that aside for now. Focusing on the remaining 40% only half (i.e. 20%) supposedly should be devoted to market analysis. I think that’s a vast over estimation and my own belief is that market analysis should account for not more than 5% of your trading. A lot more time should be devoted to campaign management, risk management, and capital commitment.  Which are activities that are by definition a lot more analytical than technical. Instead of reading charts to find entries we should be spending a lot more time analyzing how to extract maximum returns on entries we have been taking. Of course as a financial blogger that would most likely reduce my audience by a significant margin.
Published at Thu, 08 Jun 2017 13:16:01 +0000

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A Seasoned Vet Among ESG ETFs


A Seasoned Vet Among ESG ETFs

By Todd Shriber | May 30, 2017 — 1:58 PM EDT

In recent years, issuers of exchange-traded funds (ETFs) have brought an increasing number of funds dedicated to environmental, social and governance (ESG) principals to market. However, the concept of ESG investing traits in the ETF wrapper is not new. For example, the iShares MSCI KLD 400 Social ETF (DSI), home to more than $842 million in assets under management, will turn 11 years old in November. DSI tracks the MSCI KLD 400 Social Index, which is “composed of U.S. companies that have positive environmental, social and governance characteristics as identified by the index provider,” according to iShares.

DSI hit an all-time high last Friday and is up 8.7 percent year to date, a performance that is in line with that of the S&P 500. This ESG ETF holds 399 stocks, indicating that is a different animal than the S&P 500. A familiar argument as it pertains to ESG investing is whether or not principal-based investing can generate superior outcomes for investors. (See also: 3 Trends to Watch in ESG Investing.)

The idea of investing based on principals is undoubtedly attractive to many investors, but the name of the investing game is to make money. For ESG ETFs to continue flourishing, these funds need to deliver returns that are at least in the ballpark of non-ESG benchmarks with comparable or lower risk. Past performance is never a guarantee of future returns, but DSI’s lengthy track record at least gives investors a sense for how prioritizing ESG traits can affect total returns.

DSI debuted in mid-November 2006 and has returned 76.2 percent over that period, but the S&P 500 is higher by nearly 115 percent over the same period. In recent years, DSI has done a better job of keeping pace with the S&P 500, and the ESG ETF’s three-year standard deviation is only a few basis points higher than that of the S&P 500. (See also: Top 5 ETFs for Impact Investing for 2017.)

ESG strategies often overweighttechnology stocks and underweightenergy relative to the S&P 500, and DSI is true to that form. DSI allocates 28.4 percent of its weight to technology, an overweight of 535 basis points compared with the S&P 500. DSI’s energy weight of about 5.1 percent is 100 basis points below what is found in the S&P 500. DSI is also underweight financial services by more than 400 basis points against the S&P 500. Noting that DSI is underweight energy and financial services, two of this year’s worst-performing sectors, while being overweight technology, the top-performing sector, it can be argued that the ESG fund should be doing more than merely keeping pace with broader U.S. equity benchmarks.

One glaring reason DSI is not outperforming the S&P 500 is that the ESG ETF, despite being overweight technology, does not own shares of Apple Inc. (AAPL). The iPad maker is up 32.6 percent year to date. (See also: Apple Is Most Environment-Friendly Tech Company.)
Published at Tue, 30 May 2017 17:58:00 +0000

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Decent Exposure

Decent Exposure

by THE MOLEAPRIL 19, 2017

I leave it up to you to decide whether its due to sheer luck or perhaps skill but we actually seem to be accumulating pretty decent exposure and there’s more waiting in the bullpen (see below). It has always been my opinion that the true skill of a trader reveals itself not by what he/she does during the easy times but by how he/she operates during those nerve wrecking periods when things tend to get messy. And to be clear – this doesn’t necessarily mean a necessity to take action or to attempt to ‘beat the market’ at its own game – which obviously none of us will ever be able to do.


Yes equities are still meandering all over the place but the recent price action suggests that we did pick a pretty good spot for grabbing some long exposure. Now we are far from being out of the woods on this one but I do enjoy seeing a new spike low which formed overnight. I’m moving my stop at about 0.5R now as another drop toward our entry zone will most likely lead us much lower. This puppy has to get out of the gate now and that fast.

More Tape Reading

Someone asked me yesterday as to the exact definition of a spike low. Well in theory it’s a candle that is flanked by two candles with a higher low. A major SL of course is one that at the same time represents a recent price extreme – I personally use a 10 candle window to identify a major SL. Of course there is also always the advantage of additional context – for example a spike low breaching through a Net-Line Sell Level (and recovering). Or perhaps a SL dropping through terminating near a lower Bollinger you find valuable – you get the idea.


So given that I think you will agree that the current major spike low on silver is a pretty damn good one. What has followed since then is the retest that I usually wait for. I wait for one more (non major) spike low and then enter with a stop below the major SL. And voilá – that’s my setup for silver.


Good and bad news on the EUR front. The bad news is that my favorable exchange is being taken to the woodshed. The good news is that I (and hopefully you) was long since about 1.0625. I’m moving my trail at about -0.5R MFE now which may surprise you. Well, my reasoning is this – either the EUR keeps burning the shorts now or it will most likely correct back a bit deeper. If it does I can always find another entry. Oh by the way, did I mention I’ll have to raise the subscriber fees now?

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Published at Wed, 19 Apr 2017 12:03:27 +0000

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How Tough Has Trading Been?


How Tough Has Trading Been?

Thanks to a savvy trader for this graphic of the Soc Gen Short Term Trading Index, which is the composite results of the largest diversified futures funds holding positions for less than 10 days.  Even the longer track record is net negative.  Interestingly, hedge fund performance was positive for the first quarter of 2017, but the performance of CTAs was negative over that same period.  These results mirror my own experience working with trading firms:  those trading short-term and those trading in a momentum/trend style have been performing worst.  Those performing best in Q1 were ones focused on Asia, as well as activist funds and funds trading volatility strategies.

In other words, those market participants with specialized strategies have been outperforming the generalists.  Working at a number of funds as a performance coach, I can tell you that–on average–those placing directional bets on interest rates in Q1 greatly underperformed those trading relative value strategies.  Even among day trading firms, uniqueness of strategy has been an important predictor of success thus far in 2017.  Those traders day trading big liquid instruments have underperformed those finding unique opportunities in carefully selected individual stocks.

I’m not so sure this is all that different from the dynamics in the broader business world.  If new participants enter a crowded space, they are less likely to be successful than if they find unique niches.  This is an important challenge for those aspiring to trading success.  The risk tolerance of most trading firms does not permit long holding periods for directional positions.  This tends to throw everyone in the short-term camp depicted above.  You’re not going to win by playing the same game as everyone else, just as you’re not likely to find gold if you prospect the hills that have been well picked over by previous miners.

It’s not enough to learn how to trade; it’s critical to trade uniquely.  It’s not enough to trade with rules and discipline; one must also find opportunity creatively.  The firms achieving the results depicted above are trading trends in liquid markets in a disciplined fashion.  A great approach to success would be to research strategies that made money during months when those other participants were performing worst.  There is no guarantee that future returns will mirror backtested ones, but digging for gold in well-mined fields is a poor risk/reward proposition.

Further Reading: Creativity and Innovation in Trading

Published at Sat, 15 Apr 2017 10:06:00 +0000

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Yext: The newest $1 billion tech company


Confide makes the internet less permanent
Confide makes the internet less permanent

Yext: The newest $1 billion tech company


Like most New Yorkers, Howard Lerman talks quickly and dresses in black.

