Cause vs. Catalyst

Can’t help but start the post on a downer. I have just spotted the first zombie bear “I told ya so” after the Japan earthquake/tsunami disaster. It had to happen. The zombie bears have been wrong for two years and hundreds and hundreds of points on the US equity markets, so will now be jumping eagerly on the “I told ya so” bandwagon. Here is the first I have seen (probably been earlier sightings on the zombie-bear blogs, but I don’t read those):

Those who think the meltdown in the markets is anything more than catalyzed by nuclear “meltdowns” in Japan (on the cusp of the toppling of some petty tyrants) are in need of some X-radiation on their brains to see what’s wrong (i.e. need to have their heads examined). There have been two liquid tsunami’s – one of sea water and the other of C notes – washing over the world of late.


Meltdown, yeah? I read somewhere yesterday that meltdown was a weasel word, being used without definition. Seems about right. No sign of a definition in the quoted article.

More substantively, every trader-man (and trader-women too, of course) and his dog has been looking for some sort of ‘correction’, and recent activity has been warning that now was the time. Of course the tragedies in Japan (that, terribly, continue to unfold) were a catalyst for the sell-offs in relevant markets this week, the ‘cause‘ however, was the market’s position (which was looooooooooooooong). Any trader worth his salt has been aware of the market being loooooooooooooong for a long time, and indeed will have been part of the tremendous surge in asset prices over the past two years, (not just bitching and whining about the Fed etc. in the comments section of their favourite zombie-bear blog), and would been very wary of the signs in markets over the prior two weeks – TED spread (my favourite), copper, the AUD seemingly running out of puff, reversals in the US bond markets. oil price impacts (widely ignored or justified) …. Various alarm bells; but put them all together and to have been unconcerned would have been negligent.

OK, so why now?

Brings us to the question of catalyst & cause. Big difference between the two. For some traders it is critical. No point having the right view at the wrong time, especially for option traders (you guys & girls know what I’m talking about).

Anyway’s, check this out: The hardest cause to identify is the one that is universally present

I find it increasingly helpful to distinguish two kinds of aetiological question. The first seeks the causes of cases, and the second seeks the causes of incidence.

The cause can be there in front of you for a long time, without incident. Just awaiting a catalyst. You don’t always need a specific catalyst, sometimes the market can start to move as stops cascade (again, see the Enantiodromia link just above, refer to Olsen from there). But in this case we had an external catalyst. And always remember, to be early is to be wrong (ask an option-trading friend if you don;t believe me).

I expect more “I told ya so” crowing in coming days, pretty soon we can then look for support in the markets as the zombies take their hand off it and establish some shorts at the bottom (the cause for the next rally, right? πŸ™‚ )


OK, enough of the downers.

James Hamilton at Econbrowser has sourced some sane reporting on Japan (for hysteria, switch on the TV).


And now something very educational, and funny.

Interview With a Trading Legend, Part I
An interview with Peter Brandt … “author of Diary of a Professional Commodity Trader, may be the greatest trader you’ve never heard of.” Ya got that right, haven’t heard of him before. But, judging by the contents of the interview, it looks like it could be a helpful read, I particularly liked this passage:

One of the first trades I did came from my friend in Evanston who was the bean trader. I was just learning the business, and he had told me he was really bullish on soybeans: “Peter, I’m REALLY bullish on these beans.”

And so I watched them for a few days – I think they were around $5.50 or so – and I’d saved up a few thousand dollars to speculate. And they crept up like ten cents, and so I bought a contract, and they went up like five more cents – and then they went down twenty cents.

And so I got out with my loss, and eventually saw John again and said: “John, so what about those beans?” And he said “Yeah, was that a magnificent move or what?”

JACK SPARROW (laughing): Oh no…

PETER BRANDT: Yeah, and I said “What are you talking about?” And so it ends up that John is a scalper. He never takes a position home at night. He trades the beans for half a cent to a penny, and he had such a conviction on beans that he had a position he was willing to carry for three or four days. Well I find this out after the fact. He takes ten cents out of the bean market, which for him is a gigantic move, and I wasn’t even thinking that way!

And that was a good lesson. Traders at the Board of Trade would constantly say they were bullish or bearish, and it was a good lesson that the words “bullish” or “bearish” did not mean anything. I would have to ask, “What’s your timeframe? How long do you hold trades? How much money are you looking for in a trade? Where are you wrong – what will tell you that you’re wrong? Why are you bullish or bearish, what do you know?”

And so I learned really early on that bullish or bearish didn’t mean squat.

Good lesson in there.

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