Weekly Spread Re-Cap 3-18-11

In our spread book this week we focused on the SPY/IWM spread.  We have been hedging our algorithm portfolio residual by shorting SPY’s, QQQQ’s, and a very small amount of IWM.  This week we decided to periodically increase the amount of our IWM short by trading the sharp movements in SPY/IWM.  The purpose of this exercise was to “learn” how the spread trades, capitalize on its sharp movements during a volatile period, and see how the portfolio performs with an increase in the IWM hedge.  At the peak of the panic relating to Japan, large caps sold off more than small caps.  At these moments we bought the spread, and unwound it later as the market rebounded.  Additionally, shortly after the close, liquidity decreased enough to create some interesting opportunities.  The spread sometimes traded at prices far from where it closed moments earlier.

Another spread we put on this Friday, was 1*NKE (Nike) – 2*GCO (Genesco).  We had traded this one a few months ago.   NKE was down over 9% this morning after reporting earnings last night.  We bought the spread this morning for about $0.85 on the basis of “cockroach theory.”  As of this writing the spread is trading at $2.44.

Written by Norm Winer. Follow me on Twitter and StockTwits

Are You a Tourist Trader?

Seth Godin published a blog post titled Idea Tourism. The following paragraph caught my attention:

It's possible to do a drive-by of some of the big ideas of science or politics or technology and see only what you want to see. I don't think there's a lot of point in that. If you want to truly understand Darwin, then go to a lab and do some experiments. If you want to understand a gun lover, go to a shooting range for an afternoon. If you want to see how social networking will actually change the way ideas spread, go use it. Intensely, and with a purpose in mind.

In my book How Traders Achieve Creative Flow I give you this simple exercise to start experimenting with your algorithmic trading ideas:

Try the following experiment: In a sandbox account, create a notional neutral (long notional-short notional=0) portfolio of stocks using the best methods you have developed to find long and short candidates. Track the return of the portfolio and see how it performs over time.

As you run the experiment, ask the following questions:

• Should you rebalance your portfolio at specific intervals of time to account for changes in your selection criteria or changes in the value of each position?
• Can you think of any ways to improve your results?
• Are you learning anything?
• Have you observed anything unusual in how the portfolio is performing?
• Are you generating alpha? If not, why not?

The real shame here is that most readers of the book won't do the exercise. They miss out on the opportunity to move forward in amazing ways.

Michael Bigger. Follow me on Twitter and StockTwits.

Scale it to Make Good Ideas Great

When working on trade ideas, always ask yourself, “how can I scale this?”

One good idea is great but it is even better if you can scale it.  Think of ways to apply your successful ideas towards other situations, other stocks, other markets.  Think of how you can write algorithms to trade your ideas so you can spend your time thinking of the next BIG IDEA.  Be creative and expand your algorithms whenever possible to make more money.

Next time you make a good trade, try to scale it into 5, 10, 100 good trades.  Isn’t that better?

Written by Jennifer Galperin. Follow me on Twitter and StockTwits.

Curious about Japan

I am curious about Japan because once every three to five years, we buy one stock. And we usually buy this stock during a crisis.

If you look at the following charts, they reveal the best investments we have ever made:

1. We bought Amazon.com in 2001 below $10.

2. We started buying Crocs in July 2008 and purchased aggressively below $1.

3. We bought McDonald’s in 2003 at about $13.00.

4. We bought Netflix in 2005 in the low teens.

5. We bought Priceline at about $2 (pre-reverse split of one for six).

These are all companies we know quite a bit about because we use their products. We don’t need to do extraordinary things to get very good returns. The most difficult thing for us as an investor is to be patient waiting for the simple opportunity. When we force it, we don’t do well. We have the scars to prove it.

It has been almost three years since we started purchasing Crocs. We have not added a new holding since then. With the market starting to show some weaknesses, we are starting to get excited. Our immediate focus is Japan.

"Bear Markets make people a lot of money; they just don't know it at the time."

-Shelby Davis

Written by Michael Bigger. Follow me on Twitter.

Weekly Spread Re-Cap

A few spreads in our book made sharp movements this week.  The first, 4*GLD – 9*GDX, closed last week at 13.80. Yesterday afternoon it traded in the high 30’s.  We like to trade whenever we see such a large move, especially given the fact that very little has changed economically in the past week to justify such a jump in the price.  Additionally, the spread looked rich relative to its six month average price of 13.15.  We sold a small amount at 37, leaving room to add more if it went against us.  This morning it briefly traded at about 43 before drifting down to 32 at the time of this writing.  We will look to unwind in the mid 20’s.