The 37-year-old is CEO of Yext, which just had one of the biggest public debuts ever for a startup born in the Big Apple.

Yext(YEXT) stock started trading on the New York Stock Exchange Thursday, surging 22%. The company is now worth over $1 billion.

“I’m an East Coast guy,” Lerman told CNNMoney.

Lerman grew up in northern Virginia, just as AOL was exploding on the scene. He went to Duke University and just couldn’t see himself in Silicon Valley.

“When you’re starting a company, you need to rely on people around you to work for free for a long time,” Lerman says. He met Yext’s chief operating officer, Tom Dixon, in middle school. He still remembers the day Dixon brought a Pentium chip to class. It was the beginning of a long friendship, fused with a common love of tech.

“They were scary bright kids,” remembers Vern Williams, their math teacher at Longfellow Middle School in Falls Church, Virginia. “They didn’t like routine or textbooks. They wanted to push their creative juices.”

Yext is one of five companies Lerman has founded so far. It’s basically a 21st Century version of the phone book (Yext actually stands for “next Yellow pages.”)

Companies like McDonald’s(MCD), one of Yext’s clients, need the addresses, hours and contact info for its many restaurants up to date on sites as diverse as Google Maps, Yelp, Facebook, Bing, etc. Yext provides the software for companies to update their information on all of those sites with one click.

“We’re pioneering a new market,” Lerman, who co-founded the company in 2006, says.

But for all its success, the company still isn’t profitable. Like many young tech companies, there’s still a lot of risk about how much Yext will grow in the coming years and whether it will be able to generate bigger sales.

Yext has over 600 employees with offices in the U.S. and Europe. Lerman speaks German and is currently learning Chinese, perhaps foreshadowing Yext’s next move.

“I think being an entrepreneur is the intersection of two things: Being able to see how the world should be and then doing something about it,” he says. “A lot of people can do one of those two things.”

howard lerman yext nyse bell
Howard Lerman, center in the black suit, celebrates as Yext debuts on the New York Stock Exchange.

Lerman has been compared to iconic techCEOs like Marc Benioff of Salesforce for his ability to rally crowds,and Apple cofounder Steve Jobs for his love of black turtlenecks, which he wears every day.

In addition to Yext, Lerman also created the secret messaging app Confide. It’s gotten a lot of media attention lately after news broke that White House staffers were using it to chat confidentially with each other, and journalists. Confide markets itself as a secure app “military-grade end-to-end encryption,” although some have questioned whether that’s a fair statement.
Published at Thu, 13 Apr 2017 21:50:03 +0000

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How To Trade Realized Volatility


How To Trade Realized Volatility

by THE MOLEAPRIL 6, 2017

I wonder what thoughts were triggered in your head when you saw the featured image above. The notion of a brewing storm is rather ominous and usually is associated with inconvenience, discomfort, and sometimes outright destruction of property. But I chose it very carefully to make a point which I’ll try to convey below. Let’s look at some charts:


In case you are new here, the indicator on the bottom of this chart is a slightly altered version of the ATR with a simple Bollinger slapped on top of it. When creating it the intent was to visualize discrete cycles of realized volatility (RV), which I subjectively believe it does fairly well. If nothing else it does show us the wide range that RV can take and how it affects price movements.

The little boxes I drew on the chart highlight periods in which volatility had slowed down considerably, thus producing a very narrow Bollinger bubble. Chartists often refer to this as a ‘pinched Bollinger’ and the associated rule is that an expansion of the underlying is at hand. Since we are measuring realized volatility we are thus looking at moments in time that depict abnormally high contraction of RV (i.e. the ‘pinch’), which in many (but not all) cases results in an expansionary cycle. So far so clear.

What often is forgotten however is that realized volatility (RV), unlike implied volatility (IV), is agnostic to direction, it only cares about velocity (remember: average true range). While IV represents the expectation of future volatility RV shows us the volatility that already has happened in the past. And since the vast majority of traders or investors view rising prices as a positive and falling prices as a negative rising IV is associated with the anticipation of falling prices. Meanwhile RV is a direct derivative of price and as such happily swings in both directions. Which means a drop in price will have (almost) the same impact on RV than falling prices. I said almost because in order to make it the same you would have to normalize the price series but that’s a topic for another day

When a storm arrives we are often inconvenienced as for example driving in ‘bad weather’ makes things more dangerous for us. But let’s not forget that there’s nothing inherently ‘bad’ about rain and wind in, in particular if it presents itself in relative moderation. Flowers and plants for example wouldn’t pollinate and grow for one and without rain we would be forced to drink saltwater and that’s no fun.

Now there is a reason for my lengthy treatise on volatility and its analogy to weather. Because when I suggest that a storm may be brewing then my inference is not that prices may necessarily fall. It’s easily possible that we are going to see a resolution to the upside, of course most likely not without luring a few bears into placing bets to sweeten the pot a little. Noblesse oblige.

If you take another look at the chart above you will see that the very last box I drew on the very right is also the most rectangular. What does that mean? It means that RV contracted on the E-Mini to a historically low level and remained in that range for an extended amount of time. Not surprisingly that contraction accompanies the juicy rally we enjoyed all the way until my leave to Tenerife. Once again sorry for having spoiled the party.

What Comes Next?

Expansion, which is what we already have been perceiving over the past month. You may also have noticed that the current Bollinger bubble, although being in the process of expanding, continues to be positioned relatively low in comparison with at least the past year of pricing action. Which bodes the question: do the odds support a rise or a further drop and thus a renewed contraction? Just like you I don’t have a crystal ball but at least the limited sample size shown on the chart points toward expansion. And that expansion may actually come in the form of a spike higher followed by a fast drop lower, or the inverse. We. Just. Don’t. Know. But what we do know are our trading and system rules and they should tell us that realized volatility demands a adjustment in stop and campaign management. For me personally that means WIDER stops and SMALLER position size, which incidentally are mutually dependent – see for yourself.

But there is more and we’ve only touched the surface…

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Properly interpreting realized volatility can lead you to placing better discretionary trades and/or develop more effective systems tailored to exploit specific price behavior. What should have become clear now is that the underlying characteristics of various price series can differ substantially. Nevertheless it is rare to find discussions on this most basic attribute of price propagation in popular trading books or tutorials, the one big exception being the quant sector (for obvious reasons). Short of spending the next 15 years studying to become a quant trader I hope that this post will help you read your charts more effectively going forward.
Published at Thu, 06 Apr 2017 13:42:07 +0000

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5 Steps to a Retirement Plan


5 Steps to a Retirement Plan

By Arthur Pinkasovitch | Updated April 4, 2017 — 6:00 AM EDT

Basic guidelines exist to assist people in creating their retirement plans. These guidelines can either form the basis of a self-directed retirement investment strategy or can be used to help guide the investment process of an external financial professional. (For more, see our tutorial:Retirement Plans.)

1. What Is Your Time Horizon?

You current age and expected retirement age create the initial groundwork of an effective retirement strategy. First, the longer the time between today and retirement, the higher the level of risk that one’s portfolio can withstand. If you’re young and have 30-plus years until retirement, you should have the majority of your assets in riskier securities like stocks. Though there will be volatility, over long time periods stocks outperform other securities, like bonds.

Additionally, you need returns that outpace inflation so that you can not only grow your money in total, but also against your future purchasing power. (Bonds have actually outperformed stocks in the past 10 years. To read more, see: Get This: Bonds Beat Stocks After All.)

