Hirsch, Stock Trader’s Almanac 2016

The new year will soon be upon us, and with it comes the continuation of a long tradition. The Stock Trader’s Almanac is now in its 49th edition. Well, not quite the track record of The Old Farmer’s Almanac, which launched in 1792, but presumably a tad more data driven.

The spiral bound, green lexotone-covered almanac opens flat for easy access to its information or for jotting down notes. The format remains essentially the same as that of recent editions, with a calendar section, a directory of trading patterns and databank, and a strategy planning and record keeping section. The calendar section has on facing pages historical data on market performance (verso) and a week’s worth of calendar entries (recto). January’s verso pages, for example, give the month’s vital statistics, January’s first five days as an early warning system, the January barometer (which has had only eight significant errors in 65 years, one of those in 2014), and the January barometer in graphic form since 1950. Each trading day’s entry on the recto pages includes the probability, based on a 21-year lookback period, that the Dow, S&P, and Nasdaq will rise. Particularly favorable days (based on the performance of the S&P) are flagged with a bull icon; particularly unfavorable trading days get a bear icon. A witch icon appears on options expiration days. At the bottom of each entry is an apt quotation. There’s about a five-square-inch space in which to write.

The Stock Trader’s Almanac pays particular attention to the presidential cycle, and its message is mixed for 2016. On the one hand, “election years are the second-best year of the four-year cycle and sixth years of decades have been up double digits four in a row, so 2016 has some solid history behind it.” On the other hand, “eighth year of presidential terms represent the worst of election years since 1920. In eighth years, DJIA and S&P 500 have suffered average declines of -13.9% and -10.9% respectively.” Admittedly, there are only six data points in this eighth year series (new to this edition), but of them only 1988 was positive.

What other seasonals are powerful? The best six months is still “an eye-popping strategy.” Since 1950 the best months are November, December, January, March, and April. Add February, “and an excellent strategy is born!” These six consecutive months gained 17,883 Dow points in 65 years, while the remaining May-through-October months lost 1066 points. In the last two years this pattern has been less “eye popping.” The DJIA gained 4.8% in 2013 and 4.9% in 2014 between May 1 and October 31 and 6.7% and 2.6% between November 1 and April 30.

As always, this year’s almanac is chock full of data that will delight traders who believe that past is prologue.

The turkeys arrived for their Thanksgiving dinner

I took this picture of deer and wild turkeys feasting in my back yard at dawn yesterday. A couple of turkeys flew into the vegetable garden, eating who knows what in the garden paths. When it was time for the turkeys to move on, one of birds in the garden was stymied. He/she had no idea how to get out and instead paced up and down along the fence, inevitably ending up in the corner. The turkey’s family briefly showed some concern but then abandoned the dullard. I finally went out to open gates, hoping that this might prove an avenue of escape. Obviously my presence and the clanging of metal was frightening enough to inspire the turkey to “get wings.”

Benjamin Franklin might have called wild turkeys “birds of courage” and proposed that the wild turkey, not the bald eagle, be the official animal of the United States, but this particular wild turkey exhibited neither courage nor any problem solving skills.

Happy Thanksgiving

Mellon & Chalabi, Fast Forward

I just received my copy of next year’s Stock Trader’s Almanac. The page I normally turn to first is the editor’s choice of best investment book of the year. I don’t think I’ve ever agreed with the choice, but I always note it in my review. This year it turned out that I hadn’t read the top pick, so I felt I needed to remedy that state of affairs. I set some time aside to read Fast Forward: The Technologies and Companies Shaping Our Future by Jim Mellon and Al Chalabi (Fruitful Publications, 2015). And although I admit I read it in a manner befitting its title, it was definitely worth the time I put in, and probably considerably more.

This seems to be the fifth book that Mellon and Chalabi have written. Their earlier efforts are Cracking the Code, Wake Up!, Top 10 Investments for the Next 10 Years, and Top Ten Investments to Beat the Crunch!

