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
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
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 email@example.com or tell a friend you think might find this article interesting.
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