Diverging trends on the financial markets
Topic: Losing money in 2016 is probably more common than you think.
Summary: High and low alike, a lot of people are losing money despite new all time highs. I think divergent trends are a harbinger of a big move (down or up)
Help: Tell me your story and I’ll put together a collection of market tales that comfort and warn other traders of the risks associated with trading an aging bull the same way you would a strongly trending market
Length: short (a few minutes)
How was 2016 for you financially?
Have you lost money on the markets despite new all time highs?
I’ve got a message for you: You are not alone
- Many hedge funds representing a wide range of strategies have struggled this year
- Several legendary investors have lost money, gone short or given up and left the markets altogether in various ways.
- Dr John Hussman has noted that his measures of “market internals” have broken the bull pattern of trend uniformity. Instead of individual stocks, industries, sectors, spreads, rates and asset classes marching together and signalling indiscriminate buying and a high appetite for risk, they have started to diverge. Read his amazingly pedagogically and instructive weekly comments for free here.
The changed behavior is a sign of buyers becoming less convinced of the bull trend, and thus increasingly prone to taking profits, buying downside protection, and rotating between different investments in search of the few things that are still “working” on the upside.
The bull market is getting increasingly narrow with fewer (albeit big) winners and a lot of lagging securities. This lies behind the poor performance of hedging strategies, since the indexes are setting new highs, while the few reasonably priced investments underperform.
Anyway, that’s a problem for the institutional side of the market and hardly hurts anybody who can’t afford it, right?
What about you and other semi-professional day and swing traders?
I think the market is changing in more ways than one and that that has made it increasingly hard to consistently make money trading the markets. A few observations during the last few years:
- Algorithmic funds have since the crash of 2008 come to dominate the market (80-90% of trading volume is estimated to be made by autonomous software programs), causing unusual trading patterns that disrupt traditional signals and thus devalue the power of classical technical analysis.
- I’m not even mentioning frequent flash crashes in single stocks… or currencies for that matter. Oooops.
- Or all time high “P/S”-valuation for the median U.S. stock. Yes, higher than 2000 and 1929.
- An aging bull market with diverging trends, making all kinds of strategies and tactics moot: hedging, momentum trading, spread trading
- Not even mentioning valuations here…
- Newbies. A high and increasing proportion of active traders that have never seen a bear market. No, the spring of 2016 doesn’t count. Not 2015 either, or 2014, the summer of 2013 or 2012 either. No, definitely not the Greek debacles and debt ceiling tussles of 2010-2011… If you think so, you are one of the newbies.
- The newbies are bullish, ignorant, risk-willing, driven by FOMO and envy
- A market Cult. An unprecedented market and trading culture, thanks to a high availability of trading software and online market access – not to mention social media like Twitter to share your progress on.
- The market cult draws in yet more newbies, as well as sways some old souls into thinking “perhaps this time is different, perhaps technology means higher growth, higher margins, lower interest rates, more leverage and higher valuations forever”.
I think the next downturn will catch a lot of newbie investors (active since 2008 or later) wrong-footed, buying one time too many on dips, or using too much leverage.
Actually, I think it might already have started, even before the market has turned downward, and that many have already felt its effects.
They have cast fire into thy sanctuary,
they have defiled by casting down
the dwelling place
of
thy name to the ground
Your time to shine
Here is where you come in.
To help others avoid committing irrecoverable mistakes on the markets, I encourage you to anonymously tell me your story of your big losses in 2016. Maybe you’ve averaged down one time too many on your favorite stock; maybe your portfolio of small-caps just never seem to catch a break; maybe you’ve shorted the wrong high-flyers or acquisition targets; maybe you tried catching the wrong knives (GoPro, Twitter…)
If you’d like to contribute to this research, please leave a detailed comment or e-mail me your story of how you’ve been had by the market gods this year.
At the very least other traders nursing big losses could find some consolation in seeing they aren’t alone, aren’t stupid… In addition, we might be able to find interesting patterns in the stories of losses, and possibly inspire some to reduce their risks, their use of leverage, avoid unduly concentrated portfolios etc.
So, please help me help you, by telling me how you lost big in 2016, despite the constant stream of new all time highs.
I’m looking forward to hearing from you
My losses?
The only loss talking about is my big short on the Swedish stock market. It’s been a disaster since I started building it but 2016 wasn’t bad at all.
Since it’s an index (that didn’t rise that much) and I’ve traded it successfully during big events like the UK referendum and the February downturn, I only lost a few per cent in total on that one.
