Risk Off Event Volatility

Looks like the market has now been prepped for incoming volatility.  To profit in times like this, it is important to remember your risk threshold and your market correlations

With a 2-year wedge breakout on the VIX, equity markets declining, and risk-sensitive currencies finding temporary highs; we have to be ready for extreme volatility.

The market has followed through to the downside with the DOW sliding over 900 points, risk currencies declining, and the JPY powering up reflecting a true risk-off sentiment.  Risk off means movement in JPY and CHF.

Additionally it’s important to note that crypto-currencies did not receive a bid during the latest, big risk-off event; confirming that these speculative assets are sold in times of uncertainty to raise cash out of fear or greed.

The winners of the day will be those who don’t get emotional about the big market swings and stick to their money management model….always.

To be successful, think dynamically and understand the correlations among financial markets.  Tunnel vision on one specific asset class no matter the market cycle is not true objective analysis.

For me, this month I am closely watching correlations, commodities and balancing my portfolio out with metals while I search for an auditor to update the gains to my track record for 2017.


The Federal Open Market Committee

FOMC Interest Rate Announcements

What Is The Federal Open Market Committee (FOMC)

The FOMC is the policy-making arm of the U.S. Federal Reserve. The FOMC determines short-term interest rates in the U.S. by manipulating the overnight interest rate that banks pay each other for borrowing reserves.  Banks borrow reserves when a bank has a shortfall in required reserves. This overnight rate is the fed funds rate.

The Federal Open Market Committee also determines whether the Fed should manipulate liquidity in credit markets by other means. The Fed announces its policy decision (whether to change the fed funds target rate or not) at the end of each FOMC meeting. This is the FOMC announcement.  It also includes brief comments on the FOMC’s views on the economy and how many FOMC members voted for and against the policy decision.

Since the last recession, the statement also includes information on Fed purchases of assets, aka “quantitative easing”, which affects long-term interest rates.

Why Is The FOMC announcement important?

The Fed determines interest rate policy at FOMC meetings.  A FOMC meeting happens approximately every six weeks.  The FOMC meetings are the single most influential event in the markets.  For weeks in advance, market participants speculate about the outcome of each meeting. If the outcome is different from expectations, the impact on the markets can be significant.

FOMC The Fed Funds Rate
Effects Of FOMC Announcements Reach Far And Wide.

Why Is The Federal Funds Rate Important?

The interest rate set by the Fed, the federal funds rate, serves as a benchmark for all other rates….All. Other. Rates.

A change in the fed funds rate (the lending rate banks charge each other for the use of overnight funds) affects all other interest rates from Treasury bonds to mortgage loans. It also changes the flow of  investment dollars. When bonds yield 5 percent, they will take more investment away from equities than when they only yield 3 percent.

Interest rates impact the economy in various ways. Higher interest rates tend to slow economic activity; lower interest rates tend to stimulate economic activity while at the same time erode pension fund returns and consumer savings. Either way, interest rates influence consumer sales. In the consumer sector, fewer homes or cars will be purchased when interest rates rise.

Furthermore, interest expense is a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits.  When interest expenses increase, net profit decreases which lowers corporate profit. The bottom line is that higher interest rates are bearish for equities.  While a low interest rate environment is bullish for equities AND juices up government tax revenue.  Get the picture?



Alternative Investments -Measuring Performance

How to measure performance between accounts.


Old Map (76)

Dealing in Alternative Investments requires a bit of statistical knowledge (the more the better).  So I picked out one component that would benefit someone who handles their investments personally and, at the same time, benefit someone who pays an advisor because it never hurts to ask the right questions.

The following is not investment advice, but one way to assess the advice you were given…

High Frequency Trading or Unconventional Return Periods

When returns are realized at higher frequencies (many times per year), Sharpe Ratios and the corresponding t-statistics can be calculated in a straightforward way.

Assuming there are N return occurrences per year, and the mean (μ) and standard deviation (σ) of the returns are μ and σ, the annualized Sharpe Ratio can be calculated as (μ×N)/(σ×√N) …or (μ/σ)×√N.