In general, the older you are, the more your portfolio should be focused on income and capital preservation. This means a higher allocation in securities like bonds, which won’t give you the returns of stocks, but will be less volatile and will provide income you can use to live on.

You also will have less concern about inflation. A 64-year-old who is planning on retiring next year does not have the same issues about inflation as a much younger professional who has just entered the workforce.

“Inflation is like an acorn. It starts out small, but given enough time can turn into a mighty oak tree. We’ve all heard – and want – compound growth on our money. Well, inflation is like ‘compound anti-growth,’ as it erodes the value of your money. A seemingly small inflation rate of 3% will erode the value of your savings by 50% over approximately 24 years. Doesn’t seem like much each year, but given enough time it has a huge impact,” says Christopher Hammond, financial advisor and founder of in Savannah, Tenn.

Third, although it is typically advised to begin planning for retirement at a younger age, younger individuals are not expected to perform the same type of due diligence regarding retirement alternatives as someone who is in his or her mid-40s.

Also, you should break up your retirement plan into multiple components. Let’s say an older parent wants to retire in two years, pay for her child’s education when he turns 18 and move to Florida. From the perspective of forming a retirement plan, the investment strategy would be broken up into three periods: two years until retirement (contributions are still made into the plan); saving and paying for college; and living in Florida (regular withdrawals to cover living expenses). A multi-stage retirement plan must integrate various time horizons along with the corresponding liquidity needs to determine the optimal allocation strategy. You should also be rebalancing your portfolio over time as your time horizon changes.

Most important, start planning for retirement as soon as you can. You might not think a few bucks here or there in your 20s mean much, but the power of compounding will make that worth much more by the time you need it. (The future may seem far off, but now is the time to plan for it. Check out 5 Retirement Planning Rules for Recent Graduates.)

2. What Are Your Spending Requirements?

Having realistic expectations about post-retirement spending habits will help you define the required size of the retirement portfolio. Most people argue that after retirement their annual spending will amount to only 70% to 80% of what they spent previously. Such an assumption is often proved to be unrealistic, especially if the mortgage has not been paid off or if unforeseen medical expenses occur.

“In order for retirees to have enough savings for retirement, I believe that the ratio should be closer to 100%,” says David G. Niggel, CFP®, Key Wealth Partners, LLC, in Lancaster, Pa. “The cost of living is increasing every year – especially healthcare expenses. People are living longer and want to thrive in retirement. Retirees need more income for a longer time, so they will need to save and invest accordingly.”

Since, by definition, retirees are no longer at work for eight or more hours a day, they have more time to travel, go sightseeing, shopping and engage in other expensive activities. Accurate retirement spending goals help in the planning process as more spending in the future requires additional savings today.

“One of the factors – if not the largest – in the longevity of your retirement portfolio is your withdrawal rate. Having an accurate estimate of what your expenses will be in retirement in so important because it will affect how much you withdraw each year and how you invest your account. If you understate your expenses, you easily outlive your portfolio, or if you overstate your expenses, you can risk not living the type of lifestyle you want in retirement,” says Kevin Michels, CFP®, financial planner with Medicus Wealth Planning in Draper, Utah.

The average life span of individuals is increasing, and actuarial life tables are available to estimate the longevity rates of individuals and couples (this is referred to as longevity risk). Additionally, you might need more money than you think if you want to purchase a home or fund your children’s education post-retirement. Those outlays have to be factored into the overall retirement plan. Remember to update your plan once a year to make sure you are keeping on track with your savings.

“Retirement planning accuracy can be improved by specifying and estimating early retirement activities, accounting for unexpected expenses in middle retirement, and forecasting what-if late retirement medical costs,” Alex Whitehouse, AIF®, CRPC®, CWS®, president and CEO, Whitehouse Wealth Management, in Vancouver, Wash.

3. What After-Tax Rate of Return Do You Need?

Once the expected time horizons and spending requirements are determined, the after-tax rate of return must be calculated to assess the feasibility of the portfolio producing the needed income. A required rate of return in excess of 10% (before taxes) is normally an unrealistic expectation, even for long-term investing. As you age, this return threshold goes down, as low-risk retirement portfolios are largely comprised of low-yielding fixed-income securities.

If, for example, an individual has a retirement portfolio worth $400,000 and income needs of $50,000, assuming no taxes and the preservation of the portfolio balance, he or she is relying on an excessive 12.5% return to fund retirement. A primary advantage of planning for retirement at an early age is that the portfolio can be grown to safeguard a realistic rate of return. Using a gross retirement investment account of $1,000,000, the expected return would be a much more reasonable 5%.

Depending on the type of retirement account you hold, investment returns are typically taxed. Therefore, the actual rate of return must be calculated on an after-tax basis. However, determining your tax status at the time you will begin to withdraw funds is a crucial component of the retirement planning process.

4. What Is Your Risk Tolerance and What Needs Have to be Met?

Whether it’s you or a professional money manager who is in charge of the investment decisions, a proper portfolio allocation that balances the concerns of risk aversion and return objectives is arguably the most important step in retirement planning. How much risk are you willing to take to meet your objectives? Should some income be set aside in risk-free Treasury bonds for required expenditures?

You need to make sure that you are comfortable with the risks being taken in your portfolio and know what is necessary and what is a luxury. This is something that should be seriously talked about not only with your financial advisor, but also with your family members.

“Don’t be a ‘micro-manager’ who reacts to daily market noise,” advises Craig L. Israelsen, Ph.D., designer of 7Twelve Portfolio in Springville, Utah. “‘Helicopter’ investors tend to over-manage their portfolios. When the various mutual funds in your portfolio have a bad year – add more money to them. It’s kind of like parenting: The child that needs your love the most often deserves it the least. Portfolios are similar: The mutual fund you are unhappy with this year may be next year’s best performer – so don’t bail out on it.”

“Markets will go through long cycles of up and down and, if you are investing money you won’t need to touch for 40 years, you can afford to see your portfolio value rise and fall with those cycles. When the market declines, buy – don’t sell. Refuse to give in to panic. If shirts went on sale, 20% off, you’d want to buy, right? Why not stocks if they went on sale 20% off?” says John R. Frye, CFA, chief investment officer, Crane Asset Management, LLC, in Beverly Hills, Calif.

5. What Are Your Estate Planning Goals?

Estate planning will vary over an investor’s lifetime. Early on, matters such as powers of attorney and wills are necessary. Once you start a family, a trust may be something that becomes an important component of your financial plan. Later on in life, how you would like your money disbursed will be of the utmost importance in terms of cost and taxes. Working with a fee-only estate planning attorney can assist in preparing and maintaining this aspect of your overall financial plan,” says Mark Hebner, founder and president, Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”

Life insurance is also an important part of the retirement-planning process. Having both a proper estate plan and life-insurance coverage ensures that your assets are distributed in a manner of your choosing and that your loved ones will not experience financial hardship following your death. A carefully outlined will also aids in avoiding an expensive and often lengthy probate process. Though estate planning should be part of your retirement planning, each aspect requires the expertise of different experts in that specific field.

Tax planning is also an important part of the estate-planning process. If an individual wishes to leave assets to family members or to a charity, the tax implications of either gifting the benefits or passing them through the estate process must be compared. A common retirement-plan investment approach is based on producing returns that meet yearly inflation-adjusted living expenses while preserving the value of the portfolio; the portfolio is then transferred to the beneficiaries of the deceased. You should consult a tax advisor to determine the correct plan for the individual.

