Deflation

I think we are almost at the point where we are likely to experience deflation in Europe and the US is not too far behind. What is of worthy concern is the fact that we are experiencing all this deflation despite record monetary stimulus. Hmmmmm I think this is not good for governments wanting to inflate away their debt.

 

Patterns within Chaos

Last week John Hussman posted a chart that made me take note. Even though I fall in the camp that future market performance cannot be predicted, I do hold that one can forecast probability. Pretty cool concept, I am saying you have more chance predicting a prediction than simply making a prediction. In the chart below Hussman presents a time series of returns that meet a 3% down day filter with a look back of 3 years. As you can see very noticeably is that large drop days cluster around each other. If they were completely random you would see far more sporadic spikes in the chart. What is clear is that during big drawdowns of the Major Correction variety we see many large drawdown days sequentially. This no doubt makes for an interesting discussion for so called randomness.

I really like this chart, note to self and a little bit of homework, see if you can recreate this chart in R.

Post Decline Spike

John Hussman posts a very interesting panel of charts with a major top represented by the green arrow, followed by a rally thrust with the red arrow marking the top of the counter trend rally. However, these rally’s are really sucker rally’s as the markets then go onto much deeper drawdowns as presented on the chart.

The million dollar question we are all wondering is whether the highs of a few weeks ago will stand as the top of the 2009 bull market.

wmc141027a

Just to end with some Hussman conditional probability commentary:

Given the “all eyes on the Fed” nature of the financial markets here, any predictable component to short-term returns here is likely to be overwhelmed by both random noise and knee-jerk responses to whatever language the Fed chooses in its statement this week. This makes us quite agnostic about near-term market behavior. The next several sessions could contain a significant further short-squeeze or a vertical collapse, and we have very little predictive basis for that distinction. Longer term, we continue to view present market conditions as among the most hostile in history, coupling rich valuations with market internals that remain unfavorable on historically reliable measures. So allow for any sort of action in the near term, but recognize that from a full-cycle perspective, we continue to view a 40-50% market loss as having very reasonable plausibility over the completion of this market cycle.

Golden Cross Trading System in R code

I wanted to try and post my first piece of R code on the site. I am having a few problems with the HTML of the code so here goes a first try. I am rookie coder with R and any other language for that matter. What this code does is goes and downloads more than 60 years of S&P 500 daily data, it then observes when the gold cross takes place, i.e. 50 day moving average crosses the 200 day moving average. In this instance there is a long signal. When the 50 day cross the 200 day to the downside it is a signal to close out the long trade. The system does not enter short trades and is exceptional relative to the traditional buy and hold strategy.

    require(quantmod)
    require(PerformanceAnalytics)
     
    #get the data and fill out the MA
    getSymbols(‘SPY’, from=’1950-01-01′)
    SPY$ma200 <- SMA(Cl(SPY), 200)
    SPY$ma50 <- SMA(Cl(SPY), 50)
     
    #lets look at it from 2000 to 2015
    spy <- SPY['1950/2015']
     
    #our baseline, unfiltered results
    ret <- ROC(Cl(spy))
     
    #our comparision, filtered result
    ma_sig <- Lag(ifelse(SPY$ma50 > SPY$ma200, 1, 0))
    ma_ret <- ROC(Cl(spy)) * ma_sig
     
    golden<- cbind(ma_ret,ret)
    colnames(golden) = c(‘GoldCross’,’Buy&Hold’)
     
    #Plot to visually see the actual moving averages
    chartSeries(spy,
    type = “line,
    name = “Moving Average : Golden Cross”,
    TA= c(addSMA(50, col = ‘yellow’), addSMA(200)))
     
    maxDrawdown(golden)
    table.AnnualizedReturns(golden, Rf= 0.02/252)
    charts.PerformanceSummary(golden, Rf = 0.02, main=”Golden Cross”,geometric=FALSE)

    Created by Pretty R at inside-R.org

    Rplot

    Rplot01

Play Thing

At the moment this new website feels like a new plaything which has me all excited as I have a neutral venue to express myself as openly or as frequently as I wish. My wife will no doubt put some hand brakes on my openess.  😍

I have been keeping a journal of my thoughts for more than 24 years. My writings come in sporadic bursts amd are not all centrally located. I have lost one of my most intimately personal hand written journals. Recently I thought I lost the backup file for a software journal I had more than 3 years of journaling on. All good I found it.

I currently use a new software it is a mobile app and is cloud based to capture my dreams and really personal and raw emotions. However this new blog and the Sefirot Capital site is hopefully an exciting new chapter in my journey to Self discovery. Here I have an opportunity to be more structured and purposeful as I want the content to motivate and educate it’s readers.

There is something enlightening and exciting getting to see into someone’s life, but I am proposing something far more exciting I am going to take you inside the mind of a Hero’s journey.  Like Joseph Campbell monumental mythological insights into the Journey of a thousand faces and his Hero’s Journey I wish to explore the very depths of my psyche on this journey and share the struggle of the individuation process.