The corresponding t-statistic is (μ/σ)×√(N × number of years).

For monthly returns, the annualized Sharpe Ratio and the corresponding t-statistic are (μ/σ)×√12 and (μ/σ)×√(12 × number of years), respectively.  Here, μ and σ are the monthly mean and standard deviation of returns.

Similarly, assuming μ and σ are the daily mean and standard deviation for returns (you traded every day the market was open…please don’t do that:) and there are 252 trading days in a year, the annualized Sharpe Ratio is (μ/σ)×√252 …the corresponding t-stat is (μ/σ)×√(252 × number of years).

The calculators I use to find these metrics are listed in the right-hand column on “my trading desk.” They both have statistical functions.

The Test Statistic

Test Statistics (t-stat,t-statistic) are tricky creatures.  Essentially when evaluating performance, I require a t-stat of 4 or more (the higher the better) before considering a stake.  In the future, I will explain a simple model I use to allocate cash among accounts and strategies according to their t-stat.

Now, here is a simple formula to estimate a t-statistic for unusual return periods:

Test statistic= (μ/σ)×√(N return occurrences × number of years).

Note that “N return occurrences×Number of years” is just the total number of return occurrences resulting from the investment or strategy (either positive or negative).  So, if you closed out 3 trades (at 1%, -2.3% and 3%), that counts as N=3.

Or, if your investment reconciles every 6 weeks, for the past 1.5 years then N=13, (78 weeks / 6).

Remember, it is important to convert your daily/weekly/monthly returns to an annual (yearly) number.  This makes it very easy to compare performance against conventional, low-return investments pushed by financial salesmen.

And since the volatility adjustment is built-in, it is an apples-to-apples comparison.



Sails Up

Long The Japanese Yen.


↓ CAD/¥

The global macro picture looks squared away: swap dealers are short CAD and long Yen; institutional managers are actively buying Yen contracts.  Bond activity indicates risk-off verifying ¥ long positioning.  Retail positioning is not optimal and BoJ numbers are due out this week so a wide stop.

The charts show good CCI Divergence on the daily and weekly.  Stop is set north of ¥92.  Position size is a full bell.

Update:  10/01, order triggered; 10/18, closed at +2.4% of margin;


↓ €/¥

Similar global macro factors with institutional managers  actively closing their euro shorts.  CCI divergence on the weekly; stop-loss is set above the weekly high.  A correlated trade so I will be trailing the stop on this pair if it triggers. Risk taken is a 2/3 bell.

Update: 10/01, order triggered;  10/18, stopped out, -1.94% loss on equity

Trader Error:  this trade was held too long, I was away from my laptop and missed the profit target on the morning of 10/16.


European Monetary Union: Flash PMI

Emerging Markets: Flash PMI


EMU: Purchasing Manger’s Index

This week the Flash PMI for the EMU will be released.  The flash Composite Purchasing Managers’ Index (PMI) provides an early estimate of current private sector output.

The flash data are released around ten days ahead of the final report and are typically based upon 75-85 percent of the survey sample. Results are synthesized into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) output versus the previous month and the closer to 100 (zero) the faster is output growing (contracting).

The report contains flash estimates of the manufacturing and services PMIs. The survey is produced by IHS Markit and uses a sample of around 5,000 manufacturing & services firms.

Manufacturing firms located in:

  1. Germany
  2. France
  3. Italy
  4. Spain
  5. Netherlands
  6. Austria
  7. Ireland
  8. Greece.

Services firms located in:

  1. Germany
  2. France
  3. Italy
  4. Spain
  5. Ireland.

The report is significant because other investors/traders value it –economic data such as the PMIs  indicate what the economic backdrop is for the various markets:

  • Equity investors like to see rapid economic growth because that usually translates to higher corporate profits.  However, increased corporate profits may occur without any growth whatsoever.
  • Forex traders like rapid growth as well because that is one indicator of demand for a country’s currency.
  • The fixed income (bond) market prefers slow to no growth and is extremely sensitive to whether the economy is growing too quickly due to inflationary pressure.

