All posts in "Investing"

What is the difference between positive and normative economics?

By annca from PixabayWhat is the difference between positive and normative economics?


Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved.

While this distinction seems simple, it is not always easy to differentiate between the positive and the normative. Many widely-accepted statements that people hold as fact are actually value based.

For example, the statement, “government should provide basic healthcare to all citizens” is a normative economic statement. There is no way to prove whether government “should” provide healthcare; this statement is based on opinions about the role of government in individuals’ lives, the importance of healthcare, and who should pay for it.

The statement, “government-provided healthcare increases public expenditures” is a positive economic statement, as it can be proved or disproved by examining healthcare spending data in countries like Canada and Britain, where the government provides healthcare.

Disagreements over public policies typically revolve around normative economic statements, and the disagreements persist because neither side can prove that it is correct or that its opponent is incorrect. A clear understanding of the difference between positive and normative economics should lead to better policy making if policies are made based on facts (positive economics), not opinions (normative economics). Nonetheless, numerous policies on issues ranging from international trade to welfare are at least partially based on normative economics.


Published at Wed, 29 Mar 2017 22:10:00 +0000

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Energy, consumer shares lift S&P 500 to slight gain

By annca from PixabayEnergy, consumer shares lift S&P 500 to slight gain

By Lewis Krauskopf

The benchmark S&P 500 eked out a gain on Wednesday as strength in the energy and consumer sectors offset declines in financial shares and investors began looking ahead to first-quarter earnings season.

The Dow Jones Industrial Average ended slightly lower, falling for the ninth session out of the past 10, while the Nasdaq rose for a fourth straight day.

Investors have been assessing what the Republicans’ failure to pass a healthcare bill means for tax reform and the rest of President Donald Trump’s agenda, hopes for which have helped drive stocks to record highs.

They are looking to first-quarter earnings to support lofty valuations for stocks, with the S&P 500 trading at nearly 18 times earnings estimates for the next 12 months against its long-term average of 15 times.

First-quarter earnings for S&P 500 companies are expected to rise 10.1 percent, according to Thomson Reuters I/B/E/S.

“The policy risk has increased … but economic data still remains solid and therefore earnings should be good,” said Walter Todd, chief investment officer of Greenwood Capital in Greenwood, South Carolina. “Absent some revelation on the policy front, I think that’s the next catalyst for the market, is when we start seeing companies report.”

The Dow Jones Industrial Average .DJI fell 42.18 points, or 0.2 percent, to 20,659.32, the S&P 500 .SPX gained 2.56 points, or 0.11 percent, to 2,361.13 and the Nasdaq Composite .IXIC added 22.41 points, or 0.38 percent, to 5,897.55.

The energy sector .SPNY gained 1.2 percent, leading all sectors, supported by stronger oil prices CLc1.

The consumer discretionary sector .SPLRCD rose 0.6 percent as retailers such as Nordstrom (JWN.N) and Kohl’s (KSS.N) surged. (AMZN.O) rose 2.1 percent and hit an all-time high, giving the biggest boost to the S&P 500 and Nasdaq.

Financial shares .SPSY fell back 0.5 percent a day after leading a rally.

Investors also digested comments from Federal Reserve officials. Chicago Fed President Charles Evans said he favors further interest rate hikes this year, while Boston Fed President Eric Rosengren said the Fed should raise rates three more times in 2017.

“The market seems to be unfazed by the fact that the Fed is looking to be somewhat aggressive in raising rates,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.

The stock rally fueled by optimism President Donald Trump will boost the economy may be near its peak, according to a Reuters poll of strategists, who forecast U.S. shares will gain less than 3 percent between now and year-end.

In corporate news, Vertex Pharmaceuticals (VRTX.O) soared 20.5 percent after the company’s cystic fibrosis treatment succeeded in a late-stage study. The stock boosted the S&P and helped drive the Nasdaq Biotechnology index .NBI up 0.9 percent.

About 5.8 billion shares changed hands in U.S. exchanges, well below the 6.9 billion daily average over the last 20 sessions and among the lightest volume days in 2017.

Advancing issues outnumbered declining ones on the NYSE by a 1.88-to-1 ratio; on Nasdaq, a 1.59-to-1 ratio favored advancers.

The S&P 500 posted 14 new 52-week highs and 1 new lows; the Nasdaq Composite recorded 86 new highs and 24 new lows.

(Additional reporting by Yashaswini Swamynathan in Bengaluru; Editing by Anil D’Silva and Nick Zieminski)


Published at Wed, 29 Mar 2017 22:52:53 +0000

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Critical Fibonacci Extensions May Mark End Of Trump Rally

By 3dman_eu from PixabayCritical Fibonacci Extensions May Mark End Of Trump Rally

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

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Published at Wed, 29 Mar 2017 10:44:59 +0000

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Morgan Stanley Back to November Breakout Level


Morgan Stanley Back to November Breakout Level

By Alan Farley | March 28, 2017 — 3:31 PM EDT

Old school investment house Morgan Stanley (MS) stood at ground zero during the 2008 economic collapse but lived to tell the tale, grinding out a less vigorous recovery than rival Goldman Sachs Group, Inc. (GS). To illustrate, it’s trading at an 8-year high after breaking out with the financial sector following the November election but needs another 30-points to reach the 2007 high. Contrast this performance deficit with Goldman, which recently rallied to an all-time high.

Recent sector weakness is starting to take its toll, dropping the stock down to November support in a selling wave could signal the start of an intermediate correction. And there’s no guarantee that dip buyers will come to the rescue in coming months because Congressional tax reform legislation will trigger much lower stock prices if their efforts fail to translate into statute.

MS Long-Term Chart (1993-2017)


The stock came public at $6.64 (post three splits) in February 1993 and eased into a trading range, with support at $6.50 and resistance at $9.50. It held those narrow boundaries into a 1995 breakout that gathered momentum into the July 1998 high at $40.47. The near collapse of Long-Term Capital Management due to the Asian Contagion undermined financial sector sentiment at that time, triggering a steep decline that cut the stock price in half into October.

It returned to the prior high in 1999 and broke out, taking off in a vertical advance that reached an all-time high at $91.31 in September 2000. It lost ground through the rest of the bear market, bottoming out in the upper-20s in October 2002 and turning higher in a recovery wave that failed at the .786 Fibonacci selloff retracement level in July 2007. A historic decline then followed, dropping the stock more than 60-points to a 14-year low at $10.15 in October 2008.

A bounce into 2009 stalled in the mid-30s, yielding a 2-year downtrend that posted a higher low in August 2012. Committed buyers then stepped in, lifting price in a steady uptrend that stalled at a 6-year high in the low-40s at the end of 2014. An August 2015 test at that level attracted aggressive sellers, triggering a decline that reached a two-year low in early 2016, while the subsequent recovery wave posted a fresh 8-year high in February 2017.

The monthly Stochastics oscillator has eased into a precarious position, lifting into the overbought level in October 2016 and crossing into a bearish cycle that will yield a long-term sell signal when it crosses back through the black line. The stock is already testing new support at $40, generated by the November rally, and could fail the breakout in conjunction with a bearish crossover. In turn, that has the power to dump price into deep support at the 200-month EMA at 31.

MS Short-Term Chart (2015–2017)


The 2015 decline unfolded in two major selling waves that reached the low-20s in February 2016. A Fibonacci grid stretched across the rally waves into 2017 organizes price action, with a rate of change escalating rapidly after the stock lifted above the 50% retracement level. It posted just a single consolidation pattern between the low-30s and upper-40s, raising odds for a steeper slide if it fails to hold support at the 2015 high (blue line).

On Balance Volume (OBV) topped out in June 2015 and entered a distribution wave that continued into the second quarter of 2016, long after the February reversal. Heavy accumulation from that time into the first quarter of 2017 eliminated the deficit, lifting the indicator to a new high while signaling a bullish convergence that confirms the November breakout. This volume support should limit the downside during a correction.

The Bottom Line

Morgan Stanley turned lower after posting an 8-year high on March 1, losing ground for nearly four weeks in a selling wave that could signal the start of an intermediate correction. The November breakout is at immediate risk because the rally cleared that level by just 7-points while the recent decline has given up an equal number, bringing new support into play.
Published at Tue, 28 Mar 2017 19:31:00 +0000

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How do you calculate return on equity (ROE)?


How do you calculate return on equity (ROE)?

By Ryan C. Fuhrmann, CFA | Updated March 28, 2017 — 5:55 PM EDT



Return on equity (ROE) is a ratio that provides investors with insight into how efficiently a company (or more specifically, its management team) is managing the equity that shareholders have contributed to the company. Below is some insight into how to calculate it.Basic ROE

To get to the basic ROE formula, the numerator is net income, which is the bottom-line profits reported on a firm’s income statement. Free cash flow (FCF) is another form of profitability and can be used in lieu of net income.

The denominator for ROE is equity, or more specifically shareholders’ equity. Shareholders’ equity is assets minus liabilities on a firm’s balance sheet and is the accounting value that is left for shareholders should a company settle its liabilities with its reported assets.

