Market Posture & the Prime Directive - Meetupfiles.meetup.com/1621769/03.12.16 Falcon Global... ·...

Market Posture & the Prime Directive

Housekeeping

Upcoming programming

• April 9th meeting; Dave Forster - Candlesticks

Past programming recordings and supporting files

http://www.meetup.com/Chicago-NW-Burbs-Trading-Club/files/

Meetup archives

• Hedging Tactics, January 10th

• Susan Carlson’s presentation, chart package

• Ichimoku Backgrounder eBook

• CALL group annual dues $10/ guest $5 donation

• New member forms/ Sign in sheets2


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http://www.falconglobaltraders.com/disclosures


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Falcon Global Website & other Resources


Outline

• Prime Directive• Why a system?• Objective, subjective, & judgement• Resources• Market Timing/ Market Posture systems• Position sizing• Trend strength• Hedge risk levels• Strategy opinions• Warning types broken out• Sector and rotation analysis

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Market Posture and the Prime Directive

"The Prime Directive is not just a set of rules. It is a philosophy, and a very correct one. History has proven again and again that whenever mankind interferes with a less developed civilization, no matter how well intentioned that interference may be, the results are invariably disastrous."— Jean-Luc Picard, Symbiosis

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https://en.wikipedia.org/wiki/Jean-Luc_Picard

https://en.wikipedia.org/wiki/Symbiosis_(Star_Trek:_The_Next_Generation)


For investors and traders –First and foremost that all investing and trading strategies start with an alignment with the Prime Directive.

“To utilize a ‘Market First’ principle that all application of capital is in alignment with the current market posture and hedge risk level opinion.”

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My opinion is shared daily on the Falcon Global YouTube channel market preview.

https://www.youtube.com/c/Falconglobaltraders

The objective of the market posture and hedge risk level opinions are to determine whether we are in a bull market, neutral market, and bear market centered on the intermediate term time frame.

My investment strategy is always kept in alignment with the current market posture and hedge risk level.

System gives “permission” to invest or trade.

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These opinions are developed through a very comprehensive analysis that incorporate elements of:

• Portfolio posture from outside mechanical signal systems

• Position sizing opinion

• Intermediate term market forecast indicator

• Strength of trend for the S&P 500

• Hedge Warning Level opinion

• Strategy opinions for Options Income, Covered Calls, Put Selling

• Minor studies by category including: Volatility based, Trend based, and Sentiment Indicators

• Sector Performance and rotation studies

By gathering a range of inputs of different types we gain perspective on the market that is deeper than any one approach can achieve.

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Why Develop my Own SystemLots of information available (even free) out there – too much.

Lots of “opinion” available – needed to distill the facts and separate from the bias, or the sources need to sell or market something.

Classic sales technique is to create a problem and then provide the solution.

Often emotion driven scare tactics;

The market is about to crash!

Wanted a market posture system that was broader in scope, and with more depth than what is often found in most resources available to retail investors.10

Why Develop my Own System

As close to institutional quality as I could make it while keeping the daily maintenance load and subscription (my expenses) cost in a supportable level.

Wanted to be as close to the facts as possible.

Minimize opinion and bias but recognize that judgement and some bias will naturally interplay.

Influenced by my bias and needs as a full time investor/ trader with a particular style of investing & trading.

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Other Support Resources

• Morning Report – 1 page review of overnight activity, macroeconomic report schedule

• Market Condition report – 1 page focused on volatility environment

• Monthly Business Cycle review• Daily price guides – day trader tools; support &

resistance levels 16 key markets• Relative ranking reports

o Dividend Aristocrats

o Style (Large Cap Value, Small Cap Growth etc.)

o Sectors

o Industry Groups

o Put selling watch list

o Country ETFs12

Objective & Subjective Measures

Utilize• as many OBJECTIVE inputs as possible.

• a range of perspectives to give a deeper and more nuanced perspective as to the current market condition and environment.

• An anchor on the intermediate term which is my primary investing and trading time frame.

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Where does Judgement Come In?• After I gather the various objective measures I look for

consensus among what the separate indicator systems are telling me.

• Roll up the information and ultimately make an “opinion” based on a judgement call of what the collective information is telling me.

• Ultimately I feel that the use of a judgement overlay on top of the objective metrics is stronger than a mechanical alone approach.

• Synergy; 1+1 = 5

• Ability to ascertain “weighting”; not all indicators are of equal value.

