A Little Too Close

Tuesday, September 22, 2009

Sometimes you can get a little too close to the market. If someone (say, a friendly punter/blogger with a tasteful double initial) had told you that there was a potentially significant event on Wednesday, but little news of consequence scheduled for release before then, what would be your a priori expectation of price action for the first half of the week?

Chances are, you'd say something like "well, there'll probably be some profit-taking, and maybe the sharks will run some stops. I guess it'll be pretty noisy." Makes sense, right? And if you run a "directional medium-term macro strategy", you'd think it would be nothing to get worked up over.

And yet, if you're there watching the screens, it's incredibly easy to get sucked into doing something stupid when you see stops being run and/or a price correction. Such as yesterday's dip down to 1.4611 in EUR/USD....which you're kicking yourself if you sold, given that we've soared to new highs...and that's before Lauren Cooper Axel Weber said "I ain't bovvered" about the level of the euro exchange rate.
Not that FX is alone in its ability to suck in the unsuspecting punter, only to spit him out with a damaged P/L. Equities looked offered-only at this time yesterday.....and now they don't.
Treasuries caught a tasty bid.....until it went away.
Perhaps the most interesting price action was in the energy complex, where oil caught a proper bollocking...CLZ9 shed $3 at one point, and appeared on the verge of breaking a rather significant trendline. Needless to say, pre-emptive selling of the break was rewarded with a nice $1 bounce and a hole in one's P/L.
Sometimes, it's useful to take a step back and recognize that for the short-term, the noise to signal ratio is likely to be close to infinite. On yesterday's evidence, you can save yourself money by not watching things too closely. So while Macro Man is ostensibly taking Mrs. Macro out to lunch for her birthday (and our wedding anniversary!) today, he may well find that it's quite a profitable idea as well.

Posted by Macro Man at 9:08 AM  


EURUSD back end flys looking like a good sell as atm vols grinding lower but any equity correction might wipe you out..

Anonymous said...
9:42 AM  

Go on, say something about kiwi.

BNZ are claiming their tax write down (i.e. no repatriation to Oz) is responsible for that c/a shock. Well at least $600mn of it.


Anonymous said...
9:48 AM  

When does this become a currency crisis. You think us assets will have to take a hit if this continues.

Anonymous said...
10:00 AM  

You certainly were not alone yesterday ... and then the Fed went and bought all those treasuries.
Have a nice lunch :)

Nic said...
10:14 AM  

Tasty lunch plans at Nobu Berkeley? Must be close to the office I'm guessing!

Minty said...
10:24 AM  

What I keep reading here is people trying to buck the flow of liquidity. The fact that the liquidity is doing things which make the fundamental hackles rise on the back of your neck is unfortunately going to keep resulting in losses for as long as you wish to trade your beliefs rather than the market.
Oh ,eventually you'll be right of course ,but by then will you have any capital left to back your beliefs ?

Anonymous said...
11:20 AM  

Anon at 1120: I would agree but if you're going to reverse and try to swing trade a move or cheap risk premia for a hiccup (if, say, Ben started doing his job properly, talked about it, or coughed in a way indicating it). There are a good number of people on this board who have been balls-out long risk much of this year who think this week might be an excellent opportunity to put on some pants.

Nemo Incognito said...
11:25 AM  

It might be .the operative word is "might" which means readin gthe future and frankly I have yet to meet anyone trading who is successful because of that attribute.
In other words like it or not stay with the flow until there is something concrete that tells you that is no longer the play to make.A few losing trades would do it for me.

Anonymous said...
12:08 PM  

You're my hero, MM, always two steps ahead. How on earth did you have the foresight to align your wife's birthday and your anniversary? That's only one gift and expensive dinner per year instead of two! I mean, the only way it could be better is if they both happened on Christmas :>)

Well-played, old boy.

But What do I Know? said...
12:14 PM  

Goldman talking up sterling, says sell EUR/GBP. I would certainly stay away from GBP for the moment. There's sort of a deceptive calm in all these markets.

Crisis Management said...
12:32 PM  

Anon @ 12:08
Your strategy is viable when you are trading a small/medium account. My question to you is, how to move several hundred of millions or a few billions under such strategy? By the time the market makes its "turn" your profits can be quickly wiped out in a matter of a few trading sessions. A quick back of the envelope number crunching will show you that prolonged periods of market rise under compressing volatility and without meaningful corrections tend to produce the most severe declines that wipe out several months of gains in a matter of 3-5 trading sessions.

