The head fake

I had excellent open-field instincts when playing football.   The term was to “juke” the defense with the head fake.  I also had speed (4.49 40-yard dash) but it was the open field head fakes that opened the way.

Similarly, in basketball, the quick crossover dribble can leave the opponent’s body tragically conflicted, not knowing in which direction to defend.  The nickname for the crossover dribble, another type of head fake, is the ”ankle breaker” because the defender’s simultaneous movement in opposite directions is likened to breaking his ankles.

The market has rallied magnificently in the last several weeks.  Since its March 9 low of 676.83 the SP500 has surged impressively to 907.24, yielding a 34% return in less than two months.

Is it real or is it a head fake?

While there are glimmers of hope for the economy the stock market has gotten ahead of itself in my opinion.  Structural problems in the economy do not revert so quickly.  Every trader would like to be the one who times the market recovery, thus it becomes a self fulfilling prophecy.  Every slight upward trend gains rapid momentum as no one wants to be the fool who misses the rally — least of all those professional managers hanging on to their clients by a thin thread.  No manager wants to explain why their fund performed less than the market.

Moreover, the potential loss on a short sale position is unlimited:  short sellers must constantly adjust their positions, and they are occasionally forced to close them out, resulting in huge market up-days….  which in turn feeds the notion that a recovery rally is upon us…. and so on, and so on.  The market continues to advance in a pseudo-bullish feedback loop.

I too have had to capitulate occasionally.  I have participated in approximately 25% of the up-trend, attributable mostly to those days where I just gave up, reversed my short equity market positions (globally), closed my eyes and went long.

But do not become complacent.  This rally may be one of the cruelest ankle breakers of all.

– Wayne Weddington

I got married….

“People have married for many reasons — to gain a fortune, accumulate land, forge an international alliance, secure a dynasty, raise children — and even on the account of affection, a marital motive that became widespread rather late in human history with the rise of bourgeois society.”

- Randy Cohen, The Ethicist

Yes, it is true. I just got married…. but it is not what you think.  I have not had any formal nuptials.

My “wife” is the alternative strategy we have employed in order to navigate the current global market conditions.  It feels like I am on “call” 24/7… and I certainly talk to the traders more than I speak to my significant other (which has caused some chafing).  My voice is hoarse at the end of each trading day. It is decidely counter-culture to traders’ increasing use of IM and email, obviating the need to talk.  These days we talk all the time, all day.

In the last year I launched a global futures trading strategy, Global Opportunity….  out of necessity.  The strategies of which I was once an avid purveyor — stat arb and long short equity — are still viable but today’s fat opportunities are availed to current-condition-specific strategies such as distressed debt and global macro.

The interest in distressed debt reflects investors’ sentiments:  why buy equity products when you can buy debt, which is further up the food chain, at cents on the dollar?  Global macro has also been a favored destination because it enables fast and tactical movements of capital across the globe in a fast changing environment.  Given the market rumblings which started in the 4Q 2007, Global Opportunity seemed a prudent thing to do.

I was skeptical at first.  I admit I was a little hard on futures traders in Do it Yourself Hedge Funds (“DIYHF”).  I referred to managed futures trading as little more than gambling and as proof of the point I showed that the comparative reward to risk was scarcely greater than buying a good SP500 index fund.

The truth — and I redeem myself in DIYHF by pointing this out — is that volatility-loving strategies have their place and time.  And now is one of them.  In fact global macro is one of the few bright spots in performance this year for some managers.

In my case, in Global Opportunity, we began trading the US equity markets intra-day using the mini-futures contracts in the SP500 and the NASDAQ.  We go home at the end of every day flat, that means with no account positions overnight.  Everything is in cash at the market’s end.  It ensures that I sleep at night.  Potential government interventions as they are, coupled with an increasingly unstable geo-political environment, are not contributive to a deep sleep.

We trade the intra-day volatility that has be-deviled so many managers this year.  But the thing to which I have had to get accustomed is the nearly continuous interaction with the traders even though we employ  a systematic trading strategy.  Systematic trading strategies are supposed to be, well, systematic and automated.  The reality is that even the best models require an even greater model — the human mind — to look over the shoulder and be alert.  If anything ever does burp, you can be there with a napkin.

The result has been that my ear is practically glued to the phone.  I would be better off with walkie-talkies: it would save the finger cramp from hitting the speed dial.  Every day, really every hour, is a drama:  watching Congress, the Fed, Obama, economic “numbers”, foreign markets, the TED spread, etc.  The intent is that vigilance will enable us to trade against the other market participants, taking capital from their ledger and putting it in ours.  It is after all a zero-sum result.  Profits only come because you took them from someone else’s trading account by being on the profitable side of a trade.  It is somewhat brutal… but I assuage myself by concluding that I have taken profits only from people I would not like.  Because, after all, when I lose money I certainly do not like the miscreant who ‘took’ my capital either.

-Wayne Weddington