In addition, I don’t use leverage (except the built-in 50% on the index position), I have a limited amount of my wealth invested on the stock market and I actually own my apartment (no mortgage).
Further, I happened to sell my GLD and GDX (gold) at the very peak – and the proceeds haven’t yet been invested by the private Canadian royalty streaming company I bought instead, meaning I simply made big gains on gold this year instead of losses. Pure. Dumb. Luck.
Yet more luck (intuition? fooling myself? natural diversification?)
- When I sold my gold, I withdrew some extra money from my active trading account for the “Toronto gold trade” to make it an even number :p.
- When I invested in a a few private companies I withdrew some more, reducing my bear position significantly.
- And, finally, when I lent out a few million to a friend, that organically limited my exposure to the stock market (in effect, the bear position) even more.
So, I’m sorry I can’t lead the way. I’m simply still standing… until the next unexpected flash crash or market blow off blindsiding me, that is.
I still think there is a story here. A story of “weird” markets, a story of markets not feeling familiar anymore, of patterns fluctuating and breaking.
I think currency traders have their version of it, bond traders theirs, small cap traders theirs, gold traders… You get the point. The problem is that few trade many different asset classes at the same time, and those are often computers, secretive or both.
That might mean the early signals of a downturn remain ignored longer than they have to be. Perhaps we can crowd-source the full picture.
This is your chance to make a difference by sharing your story and help put together the bigger jigsaw puzzle of (possibly) divergent trends. Anonymously of course.
E-mail me at mikael.syding@gmail.com or tell a friend you think might find this article interesting.
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Hey Mike,
I agree with your observation that 2016 has seen more divergence, but I disagree with your assessment that this is some sort of bearish harbinger.
IMO this is a very reasonable response to a rising interest rate environment. In fact, I would be more convinced that this was a “blow off” top if all sectors of the rally rallied together indicating some sort of capitulation or irrational buying.
I’m actually saying it could also be a harbinger of a blow off top ahead of us. I haven’t decided whether we’ll keep churning sideways, surge or plunge.
I think we are heading into hyperinflation. Markets are losing confidence in government quickly. It would be interesting to know how the german market behaved before their hyperinflation in the 20s. Are there similarities?
The big loss? Not cashed in yet. I have a lot of exposure to interest rates through CEFs (Muni bonds, High Yield bonds, Preferred shares) and REITs and I’m down on paper by a nice 8% this year. Where I bite my fingers is that I put in my note book to hedge with TBT at the right time, every day from January onwards. In June the interest rates where at the lowest and my portfolio was in the green by a fair percentage and I completely forgot about it. And it was a perfect and easy trend reversal. I got distracted by these bloody elections. I also manage a trading account for fun and profit. I have about 20 positions opened at any time of a small size $ 2,000 to $ 3,500. I have one negative month and so far was able since October 2015 to extract about $ 1,300 every month. I use momentum (macd or Ichimoku) to enter and Parabolic SAR to exit. My hit rate is around 50% but parabolic SAR takes you out of a bad transaction pretty quickly so losses are small. However, I had one big loss in September. I was short NXPI, perfect short set up and going down quietly. I go walk the dog, come back and look at my positions; trading halted, the stock is up $ 10. Things like that happen, position sizing is key to keep your shirt.
Great post Mikael,
Can you explain what is the “Toronto Gold Trade”?
Just shorthand for my investment in a private vehicle for royalty streams from gold and platinum mines
Thx!
Thx!
Started investing in November of 2014 using a permanent portfolio. Tracked the results on a daily basis and wasn’t worried at all that the outcome would be a slow, steady and smooth ride upwards. However, that didn’t turn out to be the case from a Swedish investors perspective.
One year later in August of 2015, I had enough of the permanent portfolio bear market. The portfolio didn’t live up to its promise for me as a Swedish investor. The losses were small so I withdrew all my capital. The small cap funds had been going up for a while so I bet my money on these instead. I regained all my initial capital and got out of the market.
Shortly thereafter in September, I got laid off from my Computer systems development job and I had a lot of free time on my hands. All I ever had read on investing was Harry Brown’s book on the Permanent portfolio. So I knew nothing about investments, trading or risk-management at all.
During my time as unemployed, I decided that I wanted to make a living as a capitalist rather than an employee. So while I was frantically applying for all jobs I could find. I was also for the vast majority of my free time reading books from the famous authors on trading and investing, watching a lot of interviews of finance personalities and amateurs on youtube. Engaged with the communities of bloggers and forums on the internet and learning everything I could get my hands on about trading and investing.
