Game-changer sell-off?

Thu. 12Aug2010 02:25GMT

Yesterday I left off with the message that my main model was calling for a sell-off of 50 points or so. And so then it goes and happens in one swoon … which is really good for the model and my trust in it … but where does it leave me today? How do I reproduce such guru-ness? (/luck :-))

Well, today its back to the slog … trying to figure out what happens next.

In addition to normal market dynamics (talked about this a bit on Tuesday prior to the FOMC statement release – I proposed that the bears were more frustrated than the bulls by recent price action and I expected that it was the bears who had covered more of their positions than the bulls, which on a ceteris paribas basis left the downside more vulnerable), this appears to have been a ‘liquidity trade’-driven sell-off. Look at the walking wounded today, oil down, AUD down (ugly), CAD down, gold down (not too ugly, apparently demand is being held up by some converting their tinfoil hats to gold ones … just joking, no death threats from the bugs please).

Credit markets were not particularly fussed (BTW, 10-years and 30-years had a good rally, glad I stfu about deflation what deflation?).

Oh, and I almost forgot, Yen is up … 15 year high!

OK, so lets look at the model and see what it is saying next. Before I do, let me refer back to the article I quoted from a few days ago:
Random Musings about Forecasting and Decision-Making
http://cssanalytics.wordpress.com/2010/08/05/random-musings-about-forecasting-and-decision-making/

and this quote from it:
Models or systems suffer from the same problem–they typically do not adjust as conditions or regimes change, nor do they observe their own profitability as a cue. Most economists or technical traders build a framework that assumes continuity and self-similarity of the environment in which a forecast was made in the past.

OK, so I have this model and the way I have it constructed is to adjust itself as new information comes in (d’uh…), but does it adjust as regimes change? Reason I raise this is because I reckon the move in the ES (my model is applied to the ES, not the S&P itself, as it’s the ES that I trade), that relentless pile-driving selling that pushed it down 50-odd points in less than 24 hours, could easily be a bit of a game-changer for the coming days … a change in ‘regimes’. I would not be surprised to see another session of pile-driving selling. Let me just wimp out and say in my gut that I don’t expect to see it, the probabilities would point me to some sort of sideways with perhaps a drift lower over the coming session(s) … but gee if you want to talk about probabilities then the probability of another OTF selling day is higher than it has been for weeks …

So, the model is most likely looking for sideways-to-drift-down over the coming session(s), according to my interpretation of it, but I am going to have to check it out in the hour or so prior to the cash open (about 11 hours from now) and just do a quick assessment of likelihoods then. I normally don’t report on those (time constraints), but I will today. (the curse of interesting times).

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