The Bottom Line

Retirement planning should be focused on the aforementioned five steps: determining time horizons, estimating spending requirements, calculating required after-tax returns, assessing risk tolerance vs. needs for portfolio allocation, and estate planning. These steps provide general guidelines regarding the procedures required to improve your chances of achieving financial freedom in your later years. The answers to many of these questions will then dictate which type of retirement accounts (defined-benefit plan, defined contribution plan, tax-exempt, tax deferred) are ideal for the chosen retirement strategy

One of the most challenging aspects of creating a comprehensive retirement plan lies in striking a balance between realistic return expectations (for example, few retirees today have a defined-benefit pension) and a desired standard of living. The best solution for this task would be to focus on creating a flexible portfolio that can be updated regularly to reflect changing market conditions and retirement objectives.
Published at Tue, 04 Apr 2017 10:00:00 +0000

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Three Tech Stocks to Buy for the Second Quarter


Three Tech Stocks to Buy for the Second Quarter

By Alan Farley | March 31, 2017 — 12:30 PM EDT

The Nasdaq-100 led broad benchmarks in the first quarter, driven higher by widely held tech stocks that underperformed through most of 2016. While the most popular plays have rallied into lofty levels that could trigger sizable second quarter pullbacks, secondary tech names could gain traction as market players take profits and look for lower-risk buying opportunities.

Fiber optics, semiconductors and software providers look like sweet spots in the hunt for second-quarter tech winners but it’s hard to make bad choices because the rising market has been floating all boats. Even so, first-quarter earnings season is likely to shake out a few bad apples so keep one finger on the exit button until your new positions prove their worth with solid results.


Linux software provider Red Hat, Inc. (RHT) beat fourth-quarter revenues while guiding fiscal year 2018 above consensus in this week’s earnings confessional, triggering a 4-point gap and high percentage rally to a 17-year high at $87.91. It’s been filling the gap while testing new support near $84.50 in the last three sessions and should bounce soon in a healthy follow-through rally.

The uptick has finally confirmed a breakout above the 50% retracement level of the 2000 to 2002 bear market decline between $151 and $2.40, opening the door to the .618 retracement in the mid-90s. Price action between that level and triple digits will likely attract selling interest in a two sided tape, so keep stops tight until the stock trades comfortably above $100. Once settled above that level, it can set its sights on the much larger challenge of rallying into the high.


Apple, Inc. (AAPL) supplier Analog Devices, Inc. (ADI) broke out above the 2004 high at $52.37 in 2015 and tested new support for more than 18-months, ahead of a strong trend advance that reached with 22-points of the 2000 all-time high at $103. The rally stalled in the lower 80s in mid-February, giving way to a narrow trading range that’s still in force as we head into the second quarter.

The slow grind is approaching intermediate support at the 50-day EMA, with round number 80 likely to trigger a bounce that tests the February high at $84.24. More dynamic upside may wait until the stock mounts the 4-month rising trendline (blue line), currently near $87. At that point, a momentum crowd could choose to buy high and sell higher, triggering a vertical rally into triple digits and a major test at the 17-year-old high. The company reports earnings on May 18.


Flir Systems, Inc’s (FLIR) technological and military orientation offers a twin benefit to market players, given the Trump administration’s commitment to higher defense spending. It stalled just above $37 in 2011 at the tail end of a 2-year recovery wave and failed a breakout attempt at that level in 2014. The stock returned for a third visit at the end of 2016 and dropped into a sideways pattern that’s holding close to that resistance level.

This coiling action predicts a multiyear breakout that tests the 2008 all-time high at $45.49. The sky’s the limit once that level gets mounted, favoring a rapid advance that could offer outsized gain to well-timed long positions. Early trade entry ahead of a breakout makes perfect sense because the narrow trading range supports relatively tight stop losses in case of an unexpected downturn. The company reports earnings on April 26.

The Bottom Line

Big tech stocks have led the first quarter advance, with the most widely held names now overbought and in need of multiweek pullbacks. This technical positioning should generate a rotation into second tier sector components that have attracted less public attention than their more popular peers.
Published at Fri, 31 Mar 2017 16:30:00 +0000

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How To Trade Break Out Formations


How To Trade Break Out Formations

This is going to be a bit of quickie as I find myself short on time ahead of the opening bell. But if you have been around the block a few times then you know that quickies can be quite fun. And we both you know you’re easy!

Today’s formation on the E-Mini is a great study piece as it paints a textbook break out formation which often can successfully be leveraged as an entry opportunity. For some reason however many retail ratlings seem to repeatedly be missing out as they are unsure as to where exactly to enter. Let’s set the stage:


Quite frankly this is as textbook as it comes. Clearly what we have here is a touch of the lower 25-day SMA, which at first sight looked like weak technical context and thus was not suggested as an entry opportunity by yours truly earlier this week. Nevertheless I’m already positioned long since Monday after a speculative entry signal courtesy of the Zero indicator (you ARE a sub right? If not read this).

As a sidenote, since then I have received several inquiries as to whether it is too late to go long here and/or if I am still holding my position. Answers: NO, and YES – so rejoice!

Now I can already hear your little rodent brain rattling. “Is this a good entry opportunity?”, “Is it too late to enter?”, “Do I wait for a retest lower?”, “Do I wait for a breach of the recent spike high?”.

And here are the respective short answers: YES, NO, YES, YES.

I can understand how this may be confusing to you and I promise I’ll explain this in exhausting detail below – in the subscriber section. Sorry I cannot give it all away for free as the lair doesn’t run itself and those damn sharks in our moat need a new set of laser beams.


Now if that ticks you off then this will most likely push you over the edge. Here’s an update on our copper entry from last Tuesday. And yes it was (drum rolls) posted to the subscriber only section. Well we were hoping for a drop toward 2.62 and actually snagged it – just barely. By the way as a rule if you’re not being filled after a quick spike below your threshold then it’s usually okay to chase it up a few ticks. Yes, it may come back down and you missed a better fill but often you wind up missing out on a good campaign, especially on thinner contracts like HG. For me entry thresholds are ranges – not exact price points.

Anyway, let’s advance our trailing stop to < 2.653 – be generous – you  know make that < 2.65. We are now in very good shape here and don’t want to get shake out too early.


Still here? Well, then how about crude, which I didn’t get a fill on but I’m sure that some of the subs did. And what a beauty it has turned into. If you’re long this puppy then move your stop to < 48.27, which is the most recent spike low.

Alright, here’s the solution to today’s puzzler in all its glory:

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Please login or subscribe here to see the remainder of this post.

So which one do you pick? Well actually you can run with all three scenarios and this way scale yourself into the position slowly. In case you missed it – I wrote a pretty nice post on the subject which shows you the math involved. Have fun but keep it frosty.

Published at Thu, 30 Mar 2017 13:48:22 +0000

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Critical Fibonacci Extensions May Mark End Of Trump Rally


Critical Fibonacci Extensions May Mark End Of Trump Rally

By: Chris Vermeulen & John Winston | Wed, Mar 29, 2017

Our research is showing critical Fibonacci extensions are in place for US
Major Markets that may be foretelling of a massive market correction. Part
of our research is to search for and study events and resources that are a
bit abstract. One component of this research is to identify critical price
levels and early warning triggers from abstract price data. The major US indexes
and most individual all showing price advanced over the past years and many
are showing extended price rallies since the US Presidential election on November
8, 2017. Yet, none are as foretelling as our “US Custom Index”.

