My current profession is tech and I’ve worked for some great companies over the years.  One of those was Intel.  When you went to work at Intel in the mid ‘90’s they sent you through a HazMat (Hazardous Materials) training class.  The instructor led you through a little exercise at the start of the class that went something like this.

Instructor:  What’s more deadly, water or cyanide?

Students:  Cyanide!

Instructor:  Maybe.  How about this scenario - you have to swallow a micro-gram of cyanide or drink a gallon of water - which is more deadly?

Students:  (confused disagreement)

Instructor:  Neither, you would survive both.

Instructor:  What about drinking 2 gallons of water within a few minutes or taking 1mg of cyanide?

Students:  (tentative majority) Cyanide?

Instructor:  No, you’d survive both.

Instructor:  Now, what about 100mg of cyanide or drinking 4 gallons of water?

Students:  (majority) Cyanide.

Instructor:  The water would kill you without medical assistance.

The Lesson - In a given amount of time, with the right dose ANYTHING can kill you.  In other words, too much of a good thing is deadly.

Which is the point of this post and why I’m worried.  Mainly about the markets but also the United States in general.  We simply have too much debt.  The Federal Reserve is printing too much money. The government continues to spend like there will never be consequences to their actions.  We can argue about timing but not the eventual outcome - the US is being destroyed by its political system.

Right now the S&P 500 is sitting just below its highs for the year, up 15% YTD (including dividends, ~12.6% on a pure price basis).  But corporate earnings and revenue growth sucked in Q3.  Europe is in a recession and is kicking the fiscal can down the road furiously, in the process solving nothing.  Japan is, as John Mauldin pounds the table on, a ‘bug in search of a windshield’.  Corruption seems to be at an all time high in every country.  The US political system is so broken it turns off the vast majority of Americans who don’t bother to vote anymore.  And if you think those are big issues, it turns out we’re pretty lucky that the rest of the world is focused on Europe and, to a lesser extent, Japan because if they collectively decided to focus on the US then the reality that the US is actually quite broke might finally start to sink in.

And what is it that we, and perhaps more specifically I, have to look forward to?  Well, lets see.  I grew up not necessarily poor, but certainly not rich by any stretch of the imagination.  That meant I paid my way through tech school, then undergrad, then grad school.  I worked from the time I was old enough to paint and mow lawns all the way through every degree and to this day.  I have a positive net worth now and would be considered, if not the 1%, then certainly the top 5%.  And because I’ve been so ‘lucky’, I should be expected to ‘share’ more and more of this ‘lucky windfall’ with others.  Well, let me share something with you - there’s very little ‘luck’ involved in any form of success.  It boils down to dedication, hard work and a work ethic that makes you successful.  Luck generates lottery winners, not people that work and save for their net worth.

Obama is the worst sort of politician with his, “you didn’t build that” shit.  And Romney was a fucking nut case, war monger, Mormon.  Neither of these guys should have been running for President but those were the choices and now we are stuck with one.  Mish did an excellent blog post on Ron Paul’s farewell speech that everyone should read - like right now.  Go, read it, you can come back here after you’re done.

There was also this great chart from ZeroHedge the other day that no press outlet bothers covering:

What I really think is happening is everyone already knows its too late and the whole financial system the world is built on is going to blow sky high.  If that’s the case, then you delay the inevitable as long as possible.  It actually makes sense from a political perspective.  If you know you’re going to crash the plane and there’s no arguing about the outcome, its just human nature to delay the crash as long as you can.

On the positive side of things, I continue to short my way to on-par performance with the S&P 500 for the year.  I’m up just over 13% for the year and all of that was made purely shorting the S&P 500.

At some point, something is going to die from printing / creating all this money (e.g. debt) from thin air.  Either the USD will die, the market will die, the economy will die (in the form of massive inflation) or, and this is worst of all, confidence in the entire system that has been engineered by the unholy trinity of big government, big finance and the Federal Reserve, will collapse.  People will stop spending on discretionary shit they don’t need.  They will save more, likely a lot more.  And since 70% of US GDP is consumer spending it will be game over until the giant ‘flush’ cleans out the current system and we reinvent things again.

All of the above sounds so negative, and it is going to be painful.  But long term I’m still fundamentally an optimist.  The technology humans create will most likely save us from ourselves, and I’m still betting it will.  I just hope we can get through whats to come quickly so we can get to better times.

It has been a while since I’ve done a trading update, but I’m flying home to Austin on Friday night so it seems like a good use of time.