I titled my Journal in 1989 “Thoughts in a Make Shift Mortuary”. This period was a dark one for me having moved to a new city and forced to make a whole new friendship circle after being with the same group of friends from play school to the end of high school.

In Jungs Red Book he takes you on a far deeper ride into his unconscious as he struggles his own sanity in a deeply complex metaphorical analysis of the human psyche. I hope not to go so far to the edge in my exploration but I figure we all need to question our own sanity in our effort to find the real “I”.

What is the Point?

On Friday a friend called me and asked me if I could do him a favour and give him my professional view on a new IPO that his company is looking at. He has very little clue about financial investments and wanted to speak to his boss after doing some behind the scenes homework.

I took a quick look at the details and was in principle very comfortable with the offering, it seemed to tick all the boxes, at least all but one in my book. However, when I finished writing up the report it dawned on me that my advice was contingent on a lot more information. To tell someone that the investment opportunity ticks the boxes, doesn’t tell you anything about how big an investment you would recommend or what a suitable time frame for the investment should be.

I realised very quickly this is the worst kind of friendly advice I like to give, what is the point? If you don’t tell me why you or your company is considering the investment or from what pot of capital is the allocation coming from of what value is this isolated advice? If for instance my friend told me, the investment is coming from a 5% speculative pool that has a very high expected growth expectation attached, then I could say straight away that although the intrinsic qualities of the offering are suitable, the actual place for the investment in your allocation pool is a mismatch or some such wholesome advice.

On reflection my friend could be saying to me that he doesn’t really want my expertise on asset allocation, rather he just wants my stock specific advice. In this case then a simple advice that it ticks the boxes could suffice.

However, I believe my friend himself hasn’t thought of it from this perspective. Rather the vast majority of people see investments in isolation and do not yet grasp the broader more important information of where and how this investment impacts an existing portfolio. This is not a criticism it is more an insight as we tend to compartmentalize our investments and projects of interest, often to the detriment of how it will stick together and its impact on the whole.

To conclude with an example, placing a large portion of ones total capital in a speculative offering can result in financial ruin, or an extremely small allocation to a low risk offering might have negligible impact. Context is key in the way we live our life on both a financial, spiritual and psychological level.

Am I a Bad Person

The feelings I am going to express are less pronounced at the moment as I don’t have a trade on; however, I do remain a proud bear.

2014-10-24_1541

I often think the joy I get when the markets dip is not something to be proud of. In the moment, it never dawns on me that each time the markets dip and large sums of “wealth” are destroyed, there are going to be more hungry people battling to make ends meet. The amount of suffering people experience from financial hardship is almost too hard for me to bare and most times I try my best to blank out these images. Having grown up in South Africa with street children begging on the streets with nothing but sad, often petrified eyes looking back it you, I am fully aware of the devastation poverty brings. But one doesn’t have to look far the chances are we have all felt some form of poverty at some stage in our life, so feeling poor is a crap feeling, and celebrating someone else’s misery for our gain doesn’t feel like a good thing to do.

With trading we have so much vested interest in the markets behaving as we would like them to behave. There is of course the $’s invested and the joys of making lots of money when the call pays off, and then of course the anxiety, despair and guilt associated with losing money when the trade goes against you. The intensity of these emotions are not to be ignored, and will be explored in-depth on this site. These emotions represent only the financial profit and losses.

There is a whole other world of ego-conflict taking the form of inflation which comes with sounding like an oracle with superior analytical skills to the masses; and of course the flip side of the same coin deflation – shame and embarrassment when we get it wrong and everyone else gets it right. The ego-defences and projections play a huge role in being right or wrong with our trading calls and further add to our irrational behaviour.

With what I have said as a backdrop I believe the markets were designed to spend most of their time going up with only short bursts of panic resulting in corrections to the uptrend. My thesis is the design of the rise and fall of markets, through our collective psyche, takes the pain of these collective human emotions into account with an asymmetrical correction/pain profile. It seems it wants to give the brave few who suffer against the herd their just deserts in a respectfully humane way. Almost as if to say, “you deserve to make some money for your courage but as many people will suffer and we don’t want the feeling of sadism to take hold we are going to make it quick, to get the pain over for the losers”. This is why corrections are typically short and sharp.

Something to think about when using this line of thinking, is the belief that collective wisdom runs in multiple temporal cycles which explains why we often encounter long (decades) protracted downward cycles like we are in Japan. This occurs to balance the distortion that resulted in a excessively strong prior bull cycles.

To conclude I am not suggesting that every cycle needs to share the exact same characteristics. Rather I think there is an asymmetrical yin and yang in play most of the time. You will probably find that in the rare cases where this symmetry is distorted their will develop a “market complex” which will eventually needs to be integrated into the markets psyche.