The INDU is showing a price advance equal to a 1.8765 Fibonacci expansion.
The SPX500 is showing a price advance equal to a 1.9165% Fibonacci expansion.

What is the relevance of these expansions? Many Fibonacci retracements and
expansions fail near a n.875 ~ n.9231. Now, you may be asking, “why should
I be concerned about failure at these levels?”. The answer is simple, one of
the most important components of Fibonacci analysis is an abstract theory regarding “Failure
to Succeed or Failure to Fail”. Another very important component of Fibonacci
theory is that “price is always attempting to establish new highs or lows”.
How this relates to our understand of what to expect in the future depends
on expectations that are presented by understanding Fibonacci ratios, price
projections and simple key components of the Fibonacci theory.

Without going into too much detail, “Failure to Succeed” is the failure to
match or meet expected price objectives or actions. “Failure to Fail” is the
ability of price/trends to exceed expectations or objectives and extend beyond
expected target levels. Again, price is always attempting to establish new
highs or lows within Fibonacci theory. Therefore, success or failure at critical
levels means price should attempt to either reverse or extend.

As you are probably well aware, we have been expecting an increase in the
VIX to coincide with extensive major market volatility between March 15th and
April 24th. So far, the VIX has jumped form the March 15th low over 41%. You
can read more about this by reviewing THE
. Our analysis, originated in late January, and warns of an
extreme potential for massive price movements across the globe. This all depends
of a number of factors correlating to prompt these expected swings, but so
far, everything we predicted is starting to happen.

VIX Chart

Weekly VIX Chart

This next chart of the NAS100 Index shows a number of key components at play.
First, the 2.618% Fibonacci expansion level is currently providing strong resistance.
Additionally, it shows a series of price cycle bottoms that originate from
2014 & 2015 price lows. Lastly, it shows current price highs are also lining
up on a 1.50% Fibonacci Expansion from the recent price rotation illustrated
by the last red rectangle on the chart. One should pay attention that the two
red rectangles are copies of one another and illustrate that price rotation
has been in nearly identical volatility ranges since the end of 2014. Only
after the US Presidential election was price able to breakout of these ranges
and extend to current levels.

Further, the arcing analysis on the chart represents Fibonacci vibrational
price analysis. It is designed to show us where and when price may break out
of or into new trends/channels. As you can see, the arcs align relatively well
with price activity and price has recently extended beyond the most recent
arc level on the right edge of the chart.

Combine all of this analysis into a simple message, one would likely resolve
the following : Current Fibonacci price extensions are providing clear resistance.
Price cycles state we should establish a new price low near April 24th and
price has recently extended beyond a vibrational cycle that coincides with
Fibonacci resistance. Historical price ranges show us that June 5th, 2017 may
begin a new price trend cycle

NAS100 Chart

NASDAQ100 Chart

The “key” in terms of our analysis and understanding of the current market
setup is seen on our US Custom Index. This custom index is made up of key components
of the US Economy (US Retail, Real Estate, Consumer Finance, Consumer Discretionary
and the SPY). The reason we have selected these for our index is we believe
they relate a broad scope of “early movers” as related to the overall health
of the US economy. In other words, this custom index should relate early strength
or weakness in the relation to general US economic activities rather well.

This chart is showing a number of key components, but most important is the
YELLOW line near the top which represents a near EXACT 1.272% expansion of
price from recent highs set in 2007 (2.272 % expansions from the lows in 2009).
The n.272 Fibonacci expansion levels, like most other Fibonacci expansion levels
prompt one of two possible outcomes; a. Price congestion followed by further
advance, or b. a moderately deep price retracement (often greater than 25%
of the recent move).

This chart, as we stated earlier, is the “key to understand the potential
of and expectations of all of this analysis. With the VIX expected to “spike”
between now and April 24th, the NAS100 chart showing massive expansion (2.618)
that is correlating with recent 1.50% resistance and key vibrational resistance
and, this Custom Index, pivoting off of critical 1.272% Fib Expansion, near
the beginning of our expected VIX expansion, near Fibonacci Vibrational levels
on April 10th and near the lower range of a multi-year historical Standard
Deviation channel, we are preparing for an immediate potential price rotation
(correlating with a spike in the VIX) that may drive equity prices down to
near 2016 lows (a drop of potentially 15~20%).

Custom Index Chart

Custom Index Chart

Our analysis is showing that many key elements of cross market analysis are
aligning to warn that we may see a moderate term end to the “Trump rally” and
a relatively deep retracement that could shake the markets. We are not predicting
a 2009 style crash. We are, although, expecting healthy market rotation that
will setup additional opportunities for traders to identify profitable trades.

At this point in time, we wanted all of our readers to be aware of the multiple
correlations that support our analysis and the fact that volatility is set
to start rising. Keeping this in mind, we are positioning ourselves and our
clients to take advantage of these expected moves and we will continue to monitor
the markets price action to take advantage of opportunities as they form.

If you want know more of our unique Momentum Reversal Method
(MRM) and our trade setups, please visit to
learn more.

Chris Vermeulen

Chris Vermeulen
President of AlgoTrades Systems

10126 Hwy 126 East, RR#2
Collingwood, ON, L9Y 3Z1

Chris Vermeulen

Chris Vermeulen, founder of AlgoTrades Systems., is an internationally recognized
market technical analyst and trader. Involved in the markets since 1997.

Chris’ mission is to help his clients boost their investment performance while
reducing market exposure and portfolio volatility.

Chris is also the founder of, a financial education and
investment newsletter service. Chris is responsible for market research and
trade alerts for of its newsletter publication.

Through years of research, trading and helping thousands of individual investors
around the world. He designed an automated algorithmic trading system for the
S&P 500 index which solves his client’s biggest problem related to investing
in the stock market: the ability to profit in both a rising and falling market.

AlgoTrades’ automated trading systems allows
individuals to investing using either exchange traded funds or the ES mini
futures contracts. It is supported by many leading brokerage firms including:

– Interactive Brokers
– MB Trading
– OEC OpenECry
– The Fox Group
– Dorman Trading
– Vision Financial

He is the author of the popular book “Technical
Trading Mastery – 7 Steps To Win With Logic
.” He has also been featured
on the cover of AmalgaTrader Magazine, Futures Magazine, Gold-Eagle, Safe
Haven,The Street, Kitco, Financial Sense, Dick Davis Investment Digest and
dozens of other financial websites. His list of personal and professional
relationships approaches 25,000, people with whom he connects and shares
is market insight with out of his passion for trading.

Chris is a graduate of Seneca College where he specialized in business operations

Chris enjoys boating, kiteboarding, mountain biking, fishing and has his ultralight
pilots license. He resides in the Toronto area with his wife Kristen and two

Copyright © 2008-2017 Chris Vermeulen

John Winston

John Winston,
Chief Investment Strategist
Active Trading Partners

John Winston

John Winston, Chief Investment Strategist of Active Trading
is a recognized industry expert who specializes in providing financial advisors,
hedge funds and individual traders with accurate market forecasts and trading
opportunities. John’s mission is to bring a unique combination of relevant
market news, experience, and dynamic crowd behavioral trading ideas.

Prior to Active Trading, He spent years studying human behavioral
patterns, fundamental analysis, Fibonacci retracements, and Elliott wave patterns.
He knows investors love to chase stocks up and by doing so, they increase their
risk without knowing it. And that the crowd loves to sell low and buy high,
John attempts to do the opposite.

