The biggest news yesterday was not that the Fed once again chickened out and left the federal funds rates untouched at zero. I could have told you that ahead of time. And guess what – I actually did on several occasions. No, real big shocker yesterday was some very carefully worded mention of negative interest rates. Say what? The sheer fact that these three words were uttered by Mrs. Yellen during her address speaks bounds about the growing fear deep inside the bowels of 33 Liberty St.
Who of us would have thought a year ago that we would be entertaining the thought of NIRP instead of raising interest rates perhaps for the second or third time by now? And that exactly is the crux of the matter isn’t it? There is absolutely no predicting as to what Fed will do next as its actions appear to be not only reactive but also fearful of causing a market dislocation years after resorting to ZIRP.
The big paradox however is that this is exactly what we may be getting. Had the Fed been crystal clear about the possibility of NIRP to begin with then it would have been part of the equation for investors and traders like us. And I’m not saying all this to complain – rather it’s to make a very important point. Clearly market participants are throwing in the towel here as confusion now reigns high. Overnight equity futures across the board have sold off heavily and one wonders if the speculators are now taunting Mrs. Yellen to cross the Rubicon and bring about NIRP.
You may have heard the old saying: The road to hell is paved with good intentions. The deeper meaning of which is that a series of well meant decisions can sometimes put you on the path of accomplishing the exact opposite of what you set out to do to begin with. By mention of NIRP during a time when an interest rate hike was on the roster the Fed now has clearly signaled that it is afraid of a major market dislocation. Whether or not we will ever see NIRP is beside the point here. What matters is that we should continue to expect seeing the level of intra-day volatility we all have come to enjoy so much over the past year. And as traders that affects our daily reality quite profoundly. At minimum it means wider stops, smaller position sizing (those two usually go hand in hand), different campaign management (e.g. closer trail), and very stringent capital commitment guidelines (e.g. correlations, markets, etc.).
On to the setups: The EUR/USD is a possible long while it’s hovering near 1.4. In my mind that has been a long time coming and unless we hear some jawboning by Mr. Draghi in the near future I thing my days of enjoying a favorable exchange rate may have come to an end now. Just looking at the daily panel screams short squeeze to me. Of course the ECB could smash this chart in a heartbeat but thus far I have not seen/heard anything.
If we drop below 1.4 I’ll try to ride it lower back to the 100-hour SMA. But that one thus far has served as support quite well, and if that one gives I think the 25-day SMA is where the Euro specs will once again make their stand.
A few more goodies below the fold:
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It’s Opex Friday and instead of posting our usual line up of symbols I decided to explore some of the ruminations which followed an epiphany I experienced earlier this morning. Just like many of you one I have slowly developed an now ingrained habit of reaching for my tablet right after waking up. My rational justification is that of an online entrepreneur and professional trader who needs to remain connected, and if nothing else wants to assure that nothing urgent has come up which may require my attention. The truth of the matter however is more along the lines of me enjoying a few more lazy minutes reading in my cozy bed, especially when it’s cold outside.
Now on my actual MacBook Pro I have gone to great lengths to prevent advertisers, spammers, hackers and the sorts from getting through my digital gate. We are talking ad blockers, anti-tracking plug-ins, Flash blockers, black lists, you name it – all of which designed to aid an ongoing arms-race of avoiding useless crap I don’t want to waste my time on. My tablet however is a bit more limited in that respect and thus the following twitter reply managed to slip through this morning:
First up let me apologize to my male readers for the liberal use of pixelation in order to protect some of the more fragile minds amongst you. We over here in Europe are less affected by nudity but it’s the Interwebs and all and I really don’t feel like answering angry emails today. Now I’ll come right out and admit that I enjoy the view on nice set of mammalian glands as much as the next guy. But I had just woken up and quite honestly I found it a bit annoying. Which upon further reflection surprised me little at first.
Some of you well meaning readers may think that I may ‘have grown up’ but let me assure you that nothing could be further from the truth. The mental wiring in place to stimulate sexual urges goes deep, leading right past the hypothalamus, directly affecting hypophysis and the limbic system. As such sexual triggers accompany men way longer in life than they actually may care for. Of course the more malicious amongst you may just say that I’m getting old and heck, that may be true – however I doubt that I ever get ‘that old’ if you get my drift, so let’s just leave it at that. ¡Callate mugabe!
