Cycles

July 17, 2017

Embrace cycles and use them to your advantage. Pretending they don’t exist and attempts to eliminate the part of the cycle you don’t like, the losing streak, doesn’t work.

The investing world doesn’t like cycles. It prefers investment strategies that produce consistent profits with little variation. I believe the collapse in interest rates intensifies this desire for consistent profits. One problem with investing in such strategies is that they’re likely curve-fit to the current market environment.

In the short-term, they can do no wrong; nailing the timing on every trade – buying bottoms and selling tops. The risk, though, hides somewhere in the future when market conditions inevitably change. As a result, the strategy no longer syncs up with the markets and performance comes off the tracks, often resulting in blowups.

http://www.michaelmelissinos.com/blog/cycles/

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Why I Choose Lean

July 12, 2017

Prioritize returns and educating investors. Have the ability to think and execute without distractions. Build rapport with current and prospective investors. Say what you have to say, not what you think others want to hear. Tell the truth no matter what.

I speak out about running a small and more importantly a lean operation in an industry where you’re not seen as “cool” unless you manage +$100M in assets and have a staff of PhD’s and MBA’s. I’m not opposed to managing a high level of assets, but only if it means I get to focus on trading, research and educating investors. If managing a lot of money means taking on the extra baggage of doing business with uninformed and unwilling-to-learn performance-chasing investors, having to tell people what they want to hear just to get and keep their accounts and spending more time with these people than my wife, family and friends then no thank you. Not interested.

I thought I’d address some of the reasons why I launched Melissinos Trading with the priority of generating solid returns and education instead of running a large and complex shop.

Blog post: http://www.michaelmelissinos.com/blog/why-i-choose-lean/

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AQR Paper on Trend Following

July 10, 2017

AQR updates their paper from a few years ago on Trend Following performance over the past 100+ years.

They highlight that performance since 2010 has been the worst stretch in the backtest. The main reason for this has been an increase in correlation between many different markets. When correlation increases, trend followers cannot follow and profit from many different trends.

Over the past eight years or so, correlation has increased severly. They notice that high correlation environments tend to hurt Trend Following performance and it thrives in low correlation environments.

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A Trend Reversal in Interest Rates?

July 6, 2017

Across the globe, bond prices are declining. From Australia to Europe to the USA, prices are sitting and/or rolling over towards 52-week lows. 

Could this be the beginning of a major reversal in interest rates? Who knows, but investors have to prepare just in case. 

Investors who have profited and gotten used to the 30-year bull market, especially in the U.S., might be less inclined to adapt. They think a bull market in Treasuries and other government bonds is the norm, so they don't bother closing their long positions. 

Trend Followers know better. They respect the market. They know that old regimes and long-standing trends can break down at any time without mercy. They don't bother feeling nostalgic. Instead, they adapt as soon as possible within the rules of their own strategies.

On this episode, I walk through the charts of some of the major government bond markets and comment on their current trends and some possibilities for the future.

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Performance Doesn’t Depend on Volatility

June 26, 2017

Great trends can exist despite low and declining volatility. People seem to have gotten the idea that trend following performance has been poor over the past couple of years because of low market volatility. Not true. Trend reversals and false breakouts are the culprits, not low volatility.

I don’t root for volatility. I root for trends. Sometimes markets trend despite low and declining volatility. They can exist with high and increasing volatility too, but positive trend following performance does not need high volatility.

Full article: http://www.michaelmelissinos.com/blog/positive-trend-following-performance-depends-on-persistent-trends-not-high-volatility/

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Wine and Trading

June 23, 2017

The soil matters most.

Without great soil, wineries cannot make great wine. Without big trends, traders cannot make big money. Wine-makers are at the mercy of their geographical location; traders, at the mercy of the markets. There’s a reason why wineries don’t exist in Nebraska and why trend traders don’t make money in stagnant markets.

Much of what contributes to making great wine lies outside of our control – location, soil and weather. If a guy in Iowa wants to open a winery, he knows he has to go to where grapes grow. He cannot force the issue in Iowa. He’s simply in the wrong place to make wine. This says nothing about his talent, will or hustle. He just has to adapt to the reality that running a successful winery cannot be done in Iowa. He’s gotta move.

