Talking the Tape
T-minus 8 days...till I see you in Ojai!
Editor's Note: The following chat was sponsored by Fari Hamzei of Hamzei Analytics and we share it with his gracious approval.
Fari: Most of you know Todd -- he certainly does not need an introduction by me. Last year, I got a call from a mutual friend of ours-- the Uber-Minyan Steve Shobin--telling me I should talk to this gentleman in NYC. Well here we are and I am proud to be part of Minyanville and look forward to meet with you all in Ojai next week
Todd: Hey guys--I've done some chats before and figure that the most value I can add is to keep it interactive. Most of you--some of you?--know my style. I view the tape as four legs under the trading table. Fundies, technicals, psychology and structural.
Chat: What's your view on the four legs? Creaky, Solid, Wobbly? One broken, 3 holding the table up?
Todd: It really depends on the time horizon you're looking at. I got a bit bearish last week as we edged into SPX 1250ish
Todd: I was looking at the Fibonacci retracement above and, in the context of an extended tape (stochastics) and a lopsided lean (a LOT of bulls); it seemed like a pretty tight risk/reward at the time.
Todd: I was also keying on the financials and the break of BKX 100 is a pretty important development. Again, in a "rolling assimilation," that is subject to change but that's what my eyes were/are seeing
Chat: Sounds like sound reasoning to me.
Chat: Todd, over the next 2 years are you looking for S&P to move down quite a bit?
Todd: I'm not looking to fight the tape, just identify advantageous risk reward set-ups. To clarify--and maybe this will help. I have a two-pronged approach--active risk and longer term positioning. In the big picture, I think one of two things must happen- either the dollar must devalue or asset classes must deflate--and, I've been on the 'energy and metals' over tech and financials' trade for a while. BUT, for purposes of this chat, we can focus on whatever you guys like (ie-shorter term stuff)
Chat: Don't you think the financials are going lower as a result of the alligators in general? S&P weighting on Financials is high compared with oil?
Todd: Yes, energy overtaking the financials as the top dawg in the SPX is perhaps my most lucid thought.
Chat: So Todd, when do you do a reassessment of both of those prongs? Or is it all ongoing minute by minute or day by day?
Todd: Well, there is a LOT going on behind my eyes and I think it's safe to say that it's a constant assimilation (which makes sense in a dynamic and ever-changing market)
Chat: So you are the mainframe and the workstation in your operation?
Todd: There is no 'set' formula, per se; I've long believed that trading is more of an art than a science.
Chat: Todd, what is your forecast for the rest of the year?
Todd: I 'think' August is going to be a bovine bummer as the conditional elements are in place. Sentiment is pretty euphoric, momentum is overbought and stalling and it's a seasonally weak time frame. But, to be fair, there are some good looking charts out there as well. The bear on my right shoulder would argue that "technical affirmation" was necessary for maximum frustration but I've been doing this too long to brush off technicals.
Chat: When do you think rising rates will slow the economy or is this time different?
Todd: That's really the big question---I have maintained that there is a difference b/w legitimate economic growth and debt-induced demand. That raises some pretty intriguing questions for when the cost of capital starts to tick higher, particularly in a finance based economy tied to ARMs.
Chat: Is the XAU trying to tell us something here? Or was the move above 95 (and back below) just noise?
Todd: I love the metals long term, both as an alternative to the $ and as a function of my view on the commodities. It's pretty crowded in the short term but again, it's all about defining a horizon and having a risk profile that synchs.
Chat: In your view is the inflationist camp right or the deflationist camp correct over the next few years?
Todd: Both- stagflation I think, higher input prices and sluggish wage growth. And I think unemployment is largely understated by the BLS
Chat: So, Todd, it sounds like you have some basic economic ideas and fundamental relationships that set the background which you then test against the tape and the technicals?
Todd: I always try to poke holes in my approach (which is sometimes quite easy) and my biggest mistake is typically associated with the TIMING of my bets. Big picture thoughts have no place in the short-term game and vice versa.
Chat: If you short which I am sure you do, do you often do it via Spreads or usually just a particular index or stock.
Todd: Subjective and a function of volatility. I've generally operated from a long gamma standpoint but have shorted fat vol when it begs to be done. In the current tape--and again, this is subjective--I think there are a ton of ways to benefit from the decade low vols. ie-stock replacements or married puts, if that's your thing
Chat: Given that, Todd, how much of your trading is short term and how much is long-term based on your 'Best Ideas"?