Chris Vermeulen of met
John in late 2008 as the financial crisis was unfolding. After numerous months
of following the trading profits of and methodologies that John employs now
at ATP, Chris suggested that a joint venture be formed and we offer this service
to a select group of partners (subscribers).

Over a 23 year period, John learned how to consistently profit from investor
behavior outperforming the market in both bull and bear market cycles. These
strategies have become the foundation for his premium Stock and ETF trading
alert service.

Copyright © 2017 John Winston

All Images, XHTML Renderings, and Source Code Copyright ©
Published at Wed, 29 Mar 2017 10:44:59 +0000

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Systematic Trading Continued. Unwrapping the onion

By NikolayFrolochkin from Pixabay

Systematic Trading Continued. Unwrapping the onion

by SCOTTMARCH 15, 2017

One continual theme in my own trading is that every time I think I have it figured out – I get punched in the face with a unexpected problem. The tendency is to go more complicated, but often the solution is a degree of acceptance around the nature of the game. Sometimes my edges work, sometimes they don’t. Sometimes they stop working for long periods, 6 months or more. That’s actually ok for me, but it’s not ok for other people. The ultimate systems you choose have to suit your personality. If you cannot handle extended periods of working hard without making money (I can) then you have to retool your systems to avoid this.

My opinion is that the best edges are robust. Robust edges tend not to disappear, but not post objectively high results either (in SQN, Sharpe or expectancy). I’m an investor in a fund with the following returns (after fees) off a very simple and standard approach to trend following, no different to a number of other firms doing very similar things. You can see this is clearly an amazing investment, but it is lumpy, producing 108% in 2008 but a few negative years. Sharpe ratio is only .7 or so, not institutional grade for most people. But the edge is robust, demonstrably provable and the system is simple and I understand it. It is almost inconceivable that in 20 years (the timeframe I intend to keep this investment) I will be looking at an empty account saying “I wonder why trend following stopped working”. Almost certainly, if the bear dreams come true, the odds are strong that this will post a triple digit year. This, for me, is the gold standard of a robust edge.


My opinion is that simplicity is sophistication, and complexity is laziness.

The first thing you need to figure out, before you go any further is:

Is it an edge? – Use a scatter plot to figure that out. If you don’t want to do that then pick the classic edges which other professionals use and you won’t go too far wrong.

This is actually a special day for me on Evilspeculator. For years when I was a regular here I was telling people to get off their asses and do the damn work of finding some edges and exploiting them. Mostly my advice went unheeded but every now and again someone gives me hope, just like Bobby did when he went all out on system creation. User Francis (Mulv) has gone out of his way to provide some excellent statistics on the fakeout setup which Ivan provided us with.

What he discovered is a classic property of mean reversion systems, which segues into a classic mistake we often make in backtesting. That problem would be selection bias, where if we select any random entry and test it on a market we know has gone up, then it will probably show an edge. We can subvert this tendency to bullshit ourselves by testing random markets (and keeping the results from ourselves so we can’t trick ourselves). Professionals call this “out of sample data”. Another method is to sequester part of your available data and keep it aside, then test your data against it, to see if your hypothesis matches clean data. One thing for sure we know

Mean reversion works DRAMATICALLY BETTER in the direction of the higher timeframe trend. So if this works as a short setup, as a long setup it should be better (or something is very wrong)

Let’s dive deep and take a look at the bounty he has provided. I haven’t had the time to personally verify these statistics, but at a glance they look right. Take it for what it is, an interesting learning exercise you can apply to your own potential setups, rather than an authoritative data set. Also, there is a significant chance I’ve misinterpreted the data, since it’s not my spreadsheet I’m working with. If so, mea culpa, but the learning exercise remains.

If you want detailed instructions on how to do this click here (and read the bit about adding the regression lines). I’ll break down the results for you. Firstly Francis has tested with and without the condition of the “break of the low of the setup bar”, so we can dive deep and see how much, if at all, it changes things.

The reason we want to test firstly without the break of the low/high and then with is that so we can test everything one at a time. Maybe if the setup works with the break of the low the effect is only due to the break. That is the kind of thing we want to know.


At this stage I’ll look at just the long setups. As expected the short side in a bull market is categorically not an edge (in fact not surprisingly shorting the emini has been a good way to get your face ripped off the last 7 years). So bottom line, we have to take all these results with a grain of salt since it is a strong market.

Firstly lets look at what the market does on the day after making a double bottom (without breaking the high). You can see this is a decent positive correlation, the points are reasonably clustered (ok R squared value). This tells us what we would probably expect, that the market is trying to go up making a double bottom. One thing that would be worth testing is buying the close and selling the following close. Or alternatively buying the old spike low on a limit and selling the following close.


Day 2, however, is showing that the first day was just a blip. Market is now negatively correlated. Not what we would want to see, but perhaps the low is being retested (that’s drawing a very long bow)


On Day 3 we have a weak positive correlation, so the market is trying to rise.


So what do we have here? We have a market with very weak tendency to rise on day 0 and day 3 after making a double bottom. This is not at all what we would expect from a strong edge, aside from day zero it’s not an edge at all.

When we move on we will consider, firstly how it behaves with the break of the lows/highs as part of the condition. Then we will consider it as a component of mean reversion, at bollingers/keltners/50 bar highs/lows. The logic for this is sensible, perhaps a reversal setup is better at an extreme.

For now we have to conclude that there is nothing inherently bullish about a double bottom in ES beyond an intraday bounce. That’s great to know, and tomorrow we will continue.

My apologies for this being slower going than I thought, and apologies for rambling a little today. I’ll pick it up again tomorrow :-)
Published at Wed, 15 Mar 2017 10:43:19 +0000

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Domino’s Streak of Strong Sales Growth Continues

by Riedelmeier from Pixabay

Domino’s Streak of Strong Sales Growth Continues

By Daniel B. Kline | February 28, 2017 — 12:01 PM EST

Clearly, the Noid has been defeated.

Domino’s (NYSE: DPZ) continues to deliver results that defy the market conditions dragging down sales in much of the restaurant industry. The company posted comparable-store sales gains in both the United States and globally in the fourth quarter, its 23rd straight quarter of domestic same-store growth and its 92nd quarter in a row growing internationally.

And it’s not just that the company managed to add to its same-store sales totals: The numbers have been impressive. Domestic same-store sales climbed 12.2% year over year in Q4, and they jumped 10.5% for the full year. The chain’s international locations had 4.3% growth in Q4 and a 6.3% gain for the year.

“I’m extremely proud of our franchisees and operators worldwide, including those who contributed toward back-to-back years of double digit sales growth in the U.S.,” said CEO J. Patrick Doyle in the Q4 earnings release. “While these unprecedented results speak for themselves, I am most pleased with the passion and energy we demonstrated throughout 2016 in meeting the challenge of sustained success. The momentum and alignment within our system has never been stronger.”

A look at Domino’s numbers

In addition to growing same-store sales, Domino’s also improved its earnings per share. The company delivered Q4 EPS of $1.48, up 25.4% over the prior-year quarter. Full-year EPS came in at $4.30, up 23.9% over 2015. Revenue also climbed 10.6% year-over-year, despite the previous year’s quarter being a week longer.

Domino’s also provided indications that its expansion across the world is unlikely to slow down anytime soon. The company reported “record global net store growth of 1,281 stores in 2016, comprised of 171 net new domestic stores and 1,110 net new stores internationally.”

What’s next?

This is a clear case of “if it’s not broke, don’t fix it.” Going forward, however, Domino’s will tweak its formula. The company will continue to modernize the look of some of its stores, and it has been a steady innovator when it comes to ordering technology.

