Kudos to MMs
- Thread starter nitro
- Start date
What on earth does 'conservation of energy' mean in markets? It's a meaningless BS analogy. The markets are not physics.
What makes you think that your model is correct?
Look, it's very simple. Stocks are cheap relative to earnings, and their earnings yield is high relative to the alternatives. If you are sitting on $1 million cash, you can either put it in 10 year bonds at 4% yield, cash at 0.5% yield, both of which are taxed, or you can put it into stocks at a 7% earnings yield. Wow, tough call there - let's take the 0.5% and 4% yields, and ignore the returns at 7% available in the stock market!
A 7% earnings yield means the stock market is going to grow wealth at a 7% real return, year after year, as long as earnings hold up and keep pace with inflation. That means each year you stay flat, you miss out 7% real return, equivalent to maybe 10% nominal return. And each year you are short, you LOSE 10%. Stocks don't have to beat estimates, corporations don't have to do anything amazing, just keep chugging along normally, and at these values they will return approx 10% per annum in the long-term.
The risk of significant earnings falls are simply not that high. We have just had one recession 2 years ago, it is very rare to back another recession so soon afterwards. So, most likely, we have at least 2-3 more years before anything close to a recession looms on the horizon. So, it's pretty safe to rely on the earnings yields and forecasts.
You talk about your model. Let me ask, is there ANY fundamental or valuation input into it? I bet you a cold beer that you take almost no account of valuation or fundamentals. And you wonder why your model isn't working...
What makes you think that your model is correct?
Look, it's very simple. Stocks are cheap relative to earnings, and their earnings yield is high relative to the alternatives. If you are sitting on $1 million cash, you can either put it in 10 year bonds at 4% yield, cash at 0.5% yield, both of which are taxed, or you can put it into stocks at a 7% earnings yield. Wow, tough call there - let's take the 0.5% and 4% yields, and ignore the returns at 7% available in the stock market!
A 7% earnings yield means the stock market is going to grow wealth at a 7% real return, year after year, as long as earnings hold up and keep pace with inflation. That means each year you stay flat, you miss out 7% real return, equivalent to maybe 10% nominal return. And each year you are short, you LOSE 10%. Stocks don't have to beat estimates, corporations don't have to do anything amazing, just keep chugging along normally, and at these values they will return approx 10% per annum in the long-term.
The risk of significant earnings falls are simply not that high. We have just had one recession 2 years ago, it is very rare to back another recession so soon afterwards. So, most likely, we have at least 2-3 more years before anything close to a recession looms on the horizon. So, it's pretty safe to rely on the earnings yields and forecasts.
You talk about your model. Let me ask, is there ANY fundamental or valuation input into it? I bet you a cold beer that you take almost no account of valuation or fundamentals. And you wonder why your model isn't working...
Abandon your flawed model?
Look, it's obvious to me what is happening here. You have a system that (maybe) works in a trendless market. But it sucks in a steadily uptrending market, the kind that characterises the price action a long-term bull market.
This problem is as old as the hills - trend-followers designing models that work good for trends, but are awful for ranging choppy markets. Mean reversion traders designing models that work well for ranging choppy markets, but are awful for slowly trending, low volatility markets.
Now, you can either keep protesting about how the market isn't doing what you think it will (the model is 100% YOUR prediction, since you control the inputs and system design 100% - so don't complain 'what can I do?'). Or you can conclude that your system is deeply flawed (or at least it's wrong for this kind of market environment), realise you have a big gap in your knowledge, go back to the drawing board, and start from scratch again, this time incorporating what you have learned from this debacle.
But to me it doesn't look like you have learned much. You have ignored repeated advice on this thread for months and months, advising you to have a 'plan B' in case the market keeps rallying. You have stubbornly persisted with a flawed model, and the idea of adaptability or change seems to be anathema to you. If you don't change your attitude, you will spend the rest of your trading career bashing your head against the wall in futility, not learning anything new, just rehashing the same mistakes that all are so typical of close-minded science types i.e. thinking the world is as systematic, limited and static as their own dogmatic belief systems.
My sincere advice is to withdraw 90% of the capital from your trading accounts, and put the money into a balanced ETF/mutual fund index-tracking portfolio e.g. 50% stocks 25% Treasuries 25% corporate bonds. Experiment with your remaining 10%, at least then if you lose it won't be too big a deal, and your portfolio investments will grow steadily over time with moderate volatility. If your trading turns around and does well for 3 consecutive years of major outperformance, then you can start putting more capital back into it.
Cover the downside first, and wait until your trading technique is a lot better before you risk any serious money in the markets.
That's because it IS the same as selling naked options. Mean reversion systems are short gamma. They make small wins most of the time, and run into extended trends occasionally, losing a pile of dough in the process. The fact that you don't know this means that you just haven't researched the characteristics of trading systems very much.
It stops working because a major trend gets started, and it is a trend-fading system. If you can tell when it goes off the rails, then why keep trading it in a hostile environment? Stop trading it as soon as you get the warning signal, and shift to a trend-following system instead. If you can tell when mean-reverting market environments turn into trend-following environments, they you really do have the holy grail!
[applause]
Finally somebody is calling it, like it is. Posters here when their trade goes against them start to get philosophical or metaphisical and spread bullshit like it is butter on a toast....
As you pointed out correctly at the end of your post. Nitro's system has no fundamental base in reality. That's when the philosophy kicks in....
And someone who spends years, countless manhours and quite a few bucks on a unrealistic strategy is not better than the alchemists of the medieval times...
Since the system is a simple mean reversal strategy, as long as the market is trending upward your system wants to short, fucking duh!
What can you do? Design a system that is not based on mean reversal. That simple...