Trader’s Narrative

Two small blog updates:

Avert Your Eyes
I finally got around to updating the About section. Not only does it have more info like my favorite trading books but I also put up a picture that was taken for the Globe & Mail article earlier this summer. Yes, now you can see what I look like. Let the stalking begin!

Going Long RSS Stats
A few months ago I featured a chart and asked if you would go buy the breakout. You should have gone long. Here’s an updated chart of my Feedburner RSS subscriptions showing it cracking the 1000 mark:

The spike around June is due to my discovery of a plugin which forces all RSS feeds to be taken from Feedburner rather than my own blog feed. This relieves pressure from my own servers by using the free and awesome server power at Feedburner (Google).

Some read this blog by visiting the site, others through RSS readers and others have opted to receive updates via email. Over the summer holidays I got these auto-email messages telling me those who had opted for emails were out of their office. I was pleasantly surprised to find out through this means that many of my readers work at major firms on Wall St. and around the world.

I’m flattered to have all of you as readers. Feel free to drop me a note to comment on what I’ve written or to offer suggestions or feedback on the blog.

Ho-hum. You know, another day. Another all time high.

But wait, what’s that creeping higher and higher. It’s the bond yield. Both the 10 year and the benchmark 30 year bond yields are getting up there. There is a lot of chatter now about how this is a bad omen for the equities. The logical explanation is that bonds compete with equities for money. When they are cheap enough (yields high enough) people will prefer to buy them instead of equities.

This reminds me of one of the first trading books I read: Mark Boucher’s “The Hedge Fund Edge”. I recommend it highly. Boucher introduced me to the concept of technical analysis and for that I’m eternally grateful. He only gives it a cursory treatment but it was enough to whet my appetite. I went on to read countless technical analysis books. Another important concept Boucher taught me was the liquidity theory or the liquidity cycle from an Austrian school of economics point of view.

To show how real it is, he produces some trading systems that rely on the bond market for signals. I’ll share two with you (you really should pick up a copy).

The first looks at the 12 month rate of change of the 30 year bond yield. If it is equal to or less than 9% you buy the S&P 500. You exit when the yield is greater than 9%. Since his book was published in the late 1990’s it covers January 1943 to the end of 1997.

The result of the system is an annual return of 14.8%. The worst position was in 1974 (-11.93%). Interestingly enough, this system is only invested 64% of the time. So you could have even higher returns if you plopped your money in a money market fund the rest of the time.

The inverse system (buying the market when the ROC is more than 9% and selling when it is equal to or less) provided a -0.9% return. So atleast according to this system, there is real world evidence of the efficacy of liquidity theory.

The second bond system Boucher mentions is based on the yield curve. The rules are to buy the S&P 500 when the ratio of the 30 year bond yield to the 3 month bond yield is greater than 1.15. And to sell when it is equal to or less.

The system covers the same time as the first one and similarly, is only invested 63% of the time. Yet it produces an astonishing 19% annual rate of return. And even more astounding, the worst trade is only a loss of 3.81%.

I know what you’re thinking, where are we according to these systems right now?

The 12 months rate of change of the 30 year bond yields is at 8.70%. And the 30 year yield to the 3 month yield is at 1.058 right now.

Here’s a graph of the most current 30 year bond yield rate of change (12 month) and the S&P 500:

I’ll write some more on the bond market and its implications for the equities market over the weekend. Until then.

box.net is a neat Web 2.0 company that gives you a free mini hard drive that you can access from any internet connection. You can have it be private, invitation only or totally public. This by itself isn’t that nifty when you consider that you can turn an ordinary, run of the mill gmail account into a virtual hard drive.

What makes box.net’s offering stupendiferous is the widgitization of the hard drive. As you can see below, my public files are there in this cute little widget. You and anyone else can access them, view them, download them, and even save them. What’s more, image files, sound files and movies play inside this little widget. I don’t have any in my widget yet but trust me, it’s very cool.

You can manipulate the widget by going to the top right corner and clicking on the drop down menu. I suggest you view them as ‘List View’ not ‘Icon View’ since it gives you more information and takes less space.

I’ve got 10 GB of storage capacity so I’ll be able to squirrel away quite a few books, files and other trading related resources. Maybe even a few books that are, how shall I say this… hard to get? or maybe very expensive? In digital form they suddenly become quite affordable

Right now there are just 15 17 files but I will keep adding from my collection. I’ll also be uploading other types of interesting files. For example, my historical sentiment data. To get these goodies, bookmark and revisit the ‘Best Of Trader’s Narrative‘ section since that’s where the widget will find permanent residence. Or grab my box.net RSS feed to get notified when new files are added.

Explore the existing files and if you have any special requests, let me know. I might just have it somewhere

Just a few more days left in the first Trader’s Narrative Trading Blog Contest.
Hurry !