There’s nothing that suggest that an end is coming to either of Domino’s same-store sales streaks in the current quarter. Customers globally seem to have an ever-increasing desire for really convenient, mediocre pizza that this chain has been stunningly good at filling.

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Daniel Kline has no position in any stocks mentioned.
Published at Tue, 28 Feb 2017 17:01:02 +0000

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A New Low Volatility ETF Soars

{pixabay|100|campaign}A New Low Volatility ETF Soars

A New Low Volatility ETF Soars

By Todd Shriber | February 28, 2017 — 12:12 PM EST

Low volatility exchange traded funds (ETFs) were the talk of the ETF universe for a significant portion of 2016, but judging by recent outflows from some of these funds, investors currently are not overly enthusiastic on the low volatility factor.

Enthusiasm or not, some low volatility ETFs continue delivering solid returns and that includes some of the newer members of the group, such as the Fidelity Low Volatility Factor ETF (FDLO). FDLO debuted in September as part of a broader group of smart beta offerings from Fidelity, so the ETF is not old, but it was one of about 120 to ascend to record highs on Monday.

FDLO tracks the Fidelity U.S. Low Volatility Factor Index, “which is designed to reflect the performance of stocks of large and mid-capitalization U.S. companies with lower volatility than the broader market,” according to Fidelity.

A deeper look at FDLO reveals this is not what many are used to when it comes to low volatility ETFs, but that is not a bad thing. For example, FDLO’s largest sector weight is an almost 21.4% allocation to the technology sector, making FDLO the only U.S.-focused ETF dedicated to the low volatility factor that features technology as its largest sector weight.

Said another way, investors are unlikely to find rival low volatility ETFs that feature Microsoft Corp. (MSFT) and Alphabet Inc. (GOOGL) as the top two holdings, as is the case with FDLO.

Standard operating procedure for many low volatility ETFs is to feature overweight exposure to the utilities and consumer staples sectors, and maybe healthcare, too. FDLO’s 13.2% healthcare weight is nearly inline with the S&P 500, but the ETF’s 3.1% utilities weight is low compared to competing volatility-fighting equity funds.

While FDLO has its perks, including the availability of trading the ETF without a commission charge on the Fidelity platform, this is still a low volatility fund. What that means is that investors should be prepared for some lagging when the broad market is sailing higher. For example, FDLO is up 8.4% since inception, a performance that lags the S&P 500 by about 200 basis points.

FDLO charges 0.29% per year, which is inexpensive relative to other smart beta strategies, but nearly double the 0.15% annual fee on the rival iShares Edge MSCI Min Vol USA ETF (USMV).
Published at Tue, 28 Feb 2017 17:12:00 +0000

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The Psychology of High Intensity Interval Training


The Psychology of High Intensity Interval Training

High intensity interval training (HIIT) is an approach to exercise that replaces extended workout routines with shorter, more intense periods of activity that alternate with periods of slowing down.  The graphic above depicts one approach to HIIT; this article outlines several common protocols.  HIIT is related to super slow approaches to strength conditioning, which emphasize the value of fewer repetitions performed slowly and carried out to the point of failure.  The idea is that the body achieves maximum adaptive response when it is challenged intensively for short periods of time.  This makes exercise time-effective as well as effective for aerobic conditioning and strength-building.

Interesting from a peak performance perspective is the psychological impact of HIIT.  Viewed as psychological training, HIIT can be seen as a system for routinely challenging one’s limits.  Imagine starting every day by testing your limits and extending those.  Day after day, we become accustomed to extraordinary effort and we improve our capacity to sustain effort.  After all, when we push our limits with super slow activity and high intensity effort, we also have to sustain a high degree of focus and cognitive intensity.  As I wrote about the preparation routine of legendary wrestler and coach Dan Gable, his workout routine included intense visualization as well as physical effort.  His training extended to mind and body.

And what about training for traditional performance fields, from athletics to the performing arts to trading?  Would such training benefit from high intensity routines?  Would traders learn markets better if their learning did not take place in a classroom, but instead in an environment of intense simulation?  If we don’t systematically test our limits, can we truly hope to extend them?  If we don’t train for extraordinary effort, can we expect to summon our best in moments of challenge?  High intensity interval training may pose benefits across many domains, as a framework for self-development.

Further Reading:  Life’s Formula for Success

My Trading Journal: 30 Day Trading Journal

Published at Sat, 10 Dec 2016 11:06:00 +0000

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Momentum in the Market: Trade It or Fade It?


Momentum in the Market: Trade It or Fade It?

A trend day is basically a day with momentum on the day time frame.  The buyers or sellers so dominate the market activity that the other side backs off for the remainder of the session.  That is what we saw in yesterday’s trade:  once we broke to new highs with significant uptick readings, the buyers remained in control for the session.  I find it useful to track the distribution of NYSE TICK readings during the trading day to identify when we have made significant shifts in buying/selling and when we are extended within a relatively static range.  That shift of distribution often makes the difference between trading strength or weakness versus fading it.

The momentum principle is true on longer time frames as well.  Yesterday’s post took a look at the absence of market weakness as an indication of potential future market strength.  Now let’s look at the presence of market strength, such as we saw in yesterday’s session.  Does that tend to lead to future weakness as an overbought signal, or does it tend to yield further gains as part of momentum?

If we track the number of NYSE stocks closing above their individual Bollinger Bands and those closing below, we find that 412 closed above their bands.  That is a huge number; one of the highest since I began aggregating these data in 2014.  For comparison, since 2014, the median number of stocks closing above their bands each day has been 62 with a standard deviation of 69.  We’ve had 48 occasions over that period in which more than 200 stocks have closed above their upper bands in a trading session.  Five sessions later, the average price change in SPY has been a loss of -.13%, compared with an average gain of +.15% for the remainder of the sample.  When we look 20 days out, however, the average gain in SPY after the strong session has been +.96% versus an average gain of +.49% for the remainder of the sample.  While it’s been normal to have some near-term pullback after extreme strength, it’s also been common for the strength to resume.

The market spends much of its time trading in a range.  During that range trade, by definition the moves higher and lower lack the momentum to be sustained.  The best trading strategy is to recognize the loss of momentum and fade the strength or weakness.  Once we expand buying or selling, however, we can get the breakouts from ranges in which strength or weakness leads to further strength or weakness.  We lose flexibility when we identify ourselves as range (mean reversion) traders or trend (momentum) traders.  One of the great challenges of trading markets lies in recognizing shifts in buying and selling regimes.

Further Reading:  Tracking Institutional Participation in the Market

My Trading Journal: 30 Day Trading Journal

Published at Thu, 08 Dec 2016 11:03:00 +0000

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What is Your Recovery Plan After Trading?


What is Your Recovery Plan After Trading?

Many thanks to a savvy portfolio manager who passed along this dramatic account of what professional football players go through to recover from their weekend games.  One of the big points of the article is that the longevity of a professional career is partly a function of the time spent in recovery on Mondays.  Tending to the body after injuries allows for faster healing and prevents those injuries from compounding to the point where they lead to disability.

The principle of recovery is important for all performance professionals, if not so dramatically as in football.  In performance, we push beyond our comfort zones, and that effort taxes us.  A great example is willpower.  When we’ve focused and made critical decisions under pressure for an extended period, that willpower runs out of power.  We become fatigued, and in the fatigued state we’re more likely to make mistakes and fall into old habit patterns that cost us money.