ROE then becomes: Net income ÷ shareholders’ equity

Another Calculation for ROE

ROE can also be determined when knowing a firm’s dividend growth rate (g) and earnings retention rate (b). The calculation is as follows:

ROE = g ÷ b

The dividend growth rate can either be estimated by an analyst or an investor, or can be based on a historical dividend growth rate, such as over the past five years or decade. The earnings retention rate can also be a prospective or historical figure and is simply:

1 – dividend payout ratio.

The dividend payout ratio is the percentage of a firm’s net income (or free cash flow) paid out to shareholders as dividends.

Putting it all Together

The ROE of the entire market (as measured by the S&P 500) has averaged in the low to mid-teens in recent years and recently hovered around 12.5% in 2016. A critical component of looking at individual companies is to compare their ROEs with the market as a whole and other rivals.

For instance, at the end of fiscal year 2016, consumer product giant Procter & Gamble Co (PG) reported net income of $10.5 billion and total shareholders’ equity of $57.34 billion. PG’s ROE as of 2016 therefore is:

$10.5 billion ÷ $57.34 billion = 18.33% which exceeds the market’s level and the consumer goods industry average of just below 11% at that time.

This means that for every dollar of shareholders’ equity, P&G generated 18 cents in profit i.e. common equity investors saw an 18.33% return on their investment.

The Bottom Line

ROE is one of the most important metrics for evaluating management effectiveness. There are a couple of key ways to calculate it and use it to compare a firm to its competitors and the market in general.

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The Ultimate Guide On Raw Edge Discovery

The Ultimate Guide On Raw Edge Discovery

by THE MOLEMARCH 27, 2017

Earlier today the GoldGerb asked me how to put together a scatter plot for raw edge discovery as introduced to you by Scott during my Tenerife adventure. Since my gums and I are feeling a bit better than anticipated I thought I may as well condense some of the exchanges I’ve had with him into a dedicated post. It is my belief that raw edge discovery (or RED as it shall be known henceforth) is an integral but much neglected aspect of system development.

When done correctly RED can not only potentially help you avoid months and perhaps even years of wasted time. It will also lead to a cleaner and more solid system whilst helping you develop a deeper understanding of what actually drives your system’s edge. Finally it will allow you to establish baseline from which you are able to evaluate additional parameters or rules and avoid over optimization. It doesn’t do your laundry or wash your car but if you’re a system developer then RED is your starting point when considering a new trading idea.

Like Scott already pointed out in his original post the visualization we will use is a scatter plot, which is easy to do in Excel. There are many tutorials out there [1][2] and Google is your friend. But before we launch Excel or your favorite charting app you first have to go back to first principles and develop a hypothesis. Just like a scientist.

Scott and I looked at a heap of mean reversion systems and the hold time basically boils down to only a few bars. On average only 2 – 3 days. For example here’s Larry Connors’ hypothesis: For stocks in a bull market, trading above their 200 SMA, there is a mean reversion effect.

Raw Edge Discovery – RED

So how should we test this?

First we look at the change of price leading up to the entry condition. Doesn’t matter what exactly your entry conditions are, even if it’s something complicated like:

  • 1) The stock is a member of the Russell 1000 (at the time, not today eliminating – survivorship bias which is huge)
  • 2) Minimum daily liquidity requirement
  • 3) 70% of the stocks in the market trading > SMA(200)
  • 4) The individual stock trading > its SMA(200)
  • 5) A down move defined in different ways (see next list below)
  • 6) A volatility filter (VIX or VIX equivalent below x)

In reference to item 5) this is one of the most complicated mean reversion thing we’ve seen, ever, but a couple of useful takeaways:

  • A close below lower 1.0/20 bollinger
  • 3 lower lows (i.e. a Net-Line Buy Level [NLBL] forms at the high of the first candle)
  • 5 lower closes
  • RSI(2) < 10
  • ROC (3)  low

So you throw all these conditions together. It’s not curve fitting (yet) at this stage, but it *might be*, so don’t go crazy with the rules. Then you make your best guess of the timeframe for the entry condition. In mean reversion systems it is pretty trivial:

  • X axis: delta 3 days before (in percent)
  • Y axis: delta 3 days after (in percent).

By the way this is just a best guess. You could do a few best guesses maybe 3 days, 5 days, etc. In reality in most cases 3 days will turn out your sweet spot but prove me wrong. Of course if you’re building an hourly trading system then you’d be testing against +/- 3 or 5 hours.


Here’s an example of just that produced by Francis – an intrepid reader who took one for the team and volunteered to run the numbers on our Net-Line concept across a few daily charts. The scatters he produced show us a pretty weak positive edge. So what have we learned? At least on the daily panel on their own without additional context single Net-Lines appear to be astonishingly useless as an entry system. Which incidentally is the very reason why I rarely if ever use Net-Lines without additional context such as SMAs, Bollingers, or other even other Net-Lines.

Now a fundamental point I hope you fully comprehend moving forward is that RED only shows you what the market does after your entry condition has been triggered. It has absolutely nothing to do with your future trading system.

The R squared value you’ll get from your scatter is a measure of how strong this effect is, which is effectively how close the dots are to making a line (i.e. how bunched up the dots). If you are looking for mean reversion for example you should be seeing a nice diagonal line.

Bullpucky Testing

So how do you know if you are fooling yourself? After all, if you tested pretty much any half decent MR system on AAPL then you’ll be looking pretty clever. Buying down closes on AAPL will look great on a 10 year backtest. Does that mean your raw edge is real?

  1. Firstly you test on Russell, and then SP500 and Wiltshire 3000 participants. Results should be a forest of good results not just an outlier. Ditto for testing foreign markets. All the good mean reversions test well across countries, e.g. the Nikkei, the Hang Seng, the DAX, etc.
  2.  Secondly you make sure you have statistically significant numbers of data points, in terms of standard error. But for any given set of data the scatter plot will be orders of magnitude (literally) more reliable than a backtest in proving or disproving your hypothesis. That’s how you make your best guess against curve fitting.

After you have proven your hypothesis, then and ONLY then do you start playing around with different exits and actual system stuff.

Back Testing

If your scatter shows you at minimum a weak positive correlation – congrats,  you are now ready for back testing. The gold standard is to take out some data you didn’t use to build your system on, you optimize as little as possible, and then run your new rules over the data you set aside. Don’t just throw 20 rules at your system from the get-go – start small and build it up rule by rule. The fewer rules the better. A system’s quality and resilience come via simplicity and not by adding complexity. The closer your optimized system backtest matches your ‘out of sample data’ backtest, the less you have fooled yourself.

So for example, lets say we built a system on “Buy 7 days down in AAPL, sell a 7 day high close“. That would test amazing, but if we tested the same thing across random out of sample data it would most likely suck. A classic way is to take the Russell 1000 for example, and keep out every 50th stock alphabetically. Don’t use that data at all for your backtests, but when you finish up your system building you run your system against those 50 stocks. The closer the match the less the curve fit, by definition. That’s not to say market type won’t change, but it does prove you haven’t succumbed to data snooping biases.

By the way all this is *really* easy to do with quantopian which we’ll cover in much detail in future articles of this educational series. Now before you recoil in horror at the thought of writing code keep in mind that even Convict Scott could figure it out, and he can barely program his way out of a paper bag.

So to make it easier for you guys, for daily MR systems there are ONLY three really viable entry methods.

  1. Entry a few minutes ahead of close – standard
  2. A.k.a. the Nick Radge: Limit order .5 ATR(14) below last close. We are going for more extreme, and therefore better mean reversion.
  3. Entry following open (generally this one is not as good)

If your system is positive on all three entry methods then it is a lot less likely to be curve fitted. Again this should be a good number in a forest of good numbers. The idea is once you prove the hypothesis to a standard you are happy with, you play with entries and exits until you get something close enough. Then again you run your fledgling new system on:

  • Out of sample data
  • Other indexes in the same market
  • Other stock markets in other countries.

If you still see good numbers (which is rare to be honest) then you can be fairly confident that you aren’t fooling yourself with randomness (hat tip to Nassim). Once again Scott and I both believe that the research environment in quantopian is ideal for this stuff, which is why I am working toward posting a pertinent introduction a few weeks from now. May be something we’ll do after May so that you guys don’t go away

Shameless Plug

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.

Credits go to Scott Phillips who contributed large parts of this post

Published at Mon, 27 Mar 2017 16:34:03 +0000

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Coaching Yourself for a Better Trading Psychology


 Coaching Yourself for a Better Trading Psychology

Thanks once again to the good folks at, who hosted the recent webinar on techniques for changing your trading psychology.  The recording of that session is now up on YouTube.  I appreciate Mike, Terry, and crew making that available for those who could not attend live.  We had over 250 attendees and many more questions than I had time to answer.  In August, therefore, I’ll do another session with, but this time with the sole focus of Q&A.  Traders can ask me any question about any trading (or life) problem, and I’ll respond with ways I deal with those challenges as a psychologist and coach.  As the time gets closer, I’ll post instructions for registering for that session.