Todd: I've really shifted to doing a lot less than I used to as a function of the compression in the market. 8000 hedgies chasing the same trades tends to round the relative edges. So, I've learned patience in my old age. I'll say this--and I've said it before. I think the ability NOT to trade is as important as trading ability. I've pissed more money away than I care to remember as a function of boredom.
Chat: So, as opposed to 10 years ago, there are a lot more people out there doing essentially the same thing, and you have to be more selective about your ideas to gain the edge?
Todd: Precisely, which isn't a bad thing if you're 'proactively patient', pick your spots; define your risk and DON'T LET THE DEFINITION OF AN INVESTMENT BE A TRADE GONE AWRY. Think of it as 8000 gun slingers standing in a circle shooting at each other. If you can persevere, there will be better trades and easier tapes.
Chat: Todd, did I miss your forecast for the rest of the year?
Todd: You didn't miss it, I started to offer it and my A.D.D got the best of me :-). Not to be 'hedgy' but I don't think it's a 'linear answer---I expect some downside in the near-term but think that there are elements that remain to be seen--most notably, the dollar, fed liquidity and interest rates. Someone asked me on a radio interview recently if the DJIA could rally to 40,000. I said "sure--if the dollar gets cut by 70%.
Chat: So is it your view that, though the economy is weak, the fed will keep the printing press going to keep the market averages rising in hopes that the economy finally comes around and takes the baton?
Todd: I think these last few years, starting with 9/11, has really morphed the role of the fed. They've become much more proactive, realizing that the stock market is the world's largest thermometer. As long as the screens are green, the bears are deemed Cassandra's, but I'll maintain that the time to assess risk is in up tapes and the time to scour for opportunities is in down tapes. Not the other way around, as we've been conditioned. But I digress.. I think the Fed will continue to attempt to walk the line. We're a debtor nation--our government has historic deficits, a mountain of corporate debt will come due in the next few years and the consumer...Well, you know about the consumer. So, the question then becomes, what's the tipping point? The question is one of causation. Causation or exhaustion, and I don't pretend to be smart enough to know which it'll be. But I will say this--and I know my buddy John Succo agrees with me. The compression in the marketplace is like a coiled spring. And, with bearded financials all around us linked through the derivative market, we've got to factor that in at some level.
Chat: So either the fed inflates and energy and metals move up or the money supply contracts and the averages come down?
Todd: Dollar vs. asset classes--that kind of sums it up. BUT, I still think that secular trends will keep the wind at the back of both energy and metals. My humble 2 cents.
Chat: What do you mean by compression in the marketplace?
Todd: Hedge funds starved for return have replaced volatility with increased size/leverage. Think of it like this, if you used to trade 25,000 shares for a few bucks, and that same stock is moving pennies a day chances are you'll increase the size of your bet to make up for a lack of movement. THAT is compression.
Chat: Long term vols are so low selling premium seems really silly but I do it and win sometimes, but buying the premium until "the event" happens is hard too because the vols are dropping so fast there goes my premium.
Todd: When I was on the Morgan derivative desk, we had accounts that were the top performers for YEARS by selling 1/8s and steenths, and then they were gone. Please be careful--or hedged--if you're naked short vol. I say that with nothing but benevolent intentions.
Chat: Todd - as someone who has successfully traded large private and public capital, do you believe that an individual trader trading one or two markets - day-trading- that they are comfortable with and knowledgeable about, with some good basic trading and money-management skills, can do just as well - or better, in some cases - than someone trading a large private or public fund?
Todd: I think that discipline will differentiate performance, whether you're an individual or a hedge fund. Most professionals suffer as a function of feeling like the have to be involved (performance anxiety) and OPM syndrome (conflict). That gives individuals an edge if they follow a consistent but flexible approach and a sound risk management methodology.
Chat: Is Minyanville 'fair and balanced' - as a Minyanville sub - who works at a long-only investment management shop - sometimes one gets the feeling that it is a 'bear cave' - I respect the opinions and work on Minyanville - it has helped me immensely at the firm I work at in terms of shaping our investment style - but I am just wondering what your thoughts are there.
Todd: I get that a lot. I always say that I don't care if someone is a 'bull' or 'bear' as long as they're a) honest and b) have a lucid reasoning behind their approach. We probably need a few more bulls in the 'Ville (the other side of the trade) but they better have their facts straight because there are a lot of checks and balances. Our goal is to PROVOKE thought.
Fari: Thanks Toddo...and I'll see you in Ojai!
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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