Anonymous said...
12:38 PM  


Nemo Incognito said...
12:39 PM  

Anon 12:38:

Yes, with the glaring exception of 2004-2007. There is, so far, no reason to think that we are not in a repeat of that situation and sound reasons to think we are.

Charles Butler said...
12:45 PM  

Anon 11:20 said it all for me. I can't NOT trade the fundamentals in any meaningful way. Sure, small counter-trades after taking profits, but I don't see how the hell to buy the S&P here.

So I sell. Time will tell if I have enough capital.

At the end of the day, the bull/inflationists have never convinced me of any material difference between the US in 2009 and Japan in 1993.

Steve said...
12:52 PM  

how long did it take for the 2003-2007 gains to evaporate?

The gist of the post was to address the misconception that one can position a portfolio one sided on the belief that when "THE TURN" arrives the manager will be able to recognize the turn and quickly reposition accordingly.

The ensuing decline following the 2003-2007 market was a perfect example for those that believed on such nonsense.

Anonymous said...
12:55 PM  

Anon 12.38
Correct ,but frankly our size and ability to abruptly change our position on a market very quickly is one of the few advantages we have over the mega funds. Are you advocating we shouldn't use it ?

Anonymous said...
12:55 PM  

Anon 12.38
Apology ,I misread your reply. I have no answer for you per se that I could stand behind having never been privileged ,or hampered enough to have billions to move.

Anonymous said...
12:58 PM  

alking Treasuries, if one might mention another website in this context, take a look at Bruce Krasting's assessment of Fed deficit and funding over the next decade. The outlook is ghastly. Whatever one might make of "go with the flow" today, looking down the road Treasury bonds are about as certain a loser as a three-legged mare in the Derby.
Whoever is running the portfolio in Beijing will need a lot of concubine support to see him through.

...Sorry a slipped a cog & put it in yesterday's column.

Donlast said...
1:24 PM  

who said: "all you need for winning wars is momentum, momentum and momentum" ?

im hating this whole bordele de momentum.. im getting personal, but i hope it ends in tears. nor the yuan, nor gold will be the new reserve currency, and there will be no hpyerinflation. its all part of the momentum propaganda machine

spagetti said...
1:29 PM  

Honestly its all going to come down to the Americans on this board voting Ron Paul and saying "no mas". Otherwise I'm only going to buck the trend in small size very infrequently.

Nemo Incognito said...
1:54 PM  

Anon at 11:20:

1. Can you please define liquidity? I'll save you the trouble, because you can't. So you are going to base your trades on some ill defined, nebulous concept that you can't even define, let alone measure?

2. If you are divorced from fundamentals, then what is the basis for determining when to choose one direction over another? Everyone else isn't doing it any more? Seems kind of risky to based one's decisions on what everyone else is doing because (a) they are all doing the same thing, resulting in one big circular reference, and are therefore equally clueless; and (b) there is no way to actually determine what everyone else is doing because most people are liars.

If this is what the markets have come to, a bunch of clueless momentum based managers who are buying merely because everyone else is doing it, then the market is much, much more fragile that I would have ever expected. It doesn't matter how small and nimble you are, when the fundamentals become so incontrovertibly obvious that they are no longer deniable, you are going to get crushed.

PPM said...
1:57 PM  

In slight defence of "momentum", if my fundamental beliefs are lined up with the trend then I am very happy to add to the long trade at prices higher than entry. That is "momentum" trading, even if I believe in the fundamentals.

However, there are many markets in the last few months that have trended strongly, and I am still waiting to see the fundamentals appear to prove it....time must be running out for a lot of these moves.

Anonymous said...
2:08 PM  

I'm usually up to discuss anything with people who want an open discussion. however ,when a wet behind the ear pillock wants to tell me what I can and cannot do as opposed to invite a discussion then I tell him to sod off..I'd guess that is clear enough.

Enjoy your forum chaps.

Anonymous said...
2:16 PM  

I might put a few people's backs up here but if you guys call yourselves macro managers and you don't respect technical analysis/ price action at all, then it is quite a sad state of affairs for the macro manager industry.

Unless you guys learn some respect for the market and listen to what it is telling you, you will get carted out in a hurry.