In this post, I’d like to elaborate on a point made in the recent webinar:

What traders typically identify as psychological problems in trading are usually the result of an underlying problem and not the problem itself.  Successfully dealing with the issue means identifying and addressing its cause.

This is a very important concept, and it’s what distinguishes would-be trading coaches from actual psychologists.  Very often the wannabe coach has a favorite tool or set of techniques for dealing with trader issues.  It’s one size fits all.  A psychologist recognizes that the problems people experience can have many causes and first tries to determine where the problem is coming from.  

Let’s take a typical example of a trader complaining of lapses in discipline.  The trader trades well for a while, then overtrades and loses more money than is prudent.  The trader asks the coach, “How can I solve this problem?”

It’s the wrong question.  The right question is, “Where is this problem coming from?”  It’s only after asking that question that we can figure out a possible solution.

Consider the following possible causes of lapses in trading discipline:

*  The trader is trying to focus on screens continually for an extended time and is becoming fatigued, with a resulting loss of willpower;

*  The trader is distracted by problems in his/her personal life, perhaps upset about arguments at home or financial issues;

*  The trader suffers from attention deficit disorder and resulting impulsivity;

*  The trader has become frustrated by recent trading losses, as these trigger past feelings of being a loser;

*  The trader has failed to adapt to a lower volume/lower volatility market and is now trading breakouts/momentum that fail to materialize.

You get the idea.  Loss of discipline is not the problem.  Loss of discipline is the result of a problem, and we have to diagnose that problem to figure out how to address it.  Filling out trading journals and checklists will not help the trader deal with personal issues at home or medical issues regarding ADD.  Working on mindfulness and awareness/control of emotions will not help a trader adapt to a changing market regime or address past psychological conflicts.  All of those techniques are useful in certain situations; none are universal solutions for our trading psychology.

The starting point for identifying causes of our trading psychology challenges is creating a catalogue of instances when those challenges are and aren’t occurring.  So, for example, we would note when we are having more trouble with discipline in trading and we would jot down what is occurring at those times:  what’s happening in markets, what’s going on in our minds, what’s happening in our personal lives, etc.  We would also write down occasions when we’re faring much better in our discipline and what is going on at those occasions.  As we catalogue instances, we begin to notice patterns and those provide excellent clues as to potential sources of our trading woes.

The most important distinction is between issues that occur solely within the trading context and issues that also occur outside of trading and/or that have occurred in our past.  If we’re lacking discipline in our personal lives (perhaps by not paying bills on time, by being easily distracted, by being emotionally upset), that is different from situations where discipline lapses are specific to the trading context.  Very often the connection is an emotional one:  the frustration that triggers the lapse of discipline is a frustration that is being felt in other parts of the trader’s life and/or that has been felt during the trader’s past.  

Very often, as you catalogue the waxing and waning of problem patterns, you’ll see that working with a dedicated trading coach is not the answer.  If the problem is a conflict from your past repeating itself in your trading, a competent counselor or therapist can help with this.  If the problem is an attention deficit that has been present since our youth, this can be addressed medically and perhaps via biofeedback training.  If the problem is adapting to changing market conditions, perhaps what is needed is some mentoring from an experienced trader.

We can coach ourselves for a better trading psychology by paying close attention to the triggers of our trading challenges.  Asking the right questions greatly increases the odds of finding solutions for our trading.

Further Reading:  

Brief Therapy for the Mentally Well

More Therapy for the Mentally Well

Four Triggers for Trading Psychology Problems

A Powerful Change Technique for Our Trading Psychology

The Daily Trading Coach:  101 Techniques for Changing Trading Psychology

Published at Sat, 25 Mar 2017 11:05:00 +0000

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Two Trends That Will Force The Fed To Start Buying Stocks

By Foundry from Pixabay

Two Trends That Will Force The Fed To Start Buying Stocks

By: John Rubino | Sat, Mar 25, 2017

While the Japanese and Swiss central banks have turned
themselves into hedge funds
by loading up on equities, the US Fed has
stuck to supporting the stock market indirectly, by buying bonds. It’s worked,
obviously, with all major US indexes at record highs. But it won’t work going
forward, thanks to two gathering trends.

First, the main way bond buying supports equities is by lowering interest
rates which, among other things, allows corporations to borrow cheaply and
use the proceeds to buy back their own stock. Companies avoid paying dividends
on the repurchased stock and the government gets capital gains tax revenue
from a bull market. From a short-sighted Keynesian perspective, it’s a win-win.

Alas, this New Age public/private partnership on running out of steam. Interest
rates have fallen about as far as they can fall and corporations have borrowed
about as much as they can borrow. So the buyback binge is topping:

Buybacks Sink For Second Straight Year

(Forbes) – According to S&P Dow Jones Indices, companies of the S&P
500 index in the fourth quarter pulled back on their share repurchases by
7.2% from the fourth quarter 2015, although they accelerated 20.6% sequentially.

Companies spent $135.3 billion buying back their shares during the fourth
quarter, compared to $112.2 billion from the third quarter and $145.9 billion
in the fourth quarter 2015. For the full year, they spent $536.4 billion
on buybacks, a decline from $546.4 billion in 2015 and $553.3 billion in
2014 – the first time the index saw two consecutive years of declines since
the financial crisis era or 2008 and 2009.

S&P500 Quarterlt Buybacks

A longer-term but potentially much bigger problem for equities can be found
in the structure of US retirement savings accounts. At age 70, holders of IRAs
are required to start cashing them out, and as the number of Boomer retirees
soars the size of these required sales will rise commensurately. Here’s a snippet
from a longer analysis by Economica’s Chirs Hamilton. The full article is here.

Minimum Distributions Spell Disaster (& Even Greater Intervention)
As Sellers To Overwhelm Buyers

Simply put, investing for the long term had it’s time but that time is drawing
to a close. The math is pretty easy…we’ll have too many sellers and too
few buyers. Why? At age 70.5 years old, retirees are mandated by force of
law to sell tax deferred assets accumulated over their lifetime and do so
in a 15 year period. Conversely, buyers, incented by tax deferral (but not
forced to buy by law), generally have a 35yr window of accumulation. Over
the past 65 years (on a population basis), there were three new buyers for
every new seller. Over the next 25 years (on a population basis), there will
be three new sellers for every new buyer.

2015-2040 Buyers versus Sellers

In the next downturn, corporations will stop buying — as they always do at
bottoms — and retirees will be forced by both necessity and law to liquidate
some of their nest eggs. Combined, these sales will put unacceptable downward
pressure on stock prices, leading to the kinds of instability that over-leveraged
systems can’t handle.

The Fed – and probably the ECB – will then join the BOJ and SNB in buying
equities. Like QE and the other recent monetary experiments, this might be
seen by mainstream economists as a good thing. But it’s not. For at least three
reasons why it’s not, see We’re
All Hedge Funds Now, Part 4: Central Banks Become World’s Biggest Stock Speculators
at least three reasons why it will make a bad situation infinitely worse.

John Rubino


John Rubino

John Rubino edits and has authored or co-authored five
books, including The Money Bubble: What To Do Before It Pops, Clean
Money: Picking Winners in the Green Tech Boom
, The Collapse of the Dollar
and How to Profit From It
, and How to Profit from the Coming Real Estate
. After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst.
During the 1990s he was a featured columnist with and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for CFA Magazine.

Copyright © 2006-2017 John Rubino

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Published at Sat, 25 Mar 2017 14:43:55 +0000

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Silver Miners’ Q4’16 Fundamentals


Silver Miners’ Q4’16 Fundamentals

By: Adam Hamilton | Fri, Mar 24, 2017

The silver miners’ stocks have had a roller-coaster ride of a year so far.
They surged, plunged, and then started surging again last week on a less-hawkish-than-expected
Fed. Such big volatility has spawned similar outsized swings in sentiment,
distorting investors’ perceptions of major silver miners. But their recently-reported
fourth-quarter operating and financial results reveal the true underlying fundamental

Four times a year publicly-traded companies release treasure troves of valuable
information in the form of quarterly reports. Required by securities regulators,
these quarterly results are exceedingly important for investors and speculators.
They offer a clear snapshot of what’s really going on fundamentally, in individual
silver miners and this small sector as a whole. There’s no silver-stock data
I look forward to more.

Normally quarterlies are due 45 calendar days after quarter-ends, in the form
of 10-Qs required by the SEC for American companies. But after the final quarter
of fiscal years, which are calendar years for most silver miners, that deadline
extends out up to 90 days depending on company size. The 10-K annual reports
required once a year are bigger, more complex, and require fully-audited
unlike 10-Qs.

So it takes companies more time to prepare full-year financials and then get
them audited by CPAs right in the heart of their busy season. As a silver-stock
trader this additional Q4 delay is irritating, since the data is getting stale
by Q1’s end. But as a CPA and former Big Six auditor of mining companies, I
have some understanding of just how much work goes into an SEC-mandated 10-K
annual report. It’s enormous!

This extended Q4-reporting window naturally delays the analysis of Q4 results.
While I can start digging into the first three quarters’ results 5 or 6 weeks
after those interim quarter-ends, I have to wait longer for the fiscal-year
quarter-ends. Thankfully the majority of silver miners have reported by 9 or
10 weeks, so we don’t quite have to wait until early Q2 to analyze Q4 results.
The silver miners’ Q4’16 proved fairly strong!