As per usual, lets cover my benchmark - the S&P 500.  YTD the S&P 500 is up 12.27% on a price basis, 14.26% on a total return basis factoring in dividends.  So far this year things are going great for the index.  On my front I’m up 11.2% for the year so slightly under performing the index.  However, I’ll point out that I only trade the S&P 500 futures so I’m able to make this return with no direct exposure to ‘fruit stocks’ (cough apple cough) and the vast majority of the time (81% of the time to be exact) I am trading from the short side (e.g. selling as an opening position and buying to close the position) so I have practically zero correlation to the market from a bias perspective.  Here’s the equity curve for the year to date:

You’ll notice that around trade 200 - 400 there was a pretty significant draw down.  This occurred when I, foolishly, changed a couple things in the way I trade.  First I stepped up my size by 10X (e.g. go big or go home).  If anyone tells you seeing an extra zero on your position won’t effect you punch them in the head.  I can tell you with no hesitation that the mental adjustment is real and takes a little time.  The second thing I did was try to make myself trade more from the long side.  The best metaphor I can give you is like batting in baseball.  You favor a ‘side’ and that is the way you hit the ball.  Yes, your brain knows all the physics involved, has all the hand-eye coordination down, etc., but very, very few people can just walk up to the plate and decide to hit from the opposite side - it is a failing of the human mind / body connection.  The same thing goes for the way I’ve built my trading experience.  At some point I decided to focus on the short side and I stopped worrying about the long side.  It made a big difference for me to develop that specialization but it has almost crippled me when it comes to trading on the long side.  At some point I will get back around to working on the long side but, for the rest of this year its all about beating the index.  Now lets talk about the market.

Here was the closing numbers today from a headline perspective after both Amazon and Apple ‘disappointed’ Thursday night:

Pretty amazing performance if you ask me.  Last night before I went to bed the ES was down 11+ handles and looking like it was about to die.  This morning it was like the market forgot all about Amazon & Apple and opened without much of any gap.  Amazing performance.  But under the covers the A/D (advance / decline) and Up Volume / Down Volume are painting a slightly different picture:

What you see in the chart above is that both the declining volume led advancing volume and there were more declining stocks then advancing stocks (-502).  Granted this is the NYSE, but this type of divergence is unusual.

So, what does it mean?  Well you have Tom DeMark calling for new highs, not to mention the election is holding back all sorts of ‘things’ I’m sure.  You know damn well that the Obama administration has told every country, corporation, etc., not to rock the boat (e.g. announce funding issues, layoffs, etc.) before he’s reelected if they want to be looked upon favorably post-election by the Obama administration (sorry folks, he’s going to win a second term and its going to suck).  So, between the Fed’s dumping $40B+ a month into the market and everyone on their best behavior until after the election, I think there’s a lot of pressure under the market to stay green.  That’s my thesis at least.

As for my trading, I don’t really care as I will keep working that equity curve up and to the right.

As usual lets start out with the returns for the S & P 500.  YTD the S & P 500 is up 7.26% including dividends, 6.16% without dividends.  Clearly corporate yields are really helping the index here.

For my returns we’re going to take a new turn here so lets discuss the first 5 months of the year to 5/31.  Total return on 5/31 stood right @ 18%.  The equity curve got bumpy towards the end of the period when I was approaching 25% for the first 5 months.  At that point I decided to loosen up my rules and try for some 5% swings (daily).  You can guess what happened - within a week two different rumors about Europe being saved, or the FED doing QE3 or (fill in some other bullshit here) hit me with back to back 5% losses so I decided to tighten up everything in the face of the market not really being much of a market and instead being a rumor driven processing machine.  By 5/31 I had recovered a bit and closed the first 5 months @ the 18%.

Given the performance over the first 5 months, I decided to up the account size I’ve been trading by 5X.  While trading futures makes it theoretically possible to trade exactly the same way at any size you want, I’ve been working to adjust the way I exit trades with a bit of scaling.  Since June 1st with the new account size I’m up 1.4%.  Nothing to write home about but I’m dedicating the month of June to adjusting to the new daily P&L.  While it all does scale perfectly, your mental processes have to get comfortable seeing 5X gains and losses in the P&L.  If you don’t think that takes some getting used to you haven’t tried it yet, trust me.

On the macro picture, I have to admit I don’t like it much.  The whole world continues to paper over debt problems which can’t be fixed with more debt.  Its such a strange macro environment and its one I don’t think anyone is really digging into enough.  For instance, why is it that there is so much un / under employment in the world?  I don’t believe its just because we have a synchronous slowdown.  I think it goes much, much deeper.  WARNING - Sci-Fi discussion below.