Be this as it may – as you know much of my time in recent years has been spent analyzing the art of manipulation and deception. If you think that trading is a purely technical endeavor then think again. Being good technically just gets you through the door – the key to long term success as a market participant lies in suppressing a laundry list of cognitive biases that institutional traders have become masters in exploiting. And not surprisingly I have devoted quite a bit of time covering this topic over the past few years. As the old saying goes – there’s a sucker born every minute. Hence a significant portion of the financial industry has always revolved around luring hapless retail victims into the big meat grinder. That’s right – you are not alone.
Knowing the statistics (i.e. over 90% of retail traders fail) I have over the years adopted an instinctive habit of questioning every single piece of information that I come across. A few years ago I wrote a post about how to abide by a strict information diet which you may find interesting. It outlines a pretty practical approach to avoiding information overload and how to primarily limit your attention to useful data that aids your personal and professional goals instead of hijacking them. However it is the latter, the hijacking of people’s attention, that is today’s topic and as it is extensive we will have to split it into several parts.
The Genesis Of Spam
In order to understand the reason for my almost instinctive dismissal of Ms. Masterchef let’s go through the process and motivations involved that preceded its delivery. Amongst the daily barrage of information (wanted or not) it’s easy to lose sight of the fact that there are actually people out there who do this for a (rather profitable) living. And let me assure you – they have this down to a science:
The carrot: Create an attention grabbing message or image. A whole chapter can be devoted to this but in general what is known to work well and repeatedly are sexual triggers, small children, cute animals, violence, shocking imagery, etc. – all of which press emotional buttons and stimulate arousal, empathy, or curiosity.
Deliver the carrot to a vast but targeted audience via advertising, spamming, viruses, etc. A growing Billion Dollar industry exists now to expedite that very purpose.
The hook: Upon delivery exploit momentary attention to produce a click through.
Monetize the hook via a vast range of approaches. We won’t cover those but they roughly group into sales of products, subscriptions, or services as well as promotions, advertising, lead collection, etc. In more recent history they also serve as a means of personal profiling as well as manufacturing of consent, and we’ll cover these subjects later.
Sounds a lot like fishing, doesn’t it? And clearly quite a bit of work and thought has gone into introducing Ms. Masterchef to yours truly. And clearly it’s not being done for fun either. While the underlying motivations may be as old as humanity itself (e.g. to sell, deceive, manipulate, track, etc) the means of delivery are becoming increasingly sophisticated while the level of access into our respective sphere of privacy is unparalleled. Don Draper would have sacrificed a limb to such unmitigated means of dissemination.
What appears to be happening on a large scale basis is a concerted effort to manipulate, to trigger emotional responses in an Pavlovian manner. And a large aspect that accompanies this effort is that of digital profiling which happens every time you search something on Google, click on a particular news item, ad banner, or promotion, participate in social media such as twitter, Facebook, listen to music on Pandora or Spotify, etc. The list is long and it’s growing by the day as more and more of our time is spent in the virtual world.
Hacking The Human Mind
In information technology the art of gaining unauthorized access to a system or network is called ‘hacking’ and sometimes ‘cracking’ with the latter describing intrusions with malicious intent involving sophisticated exploits.
Cracker – This is the common term used to describe a malicious hacker. Crackers get into all kinds of mischief, including breaking or “cracking” copy protection on software programs, breaking into systems and causing harm, changing data, or stealing. Hackers regard crackers as a less educated group of individuals that cannot truly create their own work, and simply steal other people’s work to cause mischief, or for personal gain.
Hacker – This is someone that seeks to understand computer, phone or other systems strictly for the satisfaction of having that knowledge. Hackers wonder how things work, and have an incredible curiosity. Hackers will sometimes do questionable legal things, such as breaking into systems, but they generally will not cause harm once they break in. Contrast a hacker to the term cracker.
What both share in common is the underlying purpose – to gain access to systems without permission according to their respective motivation. The hacker may do it out of sheer fun or curiosity, the cracker does it for personal gain or to affect political change, deface, to embarrass, blackmail, again, the list is long. Although people on the inside draw clear distinction between the activities involved are colloquially referred to as hacking.
