Speaking as a guy who is looking forward to chaos, i.e. – market chaos, political chaos, etc., this video warms my heart:

President Trump, who I still refer to as “Drumpf” thanks to my Google Chrome Browser extension provided by John Oliver (see link) is setting the world on fire with isolationist thoughts and actions.

The last time we had an overvalued stock market peak simultaneously mixed with protectionist/isolationist actions was 1930. The stock market had just peaked and began a slide into losing greater than 89% off that peak, and while the stock market was making its way into the abyss two senators sponsored a bill that would ensure economic destruction, the Smoot-Hawley Tariff Act. Without asking you to take an economics lesson, here is the first line of that webpage:

The act raised U.S. tariffs on over 20,000 imported goods.

Sound or look familiar to you? It should. President Trump wants to impose tariffs on imported goods, to “protect” American jobs.

I haven’t seen this movie before because it happened way, way before I was born, but I’ve read about it several times over my adult lifetime. I remember discussing the impending real estate collapse with my Dad (circa 2006), who cut his teeth in the real estate business in the 1960s, and at that time he had this to say:

I’ve never seen real estate prices collapse on a nationwide basis, therefore neither have you. But when I got into the business I worked with people who had seen real estate prices collapse nationwide; it was during the depression. It will happen again.

Credit to my Dad; it did happen again.

I never thought I would see protectionism/isolationism in my lifetime. I thought we had advanced well beyond that failed economic policy several decades ago. I can hardly wait to see how this plays out.

Good luck with your protectionism.

Green and Red Marbles

In November 2007 I was in the audience for a presentation from a fellow financial planner (not a trader) on why it was “statistically smart” (his words) to stay invested in the market all the time. The timing of this speech missed the top of the market by a matter of a few weeks, and its main topic centered on the use of green and red marbles to make the speaker’s point. I thought that we were due for a red marble, which I will get back to in a moment.

A few months later, February 2008, I was asked to give a presentation on general economic conditions to a local chamber of commerce and its members. I focused my speech on the dangers of being invested in a wildly overvalued stock market and how the collapse of the housing market and its effects on the stock market was going to affect “almost everyone you know” (my exact words), and I warned the audience that “if they weren’t prepared to panic (i.e. – sell stocks) at the top,” which was already behind us on the calendar as I spoke, “then they better not panic at the bottom.” I also said, “that given comparable historical examples, the bottom is likely to be approximately -50% south of where the market rests right now.”

From the time of the speech to the subsequent low in the S&P500 in March 2009, the market lost -51.01%. Here’s the chart:

I really don’t mean to brag, so let’s call how close I was a lucky guess. Given what I know now about trading and how I have applied the lessons I learned over the last several years, there’s no way I should be bragging about that prediction because I made nary a dime from my own insight. At the time I was an asset allocator like my colleague in the first paragraph, so my bragging about that call is similar to what some mutual fund managers can claim from that era, that they lost less than the market did over that time frame. “Give me another wildly overvalued market like that one,” a refrain I have repeated many times since 2010, “and I will make my F.O. money* and walk away from this business and become a wooden boat builder or engage in some other pastime that does not have me staring at market prices, spreadsheets and economic data most waking hours of each working week.”

Well, here we are, overvalued again and ripe for a fall, similar to 2000 and 2007. My F.O. money is sitting in the market waiting for me to extract it after the inevitable decline. But what about those red and green marbles? Thanks for reminding me, as I have a point to make.

The financial planner’s argument for staying invested at all times was predicated on a simple statistic; since 1951 up to and including 2007, the S&P500 experienced 42 positive years and 15 negative years, or stated as it was in the speech, “70% of the time the market has a positive year.” Then he stated, “Now imagine an opaque jar filled with 100 marbles, 70 of which are green and 30 of which are red. You reach your hand in the jar to pull out a marble. Which color do you think you are more likely to grab?”

It makes absolutely perfect intuitive sense that you should answer, “GREEN!,” with as loud as your voice can fill the room. To go on record publicly with my cohort and since I liked to occasionally exercise my contrarian sarcastic side, I shouted out, “RED!” The speaker looked my way and smiled but did not pry to let me explain myself; he was, after all, a colleague and understood why I said that. His guests just thought I was being a smart ass, which was fine by me.

So why did I answer “red” when the correct answer to the marble question is clearly green? Because the market is not like an opaque jar of colored marbles, though in that scenario it is similar in that the jar would have a memory, so to speak. I will explain. In the case of actual market returns since 1951, the more green marbles that are withdrawn from the jar, the more likely it becomes that you will pull a red marble. Let’s look at actual returns since 1951, the first year of my sample. I’m going back in time now.

We’ll assume that the 70% rule still applies (actually it was 74% – 42 positive years divided by 42 positive years plus the 15 negative years = 74%) even if we don’t pull the marbles in their correct historical order. Each marble is labeled with a given year and its associated return. I randomly withdraw 1998, a green year. That leaves us with 41 positive years and 15 negative years, or a 73% possibility that the next draw will be positive. You know what’s going to happen from here, the more positive numbers you pull from the jar, the more likely that eventually you will pull a red marble.

