How Watching My Three Year Old Daughter Helped Bolster My Appreciation Of Markets.

[Rintel]

    I got a strike last time for swearing. So I will keep it clean......... this time. Currently 200 vaccinations down another 325 to go...... My bosses better give me a pay-rise for all this work. Because I am busting my ****-offf here !! I have aged at least 8 years with a growing pot belly. I am only 32!! 

On Fridays,  I usually stay at home, generally looking like a homeless person in sweatpants. In between catching up on much needed sleep whilst my 3 yo naps after bouncing at the trampoline park like a gummy bear and wrestling with her to get some E45 lotion on her eczema, I sit and watch her play or watch kiddie shows with dinosaurs with her ( its a phase ...... i like this phase.... I am quite happy sit there and learn about the history of the cretaceous period whilst she tries to pronounce words that with 4 to 5 syllables)  

You see , kids are like sponges ; they know nothing about the world and will absorb everything and anything you teach them. This curiosity gets lost as we grow older and more cynical. It is more a function of life lessons and interactions with other people .  As I watch her, I find there is a curiosity to her. She wants to know everything, constant questions many of which I have answers to but a few of them I don't. In my time with her I also notice that there is a playfulness she radiates with respect to the way she asks questions. There is no pride, no anterior motive, no conflict of interest , the girl just wants to get an understanding of the world around her. When trying to " crack the code" of financial markets I have found this perspective useful. Curiosity and the willingness to learn from others with the objective of gaining better understanding serves well in this field. Sir Isaac Newton put it best ......"  I do not know what I may appear to the world, but to myself I seem to have been only like a boy playing on the sea-shore, and diverting myself in now and then finding a smoother pebble or a prettier shell than ordinary, whilst the great ocean of truth lay all undiscovered before me" .....How simplistic yet elegant...........

 No gin today. It's 8pm in Cambridgeshire,  I'm in a pub, heavily caffeinated.  On to markets.... If you recall in my post below 👇 I warned about chasing prices higher.

I also updated members of a facebook group I am part of  my observations on the DOW on the same day here.👇

 

     How did I know a correction was the higher probability outcome ?? I didn't , I just did what the data told me to do reduce exposure.... If there is one thing I learnt from the man who's process I used as a template for mine; the ever so bombastic , no nonsense and forever jovial Keith McCullough head honcho @ Hedgeye it is this ; sometimes in markets you win when you don't lose money when everyone else does. I am forever grateful for all his lessons.   So whats next ?? Again I don't **** know but what I can share is a few more observations from my tools. Ready ?  Here we go !!

 

    As part of my trading process, one metric I check regularly, is the "market regime" of any instrument before I trade it . The blue chart  is a measure of the rate of change of of the the autocorrelation of an asset with respect to their returns based on a  time (t) and the red chart at the bottom is the price.  I find this very useful as a tool to gauge how extreme the auto correlation function of an asset is . If you don't understand it,  don't worry. It took me 6- 8 months of deliberate study to get my head around the idea     ( then again I am as dumb as they come  so it may take you 5 mins hehe) . Simply put, opportunities avail themselves at extreme pivot points. In other words, not all price changes are tradable. 

    I also view market movements as though they are mathematical and visualisation problems . I find it extremely difficult to trade signals and chart patterns on the fly as well as  intraday  so I try to  think about markets in a " price regime" sense.  Shout out to Darius Dale of 42 macro for this! I find that being able to visualise a market in one of three regimes ( Bullish, Bearish or Neutral)  allows me to quickly determine wether an idea is worth investing/ trading  or not . See chart below. Top = price , bottom = returns

ti

 

   From the above observation, we can see that the FTSE is now in a neutral price regime with returns since May 2021 in bearish territory. Looking back alarm bells should have been ringing  from mid September because that was the initial point in time where returns turned negative and most importantly STAYED NEGATIVE!  Could things reverse ? I dunno maybe but what I am looking for to have higher conviction in the FTSE will be; 

a) Better macro economic conditions ( Energy Crisis resolved, better economic data etc) 

b) A rebound of the returns towards positive territory.

c) A change in the price regime from bearish to bullish.

d) Most importantly, a bearish VIX 

   I would be happy to deploys some capital on the long trade if at least three out of those three conditions are met. These tools are one of many  tools I employ to better understand and appreciate the complexity of markets in the sense that I want to see  the sequence and regime shifts as they unfold.  It's not easy but with a little effort, a few sleepless nights, trial and error anyone can do it. 

Looking ahead, I am starting to warm up to the view that global growth may start to reaccelerate at some point over the next 2 quarters. Given that we are currently in the midst of an Industrial Production slowdown. This is based on the work of Lakshman Achuthan at ECRI macro research. In his observations, he highlighted that the conditional probability of equity market corrections rises when the overall global economy transitions into a slow down. We can see this in China for example. It doesn't mean everything is going to hell in a had basket ( policy makers will not permit this due to various pension obligations) . What it does mean is that corrections like these give investors an opportunity to take new positions that have better risk rewards. So do not think of this correction as a set back but rather an opportunity. Spoil yourself with trade ideas,   start looking to implement the trade ideas you have on your watchlist because this will turn out to be an opportunity in a few months from now. 

Thats all for now.... 

Take Care....

Before I forget..... 

   Here are a few resources/books that I found useful in my journey to better appreciate the ever changing nature of financial markets ; Misbehaviour of markets by Benoit Mandelbrot ( I still don't understand fractals but appreciating the importance of volatility is very powerful , Algorithmic Trading By Ernie Chang teaches various mathematical principles and ideas that enable you work smarter rather than working harder, which is a principle I picked from Anton Kreil ,  Introduction to Fractional Calculus ( wikipedia will do ) , Interviews with Benoit Mandlebrot on youtube, Darius Dale and his  educational videos on youtube, Keith McCullough educational videos ( Often quite funny , the man is a good teacher) Interviews with Anton Kreil from ITPM which are on youtube and based on day to day principles for capital preservation ( this man started me on this journey and taught me the importance of getting perspective )  , plenty of caffeine , tears ,  gin and a lot of patience.  

Thats it from me .... time to leave the pub.

PPS 

follow me on twitter for more observations.. we have created a new page

https://twitter.com/lcrm_r?s=20

 

Edited September 28, 2021 by Rintel