What I think is happening is the amount of productivity and intelligence we are getting from our machine offspring is actually impacting, in a very fundamental way, the total number of jobs we need humans to perform.  Economists always point to the unlimited amount of ‘wants’ humans have but there’s always a limit, no matter how large, to everything.  For instance, if you’re consumed for 12 of 24 hours immersed in playing the latest version of Halo, I would argue there isn’t much else you want during that period of time.  Multiply that across all the things humans can do, consume and spend their lives on and you have to see there’s a natural limit to those ‘unlimited’ humans wants.

A few years ago I ran across a technology exec that wrote a book on this topic which influenced my thinking.  The author is Martin Ford and the book is free on his site if you want to check it out.  And if you don’t believe Mr. Ford, even Gene Roddenberry, the creator of Star Trek, envisioned a future where humans had largely gotten past the stage where they pursued ‘stuff’ because any ‘stuff’ you wanted could just be printed out by a molecular assembler.  At that point, the human race had to ‘graduate’ to valuing experiences, exploration and doing things they loved to do because it turned out there really were no limits to what you could have.  Want a beach house somewhere or a million pound chunk of gold or an entire planet to yourself?  Pretty simple to achieve when you live in an infinite universe and you can get to any of it any time you want.  Just keep extrapolating from today’s tech, I don’t think our current form of capitalism can survive without some major evolution.

Tuesday Funny - And it totally ties into the current state of the market too, love it. 

Here’s a rare update on Sunday night.

For the year, the S&P 500 is up 1.63% on a price basis and 2.57% including dividends.  I’ve bounced back from my drawdown and am sitting right at 18% for the year (no chart tonight, sorry).

I’m writing this as the ES is down -8.75 @ 1265.  This is solidly below the S&P 500’s 200 day moving average and while normally I would try to play for a bounce here, I just don’t feel comfortable getting long tonight.  There’s a lack of ‘rumor swirl’ out of Europe over the weekend which is really the only thing that lifts stocks right now.  So, without that hot air (pun intended) I’m feeling more like the market is going to go straight through the 200 day.  Really, there are so many problems in Europe right now I still can’t believe the S&P 500 is positive for the year!  Nothing has been resolved.  You can’t fix debt problems with more debt.  And you can’t manage a single currency effectively when the nation states aren’t fiscally bound together (even if they remain their own sovereign nations).

So, now we’ll see how much the market finally prices in.  Sure, earnings have been OK thus far, but the projections for S&P 500 earnings are getting lowered now (as they should be).  Unfortunately the analysts never really do a good job at this, especially in down turns (e.g. they never get low enough).  So, when Q2 finally starts to wrap up and the earnings warnings start, whatever bounce we might experience after this downdraft should evaporate and we’ll get negative and stay there for the year in the S&P 500.  That is, unless, the FED does QE3, in which case all assets will go up in dollar terms since we’ll be printing / monetizing our debt.  My .02.

My trading advice for tonight:  sit it out.  If you absolutely must do something, try to get long below 1260 after Europe opens and pressures the ES some more overnight.  I’d make the stop pretty loose (5-10 ES points) and look to exit about an hour into the regular session tomorrow morning (playing for whatever gap fill you can get).

Twitter is on fire tonight with some hilarious posts.  I’ll leave you with a couple of them:

@zerohedge - Rumor preview: Gringotts to roll up insolvent European banks

@The_Real_Fly - Listening to some Phillip Glass, while sipping on some earl grey tea in a dimly lit room, patiently awaiting execution

Until next time, trade safe.

ON LOSS

“Far better it is to dare mighty things, to win glorious triumphs, even though checkered by failure, than to take rank with those poor spirits who neither enjoy much nor suffer much, because they live in the gray twilight that knows neither victory nor defeat.”
― Theodore Roosevelt, Strenuous Life

I think that’s the philosophy that rings true for me in life (and it certainly goes along with the Memorial Day holiday in the US).  I wish more people that are close to me understood this but it doesn’t resonate with as many people as I would like.  Needless to say, this trading update will examine the ‘checkered by failure’ part of Teddy’s quote above.

Let’s start with the stats and chart.  For the year the S&P 500 is up 4.79% without dividends, 5.7% with dividends included.  My performance YTD is 15.4%.   So, still a good relative out-performance but a far cry from where I was at the start of last week.  I’ll get to why that is in a second, but let’s talk about loss next (after the chart).

Loss SUCKS.  Let’s look at some examples:

• Lost a good friend?  Yep, totally stinks. 
• Lost money?  Yes, that is bad (maybe horrible depending on the amount!).
• Lost a close relative?  Crippling.
• Lost someone you love?  Absolutely gut wrenching (big time).