Silver mining is a tough business both geologically and economically. Primary
silver deposits, those with enough silver to generate over half their revenues when
mined, are quite rare. Most of the world’s silver ore formed alongside base
metals or gold, and their value usually well outweighs silver’s. Thus around
2/3rds of all the silver mined worldwide is actually a byproduct of base-metals
and gold mining.

As scarce as silver-heavy deposits supporting primary silver mines are, primary
silver miners are even rarer. Since silver is so much less valuable
than gold, most silver miners need multiple mines in order to generate sufficient
cash flows. These often include non-primary-silver ones, usually gold. More
and more traditional elite silver miners are aggressively bolstering their
gold production, often at silver’s expense.

So the universe of major silver miners is pretty small, and their purity
is shrinking. The definitive list of these companies to analyze comes from
the most-popular silver-stock investment vehicle, the SIL Global X Silver Miners
ETF. This week its net assets are running 5.4x greater than its next-largest
competitor’s, so SIL really dominates this space. With ETF investing now the
norm, SIL is a boon for its component miners.

While there aren’t many silver miners to pick from, major-ETF inclusion shows
silver stocks have been vetted by elite analysts. Due to fund flows into top
sector ETFs, being included in SIL is one of the important considerations for picking
great silver stocks
. When the vast pools of fund capital seek silver-stock
exposure, their SIL inflows force it to buy shares in its underlying companies
bidding their prices higher.

This week as the major silver miners finish reporting their Q4’16 results,
SIL includes 24 “silver miners”. This term is used rather loosely, as SIL includes
plenty of companies which simply can’t be described as primary silver miners.
Most generate well under half their revenues from silver, which greatly
limits their stock prices’ leverage to silver rallies. Nevertheless, SIL is
the leading silver-stock ETF and benchmark we have.

The higher the percentage of sales any miner derives from silver, naturally
the greater its exposure to silver-price moves. If a company only earns 20%,
30%, or even 40% of its revenues from silver, it’s not a primary silver miner
and its stock price won’t be very responsive to silver itself. But as silver
miners are increasingly actively diversifying into gold, there aren’t
enough big primary silver miners left to build an ETF alone.

Every quarter I dig into the latest results from the major silver miners of
SIL to get a better understanding of how they and this industry are faring
fundamentally. I feed a bunch of data into a spreadsheet, some of which made
it into the table below. It includes key data for the top 17 SIL component
companies, an arbitrary number that fits in this table. That is a commanding
sample at 95.6% of SIL’s total weighting.

While most of these top 17 SIL components have reported on Q4’16, not all
have. Some of these major silver miners trade in Mexico and the UK, and only
report half-year results. And plenty of companies lump their Q4 results into
full-year-2016 numbers. If not explicitly broken out, most of the fourth-quarter
results can’t simply be inferred.  So if a field is left blank in this table,
that data wasn’t available this week if ever.

The first couple columns show each SIL component’s symbol and weighting as
of Wednesday. A bare majority of these silver stocks trade in the US, with
the others in Mexico, the UK, and Canada. So if you can’t find a symbol here,
it’s a listing from a company’s primary foreign stock exchange. That’s followed
by each company’s Q4’16 silver production in ounces, along with its absolute
percentage change from Q3’16.

Quarter-on-quarter changes offer a more-granular read on companies’ ongoing
operating and financial performance trends than year-over-year comparisons.
QoQ changes are also included for the key data in this table’s right half of
cash costs per ounce of silver mined, all-in sustaining costs per ounce, and
operating cash flows generated. Together costs and cash flows reveal the financial
health of silver miners.

The Q4’16 silver production is followed by that same quarter’s gold production.
Almost every major silver miner in SIL also produces significant-if-not-large
amounts of gold! While gold stabilizes and augments the silver miners’ cash
flows, it also retards their stocks’ sensitivity to silver itself. Naturally
investors and speculators buy silver stocks and their ETFs because they want leveraged
exposure to silver’s price
, not gold’s.

So a final column reveals how pure the elite SIL silver miners are.
This is mostly calculated by taking a company’s Q4 silver production, multiplying
it by the average silver price in Q4, and dividing that by the company’s total
quarterly sales. If miners didn’t report Q4 revenues, I approximated them by
adding the silver sales to gold sales based on their quarterly production and
the metals’ average fourth-quarter prices.

This exercise of examining the quarterly results of the elite silver miners
as represented by SIL’s top 17 holdings is always illuminating. It offers many
important fundamental insights into the individual stocks and this sector as
a whole. These Q4’16 results collectively prove the major silver miners were
in no fundamental peril last quarter, despite silver and SIL plunging 16.9%
and 27.8% in that post-election Trumphoria.

SIL Component Companies' Fundamentals Q4'16

While unfortunately the silver miners as a whole are kind of lazy in breaking
out their Q4 results from full-year or half-year ones, they do report quarterly
production. Together these elite miners produced 76.3m ounces of silver last
quarter, almost dead flat from Q3’16’s 76.2m. But on average most of these
top SIL components saw shrinking silver production, which was collectively
offset by big growth in a handful.

The reasons for lower silver production vary by company of course, ranging
all the way from temporary lower ore grades to depleting mines. But this wasn’t
a symptom of a slower mining tempo in general, as these same top silver miners’
Q4 gold production rocketed 11.4% higher absolutely from Q3’s levels!
That bests the 10.9% QoQ production gains in GDXJ’s
elite junior gold miners
, which are in the gold business.

The silver miners are collectively deciding to diversify into gold due to
its superior economics compared to silver. No silver-stock investor likes to
hear this, but it’s the hard reality today. Consider hypothetical mid-sized
silver and gold miners, which might produce 10m ounces and 300k ounces annually.
What would those cash flows actually look like at last quarter’s average silver
and gold prices of $17.12 and $1218?

This silver miner would generate $171m in yearly sales, but the gold miner’s
$365m more than doubles that. Silver mining is often as capital-intensive
as gold mining, requiring similar expenses for planning, permitting, and building
mines and mills to process the ore. Similar heavy machinery is necessary to
dig and haul the ore, along with similar staffing levels. So silver’s lower
cash flows make silver mining harder.

Silver-mining profits do skyrocket when silver soars occasionally in one of
its massive bull markets. But during silver’s long intervening drifts at relatively-low
price levels, the silver miners often can’t generate sufficient cash flows
to finance expansions. So the top silver miners are increasingly looking to
gold, a trend that isn’t likely to reverse given the relative economics of
silver and gold. Primary silver miners are getting rarer.

The silver-streaming giant Silver Wheaton, SIL’s third-largest component this
week, has long been the pure-silver powerhouse of this sector. A year ago in
, it derived 75.9% of its revenues from silver which was the best
by far in SIL. By Q4’16, this had dropped to a mere 50.4%. Mighty SLW is actually
on the verge of becoming a primary-gold play! This is intentional as
SLW itself declared in its Q4 results this week…

“Since 2013, our company has seen a marked increase in gold production, and
in the second half of 2016, revenue was evenly split between silver and gold.
In order to better align our corporate identity with underlying operations
while maintaining a link to our past and the innovation that the ‘Wheaton’
name has become synonymous with, we have recommended changing our name to Wheaton
Precious Metals.”

Technically a company isn’t a primary silver miner unless it derives over
half its revenues from silver. In Q4’16, the average sales percentage from
silver of these top SIL components was just 40.6%. That is right on trend over
the past year, with Q4’15, Q1’16, Q2’16,
and Q3’16 weighing
in at 47.5%, 44.9%, 45.3%, and 42.8%. At this pace and 40.6% today, the top
silver miners are soon heading well under 40%!

While I understand this, as a long-time silver-stock investor it saddens me
primary silver miners have apparently become a dying breed. When silver
starts powering higher in one of its massive uplegs and well outperforms gold
again, this industry’s silver percentage will rise. But unless silver not only
shoots way ahead but stays there while gold lags, it’s hard to see major-silver-mining
purity significantly reverse.

In Q4’16, only 5 of the top 17 SIL components qualified as the primary silver
miners that SIL investors are undoubtedly looking to own when buying this “Silver
Miners ETF”. In today’s current Q1’17 it will likely slip to 4 as the soon-to-be-renamed
SLW slides below 50% of its sales derived from silver. I’ve been critical of
SIL’s managers in the past on silver-mining purity, but they can’t fight the
rising-gold trend.

Moving on, once again SIL plunged a brutal 27.8% last quarter on silver’s
own sharp 16.9% plunge. This serious silver weakness was driven by the post-election
Trumphoria stock-market rally slaughtering any interest in prudent portfolio
diversification with gold. That led to a sharp
mass exodus
from gold, and silver mirrored
and amplified gold’s moves
as always. Silver’s average price fell 12.4%
QoQ in Q4.

