Tuesday, March 17, 2015

Macro Risk: The path not taken

It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.

--Sherlock Holmes in A Scandal in Bohemia (1891)

My analyses of stocks and funds always begin with the micro and work up with the macro.

I begin with a specific trading signal on a specific signal, broaden out to the history on the chart, the implications of the options pricing model and the backstory of the financials.

And that's generally enough to make a trading decision. The broader market? I leave that to the chattering class. The market and the indexes that track it are mere framing devices, artificial constructions laid over the blooming confusion produced by trading decisions beyond counting.

The policy decisions made in the White House and Congress? Largely irrelevant. The ebb and flow of money amid the slow dance of the global economy's central bankers and the abstractions of its macro-economists? Often an art of profound beauty, but not relevant to my trading.

We can never know the motives of the markets. We don't even know how many people or machines are making the decisions on any given day, nor why they make them.

All we can see are the results of those decisions, and the results fly past and into irrelevance almost as quickly as they come into view.

So I find myself in a state of puzzlement when I look at the trading signals thrown up from the micro level during Monday's markets.

The macro world of the markets tells me that we are in an era of great risk to the downside. The bear has not yet arrived, but I can hear his claws scratching at the door. Yet the trading results from Monday were a bullish jubilee, with trumpets and the pop of champagne corks accompanying the progress of the rambunctious beasts;

What to make of this?

The micro-facts, what Holmes called "data" in the quote at the head of this post, are these:
  • Seventy symbols gave trading signals on Monday, 56 of them bullish. That's an 80% bullish rate.
  • Twenty-five symbols made it through my early rounds of screening, and 23 of those were bullish, for a 92% rate.
  • All of the finalists were bullish and came from distinct sectors. They are:
  • All have low implied volatility relative to the prior volatility rise and so must be traded as long options spreads, bought with a debit and expiring in May or thereafter. I generally anticipate that positions structured that way will be on books for several months. So they're mid-term plays, and a lot can happen between now and the time they near expiration.
  • Zacks Investment Research, which looks at analysts and financial forecasts, is neutral on INTU, bullish on JBLU and has no opinion on USO.
[INTU, JBLU, USO in Wikipedia]

The macro facts are these:
  • The markets have been in a downtrend since December 2015.
  • There has been no significant reversal to the upside.
  • The downtrend began after a six-year uptrend of massive proportions.
  • Many Federal Open Market Committee observers are saying that money policy makers will begin raising interest rates as early as June, three months from now.
  • The FOMC began a two-day meeting on Tuesday and will announce policy on Wednesday. Afterward, Fed Chair Janet Yellen will hold a news conference and FOMC members will release their forecasts.
A wise, and wizened, old trader once said to me, "Sonny, your trade can be a winner or your trade can be a loser, but if you've followed your trading rules, then you've made a successful trade."

By my trading rules, I ought to wrapping up a detailed analysis of these symbols with the goal of finding a trade.

But when I, like Holmes, look at the data, I can only see those rules leading to an abyss. Peace to my wise mentor, but just because the road leads over a cliff is no reason to follow it there.

The rule is this: Given a choice been a greater risk and a lesser one, choose the lesser. In this case, the choice is between a potential Fed-induced market panic and missing out on some possible profits.

The decision is, as the great detective once said, "Elementary".

Decision for My Account

I won't be opening bull positions on INTU, JBLU or USO because of my reading of the macro situation. This puts me in the position, unusual for my style of trading, of forecasting the future on the grand scale of economics, money policy and the whole market.

Given the proximity of the Fed meeting and the nature of the market trend, I think I'm taking an appropriately cautious course.

I shall add INTO, JBLU and USO to the Watchlist for re-consideration later in the week.

-- Tim Bovee, Portland, Oregon, March 17, 2015


My price channel trading rules can be read here. My long-term share trading rules can be read here.  My volatility trading rules can be read here. The channel rules are based on
 the classic Turtle Trading rules, which can be read here.


Two social media feeds provide notification whenever something new is posted.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

Creative Commons License

All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.

No comments:

Post a Comment