Global Market Comments
September 2, 2020
Global Market Comments
September 2, 2020
Since we have just taken in a large number of new subscribers from around the world, I will go through the basics of my Mad Hedge Market Timing Index one more time.
I have tried to make this as easy to use as possible, even devoid of the thought process.
When the index is reading 20 or below, you only consider “BUY” ideas. When it reads over 80, it’s time to “SELL.” Everything in between is a varying shade of grey. Most of the time, the index fluctuates between 20-80, which means that there is absolutely nothing to do.
To identify a coming market reversal, it’s good to see the index chop around for at least a few weeks at an extreme reading. Look at the three-year chart of the Mad Hedge Market Timing Index.
After three years of battle testing, the algorithm has earned its stripes. I started posting it at the top of every newsletter and Trade Alert two years ago, and will continue to do so in the future.
Once I implemented my proprietary Mad Hedge Market Timing Index in October 2016, the average annualized performance of my Trade Alert service has soared to an eye-popping 34.61%.
As a result, new subscribers have been beating down the doors trying to get in.
Let me list the highpoints of having a friendly algorithm looking over your shoulder on every trade.
*Algorithms have become so dominant in the market, accounting for up to 90% of total trading volume, that you should never trade without one
*It does the work of a seasoned 100-man research department in seconds
*It runs real-time and optimizes returns with the addition of every new data point far faster than any human can. Imagine a trading strategy that upgrades itself 30 times a day!
*It is artificial intelligence-driven and self-learning.
*Don’t go to a gunfight with a knife. If you are trading against algos alone,
you WILL lose!
*Algorithms provide you with a defined systematic trading discipline that will enhance your profits.
And here’s the amazing thing. My Mad Hedge Market Timing Index correctly predicted the outcome of the presidential election, while I got it dead wrong.
You saw this in stocks like US Steel, which took off like a scalded chimp the week before the election.
When my and the Market Timing Index’s views sharply diverge, I go into cash rather than bet against it.
Since then, my Trade Alert performance has been on an absolute tear. In 2017, we earned an eye-popping 57.39%. In 2018 I clocked 23.67% while the Dow Average was down 8%, a beat of 31%. So far in 2020, we are up 25.83%.
Here are just a handful of some of the elements which the Mad Hedge Market Timing Index analyzes real-time, 24/7.
50 and 200 day moving averages across all markets and industries
The Volatility Index (VIX)
The junk bond (JNK)/US Treasury bond spread (TLT)
Stocks hitting 52 day highs versus 52 day lows
McClellan Volume Summation Index
20-day stock bond performance spread
5-day put/call ratio
Stocks with rising versus falling volume
Relative Strength Indicator
12-month US GDP Trend
Case Shiller S&P 500 National Home Price Index
Of course, the Trade Alert service is not entirely algorithm-driven. It is just one tool to use among many others.
Yes, 50 years of experience trading the markets is still worth quite a lot.
I plan to constantly revise and upgrade the algorithm that drives the Mad Hedge Market Timing Index continuously, as new data sets become available.
Global Market Comments
September 1, 2020
I can’t tell you how many times I have been woken up in the middle of the night by an investor who was sleepless over a position that was going the wrong way.
Gold (GLD) was down $50, the Euro (FXE) was spiking two cents, or the stock market (SPY) was enduring one of its periodic heart attacks.
Of course, my answer is always the same.
Cut your position in half. If your position is so large that it won’t let you sleep at night on bad days, then you have bitten off more than you can chew.
If you still can’t sleep, then cut it in half again.
Which brings me to an endlessly recurring question I get when making my rounds calling readers.
What is the right size for a single position? How much money should you be pouring into my Trade Alerts?
Spoiler alert! The answer is different for everyone.
For example, I will not hesitate to pour my entire net worth into a single option position. The only thing that holds me back is the exchange contract limits.
But that’s just me.
I have been trading this market for more than half a century. I have probably done more research than you ever will (I basically do nothing but research all day, even when I’m backpacking in the High Sierras or Alps, by audio book).
And I have been taking risks for my entire life, the financial and the other kind, quite successfully so, I might say. So, my taking a risk is not the same as you taking a risk. With the risks I take day by day, a normal person would suddenly die of fright.
Taking risks is like drinking a fine Kentucky sipping Bourbon. The more frequently you drink, the more you have to imbibe to get a good buzz.
Eventually, you have to quit and start the cycle all over again. Otherwise, you become an alcoholic, and die.
So you can understand why it is best to start out small when taking on your first positions.
Imagine if the first time you went out to drink with your college dorm roommates and you finished off an entire bottle of Ripple or Thunderbird in one shot? The results would be disastrous and nauseous, as they were for me the first time I did it.
So I’ll take you through the drill that I always used to run beginning traders at Morgan Stanley’s institutional equity trading desk.
You may be new to investing, new to trading, and find all of this money stuff scary. A lot of people find numbers intimidating. Or you may be wary, entrusting your hard-earned money to advice from a newsletter you found on the Internet!
What if my wife finds out I’m doing this with our money?
That is totally understandable, given that 99% of the newsletters out there are all fake, written by fresh-faced kids just out of college with degrees in Creative Writing, but without a scintilla of experience in the financial markets.
And I know most of the 1% who are real.
I constantly hear of new subscribers who are now on their tenth $4,000 a year subscription, and this is the first one they have actually made money with.
So, it is totally understandable that you proceed with caution.
I always tell new readers to start out paper trading. Virtually all online brokers now have these wonderful paper trading facilities where you can practice the art of trading with pretend money.
Don’t know how to use it?
They also offer endless hours of free tutorials on how to use their platform. These are great. After all, they want to get you into the market, trading, and paying commission as soon as possible.
You can put up any conceivable strategy and they will elegantly chart out the potential profit and loss. Whenever you hit the wrong button and your money all goes “poof” and disappears, you just hit the reset button and start all over again.
No harm, no foul.
After you have run up a string of two or three consecutive winners, it’s now time to try the real thing.
But start with only one single options contract, or a few shares of stock or an ETF. If you completely blow up, you will only be out a few hundred dollars.
Again, it’s not the end of the world.
Let’s say you hit a few singles with the onesies. It’s now time to ramp up. Trade 2, 3, 4, 5,10, 50, or 100 contracts. Pretty soon, you’ll be one of the BSDs of the marketplace.
Then you’ll notice that your broker starts following your trades since you always seem to be right. That is the story of my life.
This doesn’t mean that you will enjoy trading nirvana for the rest of your life. You could hit a bad patch, get stopped out of several positions in a row and lose money. Or you could get bitten by a black swan (it hurts!).
Those of you who have been following me for ten years have seen this happen to me several times and now know what to expect. I shrink the size, reduce the frequency, and stay small until my mojo comes back.
And my mojo always comes back.
You can shrink back to trading one contract or quit trading altogether. Use the free time to analyze your mistakes, rethink your assumptions, and figure out where you went wrong.
Was I complacent? Was I greedy? Did hubris strike again? Having a 100% cash position can suddenly lift the fog of war and be a refreshingly clarifying experience.
We all get complacent and greedy sometimes. To err is human.
Then reenter the fray once you feel comfortable again. Start out with a soft pitch.
Over time, this will become second nature. You will know automatically when to increase and decrease your size.
And you won’t have to wake me in the middle of the night.
Good luck and good trading.
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