That scared silver-stock investors, leading to sustained selling fueling extremely-bearish
sentiment by late December. As always during a major selloff they assumed the
silver miners’ plunge was righteous and fundamentally-justified, instead of
purely sentimental and thus irrational. But it really was the latter as the
top 17 SIL silver miners’ recently-reported Q4 results proved.  They were never
in fundamental danger.

There are two major ways to measure silver-mining costs, classic cash costs
per ounce and the superior all-in sustaining costs per ounce. Both are useful.
Cash costs are the acid test of silver-miner survivability in lower-price environments,
showing the worst-case silver levels necessary to keep the mines running.
All-in sustaining costs reveal where silver needs to trade to maintain current
operations indefinitely.

Cash costs naturally encompass all cash expenses necessary to produce
each silver ounce, including all direct production costs, mine-level administration,
smelting, refining, transport, regulatory, royalty, and tax expenses. In Q4’16,
these top SIL-component silver miners that reported cash costs averaged just
$5.28 per ounce. That’s a major 6.2% sequential improvement from Q3, and less
than a third of current silver levels!

But cash costs are understated due to an outlying anomaly. This week Silvercorp
Metals is the 17th-largest SIL component, making it into this table. A quarter
ago it was 18th, and thus not included. SVM mines base-metals-heavy silver
deposits with huge lead and zinc byproducts. These are sold and credited to
silver-mining costs, lowering the cash costs to negative $5.48 per ounce!
That really distorts the overall picture.

Ex-SVM, these silver miners’ cash costs soared 21.1% QoQ from $5.63 in Q3
to $6.82 in Q4. While that remains far below prevailing silver prices proving
these elite silver miners were in no fundamental peril, it illustrates the
economic challenges of silver mining. With most of the major silver miners
producing less silver in Q4, their high fixed costs of mining were spread across
fewer ounces driving up per-ounce costs.

Way more important than cash costs are the far-superior all-in sustaining
costs. They were introduced by the World Gold Council in June 2013 to give
investors a much-better understanding of what it really costs to maintain a
silver mine as an ongoing concern. AISC include all direct cash costs, but
then add on everything else that is necessary to maintain and replenish operations
at current silver-production levels.

These additional expenses include exploration for new silver to mine to replace
depleting deposits, mine-development and construction expenses, remediation,
and mine reclamation. They also include the corporate-level administration
expenses necessary to oversee silver mines. All-in sustaining costs are the
most-important silver-mining cost metric by far for investors, revealing miners’ true
operating profitability

In Q4’16 the top SIL components reported average AISC of $10.56 per ounce,
up 4.3% QoQ from
Q3’s levels
.  But again this is heavily skewed by SVM edging into SIL’s
top 17 components.  Its anomalous $1.87-per-ounce AISC from its freak silver
deposits really dragged down the average. Ex-SVM again, these silver miners’
average AISC surged 18.6% QoQ to $12.01. Lower quarterly production was the
key cause.

SIL’s top two components are giant Mexican mining conglomerates that produce
vast amounts of silver but don’t report all-in sustaining costs quarterly.
Together the quarterly silver production of Industrias Penoles and Fresnillo
soared 11.5% or 3.0m ounces QoQ. Meanwhile the next 15 biggest SIL stocks saw
silver production plunge 5.7% or 2.9m ounces QoQ! That really forced their
per-ounce costs higher.

Nevertheless, silver mining is still quite profitable even at Q4’s lackluster
silver prices averaging $17.12. At that $10.56 average AISC, that implies hefty
profit margins of $6.56 per ounce or 38%! CEOs in most industries would sell
their souls for margins like that. Even at those adjusted $12.01 AISC, silver-mining
profit margins of $5.11 are still excellent. The sharp silver-stock selloff
in Q4 wasn’t fundamentally justified.

These AISC levels suggest the top silver miners’ profits will remain rock-solid
in the current almost-over Q1’17. Silver has averaged $17.37 so far this quarter,
1.5% better than Q4. So if AISC remain stable, Q1’s silver-mining profit margins
are likely to be a little better than Q4’s. The silver miners have forecast
stable AISC for full-year 2017, with 8 of SIL’s top 17 averaging $11.07.
Ex-SVM, that rises to an adjusted $11.87.

The top silver miners’ operating cash flows fared reasonably well in Q4 considering
silver’s sharp drop. They were boosted by gold performing better relatively.
Its average price only fell 8.8% QoQ compared to silver’s 12.4% drop. This
combined with higher gold and lower silver production led to $537m in OCF generation
by the top SIL miners reporting them for Q4. Compared to Q3’s $1577m, that
seems miserable.

But it’s misleading due to Q4-reporting limitations. Our sample size in Q4’16
was 9 of SIL’s top 17 stocks compared to 14 of 17 in Q3. And SIL’s top component
Industrias Penoles reported $899m of operating cash flows in Q3 but didn’t
break out Q4 from full-year results. If the same other 8 silver miners reporting
in Q4 are compared with their own Q3 operating cash flows, Q4’s $509m was only
down 14.3%
from Q3’s $594m!

So all things considered, the silver miners fared really well operationally
considering silver’s big plunge last quarter. Though their mining costs jumped
due to lower silver production, they remained relatively low even compared
to low prevailing silver prices. And higher gold production fed stronger operating
cash flows than the sharply-lower silver prices alone implied were coming.
The elite silver miners are doing fine!

But they remain really undervalued after their extreme Q4 selloff.
Silver’s mean reversion higher out of that crazy post-election Trumphoria anomaly
is already well underway. Back in Q3’16 before that, silver averaged $19.55
which was 14% higher than Q4’s levels. If silver merely returns to there, silver-mining
profits will surge 37% higher. The battered silver stocks are very attractive
with their big upside leverage to silver.

Once undervalued
starts seriously powering higher with gold again, capital will
flood back into the silver stocks catapulting their prices far higher. The
silver miners’ operating profitability greatly improves during silver bulls,
so their huge silver-stock upside is totally justified fundamentally.
The anomalous post-election silver-stock plunge and its aftermath is a fantastic
buy-low opportunity on irrational bearish psychology.

While investors and speculators alike can certainly play the silver miners’
ongoing mean-reversion bull with this leading SIL ETF, individual silver stocks
with superior fundamentals will enjoy the best gains by far. Their upside will
trounce the ETFs’, which are burdened by companies that don’t generate much
of their sales from silver. A handpicked portfolio of purer elite silver miners
will generate far-greater wealth creation.

At Zeal we’ve literally spent tens of thousands of hours researching
individual silver stocks and markets, so we can better decide what to trade
and when. As of the end of Q4, this has resulted in 906 stock trades recommended
in real-time to our newsletter subscribers since 2001. Fighting the crowd to
buy low and sell high is very profitable, as all these trades averaged stellar
annualized realized gains of +22.0%!

The key to this success is staying informed and being contrarian, meaning
buying low when others are scared. So we aggressively added new trades in early
March’s selloff ahead of the Fed. An easy way to keep abreast is through our
acclaimed weekly and monthly newsletters.
They draw on our vast experience, knowledge, wisdom, and ongoing research to
explain what’s going on in the markets, why, and how to trade them with specific
stocks. For only $10 per issue, you can learn to think, trade, and thrive like
a contrarian. Subscribe today,
and get deployed in great silver stocks before they surge far higher!

The bottom line is the major silver miners fared just fine operationally in
Q4’16. Despite all the emotional silver-stock dumping on sharply-lower silver
prices, this industry’s underlying fundamentals stayed quite strong. Costs
remained way under prevailing silver prices even at lows, feeding big profit
margins. And the silver miners growing their gold production mitigated the
hit to operating cash flows from falling silver.

With silver-stock sentiment remaining so excessively bearish, this sector
is primed to soar as silver itself continues mean reverting higher out of its
post-election anomaly. The silver miners’ profits leverage to rising silver
prices remains excellent. And after fleeing silver stocks last quarter, investors
and speculators will have to do big buying to reestablish silver-mining positions.
These capital inflows will fuel big gains.

Adam Hamilton

Adam Hamilton, CPA

Do you enjoy these essays? Please help support Zeal Research
by subscribing to Zeal Intelligence today!

If you have questions I would be more than happy to address
them through my private consulting business. Please visit for
more information.

Thoughts, comments, flames, letter-bombs? Fire away at
Due to my staggering and perpetually increasing e-mail load, I regret that
I am not able to respond to comments personally. I WILL read all messages though,
and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst,
publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis
of markets, geopolitics, economics, finance, and investing delivered from an
explicitly pro-free market and laissez faire perspective. Please visit for
more information, for a free sample, and to

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Published at Fri, 24 Mar 2017 09:22:19 +0000

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Bull market not dead as tax reform takes spotlight


Bull market not dead as tax reform takes spotlight

By Rodrigo Campos and Chuck Mikolajczak| NEW YORK
The death of the Republican healthcare reform may not prove to be the knife to the heart of the bull market some had feared, but to keep the Trump Trade alive investors should temper expectations for the breadth of expected tax cuts.
Anxiety over prospects for the healthcare bill gave stocks their largest weekly drop since the November presidential election. But its failure to pass could also force the Trump administration to come up with a palatable tax reform that could deliver this year some of the stimulus Wall Street has rallied on.