Fast Forward analyzes technologies in eight areas: robotics and automation; life extension; the internet of things; transportation; energy; payment processing; 3D printing; and media, publishing, education. Much of what they write is a summary of material that has been covered extensively in the media. But what is new and valuable is that the authors describe companies, both private and publicly listed, that are engaged in these technologies. It is therefore an idea book for technology investors. In the third appendix to the book they list the public companies chapter by chapter, along with the exchange on which they trade as well as their ticker and market cap.

Although I wouldn’t put Fast Forward among the best books I’ve read this year, for those who want to explore investing in burgeoning technologies it is a useful starting point.

Grimes, Quantitative Analysis of Market Data: A Primer

Adam Grimes’s brief book, Quantitative Analysis of Market Data (only 35 pages of text), which kindleunlimited subscribers can read for free, is indeed a primer. He starts with the formulas for percent return, both simple and logarithmic, and shows how we can standardize these returns for volatility, using ATRs, historical volatility, or the standard deviation spike tool (measuring each day’s return as a standard deviation of the past 20 days’ returns). He describes normal distribution, running mean, and running median for Cauchy-distributed random numbers.

The bulk of the book consists of an explanation of “three simple tools that should be part of every trader’s tool kit: bin analysis, linear regression, and Monte Carlo modeling.”

Traders who are familiar with the most rudimentary mathematical principles of finance will learn nothing from this book. But it’s a good place for the mathematically uneducated to start and a quick review for those whose grip on statistical modeling is tenuous.

Baker, The Trade Lifecycle, 2d ed.

Retail investors and traders are for the most part blissfully ignorant of how their orders are processed. They buy, sell, and see their account balance either increase or decrease. Or they track open profits and losses. Some days even this seems like far too much information. And, if we are to believe Nicolas Darvas (How I Made $2,000,000 in the Stock Market), it may well be.

For people who work in the capital markets, however, understanding the anatomy of a trade is of vital importance because it sheds light on how banks and trading firms are structured. Where do risk managers fit in? What does the back office do? It is this kind of understanding that Robert Baker aims to impart in The Trade Lifecycle: Behind the Scenes of the Trading Process, 2d ed. (Wiley, 2015).

He pays special attention to the role of technology in the trading progress, which makes perfect sense since it’s an increasingly important part of finance. For instance, as of this past April, of about 33,000 full-time employees at Goldman Sachs, 9,000 of them were engineers and programmers. Goldman had more tech employees than Facebook. As the Business Insider article which reported these figures noted, “The massive on-boarding of tech talent shows just how seriously investment banks regard technology as a means of security and infrastructure.”

Baker’s book may not be a page turner, but it is a useful outline of how firms develop, arrange, test, approve, monitor, report, and audit trades.

Ursone, How to Calculate Options Prices and Their Greeks

Those option traders who care about the Greeks (and not all do) normally rely on trading platforms for their calculated values. Why do the calculations yourself when an algorithm can do it for you? Just as no adult works out a long division problem on paper, almost no option trader bothers to use the Black Scholes model to solve for a value that he can find by plugging a few numbers into an online calculator.

The problem with taking this shortcut is that most option traders don’t understand how their positions can change prior to expiration. They don’t know what’s under the hood. And, unlike driving a car from point A to point B, where the road is relatively straight, the car is reliable, and you can arrive safely at your destination in blissful ignorance of how the parts of the car work, trading options without any knowledge of how the Greeks affect both one another and the price of options can be lethal.

Pierino Ursone’s How to Calculate Options Prices and Their Greeks: Exploring the Black Scholes Model from Delta to Vega (Wiley, 2015) sets out to fill this void. It requires no advanced math skills (though occasionally it invokes Excel to make the reader’s life easier) but instead offers mostly back of the envelope calculations.

For instance, the 20% to 80% delta region is almost linear. “This linearity promotes working with a lot of rules of thumb and easy derivations for the Greeks. It is a strong tool for being able to come up with values for the Greeks without applying the option model.” (p. 79)

The book is not for beginning option traders, but at the same time I don’t think one should wait too long before tackling the material it covers. I personally learned quite a bit from it, much of practical value. And it’s book I’ll keep around for when I need a refresher course.