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Where does Judgement Come In?• Ability to ascertain “weighting”; not all indicators

are of equal value.

• Ability to bring in outside information that may pertain to the current market environment.o Why is the market under pressure?

Congressional sequestration is a short term and binary

pressure point.

A business cycle related recession phase has different

implications to the market environment.

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Where does the Information Come From?

• Result of years worth of reviewing financial resources.

• What is truly helpful? Additive or Redundant?

• Is it reliable? Respected? Valuable to my understanding?

• Is it regularly available?

• What does it cost to get to the information?

o Expense in both time and $$$

• Ultimately there are many resources assimilated and assembled to make this report.

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To the Daily Report Handout• Daily Report

• Updated daily

• Most days minor change from prior day

• Watch the flow as new changes come into play and the rate of change accelerates

• Value of daily review is in the sensitivity to change that you will recognize.

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Daily Report – Favorite Quotes to Set the Perspective

“Successful investing is anticipating the anticipations of others” John Maynard Keynes

“Most investors will concede that the most difficult part of managing a portfolio of stocks is identifying the formation of a major market top before it is too late” Lowry Research

Technical analysis is a windsock, not a crystal ball.

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Market Timing

• What “they” tell you … It is impossible to time the market.

• What “they” really mean …• It is impossible for you Mr. Retail Trader to time the

market, give your money to us and let us time the market for you after fees.

• Do you think institutions are timing the market?• If it is impossible wouldn’t daily volume be random or

nearly equally distributed every day?

• Clearly volume is not random or even close to equally distributed. Institutions constantly time entries and exits.

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Daily Report – Mechanical Market Timing Signals

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Daily Report – Mechanical Market Timing Signals

Market Trend Phase opinion• 5 market phases

• Characteristics and definitions of each phase

• Tables near bottom on the report that break down typical duration, characteristics, market participants, volatility and volume expectations for your separate study.

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Daily Report – Portfolio Investor Posture

Multiple independent, mechanical market timing systems.

No or little human judgement is applied to the signal.

Three independent systems:• IBD (Investors Business Daily)• GMI Index• StockCharts Decision Point Scoreboard

• All 3 systems are produced by well respected sources. Many others available.

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Daily Report – Portfolio Investor PostureInvestors Business DailyWilliam O’Neal and the CANSLIM investor principles

IBD current market posture:• Confirmed Uptrend – 100%

• Market Under Pressure – 50%

• Market in Correction – 0%

• Mechanical plus daily input

• Breadth Score

o NASDAQ & S&P using

Accumulation/ Distribution

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GMI Index• Wishing Well Blog author

• College professor who teaches technical analysis.

• Avoided every bear market in 40 years.

• Issues a graded buy or sell rating.

• Mechanical

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Sideways markets are always a problem for any system

Note: IBD Recent Confirmed Uptrends


StockCharts DecisionPoint Scoreboard• Multiple indexes covered • Multiple time frames covered• Mechanical, bullish, neutral, & bearish signals• Look for the stack! Are the time frames similarly

aligned?

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Daily Report – Position Sizing Opinion• Every trading strategy has its own position sizing

system but this is a primary starting point.

• Two types of position sizing opinions:• Portfolio Investor

o Associated with IBD current market timing signal and goes

100%, 50%, and 0% to provide position sizing opinion.

• Active trader – based on volatility as measured by VIX current futures contract closing price.

o VIX futures; not VIX for a more consistent reading

o Uses volatility bands to determine associated position sizing

opinion.

• If my Dividend Aristocrat core portfolio strategy calls for a $20,000 allocation and the current position sizing opinion calls for 50% I buy $10,000 worth.

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Daily Report – Intermediate Term Market Posture

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• Based on the Market Forecast study available in ThinkorSwim (TOS)

• 4 indexes reviewed• S&P is the primary signal that determines rating• Focus is the intermediate term line (green line) and

the MarketSentiment indicator (orange lower line)o >80 – very strongly bullish no matter which direction line is

pointed

o <80 and falling is bearish, and rising is strongly bullish

o <50 and falling is strongly bearish, and risking is bullish (or weakly bullish)

o <20 – very strong bearish no matter which direction line is pointed.

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Daily Report – Intermediate Term Trend Strength

• Based on the Market Forecast study available in ThinkorSwim using a 5 year weekly candle time frame.

• S&P is used for the market strength signal.