There is even an aspect of ‘hacking’ that doesn’t involve any computers. Let’s say I may want to get access to a particular person’s private phone number. I may call his/her secretary and claim to be an IRS or FBI agent who needs to talk to that person about an urgent matter. I bet you good money that, if only halfway convincing, in at least half the cases I will be given that number (no I haven’t done this in case you wonder). And that right there would be called ‘social hacking’ – Wikipedia has a good write up on this in case you’re curious.
So clearly this is not a new concept but it seems that the emergence of the Internet has become the impetus for a whole new generation of social hackers if you will. Given the exponential reach and means of message delivery social hacking and mass manipulation is being perfected to a whole new level. Which brings me to a Japanese manga series – quite a segue but hang with me as it’ll all make sense in a minute.
Ghost In The Shell
The series originally emerged in 1991 and describes a possible future where computer technology has advanced to the point that members of the public are equipped with cyberbrains and related technology that allows them to interface their biological brain with various networks. The level of cyberization varies from simple minimal interfaces to almost complete replacement of the brain with cybernetic parts, in cases of severe trauma. This can also be combined with various levels of prostheses, with a fully prosthetic body enabling a person to become a cyborg. The main character of Ghost in the Shell, Major Motoko Kusanagi, is such a cyborg, having had a terrible accident befall her as a child that ultimately required that she use a full-body prosthesis to house her cyberbrain. This high level of cyberization, however, opens the brain up to attacks from highly skilled hackers, with the most dangerous being those who will hack a person to bend to their whims.
Now in comparison with such a dystopian future the twitter spam I received this morning is rather harmless. Or is it? Think about it – already today our minds are constantly being bombarded with messages and information we did not request and that we often actively avoid. We have taught ourselves to ignore most of them but the few that slip through do often accomplish their purpose. And in most cases that involves separating us from our hard earned cash, to give up some of our personal privacy, or to draw us into various political or social justice causes. The onslaught is constant and it is becoming increasingly difficult to escape. Although we all like to think that we are able to resist we are all victims of manipulation to various degrees. Some of us are more vulnerable than others but I am not going to claim that 20 years of Internet access has not fundamentally changed the way I perceive the world around me.
A Recent Example
Just a few days ago on July 14th Twitter’s stock jumped around 8 percent and then closed up 2.6 percent on the day even though the report that triggered the price jump was quickly revealed as a sham. Effectively what happened here was that a large number of market participants had been mentally hacked into buying Twitter. Although I admire the execution and nefarious intent events like these give me the shivers. Because we are only at the cusp of a technological revolution and over the coming decades I expect closer and closer integration of the human mind into the digital matrix. Right now the extent of our capabilities is limited to handheld devices, digital watches, and sensors integrated into clothing. Most recently Google attempted but eventually failed to gain traction with its Google Glass project. But where Google missed the mark Apple and its many competitors may be able to slip by our personal guards and gradually equip us with increasingly intrusive gadgets designed to integrate with its users.
The Future Is Now
For instance – already today the 1.0 version of the Apple watch is able to monitor your heart rate via photoplethysmography. And I expect even more sophisticated sensors to be added over time – all of which will greatly aid in monitoring our bodily and perhaps mental functions. But where does it stop? How will I prevent for instance a website or twitter message from monitoring my heart beat while I’m reading an article, look at a twitter message, or perhaps evem while I’m trading? Wouldn’t it be really tempting to for example identify people of a particular group and then track not only their online activities but also collect data on how their respond emotionally to certain stimuli or events? I frankly would be very surprised if nobody had thought of this yet and I have an inkling that deep inside some corporate lab efforts are underway to exploit capabilities just like that.
Now going back to the silly Twitter message featuring Ms. Masterchef earlier this morning. I wonder how many people besides me received this message and wound up ‘following the conversation’. I was able to resist the temptation (no jokes please) but in the future my emotional response may be tracked that very instance and then added to my personal profile online. And even that may appear to be clumsy if we one day manage to interface directly with computers.
It’s already started with eye tracking, motion tracking, face detection, thumbprint reading, and now various body sensors. But where will it all end? And how will it affect the world around us, including the financial markets? Could an emotional mass response to a planted news item one day actually lead to a stock crash? Or to a lesser extent – will faceless entities hiding behind cyber walls manage to succeed in manipulating markets via exploitation of integrated personal gadgets? The possibilities are vast, only exceeded by the profits that could be gained. And what would be the legal implications on financial regulation and oversight? Will we perhaps live to see a investigative cyber unit not unlike it was portrayed in a Japanese manga in the early 1990s? Not questions I ever imagined pondering in my lifetime.
