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Tag: quant

You are your own worst enemy

It’s easy to blame others.

It’s hard to blame yourself.

It’s easy to blame things out of your control.

It’s hard to blame those things that are within your control.

Rules can help you make better decisions. Your goal should be to follow your rules. Not making money. Making money should be a product of following your rules.

Don’t think of yourself as a gamblin’ man. Think of yourself as a risk manager.

Make smarter bets through time. Don’t trade too big in any one position or in any one day. When you place your bets is just as important as where you place your bets.

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How to download S&P 500 data from Yahoo Finance using Python

Make sure you have the yfinance package installed first. If you don’t, you can run the following command in your Jupyter notebook:

!pip install yfinance

Input:

import pandas as pd
import numpy as np
import yfinance as yf

Input:

spy_ohlc_df = yf.download('SPY', start='1993-02-01', end='2019-12-01')

Output:

[*********************100%***********************]  1 of 1 downloaded

Input:

spy_ohlc_df.head()

Output:

spy 12-1-19

Conclusion

This is a very brief summary of how you can download stock data information for the S&P 500 from Yahoo Finance, using the Python programming language. If there is something you want to learn about, please let me know in the comments below and I can cover it in a future blog post.

Did the Federal Reserve Kill the Volatility Trade?

On October 11, 2019, the Federal Reserve announced they would begin buying Treasury Bills in an effort to ensure there are “ample reserves” in the banking system through the end of the year.

fed treasury oct 11

On October 11, 2019, the Volatility Index (VIX) sat at 17.4. Today on November 26, 2019 the VIX has recently closed at 11.5. As you can see from below, it appears as though this not-QE program that is “organically” growing the Federal Reserve’s balance sheet has effectively killed the long VIX trade.

fed vix chart

The case made that supports this idea is that investors are engaging in more risk on behavior, because they are basing their decisions based on the Federal Reserve’s prior balance sheet expansion programs (QE 1-3).

Because the Fed is purchasing T-bills, they have eased some of the money market pressures. Liquidity in the market has proven to be a positive catalyst to the market.

Why do I believe this?

It can’t be the trade deal.

That’s the only other source that has been moving the markets higher according to many daily stock market new reporters. And I don’t believe these markets are pushing higher on hopes of a trade deal.

I think the Fed’s easy money policies have once again eased tensions. For now.

A lesson to me

This whole scenario has taught me a valuable lesson about position sizing. I’ve learned to not be so overconfident in my predictions.

Every trade made is a small bet. Each bet will abide by the Kelly criterion.

Never go all in.

Grow your money slowly and strategically.

Live to trade another day.

Read

Barton_options on Twitter has been a great resource for me to learn more about the Federal Reserve operations and how it relates to the Treasury and the overall economy.

He recently wrote about this in a newsletter you can read here.

When I stopped trying to be right, I became a better trader

I began my journey trading stock options in September of 2018. When I entered the trading arena, market volatility was picking up. This was the environment I traded and adapted to over the three months from October to December of last year, 2018.

During this time period I learned to trade options in an extremely volatile environment. I was able to successfully gain over ten thousand dollars on my small account in December by being short on the market.

I primarily bought put options on bank stocks and other stocks that were experiences drastic declines at the time. My portfolio saw outsized gains which I had experienced up until that point. Enjoying the outsized (mostly unrealized) profits that I reaped up to Christmas Eve, I continued to buy put options on the market.

This turned out to be disastrous.

The subsequent decline

All through January until April, I had the thought that the market shouldn’t be going higher. I absolutely knew what was going to happen next. Or so I thought…

At the time, I was following Fintech Twitter. I wanted to know what was “happening” in the market, and took to Twitter to see what people were saying.

90% of the people on there seem to be bearish during the first quarter of this year. This influenced my investing and my perspective of the market.

The illusion of being a good trader

It took a while, but at some point I realized that being right, or the illusion of being right, doesn’t put money in the bank account.

I called it!

On Twitter it’s easy for people to create the illusion that they called many good trades. It’s easy to do. All you have to do is post a bunch of charts calling bullish or bearish, put them on Twitter, let the market play out, and then delete your tweets that were wrong. Then you can easily pin your tweets where you “called” the market top or Market bottom.

I got caught up in the Twitter atmosphere and my trading suffered. Being right doesn’t matter.

Hedging instead of guessing

In recent weeks I’ve developed better hedges on my trades.

I like to build up large put options positions at times when I believe the market could go down over the next few months.

In the first quarter of this year, I built up put option positions, and lost a significant amount of the value that I put into those positions. It’s only after reflecting and experiencing the pain of those few months then I realize how important it is to hedge my trades.

I was concerned with effectively predicting what was going to happen in the market. I wanted to be right, and I would only enter trades on one side of the mark get out of time. This was stupid. I lost out on a ton of games I could have gotten all throughout January and February and even into March and April.