The S&P 500 rose as much as 12 percent since the surprise Nov. 8 election win President Donald Trump, mostly on bets that lower taxes, deregulation and fiscal stimulus would boost economic growth and corporate earnings.

As he acknowledged defeat for the healthcare bill, Trump said Republicans would likely pivot to tax reform. Bets on that shift in focus were seen in stocks late on Friday, as the market cut its day losses when news of the health bill being pulled emerged.

“The market believes it raises the probability of a tax cut later this year since Trump is showing more strategic behavior. (It) puts the market a little more at ease,” said Paul Zemsky, chief investment officer of multi-asset strategies and solutions at Voya Investment Management in New York.

On the campaign trail Trump promised to lower the corporate tax to 15 percent. In order to make the tax reform revenue-neutral, and agreeable to the most money-sensitive wing of his party, his administration counted on savings from the health bill that will no longer materialize.

“If we want to get something passed by the August break, it’s going to look a lot like tax reform light,” said Art Hogan, chief market strategist at Wunderlich Securities in New York.

“If we settle somewhere between the 25-30 percent corporate tax rate, that is far from the 15 percent offered in the campaign trail and the 20 percent currently in the House plan, (and) I think that’s where we end up.”

Softer cuts in corporate taxes leave stocks vulnerable after a rally on hopes for more, he said.

“It’s not a negative, it’s just not the positive the market had priced in.”

Aside from Trump’s pro-growth agenda some investors have pointed to an improving global economy and expectations for double-digit growth in corporate earnings as support for the lofty valuations in stocks.

“The evidence suggests to me that there is some Trump fairy dust sprinkled on this rally. That said, the underlying fundamentals do look better,” said Alan Gayle, director of asset allocation at RidgeWorth Investments in Atlanta, Georgia.

A survey on Friday showed Germany’s private sector grew at the fastest pace in nearly six years in March, suggesting an acceleration in growth for Europe’s largest economy in the first quarter.

Stocks could also turn to earnings to justify their price. First quarter earnings are expected to grow by more than 10 percent, according to Thomson Reuters data. In another sign of investor bullishness, February’s reading on consumer confidence touched its highest level since July 2001.

If earnings fail to deliver double-digit growth, stocks could again be seen as too expensive. At $18 per dollar of expected earnings over the next 12 months, investors are paying near the most since 2004 for the S&P 500.

“The advance we’ve had and the large spike in confidence, the expectations on the economy and earnings expectations – we continue to believe it is too high,” said Julian Emanuel, executive director of U.S. equity and derivatives strategy at UBS Securities in New York.

(Additional reporting by Lewis Krauskopf; Editing by Cynthia Osterman)


Published at Sat, 25 Mar 2017 01:11:47 +0000

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Premarket: 5 things to know before the bell


premarket stocks trading future
Click chart for in-depth premarket data.


1. It’s a pullback, not a sell-off: Global stocks are in retreat mode Wednesday, but losses are relatively minor.

Investors are taking some money off the table following a record-setting, Trump-inspired rally. And they’re putting their cash into government bonds.

“There is no obvious explanation for the poor performance but markets might be starting to question President Trump’s ability to deliver on his policy promises,” said Andreas Johnson, an economist at Swedish bank SEB.

Crude oil futures also declined to trade at their lowest levels of the year, just below $47.50 per barrel.

U.S. stock futures were edging down a bit.

European markets declined in early trading, with many indexes down by about 1%.

Asian markets ended the day with losses. Japan’s Nikkei notched the biggest drop of 2.1%.

The moves follow a sizable drop for U.S. stocks on Tuesday. The Dow Jones industrial average fell 1.1%, the S&P 500 declined 1.2% and the Nasdaq was down 1.8%.

The pull back started on the same day that Bank of America Merrill Lynch released a survey showing that 34% of fund managers believe stocks are “overvalued”.

2. Stock market movers — FedEx, Nike, Fiat Chrysler, ING: Shares in FedEx(FDX) were being delivered up in extended trading while shares in Nike(NKE) were kicked down after both companies released new quarterly earnings.

Shares in Fiat Chrysler(FCAU) declined by 3% in Europe on reports that French prosecutors are investigating the auto group over cheating on emissions tests. The company did not immediately return requests for comment.

Shares in the Dutch bank ING(ING) dropped by about 6% after the company said it’s being investigated in Europe and the U.S. for issues related to “money laundering and corrupt practices.” It warned that potential fines “could be significant.”

3. Takeover turned down: U.S. firm PPG Industries(PPG) is not having much luck with its attempts to woo and acquire the Dutch chemical firm AkzoNobel.

AzkoNobel, which makes Dulux paint, said Wednesday is rejected a second unsolicited offer from PPG. The offer of cash and stock was valued around €22.4 billion ($24.2 billion).

Shares in AzkoNobel declined 3% in Europe after hitting an all-time high on Tuesday.

4. Housing market in the Trump era: Economists expect a report from the National Association of Realtors to show that sales of existing homes in the U.S. cooled off in February. The report is out at 10 a.m. ET.

Existing home sales increased 3.3% in January, which was the strongest pace of sales since early 2007.

5. Coming this week:

Wednesday – U.S. existing home sales report; Starbucks(SBUX) annual shareholder meeting
Thursday – Accenture(ACN) reports earnings; U.S. new home sales report
Friday – Samsung annual shareholder meeting

Published at Wed, 22 Mar 2017 10:16:44 +0000

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Dow slides nearly 240 as fear returns to market

Dow slides nearly 240 as fear returns to market


Is the honeymoon period between Wall Street and President Trump over?

The Dow fell by about 238 points Tuesday, a drop of more than 1%. It was its biggest slide of the year and biggest decline since the election. The broader S&P 500 was also down more than 1%.

Neither index had ended the day with a 1% drop since mid-October. This was their worst day since September.

The Nasdaq, which includes many hot tech stocks such as Apple (AAPL, Tech30), Facebook (FB, Tech30) and Amazon (AMZN, Tech30), fell nearly 2%.

This recent market weakness seems to be a sign that the market tone has shifted to a more negative one, at least temporarily.

CNNMoney’s Fear & Greed Index, which tracks seven measures of market sentiment, is now showing signs of Fear. The index was in Extreme Greed territory just a month ago. It all just goes to show how quickly emotions on Wall Street can change.

In fact, some market watchers noted that when everyone is bullish, that’s usually a sign that the market could be due for a drop. Too much of a good thing cannot last.

“We are currently experiencing multi-decade high extremes of optimism, and we view this euphoria as a warning sign,” said Brad Lamensdorf, founder of research firm LMTR, in a report Tuesday.

Other market experts were suggesting that the slump was due to investors growing skeptical about how quickly things can actually get done in Washington.

“President Trump’s legislative agenda is getting mired in a congressional swamp, as starry-eyed optimism runs headlong into bloodshot realism,” wrote BMO chief investment officer Jack Ablin in a note to clients Tuesday.

Ablin alluded to concerns that some members of Trump’s own party are having with the Republican leadership’s plans to repeal and replace Obamacare, lower taxes and spend “bigly” on infrastructure spending.

Shares of the Health Care Select Sector SPDR ETF (XLV), which includes drug makers, insurers and other big health care companies, fell about 1%.

Caterpillar (CAT), which could be a big beneficiary of any new funding to build roads, bridges and a wall on the Mexican border, was down 3%.

“[Trump’s] health care proposal appears to be losing momentum faster than most NCAA brackets,” Ablin quipped, adding that some Republicans in Congress are “loath to racking up more debt” to pay for stimulus.

Some traders also cited a Reuters story that quoted Sen. Sherrod Brown of Ohio saying that Democrats would not support a “a wholesale rollback” of the Dodd-Frank financial regulation rules put into place during the Obama administration.

Brown is the top Democrat on the Senate Banking Committee. Reuters reported that he made the remarks at an American Bankers Association conference.

Bank stocks, which had rallied sharply since November on the hopes Trump would undo Dodd-Frank, were among the biggest losers Tuesday. Bank of America (BAC) plunged nearly 6% while JPMorgan Chase (JPM) and Wells Fargo (WFC) were down about 3%.

One market expert said that the recent slump in stocks shows that investors are now coming to the realization that Trump won’t be able to get everything he wants done as fast as he’d like.

“Trump is trying to be the CEO president. That doesn’t work in politics,” said KC Mathews, chief investment officer with UMB Bank. “Right now, it’s all about hope.”

But the selloff was broader than banks and health care stocks.

Detroit’s Big 3 auto stocks GM (GM), Ford (F) and Fiat Chrysler (FCAU) all fell about 3% even though oil prices were sliding. Auto sales tend to go up when gas is cheaper. But there are growing concerns that the best days for the car companies could be behind them.

Tech stocks fell too, even as the Nasdaq hit record highs earlier Tuesday.

This could be just a healthy pullback after a strong run for the market. Stocks are all still up for the year after all.

And White House press secretary Sean Spicer said Tuesday that the administration has “always cautioned” against looking at “one day” and noted that the market “still continues to be up tremendously.”