• A fall below 80 denotes a weak trend.

• Can remain above 80 for extended periods of time.

• Anything above 80 is considered a strong bullish trend no matter which direction the curve is pointed.

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Daily Report – Hedge Warning Status

• Scaled 0 – 3 with 3 highest market risk level• Will use 0+, 1+, 2+ as sublevels

• The current status of the IBD signal and the SPX intermediate term market forecast signal play a heavy role in the determination of the current hedge risk level.

• Judgement is applied to determine final hedge risk level to account for the sum of all Daily Report metrics.

• Try for > 80% objective measures with a dose of a judgement overlay.

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• Important to recognize that in bull markets just when it looks really scary the bulls will come in and reverse the weakness.

• Not uncommon to see Hedge Risk Level 3 hit and within 3 days to have reversed off a swing bottom.

• Since the rollout of this system on 12/26/14 there have been 5 Hedge Risk Level 3 events.

• Not all Hedge Risk Level 3’s are treated the same!

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• Duration of Level 3 events have been 13 days (January 7), 3 days, 11 days (August 24), 2 days, and 1 day.

• In bull markets such pullbacks are buying events and they quickly disappear.

• Bull market pullbacks are just pullbacks until proven otherwise.

• Your hedging actions may be less aggressive during bull market pullbacks.

• Your re-entry, time to initiate new positions may be more aggressive in bull market pullbacks as they quickly retrace. Less confirmation may be required.

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• Duration of Level 3 events have been 13 days (January 7), 3 days, 11 days (August 24), 2 days, and 1 day.

• Expectation is that duration will last longer in bearish markets.

• Bear market rallies are just bounces until proven otherwise.

• Your hedging and risk management will seek to be more aggressive during more bearish postured high risk levels.

• Your bullish re-entries will be very patient; scale in.

• You will look for much more confirmation.

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• I will by design manage my portfolio with a more defensive posture being quicker to remove risk and slower to add exposure when in Hedge Risk Levels 2 and 3 and back to 2.

• This means some opportunity cost is expected.

• Risk levels go up faster than they go back down to normal.

• I am not a “value” investor; primarily a price action/ momentum growth oriented investor. This is important to understand as it permeates through my systems.

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• Geopolitical Risk/ Black Swan events often seem to come from “nowhere”.

• Often these conditions actually are associated with increased market volatility prior to the “surprise”.

• Some events will actually surprise.

• System is designed to sensitize to most but not all elevated risk conditions.

• Your portfolio diversification & risk management are always paramount to long term consistent performance.

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• Character of market is different going to level 2 from level 1 than going from level 3 to level 2.o Both are level 2, one is increasingly risky market

environment and the other is diminishing market risk.

• Specific action steps are called for with each change in Hedge Warning level.o I have specific hedge risk action steps to review when a

level is triggered.

o I have specific steps to increase or decrease portfolio exposure as the risk level opinion goes up or down.

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Hedge Tactics presentation:




• Archives of the daily market previews are available @

http://www.falconglobaltraders.com/blog/YouTubeDailyMarketPreview

• Shows the dates current IBD status, Market Phase, and Hedge Risk level.

• It is possible to study how the system performed coming into and out of previous corrections.

• Both the August and the December corrections had “notice” of increasing risk before it hit the fan.

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http://www.falconglobaltraders.com/blog/YouTubeDailyMarketPreview

Daily Report – Strategy Opinions

Specific market posture opinions related to key strategies I regularly utilize in my trading.

• Option income strategies

• Covered Call Writing

• Put Selling o Pertains to my use of put selling in a specific watch list

of stocks that I am willing to own.

o Put selling as speculation is handled separately.

o I use put spreads, not naked puts.

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• Option income strategieso Distinguishes what is appropriate for novice traders

from more experienced and aggressive traders.

o Associated with the current VIX futures closing price.

o VIX 12 – 18 associated with more normal trading environment and generally favorable option income trading conditions for all traders.

o VIX > 18

Generally expect larger than normal Delta and Vega moves.

Larger number of adjustments, faster moves.

Often requires more capital to backstop the larger than normal

adjustments.

Not appropriate for novice option income traders.

Aggressive traders may want to reduce position size.

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Covered Call Writing• Separates what is appropriate for novice traders

from more experienced and aggressive traders.