Current endeavors

I’m currently building up put option positions on SPY and IWM.  I’m hedging the position by buying shorter-dated call options, debit spreads actually, and then collecting profits when the underlying stock price land somewhere in between the two strike prices of my debit spread. This has been a much more effective strategy and has kept my portfolio more even overtime while I continue to build up a larger put option positions.

Ideally, call options on the S&P 500 and the Russell 2000 Index will continue to gain value in excess of the value that I lose on those longer-dated put options while the market continue to rip higher. Then, when the market does turn, I’ll have built up a decent size put option position to benefit from larger price declines.

Conclusion

I believed I had to try to predict the market and be correct. Instead I have to be flexible, I have to adapt, and I have to head to effectively on my positions.

What is the next catalyst that will move the stock market?

This week in the stock market has been a very slow news week.

We had a big news story with Boeing’s new 737 Max 8 crashing for the second time in six months. As a result numerous countries have grounded the 737 Max as a precautionary measure.

Also in this week’s news, Jerome Powell, Chairman of the Federal Reserve, spoke to 60 Minutes on Sunday evening to discuss the Federal Reserve policies and the current state of the economy.

With the exception of these two news stories, there hasn’t been a ton of newsworthy items this week.

What happened to a China Trade deal?

One of the most popular news stories from past two months was the promise of a China trade deal. If you look at this week’s headlines, there is little to no new information about a trade deal. This makes me believe we’re not going to have a China trade deal anytime in the next month or two.

So, with a slow news week it seems as though investors are waiting for some catalyst to move the market in one direction or another. Today, the S&P 500 Index touched the $2817 price level for the first time since October. I see the S&P 500 Index hovering around this level and continuing to consolidate within the $2780 to $2820 for the time being.

So with all of that in mind, what’s going to be the next Catalyst in the market? Which way is the market headed next?

Potentially positive catalysts for the stock market

Favorable trade deal for the US with China

If we are able to come to a trade deal agreement with China that is favorable to the United States, that would be great for our stock market.

For a trade deal with China to be favorable to the US it would need to protect our intellectual property rights and would also have some sort of a trigger for automatic tariffs if the Chinese don’t comply with the agreement. This would be the absolute best case scenario for the United States.

However I don’t think an agreement like this will come to be anytime soon. Xi Jinping, President of the People’s Republic of China, wants to maintain an appearance of strength for China. For this reason, I don’t think they’re going to make any concessions to United States any time soon.

According to Robert Lighthizer, we’re still a ways off when it comes to a favorable trade deal for the US.

Better than expected earnings

The second potential positive catalyst would be a positive earnings cycle in the first quarter of 2019.

Fourth quarter earnings from 2018 turned out to be better than expected and I believe this gave investors some confidence to continue to ride the market up in January and February.

If first quarter earnings are better than expected in the market this could be a positive catalyst for the market as well. It’s possible first quarter earnings go well, as some of the economic numbers we’ve seen are not quite as disappointing as expected, namely fourth quarter GDP growth, suggesting that perhaps Wall Street overreacted to slowing growthg. The worst economic numbers we’ve seen thus far of those of the non-farm payrolls added in February.

Personally I’m not too optimistic of either of these two scenarios playing out.

Potentially negative catalysts for the stock market

Worse than expected earnings

The first potentially negative catalyst would be if companies have worse than expected earnings in the first quarter. If we see earnings numbers come in below expectations this would likely drag the mark down.

Earnings estimates for the first quarter have declined for the S&P 500 as a whole, with estimated earnings for the index at -3.4% as compared to the previous year. In addition,  there have been 76 companies in the S&P 500 Index that have issued negative EPS guidance as compared to 22 companies issuing positive EPS guidance. (Only 103 companies in the S&P 500 have issued guidance).

It’s important to pay attention not just to EPS results, but to the guidance we get from companies going forward into the second and third quarters of 2019.

Trade talks sour, and the US slaps more tariffs on China

Another potentially negative catalyst could be if the United States growing frustrated with the negotiations with China and decides to raise tariffs. Remember that President Trump delayed automatic tariff increases that were scheduled to kick in on March 1, 2019.

If this were to happen, it’s very likely China would raise their tariffs on American products as well. Much of this has to do with how well the negotiations go and if the two sides can at least agree on some sort of a framework of a trade deal moving forward.

Economic data is disappointing

A third catalyst would be if economic data continues to point to negative growth and growing in unemployment. If we begin seeing unemployment numbers rise, that could spook investors as rising unemployment tends to be an indicator of potential stresses in the economy.

In addition, the Federal Reserve Bank of Atlanta projects first quarter GDP to come in under 0.5%, which surely would be negative for investors.

