After a week or two of relentless risk on behaviour, culminating in the NASDAQ hitting and all-time high, there is a faint hint of risk-off behaviour today. EM currencies (RUR, MXN, ZAR) are being hit hard, the DAX and MIB are down steeply, oil (CL) is down 2.4%, GC is up a bit. Bonds (e.g. ZN) up, 0.34%.

I tried to protect myself buy buying a few cheap ESTX50 puts. Not panicing yet. We’ve had pauses a lot of times since the Covid crash. Still slightly delta positive.

Have been re-reading “How to trade in stocks.” Livermore’s main insight seems to be that prices know more than you do, so you should close losing positions and ignore both fundamentals (implicitly) and tips (explicitly and strongly expressed). He exhorts the trader to do their own investigation, but he seems entirely focussed on what we’d now call technical analysis. Having said this, he clearly paid attention to the news and fundamentals. It seems to me logical to trade only when the case is strong from both a technical and fundamental perspective. Of course, charts are noisy, especially single stocks. Livermore’s argument about “following the leaders” is, I think, really about not ignoring the broader market. In his day, there were, I guess, no continuously updated prices for indexes, so he used a large stock as a proxy, which is probably the least bad option unless you want to be limited to once-a-day lagged data.

Perpetual Voting Machine

Yesterday’s Daily Rap, from Bill Fleckenstein was a bit more interesting than usual. It pointed out that with massive QE, there is no longer any price discovery in Fixed Income (this is literally true for JGBs where the BoJ explicitly trades against the market to keep the ten-year yield at exactly 0, plus or minus a few bps). Fleck argues that with passive equity investing now dominating all purchases, and this being largely funded by cheap money courtesy of the Fed (via margin loans for ETF purchase, or maybe futures), it’s really quite logical that “stonks only go up” (as Dave Portnoy claims). Well, yes, but at some point, people want to spend their gains. Maybe they’ll just use them as collateral. Maybe this can go on for a long time. Maybe Stein’s Law is not broken, just delayed.

More details in this dense paper.