• Opinions issued related to a ratio of strikes to be used in the construction of covered call trades.o May use in the money, at the money, and out of the

money strikes in various ratios depending on how defensive the current market posture reading is.

o 1:1 means 1 in the money for every 1 out of the money strike.

o Allows us to define how aggressive the portfolio is.

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Daily Report – Strategy Opinions/ Covered Calls

• Opinions issued related to the ratio of low beta and high beta positions mix for the covered call portfolio.o Related to how defensive the current market posture is.

o 1:1 means 1 low beta holding for every 1 high beta holding in the covered call portfolio.

o Allows us to refine how aggressive the portfolio is.

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Daily Report – Specific Warning by Type

• Volatility based• Trend based• Key ratios• Sentiment indicators

• Important to have a mix of perspectives as to the current market condition/ environment.

• Important to look for trends in the changes, rate of change of the various indicators triggering their respective thresholds.

• Important to look for consensus across the different indicator systems.

• I have found that these can be very sensitive to alerting me to increasing or decreasing adverse conditions.

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Daily Report – Specific Warning Indicators

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• Items that have triggered warning status are in red font


• Volatility based

• A series of indicators based on various volatility related relationships.

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• Time tested and proven ratios.o Volatility cross-relationship status; looks at relationship

between short, intermediate, and longer term volatility.

o Volatility short term to intermediate term status

When short term volatility is greater than intermediate term

this is a warning situation.

o Volatility ratio warning; over 1.2 or under .80 triggers

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• Specific condition triggerso VIX spike; >3 or more point increase close to close

o VIX < 12; extremely low volatility invites expansion

o /VX futures > 18; above normal volatility for healthy bullish market is a warning

o VIX futures daily squeeze; compression invites expansion

o VIX phase – associated with table that describes volatility market phases

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• Threshold triggers.

o Distribution day count on the NASDAQ and S&P

> 5 triggers warning level; high number of distributions days moves IBD

signal to Uptrend Under Pressure and eventually to Market in Correction

o SKEW > 125 triggers increasing risk of 2 standard deviation moves

o Week out expected move on the SPX; what is priced in by the

market makers? Pegged to the closest option chain to 10 days

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• Trend based

• A series of indicators based on various trend metrics.

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• Market Phase • Market Posture intermediate term line for SPX• NYSE New Highs/ New Lows 1 month • Key intermarket Risk Aversion Indicators scores

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Key Intermarket Risk Aversion Indicators

5 key charts that show if the market is “Risk On” or “Risk Off”.Risk on – institutions are accumulating higher risk positions.Risk off – institutions are distributing higher risk positions.How averse is the market to risk, how defensive are they.Watch to see “tide changes” as these roll from risk on to risk off or the reverse.

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• Market Sentiment based indicators• Mechanical signals from outside resource• Red font is in warning status• Think of it as the emotion of the market

participants.• Can be at extreme levels for prolonged periods of

time.• Can seem “irrational” or “illogical” at times.• Best used as signal to start looking for reversal

signals but is not a reversal signal in itself.

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• Market Sentiment based indicators• Mechanical signals• Sector, Index, Country, Commodity specific extremes

in sentiment• Remember to look for reversal signals in the price

action!

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• Market Sentiment based indicators• Fear & Greed Index; composite indicator of 7

indicators of investor sentiment.

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Daily Report – Sector Specific Metrics

• StockCharts Decision Point Intermediate Term Market Posture by Sector

• Helps identify sectors of strong interest by institutions. Is the market defensive or risk on?

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• Sector Specific market posture and % change over various time frames.

• Helps identify sectors of strong interest by institutions. Is the market defensive or risk on?

• Is the market healthy over various time frames? • Who is consistently performing?

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• Relative rotation graph of sectors & industry groups• Weekly

• Who is coming on? Who is fading?

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• Daily rankings reports for Dividend Aristocrats, Sectors, Industry Groups, Countries, Falcon basket

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• Daily rankings reports for Sectors, Industry Groups, Countries, Falcon basket

• Excerpts:

• From report dated 3/10/16

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Summary

• It is possible for a retail investor:o To follow the Prime Directive and to align your portfolio

with the intermediate term market posture.

o To be very sensitive to changes in market posture & conditions.

o To be able to take actions to reduce portfolio risk BEFORE the market gets too hot much of the time.

o To apply appropriate strategies at the right time to the right type of market conditions.

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Market Posture & the Prime Directive - Meetupfiles.meetup.com/1621769/03.12.16 Falcon Global... ·...

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