Few experts are predicting a correction — which is a 10% pullback from a market high. Even fewer see a bear market, a 20% drop or more, on the horizon.

Mathews said that if Trump doesn’t make any significant headway with Congress on some of his key initiatives by late summer, then that could spark a correction.

Bruce Bittles, chief investment strategist with Baird, agreed that it will be key for Trump and Congress to actually get something done in order for the market rally to keep going.

The bull market celebrated its 8th birthday earlier this month. Can it survive to hit a 9th next year?

“It’s usually buy the rumor and sell the news. But there is no news yet. There is optimism, but still a lot of caution,” he said. “If Washington gets gridlocked, then we run into headwinds.”

–Matt Egan contributed to this report

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Hedge fund Millennium hires portfolio manager from Steve Cohen’s firm


 Hedge fund Millennium hires portfolio manager from Steve Cohen’s firm

By Svea Herbst-Bayliss| BOSTON

Millennium Management, one of the industry’s biggest hedge funds, has hired a portfolio manager from billionaire stock picker Steven A. Cohen’s investment company, two sources familiar with the matter said.

Ariel Masafy specializes in consumer stocks and had worked for Cohen, who invests roughly $11 billion, since 2011. Masafy could not be reached for comment and a spokesman for Cohen’s firm, Point72 Asset Management, declined to comment.

Moves by portfolio managers between fund firms are closely watched on Wall Street especially now that many firms posted lackluster 2016 returns which could signal an uptick in moves.

Millennium, led by billionaire Israel Englander, employs a large number of trading teams that invest some $34 billion in assets. The firm’s flagship fund ended 2016 with a 3.3 percent gain, far below the double-digit gains it earned in past years.

In 2013 SAC plead guilty to insider trading charges and was forced by the government to stop managing outsiders’ capital. Cohen was never charged. A year later, the firm turned into a family office that invests Cohen personal fortune and changed its name to Point72. At that time, a number of Cohen’s fund managers left to set up their own firms.

(Reporting by Svea Herbst-Bayliss; Editing by David Gregorio)
Published at Tue, 21 Mar 2017 16:41:49 +0000

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Seven Training Resources For Developing Traders


Seven Training Resources For Developing Traders

If you look at successful programs of training, you’ll see three elements:

1)  Hearing – Having information taught to you;
2)  Seeing – Seeing skills being performed based on the information being applied;
3)  Doing – Trying out the skills yourself, with ongoing feedback and guidance from a mentor

Think about apprenticeship programs in the trades; the training of military recruits; the medical education of physicians; and the training of elite athletes.  All involve acquisition of knowledge/information; observation of advanced practitioners applying the knowledge; and supervised efforts to apply the knowledge oneself.  In this three-fold process, we make the transition from theory to skill development.

What we’re seeing is an increasing number of offerings to developing traders that integrate the hearing, seeing, and doing through a combination of videos, live trading sessions, and active mentoring/teaching.  Back in the day, trader education generally meant someone giving a class on a topic–and that was it!  Obviously that didn’t help traders translate theory into practice.

Here are some outlets for more complete training and support of developing traders that I’ll list in alphabetical order.  My goal is not to formally review or endorse these, and none knows that I’m writing this article.  Rather, the idea is to point developing traders in a few directions that could prove promising.  If I have missed some excellent comprehensive resources, please feel free to let me know at steenbab at aol dot com.

Crosshairs Trader – David Blair has assembled a comprehensive suite of educational videos and daily watchlists, reviews, and mentoring to help traders apply chart-based setups in real time.  Great way to see how an experienced trader approaches market opportunity.

Exceptional Trader – Terry Liberman has assembled a unique coaching resource for traders.  The focus is not on finding trade setups, but rather on building your trading business and figuring out what *your* edge is in markets.  Regular webinars and group as well as individual coaching.  Great way to think through the big picture of your trading. – Mike has built a large and active trader community with chat and frequent webinars and downloadable trading tools and resources.  Topics on the discussion threads range from trading journals to the creation of quant tools for trading.  Great way to learn from others.

Investors Underground – Nate and team have assembled an active trading community that offers beginning and advanced courses, chat rooms for different strategies, daily watchlists, webinars, and mentoring.  The courses cover a range of topics from chart patterns and setups to scanning for opportunity and reading Level 2 information.  Great way to connect with a variety of mentors and traders in a community.

NewTraderU – Steve Burns explicitly addresses the learning process of new traders with courses on such topics as using moving averages in trading and trading with options.  He also maintains an active blog and has written several ebooks.  Great introduction to trading.

OpenTrader – Ziad and Awais offer a comprehensive training program that includes a large number of videos, exercises to drill skills, and live mentoring/coaching.  A unique aspect is the grounding in auction theory and Market Profile.  Great way to approach trading with a well constructed curriculum that moves from theory to practice.

SMB-U – Mike and Steve have built SMB’s training programs into a successful proprietary trading firm.  Detailed courses integrate video, skill drills, and a real time audio feed to their trading desk.  Topics range from foundation skills to tape reading and options trading.  Their in-house training includes practice trading on a simulator, access to quant tools to improve trading, and daily mentoring.  Great way to learn hands-on.

Interested traders will want to investigate offerings and the cost of those offerings thoroughly before seeking training.  Note that most of these services are offered for active/day traders and especially those in the stock market.  If you do investigate, I think you’ll be surprised by the depth of offerings and the degree to which information is supplemented with active opportunities to watch experienced traders in action and try out their methods for yourself.

For those looking for a low overhead start with trading education, check out Adam Grimes’ site, which contains a podcast covering relevant trading topics and a free trading course that tackles topics ranging from technical analysis and psychology to quant trading and options.

Further Reading:  Fake and Real Education in Trading 


Note:  TraderFeed will move to a weekend basis of publication starting this coming week, but I will repost popular pieces during the week re: topics that seem currently relevant.

Published at Sun, 19 Mar 2017 13:09:00 +0000

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Schedule for Week of Mar 19, 2017


Schedule for Week of Mar 19, 2017

by Bill McBride on 3/18/2017 08:11:00 AM

The key economic report this week are February New and Existing Home sales.

—– Monday, Mar 20th —–

8:30 AM: Chicago Fed National Activity Index for February. This is a composite index of other data.
—– Tuesday, Mar 21st—–

No economic releases scheduled.
—– Wednesday, Mar 22nd —–

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.9:00 AM: FHFA House Price Index for January 2017. This was originally a GSE only repeat sales, however there is also an expanded index.

Existing Home Sales10:00 AM: Existing Home Sales for February from the National Association of Realtors (NAR). The consensus is for 5.55 million SAAR, down from 5.69 million in January.

Housing economist Tom Lawler expects the NAR to report sales of 5.41 million SAAR in February.

During the day: The AIA’s Architecture Billings Index for February (a leading indicator for commercial real estate).

—– Thursday, Mar 23rd —–

8:30 AM ET: The initial weekly unemployment claims report will be released.  The consensus is for 240 thousand initial claims, down from 241 thousand the previous week.8:45 AM, Speech by Fed Chair Janet L. Yellen, Opening Remarks, At the 2017 Federal Reserve System Community Development Research Conference, Washington, D.C.

New Home Sales10:00 AM ET: New Home Sales for February from the Census Bureau.

This graph shows New Home Sales since 1963. The dashed line is the January sales rate.

The consensus is for a increase in sales to 565 thousand Seasonally Adjusted Annual Rate (SAAR) in February from 555 thousand in January.

11:00 AM: the Kansas City Fed manufacturing survey for March.

—– Friday, Mar 24th —–

8:30 AM: Durable Goods Orders for January from the Census Bureau. The consensus is for a 1.5% increase in durable goods orders.10:00 AM: Regional and State Employment and Unemployment (Monthly) for February 2017

Published at Sat, 18 Mar 2017 12:11:00 +0000

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Post-Fed boost for small-cap stocks may be limited


 Post-Fed boost for small-cap stocks may be limited

By Caroline Valetkevitch| NEW YORK

Small-cap stocks benefited from a dovish lining to the U.S. Federal Reserve’s decision to raise interest rates this past week, but strategists warn it will take more to make these pricey stocks outperform their larger brethren in the long haul.

The Fed on Wednesday raised rates by a quarter of a percentage point, as expected, but did not flag any plan to accelerate the pace of monetary tightening. A less aggressive monetary policy may benefit small-caps, which tend to get hit harder as borrowing costs increase when rates rise.

Stocks in the small-cap space rallied after the Nov. 8 election that put Donald Trump in the White House as investors bet Trump’s plans to cut back on regulations and taxes would especially help small companies.

That hasn’t panned out in the new year, as they have underperformed the S&P 500 year-to-date. Their near-term performance hinges on how much the profit picture improves, but so far small-cap earnings have yet to rebound in the same way that large caps have.

Investors consider small-cap stocks comparatively expensive.

“We’re in a show-me state for small caps,” said Steve DeSanctis, equity strategist at Jefferies. “We’ve gotten (price-to-earnings) multiple expansion, so you need earnings growth.”