So which market do you think the central pirates banks cater to?

Homanns Heirs c1746

Have A Calculated Edge

Do you have a calculated edge?


It is important to have an edge as a trader.  But, what is an edge?  And how do I act on it to minimize risk and profit consistently.

The generic definition of an edge is this: an edge is a higher likelihood of one outcome happening over a second outcome.

With this definition in mind, let’s take a look at a simple scenario that illustrates an edge.

If you play heads or tails, with a friend, with a coin that you know is weighted more on one side (heads by 70%) than the other (tails), does it make sense to try and predict whether the number of heads will exceed the number of tails by the end of the day?

No, because each outcome is not random, you know that over time if you keep calling heads you will be wrong more often than you are correct.

The exact same can be said about trading. Simply put, once you have found an edge, all you have to do is keep applying that edge to the market whenever it presents itself.  Different traders hold different kinds of edges.  The type of edge you hold matters little.  What matters is that your edge is profitable and can be applied consistently.  And, if you have multiple edges, that definitely matters!

There is no point in guessing whether the next trade is going to be a winner or a loser. Guessing is futile.  Don’t guess your way into a soupline. When your edge is present, you don’t need to guess what the ruling market will do next.

Do you have a clearly defined edge?

So what is my edge?  I have multiple edges since I prefer a good nights rest …and need my beauty sleep.

My #1 edge is Mindset –I know that money is a means and not an end.  I know that markets rule 24 hours a day, non-stop.  Missing a trade means nothing, losing a trade means little.  I know there are many more trades that are correlated  and time-lagged to any that I miss or lose.

My #2 edge is Money Management  —the money management model I developed over the years minimizes risk and adapts to trader performance.  When I take a loss, it is minor …gains always exceed losses.  My model is based on the work of great minds like:

  • Ed Thorpe
  • Claude Shannon
  • John Kelly, Jr.

At least one of those names should ring a bell.  Afterall, Claude Shannon (M.I.T.) is the father of modern Information Theory!

My final edge is market analysis which I learned from taking the first two CFA exams; as well as learning entry & exit points according to price charts (technical analysis).

If you want learn how to gain an edge in the market, go visit the fine folks who taught me:  Infinite Prosperity, a Corp. Authorised Representative of Alpha Equities & Futures Ltd ABN 76131376415

What is your edge?

When thou sittest to eate with a ruler, consider diligently what is before thee…              –prov XXIII


U.S. Nonfarm Payroll (NFP)

All about the Nonfarm Payroll (NFP)


Always check the Economic Calendar

Later today, there will be released two separate surveys in one report. The first is a survey of 60,000 households (called the household survey). Workers are counted once, no matter how many jobs they have, or whether they are only working part-time. To be counted as unemployed, one must be actively looking for work. Other commonly known figures from the Household Survey include the labor supply and discouraged workers.

The second survey is the Establishment Survey –a survey of over 557,000 worksites. Nonfarm payroll employment is the most popular and well-known indicator from this survey. Business establishments in the nonfarm sector report the number of workers currently on their payrolls. Double counting occurs when individuals hold more than one job.  Always keep in mind that this is just a single indicator.  One that appeals to the emotions of many traders, but is hardly representative of the overall economy.

Market reactions to this indicator are usually dramatic.  The employment data given is comprehensive on how many people are looking for jobs, how many have them, what they’re getting paid and how many hours they are working. These numbers guide, not determine, the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.

The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

By tracking jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it’s a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline – boosting up bond and stock prices in the process.
The employment situation is the primary monthly indicator of aggregate economic activity; it encompasses all major sectors of the economy. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. The Fed has emphasized that it is overall labor market conditions that matter – not just a specific number.

The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.

The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates.

The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.

Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.

When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.

Gains in average hourly earnings represent wage pressures. These figures aren’t adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.

90% of the time, I close out 90% of my positions the week of the NFP release.cropped-old-map-36.jpg