Imagine a person who works nonstop planting grass seed and becomes so exhausted that they fail to water the areas they planted.  We can wind up pushing ourselves to the point where we fail to water ourselves.  We fail to take the time to renew our energy and that takes a toll on performance.

We often hear that traders should plan their trades and trade their plans.  Less appreciated is the importance of plans and routines for recovery.  What are you doing on evenings and weekends that renews you?  Of the four main sources of well-being, which ones are you cultivating in your time away from markets:

Happiness, and doing things that are fun and enjoyable
Satisfaction, and doing things that are meaningful
Energy, and doing things that energize you mentally and physically
Relationships, and doing things that bring you closer to the ones you care about

A good recovery plan should include healthy eating, high quality sleep, and activities that check all four of the boxes above.  

It’s the watering you do at night and on weekends and holidays that allows your career to blossom during the work day.

Further Reading:  A Personality Questionnaire for Traders

My Trading Journal: 30 Day Trading Journal

Published at Tue, 06 Dec 2016 11:49:00 +0000

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A Unique Way of Tracking Market Strength and Weakness

by geralt form Pixabay


Above we see a cumulative running total of the number of NYSE stocks closing above their upper Bollinger Bands minus the number closing below their lower bands.  (Data from the Stock Charts site).  This is an interesting measure, because it tells us how many issues are distinctively strong versus weak.  The slope of the cumulative line is as important as the direction, as it gives us a sense for the breadth of market strength or weakness.  Note the anemic bounce in the cumulative line since the election lows.  This reflects the very mixed breadth of the market rise–some sectors quite strong, others distinctively weak.  Still, the line has been consistently rising, reflecting relatively little weakness among stocks.  For example, the past two days we’ve seen 95 and 103 stocks close above their respective bands, but only 5 and 9 stocks close below their lower bands.  In general, to get a sustained market decline, we need to see not just a reduction in market strength, but an expansion of weakness.  

The absence of weakness very often is a useful predictor of future market strength.  For example, when the number of stocks below their Bollinger Bands has been in its lowest quartile since 2004 (little weakness), the next 20 days in SPY average a gain of +.95%.  When the number of stocks below their bands has been in their highest quartile (great weakness), the next 20 days have averaged a gain of +.70%.  All other occasions have averaged a 20-day gain of only +.21%.  It’s a nice example of how so much in the way of market returns comes from the relative extremes of momentum and value.

Further Reading:  Momentum, Value, and Short-Term Market Movement

My Trading Journal: 30 Day Trading Journal

Published at Wed, 07 Dec 2016 11:01:00 +0000

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The Path of Persistence


The Path of Persistence

Here’s a great exercise:

Review your trading journal and/or your written goals and plans over the past several months.

How many items appear repeatedly, over many days per week and over many weeks?

Change is rarely instantaneous.  Enduring change requires repetition.  Repetition requires persistence.  

If your notes and journal entries don’t have items you work on repeatedly, over time, then you’re simply logging one good intention after another.  The path of least persistence rarely is the path to success.

And if you’re not persisting in keeping a journal, setting goals and plans, and chronicling your progress and learning?

We don’t win by persisting at trading.

We win by persisting at working on our trading.

Further Reading:  How Ordinary Traders Become Extraordinary

My Trading Journal: 30 Day Trading Journal

My Trading Journal: 30 Day Trading Journal

Published at Mon, 05 Dec 2016 11:09:00 +0000

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Trading Model and Market Update


Trading Model and Market Update

Here’s an update of the multivariate trading model I keep for SPY.  A number of variables go into the ensemble model, including buying pressure, selling pressure, breadth, sentiment, and volatility.  Readings of +3 or greater and -3 or less have had particularly good track records in and out of sample, anticipating price change 5-10 days out.  Note that we hit a -3 reading on Friday; prior to that we saw +3 readings shortly before and after the election.

Thus far, we are not seeing significant breadth deterioration in stocks.  For ten consecutive sessions, we have had fewer than 200 stocks across all exchanges register fresh monthly low prices.  This breadth strength generally occurs in momentum markets; weakening of breadth–particularly an expansion in the number of issues making fresh lows–tends to precede market corrections.  It is not at all unusual for momentum markets to correct more in time than price.  We’ve seen selling pressure the past two sessions, but not significant price deterioration.  This dynamic allows momentum markets to stay “overbought” for a prolonged period as price consolidates and often grinds higher.

Further Reading:  Previous Model Update

My Trading Journal: 30 Day Trading Journal

My Trading Journal: 30 Day Trading Journal

Published at Wed, 30 Nov 2016 10:13:00 +0000

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Trading Market Flows by Sustaining the Flow State


Trading Market Flows by Sustaining the Flow State


The flow state is one in which we become highly absorbed in our activities, losing a sense of time and experiencing deep pleasure.  A great example of flow comes from the drumming movie mentioned in the previous post.  The drumming greats are not explicitly thinking about what they are doing, what they should do, or what they should have done.  The skill is flowing through them, and they are performing in a profoundly fulfilling zone.

The capacity for operating within a flow state is one that can be developed.  Indeed, we can look at deliberate practice as a training ground for flow.  As we tackle one challenge after another, we also extend our capacity to sustain the flow state.  Flow requires an ability to operate outside our comfort zones, but our limits of willpower make it difficult to stay outside our sphere of comfort.  A fascinating study by Judith Lefevre found that people experience flow more often in work than in leisure, and yet they are more motivated to seek leisure than work.  She notes:

“It is possible that the higher levels of concentration and activation in flow cannot be tolerated by most people for extended periods of time.  In making the choice to spend their leisure time in the low challenge, low-skill context rather than flow, the workers may be indicating their preference to rest from the demands of work, even at the cost of an overall reduction in the quality of experience.”  p. 317

If the research on flow is correct, then much of traditional trading psychology is wrong.  The elite athlete, drummer, or chess player does not achieve flow by controlling emotions, imposing discipline, or basking in awareness of their feelings.  Rather, flow is achieved by shifting to an entirely different state of consciousness, not by rearranging the components of normal consciousness.  That different state requires sustained, relaxed focus and immersion in experience.  That shift of state is one in which we experience ourselves and the world differently.  It’s also one in which we become sensitive to patterns in the world around us.  A wonderful portion of the drumming movie pans to the lake surrounding the camp and the sounds of the insects and lapping water.  It is impossible to not hear a poly-rhythmic drumming in the sounds of nature–something we would have never apprehended prior to watching the film.

 It is in this context that Campbell’s observation is profound:  when we follow the bliss of operating within the zone, doors open to seeing the world in new ways.  Patterns that are hidden to us in normal, distracted consciousness pop out when we in a flow state.  In our normal state, we try to perform well; in the zone, performance flows through us.

Are you trying to correct your mistakes while you’re trading?  Are you trying to avoid poor trading practices?  If so, you’re trading in a flaw state, not a flow state.  Flow requires a loss of self-awareness; not thinking positively or negatively about ourselves, our P/L, or our performance.  

One of the greatest dilemmas we face as traders is that we benefit from following our bliss, but we are limited in our capacity to sustain bliss.  It may well be the case that the greatest value of preparation for trading and review of trading is the exercise of the capacity for relaxed concentration.  In building our capacity for flow, we cultivate the state of consciousness in which we’re most sensitive to the flows of markets.

Further Reading::  Why It’s Important to Go With the Flow State

Stock market, trading journal, daily journal, investing journal

My Trading Journal: 30 Day Trading Journal

Published at Sat, 26 Nov 2016 13:08:00 +0000

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