Fourth-quarter earnings for companies in the small-cap S&P 600 .SPCY were down 1.0 percent from a year ago, while the benchmark S&P 500’s earnings .SPX rose 7.8 percent, Thomson Reuters data show.

Analysts expect profit growth for the S&P 600 in the first quarter of 2017, but at a rate still well below that of the S&P 500.

The S&P 600 is up just 1.4 percent since Dec. 31, after rising 24.7 percent in 2016. The S&P 500 by comparison has gained 6.2 percent since the start of the year.

At 20.4 times forward earnings estimates, the S&P 600 looks expensive compared with its long-term average of 17, Thomson Reuters data showed. The S&P 500 trades at about 17.8 times forward earnings, also above its long-term average.

The Russell 2000 , a widely used gauge for small-caps, has a forward price-to-earnings ratio of 25.4, brushing against its highest level since 2009. Its 10-year average sits at 20.7.

“Growth and the interest rate trajectory are going to be two key factors,” said Dan Suzuki, senior U.S. equity strategist at Bank of America Merrill Lynch in New York. He thinks small caps may have more room to gain in the short run, especially if earnings surprise to the upside, but that valuations remains a negative.

On the flip side, rising rates also tend to boost the U.S. dollar, which would have a bigger negative impact on large-cap multinationals as a stronger dollar weighs on offshore revenues when they are translated into the U.S. currency.

Investors also worry that any tax reductions under the Trump administration may not come for many months, or even until 2018.

“Small-caps generally pay more in terms of U.S. corporate taxes,” said Nicholas Colas, chief market strategist at Convergex, a global brokerage company based in New York.

“You can somewhat view small-caps as a bit of a proxy for confidence in the tax reduction piece of the Trump economic plan.”

(Reporting by Caroline Valetkevitch; Editing by Daniel Bases and Leslie Adler)
Published at Sat, 18 Mar 2017 05:26:42 +0000

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Building Your Trading By Building Your Consistency

Building Your Trading By Building Your Consistency

Bella makes an excellent point in his recent post:  We improve our trading not only by making improvements during trading hours, but also by building consistency in our lives outside of trading.  It is through such consistency that we build habit patterns.  Those habits reinforce qualities in us that show up in our work.

Just a moment ago, I was starting to write this post when Sofie jumped onto my lap after bringing me her favorite toy, a rubber mouse.  She was purring and clearly wanted to cuddle and play fetch.  So now I have a dilemma:  do I continue with the post or do I pet this formerly homeless cat and toss her mouse for a few rounds of fetch?  Of course it’s a no-brainer.  I play with Sofie.  And I would have done the same thing if it had been my little son or daughter coming up to me while I was reading, writing, or working.  People and their needs come first.  That’s what makes me a psychologist.  The consistency of acting upon that is a big part of what has helped me be effective when the people I work with have needed attention.

Whatever we do during the non-trading day is training for what we will be like when we’re trading.  Everything we do trains us for something.  If we are scattered and disorganized in our personal lives, we are building those qualities and will enact them in our trading.  If we fail to make efforts outside of trading, it won’t be surprising if we don’t follow through on goals written in our journals.  Bella’s point is that we become better traders by enacting the qualities in our personal lives that will make us better in financial markets.  

In small ways, every day, we can be the person we want to become until, one day, it all comes naturally.

Further Reading:  Be The Person You Want To Become

Published at Sat, 18 Mar 2017 09:52:00 +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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Wall Street flat as tech gains offset weakness in banks


Wall Street flat as tech gains offset weakness in banks

By Anya George Tharakan

U.S. stocks were little changed on Friday as bank shares fell on lingering effects of the Federal Reserve’s less aggressive stance on future rate hikes, while a jump in Adobe lifted the technology sector.

The S&P 500 financial sector .SPSY was off 0.82 percent, led by losses in big banks including Wells Fargo (WFC.N) and Bank of America (BAC.N).

The index has outperformed in a post-election rally on bets of simpler regulations and on heightened expectations of higher interest rates.

The rally lost some steam after the Fed on Wednesday stuck to its outlook for a gradual tightening in policy following a widely expected quarter point rate hike.

“We got the rate increase that the market was looking for, albeit some of the future expectations were a little bit more muted then investors had been bracing for,” said Eric Wiegand, senior portfolio manager at the Private Client Reserve at U.S. Bank.

However, the S&P 500 is on track to score gains for the week, helped by the technology sector.

The S&P tech index .SPLRCT was supported on Friday by Adobe’s (ADBE.O) surge to a record high of $130.30 after the Photoshop software maker reported strong earnings.

At 12:33 p.m. ET the Dow Jones Industrial Average .DJI was down 0.74 points, at 20,933.81 and the S&P 500 .SPX was up 0.17 points, or 0.01 percent, at 2,381.55.

The Nasdaq Composite .IXIC was up 2.44 points, or 0.04 percent, at 5,903.20.

Eight of the 11 major S&P sectors marked slight gains, topped by a 0.54 percent rise in utilities .SPLRCU.

Amgen (AMGN.O) dropped 6.7 percent, weighing down the healthcare sector .SPXHC after analysts were unimpressed by results of a study on its cholesterol drug.

Amgen was also the biggest drag on the broader S&P 500 index and the Nasdaq.

Tiffany’s (TIF.N) shares rose 2.8 percent to $92.48, after the high-end jeweler’s fourth-quarter profit topped estimates.

Advancing issues outnumbered decliners on the NYSE by 1,696 to 1,181. On the Nasdaq, 1,437 issues rose and 1,315 fell.

The S&P 500 index showed fifty one 52-week highs and three lows, while the Nasdaq recorded 110 highs and 38 lows.

(Reporting by Anya George Tharakan and Yashaswini Swamynathan in Bengaluru; Editing by Anil D’Silva)
Published at Fri, 17 Mar 2017 16:59:13 +0000

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Market may stall if Trump can’t live up to the hype


NY Fed president: Market sentiment improved under Trump
NY Fed president: Market sentiment improved under Trump

 Market may stall if Trump can’t live up to the hype

Has the easy money in the Trump bump rally already been made?

The stock market has cooled off a bit lately following its euphoric post-election run from November through the end of February.

Yes, the Dow, S&P 500 and Nasdaq are all still at or near record highs.

But it’s worth noting that CNNMoney’s Fear & Greed Index, a measure of seven different gauges of market sentiment, is now in Neutral mode. It had been showing signs of Greed — and even Extreme Greed — earlier this year.

One important indicator in the index, safe haven demand, is flashing Fear levels. Essentially, more investors are starting to flock to bonds over stocks. Bonds are perceived to be less risky, so this could be a sign that the market is growing a little more worried.

Two other measures in the index, that look at options trading and market volume, have even dipped into Extreme Fear territory.

That could be a worrisome sign.

Experts think that for the market to continue rising, Trump needs to prove that his economic policies can kick GDP growth into a higher gear as promised.

And there are some doubts.

Jeffrey Cleveland, chief economist at Payden & Rygel, said investors may be just a little too bullish on Trump.

He’s not suggesting that the markets are going to crash or that the economy is going to suddenly slow. But he does think it will be difficult for the president to fulfill his promise of getting the economy growing at 4% annual rate anytime soon.

The main reasons? There is just simply so much to do, and it’s not yet clear that Trump will be able to quickly reach a consensus with even Congressional leaders in his own party — let alone Democrats.

Tax reform. Unwinding Obamacare. Tweaking Dodd-Frank. Getting an infrastructure bill that could cost $1 trillion or more. All of this will require a lot of compromises, patience and time.

“The post-Trump optimism may not translate into real growth that quickly,” Cleveland said. “I’m not bearish, but I can’t make the 4% GDP math work. Wall Street could be disappointed.”

Frances Hudson, global thematic strategist at Standard Life Investments, is also a little wary of how bullish the market has become.

She argues that investors may be underestimating how tough it will be for Trump to convince hardline, deficit-hating fiscal conservative Republicans to buy into his plans for stimulus.

“There could be opposition to stimulus from some in the GOP. The Trump administration is more fiscally liberal than a lot of Republicans in Congress,” she said.

Of course, if Trump is able to get many, if not all, of his economic proposals approved in a somewhat speedy fashion, then stocks could wind up going off to the races again.

Ed Campbell, a managing director and portfolio manager with Prudential subsidiary QMA, noted that earnings for the fourth quarter were pretty solid.

He added that Corporate America’s profits should continue to improve thanks to some of Trump’s plans and the boost to consumer and corporate sentiment that has occurred since the election.

But he concedes that the market may be just a little too giddy and that there is still “risk and uncertainty in the U.S. political environment.”

The good news is that you’d be hard-pressed to find a strategist or economist predicting outright doom and gloom.

The so-called animal spirits that have been unleashed since Trump’s win do seem to be real — and maybe even spectacular for any Seinfeld fans out there.

The problem is that nobody seems to be worried about anything. And that’s often a recipe for a letdown.

“The economic expansion is still intact. It may last another 2 to 3 years if we get capital investment and productivity improvement,” said Atul Lele, chief investment officer of Deltec International Group. “But the rate of growth and momentum may slow.”

Published at Fri, 17 Mar 2017 15:01:03 +0000

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