Analyst vs. Market Participant

On the surface, being an analyst and being a market paricipant seem almost identical in nature. Both parties are analyzing various asset classes from around the world to identify potentially skewed risk/reward opportunities to profit from. The steps following that analysis are what really separate the two parties.

An analyst is paid for his/her research / expertise in an area and never actually commits any capital his/her self. Their job is to provide information for other people to make decisions, essentially making their goal to be right, or at least convince people that they’re right, as often as possible.

Market participants however, take the process a step further in actually putting capital to work based on their analysis. In this sense, market participants are concerned only with making money, not with being right, making risk management their number one priority at all times.

This is a distinction that I see reiterated over and over again in my own trading, with these last few weeks providing me with a number of frustrating, but prime examples. (See tweets & outcomes below)

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Long SDS Trade Review (-2.02%)

Thesis: Prices had an aggressive run-up into previous highs, while the Micro, Small, Mid Cap indicies continued to lag the S&P 500 and Nasdaq 100. We finally got a pivot high to trade against on the short side, so I took it with a tight stop against the day’s high. chartOriginal Plan: 

Entry 21.28
Stop 20.85
Target 24
Shares 1
Profit 2.72
Loss 0.43
Risk/Reward 6.33

Actual Entry: Same as above.

End Result: chart

Symbol Date Entered Entry Price Date Exited Exit Price Profit (Loss)
SDS 10/13/2015 21.28 10/15/2015 20.85 -2.02%

Trading Notes: Not many notes here, the conditions for a trade on the short side were there and I took the opportunity once a pivot high was established. We didn’t get much downside follow through despite poor earnings, Yen strength, and other bad news from large companies like Walmart, but I chose not to stop myself out early since the risk was small and well defined.

Lessons: The market can stay stronger than you expect longer than you can stay solvent. If you get stopped out, take the loss and revisit it if / when conditions improve.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

Weekend Thoughts 10/25/15

In terms of the major averages, we continue to see the a melt up with the S&P 500 and Nasdaq 100 continuing to lead the upside while Micro, Small, and Mid-Caps continue to consolidate in a tight multi-week range. Tech related sectors remain strongest with momentum hitting overbought conditions, whereas other sectors have yet to see momentum break out of its bearish range. Mining and material related sectors remain some of the weakest in the market, while biotech and retail barely bounce as well. I think the healthiest action for this market would be for price to consolidate at current levels with momentum getting into overbought conditions. That we simply continue to grind higher without acknowledging the overhead supply present in so many sector seems like the lower probability outcome, but I’ve been wrong as of late. Until we get an actual pivot high to short against we need to remain patient. To put on swing longs as this point doesn’t present a good risk/reward, so I’d be reducing size and my timeframe to take some “cash-flow” trades until better conditions for swing positions develop.

We got some nice mean reversion across many of the foreign equity market etfs I follow, but many are approaching overhead supply below downward sloping or flat 200 day moving averages. Ireland continues to look like an interesting place to be on the long side if this multi-month consolidation near all-time highs resolves to the upside. Personally, I think what we’ll see across many of these markets is one more high in price while momentum diverges, which I think could provide some nice setups on the short side. India looks like an interesting short setup at current levels.

Interest rates continue to be a no touch, though the 200 day moving average in TLT is slowly beginning to slope downward and momentum remains in a bearish range. A transition to a rising rate environment will take a long time and you will have plenty of time to participate, trust me.

In the commodities and currencies space, the mean reversion we’ve seen play out throughout this year has reset many of the sentiment indicators back to neutral, which has me thinking that we may see a resumption of the primary structural trends in those markets. Sugar seems like the only interesting short setup for this week, the rest of the space I’m watching for setups to develop. EUR/USD is breaking an important trendline, so I’m watching to see if this is the resumption of its structural downtrend.

Overall, I’m remaining patient this week and not overthinking things. I’ve got a busy week ahead with school and other responsibilities, so I probably won’t be trading much, if at all. I didn’t get around to doing individual stock work, but a lot of the same names I mentioned these last two weeks are still in play.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

Weekend Thoughts 10/11/15

This is going to be a relatively short post as I don’t expect to do much in the markets over the next week or so, as time will be needed for new setups that fit my strategy to develop.

