Careening Into Quarter-End

Where from here? Yesterday has (or should that be had?) the potential to mark a significant turning point for markets, though as yet follow-through has been indifferent, to say the least. The Eurostoxx closed below its 200d moving average, and while the SPX fell 2.4% yesterday it remains 1.5% above its 200d. It is slightly dangerous to get aggressively short SX5E without confirmation from US equities; unsurprisingly, therefore, European equities have been trading water this morning as they wait to see what the Americans do.

The past 24 hours have also seen a classic FX screw-job, as EUR/USD broke through a fairly obvious head and shoulders neckline, prompting a raft of stops......only to squeeze back above (also courtesy of stops) this morning. Apparently, the BRICs moratorium on talking down the dollar (thereby shooting themselves in the foot) only lasted a day, as the weekend comments from Kudrin that there was no real alternative to the dollar have been countered by Medvedev's stated desire to...err.....create an alternative to the dollar.
With quarter-end falling two weeks from today, it's perhaps worth considering what the next couple of weeks might hold. There's the small matter of Friday's triple-witching expiry and next week's Fed meeting, of course, which could obviously add ample noise (and perhaps a dose of signal?) to price action.

Regardless, Macro Man has heard some rumblings that funds will be buying equities into the close of the quarter to get closer to benchmark, which has been cited by some green shoots/reflationist proponents as a rationale for further equity gains.

While this may be the case for individual managers, Macro Man isn't so sure about asset allocators such as pension funds. Through yesterday's close, US equities had posted their second-largest quarterly outperformance over government bonds of the last thrity years. In fact, until yesterday, it was the largest quarterly outperformance.
Now this admittdly comes on the heels of a record underperformance of equities in Q4, followed by another abject stock market performance last quarter. And if pension funds didn't do any rebalancing over the last few quarters, then yeah, they are probably still underweight. But if they did......well, then they might even be overweight now. A pension fund that owned 60% equity and 40% bonds at the end of March would now own 65%/35%. Price has done a lot of balancing work for them.

We'll only know in retrospect what allocators end up doing, but Macro Man has a funny feeling that anyone expecting a late-month or late-quarter bounce such as we observed in Q4 and Q1 might well be disappointed.
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Cortex
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June 16, 2009 at 10:21 AM ×

Seriously, is there any statistical proof that the technical analysis mumbo-jumbo has more than 50% accuracy when it comes to predicting market direction?

My belief: The parties that make up a market are unable to immediately analyse, digest and act on input. This makes trends occur. Trends being more short-lived than a moving average is what makes indices and stocks break through the moving averages. Why don't we all skip the TA-BS and talk of market trends instead?

MM, you are better than that!

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Macro Man
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June 16, 2009 at 10:30 AM ×

I find technicals useful to anticipate short-term price action and to time medium-term trades. I've never really understood the aggressive revulsion of some (usually equity) folk to using them.

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June 16, 2009 at 10:33 AM ×

I'm no fan of technicals myself but if there are enough folk that believe in them then they tend to be somewhat useful. When we all stop believing in them we can modify Nietzche's comments about god being dead to be about technicals.

That being said, I'm more of a fan of events and quite clearly the market is sitting around waiting for some data.

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H(oratio)
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June 16, 2009 at 10:50 AM ×

FX screw job.. how do I put that better.. well no, that just about does it. Okay which one of you knows all the stops in the room, eh? Still usd/jpy is not confirming any of these little games for now, although it is fifty pips better than two hours ago. With all the deficit we are running, it's time for the Tiny Turbo one to buy a spread of ten thousand CL contracts til Dec '10 and let go some of that Strategic Petroleum REserve. That would get us some good GS, MS and DB money. We could then not auction Treasuries in July, and give them back the money through TARP in August. It would help the green shooters, fo shaw.

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thetrader
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June 16, 2009 at 11:35 AM ×

Cortex said "Seriously, is there any statistical proof that the technical analysis mumbo-jumbo has more than 50% accuracy when it comes to predicting market direction?"

Does it really matter if it is only 50% correct when it gives you the opportunity of making three times what you lose? Surely we are all past this need to be right more times than wrong. The only thing that matters is how much you make when you are right versus how much you lose when you are wrong. Technicals give you a cool, unbiased view of the current state of the market. They also give you trading levels around which to trade your fundamantal view. Even if you are correct fundamentally, you can still go broke trading leveraged instruments while the market figures out you were right all along!

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tom
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June 16, 2009 at 12:25 PM ×

ha! maybe with everyone watching out for a "head and shoulder" (and the inverted variety on dollar/ swissy)......
maybe it just won't pan out ;)


on fundamental note, UK inflation turning out a bit sticker than expected, eh?

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But What do I Know?
admin
June 16, 2009 at 12:38 PM ×

Happy Bloomsday, MM!!!

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Macro Man
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June 16, 2009 at 1:06 PM ×

Funny enough, since I started my current gig, I have had exactly the same number of winning days as losing days...but the Sharpe ratio is quite high (knock on wood.) So winning 50% of the time is A-Ok with me.

SWDIK, I have to admit that I could never get into Joyce. I was permanently scarred by having to read Portrait of the Artist... in high schooland thinking it was absolute pants.