Two other spreads worth noting are 5*USO- 3*XLE and 3*USO- 2*XOP.  Unlike GLD-GDX these spreads do not fluctuate wildly in such short periods of time.  They tend to move in one direction for long periods.  We’ve been long both of these for a few months now and have watched them slowly move against us.  That recently changed.  Both spreads bottomed on Feb. 16^th, with USO-XLE closing at -50.20 and USO-XOP closing at -12.15.  These spreads sharply reversed direction at the beginning of the recent turmoil in the Middle East, and as of the time of this writing are trading at -23.15 and 4.30, respectively.  Today they are down for the first time in over a week, which may be a buying opportunity.

Written for Bigger Capital by Norm Winer on 3/11/2011. Follow me on Twitter and StockTwits

The Trading Books I Want to Read…

Have the following things in common. They:

• Are written by someone who made a load of money.
• Contain one or two powerful ideas.
• Should be no longer than thirty pages. Let’s stop the yapping.
• Are published in electronic format.
• Are self-published so that text to speech and other innovations are not restricted by the publishers.
• Welcome the readers to initiate a discussion with the author.
• Are written by an author who is responsive to his or her readers.

What kind of trading books do you want to read? Chime in.

Michael Bigger. Follow me on Twitter and StockTwits.

The Creative Space

At Bigger Capital’s we recently started building our Creative Space. What is the Creative Space? A Creative Space is your augmented information space.

In my new book How Traders Achieve Creative Flow, I describe my information space the following way:

The process of extracting intelligent information is creative. Using creativity, I apply a framework to recognize, harness, and interpret information and continuously evaluate the quality of the information. This defines the Internet information space in which I operate. That space is my creative ecosystem (see chapter 11, “Building a Creative Ecosystem”). I challenge myself continuously to use that creative space to interact with other very smart traders to promote the collision, fusion, and combination of ideas. Think of it as a massive dam extracting energy from a flowing river. The creative ecosystem is the turbine transforming that intelligent energy into powerful trading insights—insights you can use to innovate your trading edge and to increase your value to infinity. This ultimate experience results from achieving creative flow, which we will discuss in chapter 2.

The Creative Space is that information space augmented with the following concepts:

• Network augmentation capital empowerment.
• Location independent brain power extraction.
• Brain synchronization.
• Development of digital second selves.
• Brain augmentation using technology.
• The algorithm as the Creative Space and vice versa.
• Neurons and Humans APIs.
• Twitter as the brain synchronization API.
• Mechanical Turks as traders.
• Brain power elevation.
• And so forth.

I will explore each of these concepts in future blog posts.

Michael Bigger. Follow me on Twitter and StockTwits.

You Were Wrong Buying SPX at 777

You were wrong as you watched it slide to 666 in early 2009. But wait, the market has since rendered its verdict, and now you know you were right.

How could you be both right and wrong about one decision you made in the past? Your mind tricked you. You most likely attached too much importance to what was happening then. You let the market, which at the time was composed mostly of people going apeshit, lead you into drawing a hasty conclusion.

Humans have a tendency to attach too much importance to recent events. This cognitive dissonance is known as the fallacy of vividness.

People going apeshit are lambs. They sell low, they buy high, and they compound their assets into negative returns.

Do you hear the lambs approaching?

Michael Bigger. Follow me on Twitter and StockTwits.

P.S. Check out my new book How Traders Achieve Creative Flow.

Renita T. Kalhorn, who contributed the bonus work to the book, sent me the following comment this weekend:

Hi Michael,

I read your book again over the weekend and felt like I was reading it for the first time! It truly is chockfull of profound and practical insights. I hope you will send it to Seth Godin — I’m sure he would be interested in learning how you’ve applied some of his ideas.

I also think your diagram of the creative ecosystem is very powerful/useful, and something that traders should keep in front of them at work. You could have someone flesh it out artistically, kind of like a mind map, and even make it a separate download, like behavior gap does with his drawings.

How Traders Achieve Creative Flow Interview

Renita T. Kalhorn, who generously contributed the bonus material for my book titled How Traders Achieve Creative Flow, interviewed me last evening. You can listen to the interview right here.

Michael Bigger. Follow me on Twitter and StockTwits.

The Creative Trader Manifesto

Dear Trader,

To celebrate my recently published book titled How Traders Achieve Creative Flow, I have created The Creative Trader Manifesto for you for free. You can download a PDF version of it by clicking here. If you like the material, pass it on to another trader.

Renita T. Kelhorn, who generously contributed the bonus material to the book, will be interviewing me this Thursday at 5pm. To listen in, register here.

Michael Bigger. Follow me on Twitter and StockTwits.