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It’s fascinating to me what passes for financial reporting these days. This morning I came across a little jewel by Mark Ackerman who once again blames the big bad Market Boogeyman for the fact that equities have not crashed and burned this fall. I guess it’s that time of the year again – and no I’m not talking about Halloween. After all October is high SKEW month and how dare equities NOT fall off the plate six years and counting! Be this as it may – we are used to seeing our daily dose of doomsday reports and most of it we simply fade out for the useless and unproductive noise it is.
However articles like this follow a cognitive dissonance that we all fall prey to during our life and unfortunately it is not reduced to only the trading domain, it affects all aspects of our life. We will be dissecting this beast like a frog, so let me grab my B.S. scalpel and start cutting away, layer by layer:
In recent days, the stock market has been like an economic roller coaster, rising one day before falling — dramatically — the next.
Isn’t that what markets do? They rise and they fall, they do not move in a straight line or we’d all be billionaires. There is no recipe as to the magnitude of the market’s gyrations. However there are seasonal forces that affect SKEW. If you are not familiar with the term – here’s a definition I lifted right off Investopedia:
“Skewness is extremely important to finance and investing. Most sets of data, including stock prices and asset returns, have either positive or negative skew rather than following the balanced normal distribution (which has a skewness of zero). By knowing which way data is skewed, one can better estimate whether a given (or future) data point will be more or less than the mean.>
Most advanced economic analysis models study data for skewness and incorporate this into their calculations. Skewness risk is the risk that a model assumes a normal distribution of data when in fact data is skewed to the left or right of the mean.”
So to say that ‘in recent days’ the market has been like an economic roller coaster discards the fact that this, to a certain degree, happens every single day/week/month/year. There are periods in which SKEW is historically more amplified and guess which month has the highest SKEW of them all.
Yes, you guessed it – October. I have written about this before and it’s a fact that most of the crashes in history occurred in the fall season. Let’s list the 10 largest crashes by magnitude:
October 14th 1987 – 22.68%
October 15th 2008: -7.87%
December 1st 2008: -7.7%
October 9th 2008 – 7.33%
October 27th 1997: -7.18%
September 17th 2001: -7.13%
September 29th 2008: -6.98%
October 19th 1989 – 6.12%
October 22nd 2008: -5.69%
April 14th 2000: -5.66%
Obviously October is seasonally prone to attract six sigma events. Does that make it a bad month on average? Well, let’s take a look at some pertinent stats – we love numbers after all:
Turns out on average October is somewhere in the middle, and that includes all the crashes. So it’s really a matter of interpretation. In the last 64 years give or take we’ve had four stock market crashes in October – three in 2008 and one in 1997. That still leaves you with 62 years in which you would have done quite well in equities. That does not mean it’s wise to ignore the potential for outliers in October (like I warned about earlier this month when we were dropping) but neither should you jump to conclusions.
When saying ‘the market these days’ has done x – implicitly suggests that it’s an extraordinary situation/event and that is simply not true. When writing financial newsletters the wording is extremely important as it’s easy to assume a biased tone/approach. Personally I try to be as objective as humanly possible and quite frankly it’s a daily struggle as I, just like you, am not immune to outside stimuli. We can however do our best by limiting our exposure and by questioning every little piece of information based on its merit.
And on those down days, the market often seems as though it has slipped into a free-fall, dropping hundreds of points in just a few hours.
I’ll come right out with it – yes, there probably is a Plunge Protection Team. Is it responsible for lifting the market ahead of potential crashes? I do not know – maybe – there are definitely indications of such attempts. But although I love a good conspiracy theory as much as the next guy I am not willing to base my trading activity or my investments on hunches or hyperbole. If you have ever spent more than a few months trading then you have probably realized that sell offs move much faster than rising markets. It’s an implicit product of human psychology – sell offs are driven by fear and often panic, which accelerates and spreads. All the proof you need is any daily, weekly, or monthly chart. Compare the sell off candles with the buy candles and this intrinsic aspect of market behavior will become clear to you.
Only to rise again before the final bell.