Federal reserve raises interest rates

Finally, a fourth catalyst could be if the Federal Reserve does decide to raise interest rates this year. As I mentioned in my previous article, many investors are pricing in a rate cut this year.

If the Federal Reserve decides to raise interest rates, it would be due to the threat of inflation in the economy while unemployment rates remain low.

Conclusion

Overall, I believe the potentially negative catalysts are more likely to occur and impact the market. I believe that we’re going to see a downside move within a month or two, given that the recent market rally has been a little too hot in the current global economic backdrop.

However, it’s not outside the realm of possibility that we get positive news that could drive the market to all time highs before beginning to hit some resistance.

These are just a few of my thoughts on what I believe could impact the market moving forward. What catalysts are you watching out for in the market?

What has caused the market to rally from December through today? (It’s not the promise of a China trade deal)

If you’ve been paying attention to the stock market since the Christmas Eve bear market, the S&P 500 is up 19.5%. Much of this rally has taken place in January and February 2019. If you’ve been reading the news headlines, a lot of the rally was contributed to the promise of a China trade deal. In my opinion these news headlines are wrong. Let me explain why.

Enter the Federal Reserve

Investors have a tendency to pay very close attention to the actions of the Federal Reserve board. If you’re not familiar, the Federal Reserve primarily has the task of influencing interest rates.

To illustrate this point, look at how the market reacted in the times where Jerome Powell discussed the interest rate policies of the Federal Reserve.

On October 3rd an article by CNBC, Powell said we were a long way from a neutral on interest rates. This was an indication that more rate hikes were to come.

Jerome Powell said that interest rates were extremely accommodative and that this was necessary when the economy was weak. We no longer needed low interest rates anymore. He went on to say that interest rates were still accommodative but they were moving to a place where they can finally be neutral.

What happened next?

https://www.tradingview.com/x/fBJ8XGWK/

Following these comments by Jerome Powell we saw the S&P 500 index drop through the month of October (see the red arrow above). The S&P 500 continue to experience high volatility through November and into December.

Interest rate policy uncertainty

There was a lot of fear in the market when it came to the interest rate policies of the Federal Reserve. The Federal Reserve continued to hike interest rates in December which set off a wave of selling in the market.

From December 3rd until the low point on December 26th the market dropped 16.1% of its value. This came after a slight bounce back in November following Black Friday shopping.

Jerome Powell continued to say that interest rates needed to get back to neutral. He said that the Fed was relying on the data to tell them when to stop raising rates.

The language used by Jerome Powell scared the market because they believed that the Fed would continue to raise interest rates two or three times in 2019 along with the interest rate hike that they had just completed in December of 2018.

Fear and pressure from the President

A lot of investors took this language as being quote “hawkish”. What this means is that the Federal Reserve is using tighter monetary policy which would raise interest rates and help cool down the economy and keep inflation in check.

There was a lot of fear in the market in December and Donald Trump wasn’t a fan of Jerome Powell raising interest rates.

In my opinion I think Jerome Powell faced a lot of pressure from investors and our President to take a more neutral stance on interest rates. As a result the Federal Reserve went from being hawkish to what they called dovish.

For this reason I don’t believe that any of this rally has to do with a China trade deal. I think the rally from January until February and now going in March is entirely on the back of the Federal Reserve.

I believe that a lot of investors are pricing in an interest rate cut at some point in 2019.

The Fed’s dovish opinion on interest rates combined with short-side investors getting squeezed, algorithmic trading, day traders, have all contributed to this most recent market rally.

What comes next?

We are at a level in the market that we have struggled to get over time after time.

There seems to be a lid on the value of the S&P 500 Index around 2,800 to 2820 price level. We’ve touched this price level multiple times and have only broken through the level one time since last February, when the market rallied over the summer.

It will be interesting to see how the market plays out over the next few weeks. I believe many investors have priced in the Federal Reserve decreasing interest rates at some point in 2019.

If the Federal Reserve decides increased interest rates one more time this year I think it could be extremely detrimental to the market and how they perceive things.

I don’t think an increase in interest rates should have such a drastic effect on the market, but because investors are expecting expecting a cut in interest rates instead of an increase, this could set off some pretty drastic, expected action in the market.

I believe that Jerome Powell wants to continue raising interest rates and try to get back to a more neutral level, I just don’t know if the political pressure will allow him to do so.

The case for raising interest rates is to allow the Fed some more room to cut interest rates if and when we do eventually enter into a recession in 2020 or 2021.

Conclusion: Don’t pay too much attention to headlines

Don’t believe what you see in the news. I don’t believe the market is rallying on the back of a China trade deal. I don’t think the market believes we’re going to get a China trade deal in the next two months.

I think the market is hyper focused on the behavior of the Federal Reserve and that has caused much of the volatility from October through December, and the Federal Reserve’s complete 180 on interest rate policy has also caused the market rally up to this point in 2019.