my solemn pledge

i must confess, i’d rather just guess

than be duped and fooled, by randomness

i rather think twice, than just roll the dice

since lines on a chart, do not drive price

rather think like a fox, not be put in a box

as the markets are, a recursive paradox

if not arc sine laws, then ever-changing-cycles

if you are in denial, it can be almost suicidal

these damning effects, must be circumvented

but not with the invented, nor the misrepresented

not with tools that are myopic, or simply synoptic,

lest the retail hypnotic, not benefit the agnostic

a causal understanding, is certainly demanding

but in-or-out of sample, it sets the best example

there’s so much more, than just trade and win

like adding to profits, when others are cashing in

immune to the tout, trading without any doubt

entering trades, where others are stopped-out

not stepping out-on-the ledge, with an illusory edge

there’s no need to hedge, this is my solemn pledge

it ain't over till it's over...

last friday’s end-of-the-week bullish festivities failed to endure past the european markets’ close, and couldn’t even reach a level lofty enough to allow thursday morning’s longs the opportunity to escape at break-even, before the es began it’s daily swoon. after all was said and done, the spx was still trapped in the ~40pt trading range that had defined the market for the past +1 month. emerging markets re-emerged and displayed very good relative strength as money rotated out of past over-performers (bio-techs-naz and momentum stocks-rut) into past under-performers (EEM). the yield curve continued to flatten and credit spreads widened as the market discounted yellen’s and others, hawkish comments. once again, internals were mixed, with bearish p/c ratios and breadth, juxtaposed against a benign and bullish $vix. after settling the week midway between the weekly S1 and the weekly pivot, the market appeared to be waiting for long-term traders at-the-margin to finish weighing their options before stepping in full force. relatively low vix and skew readings indicated an unreasonably complacent mood in the market, although a $2.8BB put position was executed last week - so someone was concerned about downside tail risk. the market had taken on the visage of an aging fighter who had absorbed an inordinate amount of blows to the head and body, yet still remained standing; willing, but not as eager as he once was, to continue fighting. of course, the market couldn't stay in the current trading range indefinitely; some endogenous or exogenous event had to cause the threshold to be breached, so that the market could make it' move away from current value. perhaps the fix was in, but somebody was betting a lot money, that an overextended and beaten down mr. market, would finally utter no mas on his way to a hard landing on the canvas. but like it has , so often, the past 5 years, the market summoned up it's courage and strength and rallied once again, forging new historical highs. it was a comeback that many had thought to be unattainable; and in it's aftermath, there were the usual accusations that the fight was "rigged". mainstream media denied the rumors and in another classic example of hyperbolic hypocrisy, the game's biggest promoter denounced the practice and announced it was getting out of the game. or as the boys at goldman would say, timing's everything.

Zappa said it best...

 The market may not appear to be portrayed against a bullish backdrop, but irrespective of fundamentals, geopolitical perturbances, inter-market context, and lofty location, it is the willing beneficiary of the matriarch's munificence and investor inflationary expectation.

you are what you is
you is what you am
you ain't what you're not
so see what you got
a cow don't make make hams
and a bear don't make clams
five years since its birth
the bulls still inherit the earth

p/c ratios, breadth and volatility are all sanguine — but not overly so, it is what it is — and that's all it is

are we in store for another structural change to the market?

a long career in the markets has afforded me the perspective to see how the markets have changed over the years. when i first started trading more than 40 years ago, markets were undeniably less efficient; information was extremely asymmetric, spreads were large, audit trails were virtually nonexistent, and there weren't any computers, nor the internet. however, the law of ever-changing cycles has had some help along the way; not the least of which are:

• government regulations
• changes in order handling rules/reg ats
• market fragmentation (dark pools)
• financialization/indexed instruments & etfs
• electronic trading
• decimalization
• for-profit exchanges
• systemic market shocks (flash crash)
• global economic shocks (credit crunch)
• advances in information processing and the internet
• algo/hft driven trading and market-making
• central bank policy/qe-zirp

so, if we were to see hft banned or regulated, and a return to normal levels of human market activity, would the markets morph, once again?

never trade retail...

uncertainty is a fundamental reality in trading. the best we can hope to achieve, under any circumstance, is an incomplete, but probabilistic knowledge of that environment. most new traders neither understand the markets are dominated by chance and randomness, nor possess the ability to cope with the day-to-day gyrations of the market. the natural inclination is to find a comfortable resolution and a shortcut to order amongst all the chaos, while never understanding the structure of its source. ironically, they tend to herd with other naive neophytes into a socialistic like trap, incorporating cliched and anachronistic methods, strategies, and approaches to the market. like churchill remarked, it is a philosophy of failure, and a creed of ignorance, whose inherent virtue is the equal sharing of misery. paradoxically, the less they really know and understand about the market, the more they think they know, and the more likely they are, to have a predictive bias to the market.

as previously mentioned, strategies with the greatest commitment to predicting the future, maximizes the probability of failure. trading today's markets requires a new approach that must be built on an analytical framework that is relevant to current drivers of price. what dramatically distinguishes today's markets from yesterday's trade, is market structure and fed policy. to a very large extent, price action is no longer controlled by humans, and to an even larger extent, price action has been contaminated by qe/zirp. unless we see a return to normal levels of human market activity, and an absence of artificially controlled markets by the fed, we will never see markets that even bear a resemblance to markets of the past, nor will yesterday's approaches to market analysis ever be applicable again.

how traders cope with probabilistic uncertainty and their imperfect view of the market is critical to their success. incorporating relevant informational signals from a wide range of deterministic processes is the foundation for a trader’s success. this means resisting the sirens' call to assign causality to traditional ta patterns, trend-lines, fibs, and other hackneyed tools that were created for highly auto-correlated markets, driven by human decisions and real risk/reward considerations. the new-normal approach begins with recognizing the current dynamics of liquidity provision and developing an informational framework with signals that reflect the machine driven reality of hft, along with an understanding of the the impact of qe/zirp and risk-on/risk-off on relative value and carry strategies. there is a right way and a wrong way to deal with the inherent fuzziness and noise in today's markets, and without the right tools and the proper perspective it's easy for human decision makers to be misled by the machines and policy makers. or, you could just wait for a head-and-shoulders top, trend-line resistance, or a moving average crossover to get short, and then hope and pray.

don't blame the player, blame the game OR if i could, i always would

i must (somewhat) sheepishly admit, that i don't see that much difference between yesterday's human-driven liquidity providers (floor traders) and the machine-driven liquidity providers of today (hfts). the only difference is that as a local in the pit, we often possessed exogenous information, that was yet to be incorporated in the market. predatory algorithms must rely on their endogenous actions to trigger the desired outcome. of course, in my own version of strategic sequential trading, i would often hit bids and lift offers in search of stops, just not as efficiently and unemotionally as hfts. of course, our rather dubious actions were as summarily and similarly rationalized back then as they are today; as our privilège intitulé and due compensation for the risk we incurred for providing liquidity. after all-was-said-and-done however, we did it for the same reason that a dog licks his balls... because we could. perhaps, if goldman wasn't obama's largest campaign contributor, sec employees didn't have quid pro quo agreements with private sector bd's and wall st. law firms (for post govt.-service employment) and the exchanges hadn't gone for-profit, mr. lewis would have had to write a book on a different topic.