After nine days of upside, we’re headed into overhead supply into many of the major indices and US sector averages. Commodity related sectors like KOL, SLX, XME, XLE, OIH, XOP, saw massive rips to the upside last two weeks, with some names up 20-30% or more. Other sectors like XBI, XLF, IAI, IYZ, didn’t participate much, experiencing relatively small bounces below key resistance levels. At this point, since I haven’t had any long exposure on, I don’t plan to add any as we head into this overhead supply. I’d much rather be looking at the short side of sectors that didn’t participate or looking for strong sectors that I want to be buying if the market consolidates at higher levels. XLY, FDN, PBJ, ITB, XHB, all have rising 200 day moving averages and have not pulled back as much as the rest of the market, so those are some areas that might be worth a look on the long side if/when the market firms up a bit.

Foreign equity markets are in a very similar position, with commodity related countries getting a bounce in these past few weeks like EIDO, THD, EPU, ILF, EWZ, GXG, ECH, RSX, and VNM bouncing really hard within structural downtrends. Turkey (TUR) is at a critical long term resistance level near 40. Many will be watching to see if it reverses and heads lower, or if we continue to squeeze toward the next resistance level near 42 before heading lower again.

In the currencies space we saw the same thing with AUD/USD, CAD/USD, NZD/USD, all benefiting from the snapback in commodities. Many people are watching USD/JPY as that range has not resolved itself yet, but when it does, will have big implications for US equities.

Long term interest rates remain rangebound at best with a flat 200 day creating a lot of whipsaw action, still nothing to do there.

If energy-related equity sectors & markets, as well as the Canadian Dollar are bottoming for good, there will be plenty of opportunity on the long side. I think this is an area where a lot of people are underinvested or short, which leads to sharp rallies like we saw as of late. If the 200 day can continue to flatten and begin reversing trend, we could see a longer term move develop.

Many are also looking for bottoms in the precious metals space now that silver is gaining some traction. I do see some improvement in the price action of Silver and Gold in particular, but I think that similarly to energy, it’s going to take some time for price to put in a structural bottom. If the lows are truly in, we will have plenty of time to get involved on the long side before we get a sustainable long term move to the upside. With many structural downside targets hit and sentiment/commercial hedger positioning where it’s at I see two outcomes. Either we rally/consolidate and sentiment resets for another move lower, or it remains elevated and we break to the upside to create a new trend. Or it could do something totally different, who the heck knows?

I’m also watching the Soybean market for a breakout above that 900 level which I think can offer a nice risk/reward setup for a mean reversion to the upside like we’ve seen in other commodities.

Some things that look interesting on the long side in the coming week include: NKE, AOS, LB_F, ZO_F, EGPT.

Like I said at the beginning of the post, this week I’ll likely be waiting/watching to see how things develop before putting on any trades. The time to get long was 8-9 days ago, and I’m not going to get short without a pivot to trade against. We’ll just have to see what the market gives us.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.

Coffee Long (+13.51%)

Thesis: Prices broke out above a falling wedge, while public sentiment is extremely pessimistic and commercial hedger net long positioning was at multi-year highs. This combined with the prices being extended from their 200 day moving average makes for a high probability mean reversion trade. Since prices broke out, I would buy 1/2 a position on pullback to support, which was the downtrend line that prices broke out above and add the other half on a break to new highs.


Original Plan:

Entry 19.25
Stop 18.7
Target 22
Shares 1
Profit 2.75
Loss 0.55
Risk/Reward 5.00

Actual Entry: 
Same as above.

End Result:


Symbol Date Entered Entry Price Date Exited Exit Price Profit (Loss)
JO 9/28/2015 19.25 10/9/2015 21.85 13.51%

Trading Notes: Not many notes here, I put in a limit order for the price I wanted to buy it at and got filled the following day. I set an alert for a breakout above the 9/25 highs as a signal to add, which I missed, due to being busy elsewhere. I took profits slightly below my profit target since price went somewhat parabolic intraday and was close enough to my profit target.

Lesson: My positions work out best when they’re planned and I follow that plan to a T. As I’ve seen in some of my other trades, if I watch a position too closely I’m more likely to deviate from my original plan. I could’ve added to the position as prices flagged for a few days, but I kind of gave up on it after missing my original signal. I could benefit from working on getting the most out of my best ideas that are working before I move onto another idea.

As always, if you have any questions feel free to reach out and I’ll get back to you as soon as I can.