I ran backtracking simulations and experimented with everything one could possibly think of such as swing-trading, day-trading various stocks, trend traded using mutual funds, quantitative investing strategies, index-investing, dividend-stocks investing. I learned about risk-management, how the big guys trade, portfolio theory and pretty much everything else one can think of. Learning and experimenting in a bear market was really stressfull.
In Q4 of 2015 I traded mutual funds on a momentum basis.
At the end of 2015 I sold everything for tax-harvesting purposes. Then in January when the market furiosly crashed, I could feel the fear from markets from within myself. I realized this was the perfect timing for a bet on Gold and TLT. So for Q1 of 2016 I was long GLD and TLT.
I woved to never loose my initial capital I had earnestly toild for and earned through many hardships as an employee.
My total gains was never substantial and long-lasting. The winnings was soon consumed by losses in the choppy markets following in Q2 of 2016. Many days went by when I was high on adrenaline. Trying to predict the next move of the market would turn out to be nigh futile. Sometimes I took a lot of profits on one bet just to loose it all in on the next trade. Sometimes I let the trade reverse back on itself and ended up with nothing. In the end, tallying up the totals I was pretty much back to where I started.
Around the time of brexit I recon th the market had turned bullish again and am for the moment fully invested with leverage in the stock market. Still trying to decide if I want a trailing take-profit stop or if I am simply going to be a passive investor. I know the risks of not taking profits while the opportunity is still available. The market can take a large nose-dive to never return for decaded like in Japan or the great depression.
In Q3 of 2016, I was finally reemployed yet again. From the fire-hose of money that a at a regular job provides, I will be growing my AUM with a few percentage from my roughly 50% saving-quota. Days when I have a difficult time motivating myself to go to work after the alarm-clock rings in the morning. I chant to myself that I am doing it for the portfolio.
My dream is still to become a full-time capitalist and live off my investments. If I want to do it by passive index-investing or dividend-investing I will need a much larger portfolio then I have now. Earning a living through active trading seems to be almost impossible.
Great story. It will be a little while before I summarize all the various experiences and lessons
Sorry, I have no disaster stories either. Only invested in solid dividend stocks. They went up and down as expected, inverse to rates.
I think there is a good chance of a selloff come jan 2. I never consider shorting until there is a psychology-damaging break and rally to sell in to. Most of my powder will remain dry for picking up bargains after the next crash. I’m patient. I don’t care how long that takes. I know it will because it always has.
Hello Sprezza,
This question is about market structure. Many people say many things about “Risk Parity”. Some in favor of it, others against it. The big issue for me is a potential change in the negative correlation between US stocks and US bonds which would generate a spike in vol(out of the established limits), triggering a deleveraging of the funds. As far as I’m concerned, only a Huge spike in inflation/rates or a potential US default(like 2011) could lead to that scenario.
Do you think that on the next big correction, which will eventually come, there is some probability of an events like those? Other ideas about the topic?
Happy New Year!!
Cheers from Brazil!
Hi and thanks for reading and commenting.
I don’t really think in terms of triggers in that detailed way. I don’t think there was A trigger for 2000 or for 2008 and I don’t think there will be ONE for 2017-18 either. it will simply happen as a law of gravity and afterward people will retrospectively assign arbitrary triggers.
Hej!
Tack för em bra blogg
Jag vill investera i guld och har spenderat tid på hur jag skall kunna göra det på bästa sätt för mig (medelklass Svensson) som vill ha en andel av mitt sparande i guld, kommer tillsammans med aktier och bostad utgöra mitt totala kapital.
Har kommit fram till att jag vill äga fysiskt guld! Hur ser du på det? Vad är nästa steg? Kag har kollat på tackor från liberty silver
Tack för din kommentar
både fysiskt guld och silver är rätt ok alternativ tror jag
Hej!
Tack för en bra blogg
Jag vill investera i guld och har spenderat tid på hur jag skall kunna göra det på bästa sätt för mig (medelklass Svensson) som vill ha en andel av mitt sparande i guld, kommer tillsammans med aktier och bostad utgöra mitt totala kapital.
Har kommit fram till att jag vill äga fysiskt guld! Hur ser du på det? Vad är nästa steg? Kag har kollat på tackor från liberty silver
Tack för din kommentar