The speaker’s argument, however, and to be fair, was more complex than that. He said we start each new year with the same number of marbles and the same probability, starting from 100 with 70% of them being green. My counter argument was and still is, that you have to take valuations into account when determining your odds of pulling a positive year out of the jar, or as I have alluded to, the market has a memory unlike a fresh jar of marbles waiting to be pulled one by one.

Current valuations on the S&P500 are very similar to 2000 and 2007. The likelihood of pulling a red marble is increasing. If I assign a weight to the next marble pulled from the jar, it may in fact be green labeled with some positive return, but the risk of pulling a red marble with a large negative number far outweighs the likelihood of another green marble no matter what the return.

I have not lost my marbles.

* – If you need an explanation for the letters F.O., look no further than Jackie Gleason’s character in Smokey and the Bandit. You can probably find it in YouTube.

Conditional Probabilities

I got caught up in the quiet hysteria of noticing that the S&P500 has not had a down day of greater than -1% since October 11th. Tomorrow will mark three months since; that seems like a long time. In fact I made reference to it in a tweet before I ran over to my spreadsheet to put the study into the context or perhaps view it through the perspective of whether or not the market is in a bullish or bearish phase, which I like to define as residing above or below its 200-day simple moving average (sma).

My spreadsheet goes back to January 7, 1988, or 7,312 trading days. My first glance of -1% down days revealed 894 occurrences, or ~31 per year. From the first glance is seems like we are well overdue for another occurrence. But then I remembered the criteria of where the market resides in relation to its 200-sma. Here’s a nice little table that shows the relationships:

above/below 200sma all days -1% days % occurrences
above 200sma 5,368 407 7.58%
below 200sma 1,944 487 25.05%
7,312 894

As with all things, context is important. If we’re looking for a -1% down day and the S&P500 is above its 200-sma, we’re only likely to see ~19 of them per year, but on the flip side, or better said, the “underneath side of the 200-sma,” we’re likely to see a -1% down day every fourth trading day, or ~62 times per year. The S&P500 is currently above its 200-sma and has been since June 28th of last year.

Stay safe out there.

Commitment of Traders

The blue arrows show the trades that I made last year; these were long signals from my commitment of traders report. The short signals, shown with the black arrows, were ignored. I just got another signal with this past week’s report and I placed the short near the close of trading on Friday.

I’m taking every signal this year and will chronicle the details as I go.

2016 in Review

There were two signals last year from my commitment of traders report, which I will be discussing in greater detail this year. For now, have a look at this:

Cheers, and happy new year.

Clinton Lost

It has begun. Donald Trump has accumulated enough electoral votes to secure the victory and already I have seen videos of people marching through various streets of America chanting, “not my president!” Therein lies the difference between a spoiled expectancy and coming to grips with reality. Hillary Clinton lost this election more than Donald Trump won it. However, Trump is a lifelong salesman who is accustomed to asking for and closing a sale. Clinton expected the win and so did everyone who sided with her against Trump, never really asking for the sale but expecting it because the alternative was so reviled.

I am old enough now to have experienced more than a few of these Presidential elections. I was unhappy with the result in 1992 when Bill Clinton won with significantly less than a majority, and also when he repeated the feat in 1996. At no point in time immediately after those elections or subsequently did I ever mutter the words, “not my president.” I sincerely wish that the people (mostly celebrities) who threaten to leave the country, like spoiled little crybabies who stamp their feet when they don’t get their way, would actually follow up with their threats and hit the road, Jack!

A lot of blame has already fallen on the wrong shoulders. The emails did not do her in. Protectionism did not drive him to victory. I think the populous, and most of the unemployed and underemployed who have yet to recover from the Great Recession, were and still are angry that no one from Wall Street has suffered at all following a mortgage and debt catastrophe that was created inside those investment banks. To make matters worse, Hillary Clinton received several $225,000 speaking fees from those very investment banks that created the housing disaster. In the eyes of the lower middle class in this country, those speaking fees look very much like advanced bribes to continue to create more “financial innovation” while Hillary potentially looked the other way; but that’s conjecture on my part.

The “rednecks” who drove Trump to victory in their dirt covered elevated trucks and jeeps wanted a genuine outsider to go to the White House. Hillary was and still is anything but an outsider, and she downright sucks at closing the sale.

How Much Better Can it Get?

That’s what market participants and election pundits needed to be asking themselves at two significant points in this fiasco otherwise known as this summer’s election cycle. I borrowed a couple of screenshots from Nate Silver’s website, Have a look:



I put two arrows on the chart of the S&P500 to show exactly when Hillary Clinton enjoyed her biggest lead(s) over Donald Drumpf.


As I write this today my prediction is that Hillary will win. However, I dislike the both of them.

Two Wrongs

Two Wrongs

Anyway, the time to hedge against a perceived worst case scenario was when Hillary had her largest lead(s). If Drumpf pulls an upset on Tuesday, I have no idea what to expect from the market, but my perception is that all of the hedging and/or selling has already been done.

Stay safe out there.