Volatility and losing sucks.  However, it is an ABSOLUTE fact of life.  If you start your life, career, etc., thinking you aren’t going to face some ups and downs / lose a few then you are setting yourself up for suicidal tendencies later.  See, the problem with all of the super important things in life – career, love, marriage, etc. – is that if you don’t succeed at it the first time you feel like you’ve totally screwed the pooch.  But that is crazy!  Imagine someone telling you to walk up to the following for the first time:

• batting cage
• swimming pool
• soccer field
• juggling camp
• uneven parallel bars

Expecting you to do everything 100% right the first time at any of those is crazy – you would fail MISERABLY.  It takes a few times at bat (1000’s?), lots of swim laps, thousands of hours on the soccer field, lots of dropped balls juggling and huge misses on the bars before you are even good enough to bother showing your closest friends what you’ve learned.  Being a world famous batter, swimmer, soccer player,  juggler or gymnast?  Pencil in 10,000+ hours of practice (according to Malcolm Gladwell anyway).

You have to expect to lose at things you don’t want to lose at – it is absolutely unavoidable.  Sometimes you can keep at it until you succeed, other times you have to know when to let things go.  A good friend of mine (Garry O.) has a great way of looking at things.  He told me to imagine your life as a Venn Diagram.  In the first circle is what you love.  In the second circle is what the world values.  In the last circle is what you are good at.  If you can nail the intersection of those three circles you are going to be quite happy, successful and (likely) wealthy.

The question is - how do you know how to hit that intersection?  The answer is you have to KEEP TRYING even when you lose from time to time.  I’ve heard people spout off Einstein’s famous quote too many times now, “The definition of insanity is doing the same thing over and over but expecting different results”.  This is fine for a Physics experiment but in life, building a skill set around something you love (and think you are good at) REQUIRES you to KEEP TRYING the same thing OVER AND OVER until you ACHIEVE the results you knew were possible.  Yes, it is ARDUOUS.  Yes, it is HARD.  Yes, it is SOUL WRENCHING.  But in the end, the story is the fable…the people that persevere WIN at love, work, sports, trading – LIFE.  So, enough philosophy, let’s get back to trading.

Unfortunately over the last week we’ve had some strange trading action.  See HERE and HERE for a couple references to the confused trading that’s been going on.  My general philosophy is to preserve core capital at all costs.  Losing your basis is NOT an option, so on January 1st every year the game is to get out of the starting blocks with VERY strict rules on win / loss % (+/- 1% per day).  Once there is some alpha sitting in the account YTD I loosen up the rules.  +/- 5% per day is acceptable when relative out performance for the YTD is close to +10%.  After all, I want to hit a Grand Slam every once and a while but you can’t do that without some additional leverage / risk (at least the way I trade).  So, over the last few weeks the targets and stops were loosened up (with NO risk to core capital mind you) and, unfortunately, we’ve given some $’s back to the market Goddess.  This isn’t unexpected, but it isn’t optimal or very satisfying (understatement).

Honestly the question is, what to do now?  We’ll return to the starting blocks strategy of +/- 1% per day and stick to that until we achieve a new equity peak for the year.  We may never quite make that number (+20%), but I’m betting that we will and long before the end of the year.

On the moral of the story?  You can NEVER give up, but you might have to readjust from time to time and be careful to conserve when things aren’t going quite the way you’d like / to plan.

Now I’ll leave you with the best trading advice I can.  Until next time - trade safe in the face to the market moving rumor machine otherwise known as Europe!  Also, you could listen to the 2004 Switchfoot Song - ‘Dare You to Move’ for some inspiration. 

The last couple weeks the market has been pretty much sideways.  Volatility is down, but we are getting plenty of movement in the ES.  The overnight sessions have seen some pretty wild swings as the overnight session is hyper sensitive to the European open and whatever follow through (or not) develops as their sessions play out.

I still don’t like the macro picture even though everyone continues to whistle past the graveyard.  Friday was a great example when the GDP number came in light but the market rallied anyway as the prospect of further meddling by the Fed was priced in.  Really, if central planning worked so well, the Russians (no dummies) would have ruled the planet 30+ years ago and that would have been it.  We all know that’s a fallacy, why we ignore this fact and think that the Fed can somehow save the world by ‘printing’ money with absolutely no downside is just stupid.  But hey, the Zimbabwe stock market rallied something like 5000% as they printed their way to hyperinflation so maybe its just all part of the plan!