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Cortex
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June 16, 2009 at 1:47 PM ×

It seems we have reached agreement that TA doesn't tell you up or down (any better than a coin toss) but is efficient on the more etheric things like levels?
MM - I believe you are overly humble regarding the Sharpe ratio. A disciplined stop-loss policy is probably the key.
TA is a very blunt tool, especially given the number of followers that theoretically should make it true, just by placebo effect. Personally, I would rather trust a weather forecast for the summer of 2011 than build my market belief on a head-shoulder-batman-turner-overdrive formation.
If i am wrong, any trading system programmed with a TA-software would be the perpetuum mobile of financial markets.

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Last word from Cortex on the matter
admin
June 16, 2009 at 2:43 PM ×

"The Eurostoxx closed below its 200d moving average, and while the SPX fell 2.4% yesterday it remains 1.5% above its 200d"

My guess is that one of these indices' signals will prove correct and thus confirm your belief in this tool.

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Macro Man
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June 16, 2009 at 2:51 PM ×

Technical analysis is like a hammer, a saw, or any other tool; its effectiveness depensd on how it is used. You seem to have a rather simplistic view of how it fits into a portfolio, or at least mine.

The only thing that confirms my belief in the effectiveness of any portfolio management technique is that number at the bottom of the P/L sheet.

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thetrader
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June 16, 2009 at 3:20 PM ×

MM said "The only thing that confirms my belief in the effectiveness of any portfolio management technique is that number at the bottom of the P/L sheet."

Well said MM, that is the only thing that matters at the end of the day.

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wcw
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June 16, 2009 at 3:51 PM ×

I don't even trust the P/L. If you're out there selling the tails, you can have a beautiful-looking Sharpe and a great P/L, until you blow up.

Full disclosure: I do performance analysis for a living, and trade for fun. Perhaps I am just bitter that my daily Sharpe for the last eighteen months is roughly zero. YTD, mind you, it is closer to two.

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Macro Man
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June 16, 2009 at 3:55 PM ×

wcw, that's one of the reasons that i like to look at % of winning days. The higher the percentage of winning days, the more likely it is that you are just selling vol/clipping coupons and have a fat-tailed turd in the offing.

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thetrader
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June 16, 2009 at 4:10 PM ×

wcw said "I don't even trust the P/L. If you're out there selling the tails, you can have a beautiful-looking Sharpe and a great P/L, until you blow up."

Absolutely right and very good point, I probably should have stated clearly that the P+L is the only thing that matters assuming you actually have a decent strategy not based on the "nickels in front of a steamroller idea."

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thetrader
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June 16, 2009 at 5:11 PM ×

By the way MM, I have been a lurker for a while and have really enjoyed reading your views and analysis on the markets. Thanks for doing this, this blog should be on university/ business school economics curriculae for aspiring traders/ hedge fund managers! Then again, they would probably get too caught up in the fundamentals and not appreciate the technical analysis!

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freude bud
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June 16, 2009 at 6:33 PM ×

It may be that Medvedev's--and Beijing's and Brasilia's--stated desire to create an alternative to the dollar is no more than the creation of sufficient domestic political space to spend more of the budget on the IMF ... traditionally not one of the most popular organizations in the world in the relevant capitals ... and for some fairly good reasons, too.

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But What do I Know?
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June 16, 2009 at 7:18 PM ×

MM, I hear you on Joyce--Finnegan's Wake is purely mastubatory, but Ulysees kind of grows on you if you think of it as a story in which he starts out thinking he can really write about this one day and then halfway through realizes that it's just going to be words, words, words anyway and that if there is a there there he's not going to be able to pin it to the page, so he gives free range to his imagination and just starts to let the humor rip.

I'd recommend becoming familiar with some basic outlines of the book before starting--and then don't take it too seriously. Kind of like trading. . .

Sorry to get off the financial topic there, but you seem like a guy who might appreciate Ulysees. BTW, I assume that "absolute pants" is synonymous with uninteresting and tedious--the expression is a new one on me. .

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Macro Man
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June 16, 2009 at 8:36 PM ×

BWDIK: Pants. Noun/Adj. Nonsense, rubbish, bad. (That's from the dictionary of British slang.)

I confess to not knowing much about Leopold Bloom except that his wife is called Nora Barnacle and he has a fondness for gorgonzola cheese.

Having lived in Dublin for three years earlier in the decade, I perhaps should give it a try again, though funnily enough I always manage to have some book or another land on my bedside table before I run dry. In any event, I will forever associate Joyce with AP English in high school: Joyce and Thomas Hardy. Ugh.

Freude, I certainly understand the desire of China/Russia et al to purchase IMF bonds as a politically expedient way to loan money to the IMF. But then again, doing that doesn't require the virtually incessant drumbeat of recent commentary on the desirability of using the SDR as a reserve currency (i.e., a store of value), when all it really has ever been is a book-keeping oddity. In any event, call me cynical, but somehow I don't think that altruism (i.e., desiring to funds the IMF's "good deeds" over domestic objections) scores very highly on their list of utility functions.

thetrader, thank you for your kind comments.

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Paul W
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June 16, 2009 at 10:59 PM ×

It is hard to tell with institutional asset allocators. I've been sleuthing through the portfolios of some of the largest US pension funds, like CALPERS, and find them still underweight equities. But over the last 6 months the majority of pension funds and endowments have also been reevaluating their strategic asset allocation and shifting their target weights towards fixed income and short duration.

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