Only problem I have with your view here is this: a trend not being sustainable is no reason not to play the trend. For example, corporate profit margins may well revert to their historical mean. But, isn't the play to wait *until* there is some evidence they are reverting? Trying to anticipate something that hasn't even started yet, is like trying to call the top in the nasdaq in 1995, or housing in 2002.
JS Global Macro Notes
- Thread starter darkhorse
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Only problem I have with your view here is this: a trend not being sustainable is no reason not to play the trend. For example, corporate profit margins may well revert to their historical mean. But, isn't the play to wait *until* there is some evidence they are reverting? Trying to anticipate something that hasn't even started yet, is like trying to call the top in the nasdaq in 1995, or housing in 2002.
Sure, fair point... and there are a number of ways to respond to that.
First and foremost, traders should respect price (and respond to price). We would love to buy BRK.B if it breaks out above $80, for example, as Berkshire is a premier example of what should work in this environment (quality blue chips with high quality cash flow etc).
But the opposite also applies in respect to warnings from price, and opportunities to go short. Awareness of the mean reversion factor does not speak to timing. But it could have something to say about magnitude.
Your inquiry has parallels to the classic question, "When to short a growth stock?" Unsustainable PE ratios revert to the mean at some point -- always -- just as profit margins do.
The answer to the "when" question is, "Let the chart tell you." Netflix is a classic example:
By 2011, it was clear that Netflix had gone into silly season. But overvaluation is no reason to short a growth stock -- let alone sell it if long -- because growth stocks don't trade on valuation in the favored phase. The multiple isn't attached to anything.
And yet, charts give clues as to the moment of truth -- when the honeymoon finally ends.
In 2011, we got meaningfully involved with NFLX twice from the short side: First in March, when what looked like a key reversal appeared on the weekly charts (first arrow). But that turned out not to be the end, so we covered and wound up roughly breaking even on that campaign.
The second time a window appeared -- after the closing of a July gap and the break of the long term trendline -- it was the real deal, allowing us to catch most of the precipitous drop.
Nobody rang a bell. But the charts -- longer term charts in particular -- provide clear signals as to when to step in (or when to get out).
It always amuses me how charts are either misused or overlooked. Contrast our NFLX experience with, say, value investor Whitney Tilson's, who shorted far too early (with no regard for the charts), got blown out somewhere near the euphoria top, and then elected to switch stance and go long when NFLX was falling like an anvil. (Not sure where he is now, but I imagine still underwater on the long.)
Charts aren't magic. They don't hold arcane secrets or predict the future. But they are useful in terms of alerting the observant trader to attractive reward to risk opportunities, especially when the fundamental overlay -- the anticipated scenario -- is already known.
Based on our previous exchange about Peter Brandt's book (I went by Gabfly1 at the time), you may or may not recall that I was not a fan of diagonal lines (trend lines), a conclusion that Mr. Brandt seemed to share towards the end of his book.Quote from darkhorse:
...In 2011, we got meaningfully involved with NFLX twice from the short side: First in March, when what looked like a key reversal appeared on the weekly charts (first arrow). But that turned out not to be the end, so we covered and wound up roughly breaking even on that campaign.
The second time a window appeared -- after the closing of a July gap and the break of the long term trendline -- it was the real deal, allowing us to catch most of the precipitous drop...
I mention this background because I note that your NFLX chart has only two trend lines. However, you will note that early in 2010, the price action could have warranted a steeper trend line twice, after your first one, each of which would have been broken, thereby prematurely suggesting a change in trend. The first would have been broken around the middle of 2010 and the second by about that year end. Retrospectively, I would say you chose your trend lines quite well, and I am not suggesting you constructed them after the fact (break). However, I find it curious that you would use such a wobbly tool when there are arguably sturdier ones.
That is sooooo vague. Can you be much more specific? Inquirying minds need to know.....
Quote from Optionpro007:
That is sooooo vague. Can you be much more specific? Inquirying minds need to know.....
We set up our fund structure and have been actively trading since Q211, but aren't yet soliciting accredited investors. Preference is to say as little as possible in this arena so as not to freak out the lawyer.
Global Macro Notes: Winds Blow Cold for Bonds and Gold
On February 14th -- one month ago -- we pondered "Long Bonds and Yen: Big Shorts for 2012?"
Japan's currency (which we shorted circa Feb 14) has been in freefall the past four weeks, from 77 to 83 yen to the dollar. (As the yen declines in value, USDJPY rises.)
And now, this week, we may be seeing the long bond breakdown:
Treasury bonds, as you know, have long been the "safe haven" of last resort for frightened capital in a low inflation, low opportunity environment.
While the finances of the U.S. government are terrible, treasurys have been a "least bad" option in a world of high unemployment, stagnating economies, and elevated risk.
What's more, those who remain bullish on bonds (like Gary Shilling) foresee "more of the same" in terms of economic malaise, high unemployment, and general doldrums -- not to mention slow motion crisis in Europe.
But 30-year yields around 3% have always been a temporary proposition. With any sign of genuine economic recovery, the risk to bondholders is a flight-to-safety reversal -- a return to risk that sees investor capital pouring out of treasuries and back into stocks.
Read full notes here
On February 14th -- one month ago -- we pondered "Long Bonds and Yen: Big Shorts for 2012?"
Japan's currency (which we shorted circa Feb 14) has been in freefall the past four weeks, from 77 to 83 yen to the dollar. (As the yen declines in value, USDJPY rises.)
And now, this week, we may be seeing the long bond breakdown:
Treasury bonds, as you know, have long been the "safe haven" of last resort for frightened capital in a low inflation, low opportunity environment.
While the finances of the U.S. government are terrible, treasurys have been a "least bad" option in a world of high unemployment, stagnating economies, and elevated risk.
What's more, those who remain bullish on bonds (like Gary Shilling) foresee "more of the same" in terms of economic malaise, high unemployment, and general doldrums -- not to mention slow motion crisis in Europe.
But 30-year yields around 3% have always been a temporary proposition. With any sign of genuine economic recovery, the risk to bondholders is a flight-to-safety reversal -- a return to risk that sees investor capital pouring out of treasuries and back into stocks.
Read full notes here
One more question if I may, strictly out of curiosity. Do you use predefined profit exits for your trades, i.e., "measured moves" or some such?
I ask because when we last discussed Mr. Brandt's then new book, I noted that he used meaured moves, and the trades in his journal showed that the price action was no less likely to fall short or overshoot, thereby resulting either in losses or opportunity cost. Such things are always easier to point out in retrospect, of course. Even so, I think that having specific profit targets, rather than assessing the price action during the course of the trade and responding accordingly, is akin to full out predicting. And I don't put a lot of stock in prediction.