Again, that is a rather common event. I can not count how many sessions follow that script – after a mid day sell off in many cases the dust settles and folks come back after lunch as there are buy back opportunities. Are there large entities who attempt to bang the tape and attempt to trigger a certain response? OF COURSE there are – it’s easily observable by just looking at a LEVEL 2 data feed. But to ascribe this to some mysterious market boogyman is just silly. As the saying goes: Don’t blame the player – blame the game. This has been an inherent aspect of our financial system since day one.
How is that possible? It’s only possible through government intervention aimed at stemming losses and, most likely, to shore up confidence in a the U.S. economy and the leaders (elected and unelected) who are running it:
This is ONLY possible through government intervention? Seriously? Now, I’m not playing super cynic here, just for the record. OF COURSE the government is in kabuz with Wall Street and they are interested in avoiding a panic ahead of elections. But had we been in a crash in April or last year do you think everyone would have already forgotten? I mean there are arguably a lot of empty suits roaming our streets but events like these have consequences which then concludes me to assume that such manipulation occurs on a regular basis. But if it is and is ongoing – was it invented five years ago? Perhaps it was perfected and is now played on a higher level but in the end it all boils down to this: HOW does this affect me the trader/investor? Do I mind trading in a manipulated market? Frankly, I would prefer zero manipulation but I also would like world peace and end hunger. Neither is going to happen in my lifetime. It is what it is and I cannot blame my losses or inability to thrive in what purportedly is a manipulated market on external forces. I mean, if Mark is right here, and there are secret meetings being held right now to prop up the tape ahead of the election, then why not be long and ride it all the way? Actually that’s what we have been doing for five years and counting. And no single market event is going to ever wipe out all the (ill-gotten) coin we have banked by doing so.
Mysterious forces were trying their best, but they couldn’t keep the stock market from swooning >[on a recent day>].
So on one hand the assumption is an all powerful cabal of financial entities working at the behest of the government to keep the market from falling. But then that mysterious force was unable to keep the market from ‘swooning’ – whatever that means. Quite a lot of assumptions here – and none of them tradeable in my book.
They failed in the morning, despite massive purchases of stock index futures contracts. Within minutes of the market’s opening, the Dow Jones industrial average was down 350 points. Later in the day — after a lot of shocking ebb and flow — the Dow bottomed out with a decline of 460 points.
Only in the final hour of the trading day, market saviors achieve a modicum of success, trimming the losses to just 173 points at the final bell. And then, they only succeeded after Federal Reserve Chairman Janet Yellen’s private, but upbeat, remarks about…
Alright – the theme is clear and I won’t continue wasting my time pointing out one cognitive bias after the other. I may be better off gathering a hunting party to track down Big Foot. The bottom line is that thinking like this is sensationalistic at best and if nothing else counter productive to your daily trading activities. It instills fear about things that you have zero control over, which makes you emotional, which then leads to biased and most likely unfavorable trading/investing decisions. And that’s not a place you want to find yourself in.
Do yourself a favor and trade ‘information’ like this for what it is – a lot of hype that has zero productive value – thus it’s noise and should be avoided. Actually I’m going to take a hot shower right now to wash off any traces of emotional bias I may have contracted by dissecting this piece.
Even better: Fade the news completely and instead start working on developing your own personal trading skills – improve your edge – work on your discipline – learn about campaign management and compounding. Because the truth is that I lied to you. There actually IS a market bogeyman and he’s hiding in your bathroom. If you’re quick enough you can catch him right now – he’s staring at you right behind your mirror.
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Disclaimer: The information provided on this website, while timely, colorful, and accurate, is not to be taken as financial, legal, tax, psychological or any type of advise. The purpose of this website is to track the progressions of human herd psychology as it is reflected through several financial markets. Any commentary on this page, however useful it may be, is used for illustration, and to inspire thought provoking discussion, and not to be taken as specific trade recommendations. We are not endorsing any site or service, nor are we promoting choice examples as real-life trades. If it sounds sarcastic, it probably is and if it offends you, just don't read it. There are tremendous inherent risks in attempting to trade any market using any vehicle, particularly if it is leverage. Please contact your broker to explain all risks involved in the vehicle you will be trading and any questions you may have. Please consult with your own financial advisor before you tempt fate by following our evil speculation.