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Hello and Welcome,
Welcome to the new Trizen Systems newsletter. This will be the new format for discussing our algorithmic trading systems and other information. Bi-weekly updates will include Actual Profits/Losses, Commitment of Traders, Articles and Actual Trading screen shots. Pass this along to anyone that you feel would like to understand more about the financial markets, derivatives, and how to trade them successfully. Year to Date (YTD) Performance vs. the S&P 500:
Return on Initial Capital: +25.00% We are currently above the S&P index by 22.00% |
| Market Action
Bi-Weekly Profit (P/L): +2700 | | A good two-week run heading into 1140 and heavey resistance but we left a lot of money on the table by not getting long at 1120. We introduced a subjective component that takes resistance into consideration at distinct points especially when the Commitment of Trader warrants further review. The action on the sell-side was weak in terms of relative ease to move the market down while the relative ease to move the markets up was much more significant. A modified TRIN (called TRIzeN) takes into consideration this ease of movement and can better estimate daily "power" moves based upon price and volume. Overall the TRIzeN has shown it is much easier to advance the market than to sell it. The shorts have been running for cover while the "big" S&P hedgers have gone short and the professionals are all long. Moving into 4th quarter with 3rd quarter earnings will be an interesting time but right now the market looks to go higher.
The flip side of this is that the prices in treasuries also appear to be edging higher along with gold and the Electronic Professionals (See COT Blue blue bar below) are significantly Short and Red Hedgers are significantly Long (there are very strong opinions on both side). There is also an election coming in which it appears as though the Republicans will regain some sort of balance in congress and this should bode well for stocks. Any additional taxes on equities and income from equities should take a backseat and we may see heavy rotation out of treasuries and into markets after the election assuming earnings season comes in above expectations; however, the COT for the electronic trader is setting up for a really poor earnings season and hasn't been this net short since middle 2008.
Deflationary concerns are always on the horizon but it only appears to be affecting housing and big ticket items. Overall the market is extremely difficult to navigate with talks of treasury bubbles, gold bubbles, etc. its hard to know where to put your money to get any kind of return. For now though, it looks as though all items are going up as investors feel the stock market looks cheap, gold is rallying, and treasuries are the safe haven. Someone will be right, but we will continue to maintain our course of action.
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| Commitment of Traders
Bulls-n-Bears | | The COT, or Commitment of Traders, represents a government report that collects all the open positions for all traders in the futures market. It breaks it out into Hedgers, Professionals, and Small Traders. Hedgers maintain large portfolio positions and will hedge their positions using the S&P (so they can protect against falling markets). Professionals speculate and tend to be on the right side of the market opposite the hedgers. In most cases the Small trader (Green) is a contrarian indicator.
Analysis: Lets review the prior COT analysis:
Well, the sell off actually occurred early in the week and the test of 1080 came and went as the market closed near its difficult to break 1105. The COT being a very early indicator shows a tremendous short position being taken by professionals as Hedgers (RED) continue to be long. In general, portfolio managers are NOT expected a good earnings season, however, if expectations are extremely low, then the market may rally regardless.
We are coming up on expiration, and as open interest climbs above its current level, we should see a coinciding sell off expiration through the end of September to earnings season.
Much of the rally over the last three weeks can in fact be contributed to the commercial hedger, in fact most of the rally is due to this. This chart has not bee seen since 2007 when only 36% professional traders were net long. Hedgers protecting against UPSIDE gains is very disturbing with the added contrarian signal that the small Green trader is mostly wrong. Much of what may be happening here is an expectation that 3rd quarter results may not come in as well as 2nd quarter results. Though a rally may be in force at the moment, there are many things to consider and the most probable is that the market will rally for a bit and head into October on a positive note, but it certainly is setting up for something big one way or another. The variable here is the November election and is difficult to model.
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| Ride the Rally (until its time to get off the ride)
A Commercial Rally |  I am deeply concerned by the action in the stock market this last few weeks. Yes, we added an additional 7 percent to our earnings and have climbed to 25% on the year (we should be over 30% but we didn't start until mid march) but there are some definite issues that just aren't going away. For the most part, housing is getting worse, consumers have found some sort of balancing act, but if you're like me, a new reality of budgeting continues (it seems everything is getting reviewed). Banks continue to collect homes and keep them off the market. Foreclosures at all time highs with no end in sight and banks continue to ignore reality that they simply need to bring mortgages down to rental rates (is that so hard for them to do? Seriously, who is running the banks, accountants? Hire some sales people and go out into the communities and make mods right there on the spot according to rental rates, this data is not hard to find, its on the internet). The rally has been good but after a 10% move, can we go higher? Absolutely we can go higher as these things tend to just get out of hand, just like selling. A frenzy of "I don't want to miss out on the 4th quarter rally" may have many dump treasuries and go all out equities. You have to ride the rally no matter how bad things are going personally and or economically. Though I feel we will have some difficult times ahead, right now the risk trade is on and if hedgers, professionals (currently short), and small traders are all LONG (meaning no one is shorting) then its get on the train and ride it through the elections, but do yourself a huge favor. Buy 1 S&P500 December 2011 PUT just in case...
So what will happen from here to Jan 1? I have no idea, but the Professional traders got slammed on the short squeeze but the hedgers have reached 52% which hasn't been seen since, yet again, 2008. I don't like making drastic calls, but I am not convinced that this rally had anything to do with anyone feeling the economy is good, or small/medium sized business is good, or that we are out of the recession (btw, I love how the recession ended over a year ago, exactly 18 months after it started, makes you wonder if they actually did any work or simply said 'well, most recessions last 18 month so lets go with it.'). I feel this rally was largely about exhaustion on the short side (you get tired of being short for nearly 7 months, I know I was, I was getting bored with being short) and hedger rallies combined with a Professional short squeeze. It was dramatic, but when buying power by the hedgers stops, we will see some issues until the Professionals close their Longs. With that said, I will state that we are LONG only right now. No short contracts to be made at this time, and we will ride this out until the COT and the market react accordingly. The COT is a leading indicator and sometimes it isn't perfect, but we are hitting extremes in the COT that haven't been seen since 2008 and I fully expect buying power to be picked up by the small trader while the professionals continue to add positions in the opposite direction. |
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Sincerely,
Edward Zaremba
Trizen Systems, Inc.
Commodity Trading Advisor
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| | BladeTrader Version 3.6 | | Version 3.6 and 3.3 have been released. We will have four accounts for each side and version and seperate percentages. |
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U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
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NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED WITHIN THIS SITE, SUPPORT AND TEXTS. OUR COURSE(S), PRODUCTS AND SERVICES SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE USED TO INVEST REAL MONEY. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS SHOULD BE YOUR OWN. |
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