There is nothing wrong with having a fundamental view but don't get married to it if the market is smacking you in the face with it on a consistent basis. Come on guys that's trading 101. And of course not risking your whole portfolio on one trade/ view. And not being overleveraged etc etc.

But then you guys probably knew all of that already, right?

Peace out

Anonymous said...
2:25 PM  

Yen threatening to put in a daily outside reversal. At this rate we could see that holiday stop running after all.

Crisis Management said...
2:37 PM  

Looking at the NZD, MM, I think you are in the right place today having lunch with Mrs Macro. LB is still keeping his claws sharp for a post-FOMC reversal.

Some chaps here need to calm down and be a little bit more zen about these manipulated markets. You can lean one way now but may have to do a 180 at some point in the future, and then once again after that. That's how abnormal all of this is.

My own convictions are, as Steve posted, we are turning Japanese, and you can predict almost everything that will happen from the history another recent debt deflation. The difference is that this one has a more global nature.

leftback said...
3:04 PM  

While history will arbitrate who is ultimately the pillock, I do apologize to Anon for my tone, which was a bit harsh.

PPM said...
3:04 PM  

Guys please, let's trade macro and exchange views. That's what this job is about.

Steve said...
3:25 PM  

PPM, frankly hardly a day goes by when LB does not consider himself to be a pillock, so it's hardly a distinction. One simply has to minimize the damage...

leftback said...
3:32 PM  

Cor blimey...I take Mrs. M for a bit o' posh nosh and shopping, and world war three breaks out!

Other than a gentle reminder to please keep the discourse civil, I would offer the following thoughts:

* momentum following would make no rational sense in a world where investment flows were predominantly/exclusively value oriented. I don't believe that that's an accurate description of the world in which we live

* while it is easy to say that momentum jocks will eventually get carted out, in my experience it's almost always possible to spend part of the "ill gotten gains" from tape-following on insurance policies to guard against that eventuality.

* while most macro guys would probably say that the "fundamentals" dominated much more last year than this, I can't help but observe that the best performing hf strategy by far was managed futures, e.g. trend following CTAs

* Sometimes, the tape sees what your eyes cannot. There's a good Paul Jones quote to that effect somewhere

* Speaking personally, my best performing strategy in this most frustrating of months has been a "push the button and execute the trade" momo strategy that started the month short risk and swiftly (and profitably) turned long...

My two penneth...

Macro Man said...
3:51 PM  

you guys read this blog?


interesting idea, guy is reading WSJ in NY public library and reporting the stand-out stories.

Amedin said...
3:52 PM  

Yeah, there was a great quote in late August about how much money there was on the sidelines and how it would support equities from "now" til kingdom come....

Macro Man said...
3:57 PM  

long vol guys

you just gotta actively trade it
everyone here believes in the extremes at this point anyways


Anonymous said...
5:12 PM  


can't all be luck

Anonymous said...
5:50 PM  

liquidity = money in financial system -> price of money dropping -> nominal returns chasing -> volume

and as far as value and fundamentals go, 'price is what you pay, value is what you get' according to some bod from Omaha.

liquidity drives price, not value. we all happen to trade in price terms last time i checked.

Anonymous said...
6:49 PM  

Happy Anniversary Macro Man!!!

DT said...
6:52 PM  

I guess we should all just go long everything... the latest video from Marc Faber says dollar will be "vurthlezz"... funny. So much dollar despondency in the media now, contrarian indicator?

leftback said...
7:05 PM  

LB, I am waiting for this.

Macro Man said...
7:20 PM  

Regarding whispers from pleasant characters,take out your Bible(Reminiscences of a Stock Operator) and read the chapter where Percy Thomas convinces Larry Livingstone.....

Anonymous said...
8:49 PM  

MM, nice. The Economist Cover contrarian indicator. Ritholtz loves that one. I would pay them to run one of those... don't the Victorias Secret models usually request payment in Euros about now?

(Don't use that as an excuse for pictorials tomorrow. Well, maybe AFTER FOMC Day).

leftback said...
8:55 PM  

groundhog day - kiwi off to the races on better than expected GDP print. DOllar once again getting smoked with the mkt hunting for stops.

Anonymous said...
12:57 AM  

MM, not sure if you noticed, but EURUSD is trading roughly were it was when those covers were published.

immy said...
10:15 AM  

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