In trading, we depend on trends to make money. Long-term traders, like myself, need months of price persistence to produce a profit. Outside of stocks, markets have been fairly stagnant for the last couple of years. Like a winery, a large part of what we need to succeed lies outside of our control. I have no control over what markets do and there’s nothing I can do to change them. I simply have to wait it out until the soil (markets) become more fertile.

Blog post: www.michaelmelissinos.com/blog/wine-and-trading/

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Leaving Money on the Table

June 19, 2017

Trend Following, by design, leaves money on the table. It does not try to milk every trade for every penny.

It aims for profit, but not greed.

It accepts missing tops and bottoms in order to capture the middle of trends.

We humans love predicting, buying bottoms and selling tops. The cost of these behaviors outweigh the profits, though.

Many people choose not to buy stocks during this 7–8 year bull market because the perfect buying opportunity never occurs. The market never pulls back enough to justify getting in; no one wants to be the sucker who buys the top.

Being a human, myself, I understand this pain. However, waiting for a pullback to get in at “better prices” often times keeps you out of the market altogether and, as a result, you miss the trend. The pain of missing the long-term trend outweighs the pain of overpaying in the short-term.

Blog post: http://www.michaelmelissinos.com/blog/leaving-money-on-the-table/

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Why Have Trend Followers Been Losing Money Lately?

June 5, 2017

From 2013 to early 2015 trend traders profit from a few large trends – crude oil falls 70%, stocks rise 40% and the U.S. Dollar rallies 20%. Since then, performance stagnates. Over the past two years, many markets move sideways and exhibit nasty V-shaped reversals. As a result, many trend following strategies take many small losses as they buy near tops and sell (or short) near bottoms.

I want to show you how and why trend traders have been losing money over the past two years. In the podcast, I discuss a couple of charts from the major sectors: Bonds, Currencies, Commodities and Stocks.

In these directionless environments, trend traders rely on risk management to keep losses small and simply wait it out until trends come back. When they do, they have the capital to take advantage.

I believe discussing the individual markets can help answer the question many have been asking since 2015: “Why are trend traders losing money?”.

Blog post: http://www.michaelmelissinos.com/blog/why-are-we-losing-money/

 

Disclosure

Past Performance is Not Necessarily Indicative of Future Results
There is always a risk of loss in futures trading.

This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Melissinos Trading LLC. All information is subject to change without notice.

These charts show examples of trends. Inclusion of a chart as a trend example does not imply any kind of recommendation to buy, sell, hold or stay out.

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Warren Buffett vs S&P 500

June 1, 2017

Since 1984, Berkshire Hathaway underperforms the S&P 500 more than half the time (4,198 out of 8,363 days). Yet, Berkshire doubles the S&P 500 in average annual returns and achieves a total return ~43 times higher.

Case in point: too much focus on short-term underperformance can inhibit us from capturing the long-term upside.

Blog Post: http://www.michaelmelissinos.com/blog/performance-on-any-particular-day-doesnt-matter/

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Is the Stock Market in a Bubble?

May 30, 2017

Charts can deceive us. The same market displayed on different scales can distort our opinion on whether the trend is up or down and how strong the trend is. In this short article, I compare and contrast the look and feel of the stock market prices on both linear and logarithmic scales.

The linear chart looks and feels like a bubble. We see the parabolic nature of the uptrend and think “I’ve seen this pattern before (in 2008 Crude Oil, 2011 Cotton, 2000 NASDAQ and others)”. In linear-scale charts, early data cannot tell the full story.

The logarithmic chart doesn’t look and feel like a bubble. Unlike the “bubble” chart, the logarithmic chart below might leave you feeling that the stock market could rally another 100% to the top green up-sloping line. Here we can get more a feel of the ups and downs, especially in the early data. We can see the tail end of the post-Great Depression recovery (1929 top to new highs in 1954); the long sideways slog that is the 1960s and 1970s; again from 2000–2014.

Charts distort our opinions and feelings about markets. Personally, I prefer to get my hands on the daily price data and not use charts at all. With the hard data, I can test different ideas and theories; not be swayed by the look of the chart or have to worry about whether the market is in a bubble or not.

Charts here: http://www.michaelmelissinos.com/blog/bubble-or/

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