Trading performance has been a bit flat over the last couple weeks although we are sitting on a new equity peak as of Friday.  Year-to-Date return is just under 28%.  A note on this.  As I’ve went back to double check the numbers, I’ve noticed that the TradeStation stats are only taking into account about half the commissions and none of the account / data fees they charge, so the return including those would be around 24%.  For now I’m just going to stick to the equity curve that the reporting tool spits out as I’m not sure I’ll ever get it to report the return 100% accurately unless I do everything manually.

The S&P 500 index itself is up 11.5% on a price basis (so not including dividends) and 12.3% if dividends are included.    So, relative out performance is right around 16% YTD.  Next week should be interesting as May officially gets underway and, historically, the May - October months are usually under-performers, hence the old, ‘Sell in May & Go Away’ saying.  We’ll see if that holds true this year, but personally I don’t really care much one way or the other.  As long as there’s some movement in the index, I’m happy.

Q2 is off to a rough start for the S&P 500.  QTD (quarter to date, e.g. Q2’12) the index is off -2.71%.  YTD the index is still up a healthy 8.96% (based on the price of the index) and 9.63% in total return (price appreciation plus dividends).

My trading in the ES futures (the S&P 500 futures contract, aka the E-mini) continues to go well.  Total return YTD now stands at 24% with a small leveling off towards the end of the last two weeks.  Here’s the equity curve:

The question is…now what?  Well, since I tend to trade overnight or short term around the open, I try to ignore the macro picture in favor of making money.  Its really unfortunate that the market doesn’t discount reality very well, but that’s my observation.

To give you a for instance, on Thursday the market went straight up in the face of knowing that Spain is cracking and ended up closing on the high.  Friday saw the whole move unwound and on what new information that wasn’t already in the market on Thursday for anyone with half a brain?  None as far as I’m concerned.  The markets are a giant game, but played by guys so much bigger and better equipped than the average individual investor that the only metaphor I can come up with is of the amateur player trying to compete with a professional player.

Individual investors are like the neighborhood softball team.  Sure, they have equipment and know the mechanics of the game, but you can’t expect them to go out on the field vs. the Red Sox or the NY Yankees and not get murdered.  Unfortunately that’s exactly what its like for individual investors in the markets today and I think its why you see volume continuing to drop and unending redemptions by the ‘little guys’.  They have finally realized they aren’t playing a game that’s fair anymore.  Good for them!

So, back to the question of what now.  I can’t see a huge collapse in an election year in the US.  I do think Europe could hurt us at some point if they end up with a big bank blow-up.  When that happens, collateral gets raised and guess what gets sold, the junk?  No, no, no, they sell the assets that still have value so over the side will go any good / solid stocks, index positions they own, US ETF positions  (SPY, QQQ, etc.) and the Euro will get killed when the ECB goes to 24x7x365 Euro printing.  But all that’s still to come, for now enjoy the start of Q2 and stay focused on making money.

Q1 Performance Report

Q1 2012 is over.  The S&P 500 returned ~12% for the quarter, the best return in more than a decade for a single quarter.  The press is now busy writing up all the great news.  I’m not nearly as positive on the macro picture as nothing has been fixed in Europe and the US Federal Reserve continues to talk up the market to the best of its ability by hinting at QE3 (quantitative easing three).  The fact is, without all the money printing the US would not be enjoying the current sugar high.  And don’t think the money printing isn’t having an effect.  I’ve been looking at a place to buy in San Francisco (one bedroom or a loft) and the market is back to bidding wars, multiple offers after properties have been on the market 4 days, etc.  This isn’t healthy or normal and it will, once again, end badly.  And on the stock market front, Bernanke’s commentary on Monday is what ramped the market in the morning and it never closed that giant opening gap until Wednesday.  All the Fed cares about is saving the banks and it ensures their survival through creating inflation which destroys people’s savings.  Checkout the book “The Creature from Jekyll Island” sometime if you want to learn more about the Federal Reserve.

For the quarter, I had an 18% return over 71 trades in the ES futures where I focus (the ES tracks the S&P 500).  Winning percentage of short trades was right at 78% with long trades being just 58%.  Clearly my focus on shorting over the years comes through in the stats.  The quarter also ended on an equity peak after some chopping around mainly due to the above mentioned Fed market ramp-up early in the final week of the quarter.

Wisdom?

There was a huge lottery jackpot in the US this week.  I was talking with a friend about it and the question always comes up - what would you do if you won?  For me, while I love what I’m doing in my professional life, I would never give up trading and would likely spend the equivalent of a full-time job (or more) continuing to trade, write more about trading and generally make trading my profession.  This brings up the ultimate question - why aren’t more people trying to live the life they would love vs. the life they have?