Technically Speaking, January 2022

Happy New Year, dear readers!

Here’s wishing you a year full of learning and accomplishments.

So how was 2021? Was it anything at all like 2020? I hardly doubt that a year like 2020 will make its way to us that quickly! I feel like the year you had would be dependent on your trading style. If you’re a trend follower, then opportunities came in instalments. If you’re a range-bound trader, then the past year must’ve been a delight! But regardless of the type of trader you are, the year 2021 definitely imparted a lot of lessons!

As we enter a new market year, we look forward to the teachings of the year 2022 as well. Sure enough, the pandemic is still around, but for how long? Nobody knows. It’s like asking a technical analyst how long the trend will last. Nobody has the answer. You just do what you do with the information you have today.

So, what is it that the market is saying today? Well, interest rates are certainly holding up. What that means is that financials are probably doing well in that environment. Rising interest rates translate to rising equities and commodities. Stocks and commodities are probably doing well there too. What else? Precious metals haven’t been up to anything really, so at this point who knows what will happen there. We’re seeing breakouts coming through in several sectors from regional banks to materials to chemicals. The Indian market has seen complete domination on behalf of the Information Technology Sector that has been the most consistently bullish sector all of last year. And what’s more? It doesn’t seem like it’s in the mood to grind to a halt.

Markets are doing well in pockets, and that may as well be the theme going forward. We’re way past that point where the market has to recover from a shock event like the 2020 crash. We may not see front-line indices putting up their best performances but we may see stock-specific moves dominate the year ahead.

So, what is one to do in such a market? As a kid, I used to play a game called Wiggly Worms. There was a big flat red apple with tiny holes in it that housed tiny worms with coloured tails. As you’d start the game, the tiny worms would come out of their homes one by one, at random, and you’d have to pull them out. The person who pulled out the greatest number of (same coloured tail) worms in under a minute won.

The point is, that we might be in a Wiggly Worm market. Different trades (worms) will jump out at you at different points in time. If they suit you, you pull them out. If they don’t, you place them back in. When the market as a whole is going up, it’s easy to make money because of the bullish mood. But we may be in a market whereby relative strength will play an even bigger role than it has in the past. My plan is to take each trade as it comes rather than waiting for the combo offer deal.

In this month’s edition, we bring to you comprehensive Options strategies, a book review, and reminiscence of the MTA among others.

We’ll meet again next month. Until then, Think Technical!

Rashmi Bhatnagar, CMT

Editor

What's Inside...

President's Letter

Brett Villaume

As we begin the new year, the Board of Directors and Staff have initiated the annual strategic planning process. The CMT Association’s fiscal year begins July 1st, so the next...

Tail Risk Pricing Post-Pandemic

Ryan Hysmith DBA, CMT

The Pandemic Crash was the fastest drop in history from all-time highs to correction territory.

Hedged traders were not totally immune to the panic, but their portfolios were more stable...

Reminiscing the early days of the CMT Association

Walter Deemer

What was the TA world like in the earliest days of the Market Technicians Association? Not at all like the world we enjoy today! Read on; we’ve come a long...

Capitalizing on New Year Short-Covering Opportunities

Matthew Timpane, CMT

For the last few years, one of the things we love to look at is tax-related short-covering opportunities as we enter the New Year. It’s a play on the old...

[Options] My Favorite Strategies: Bullish Risk Reversals

Sean McLaughlin

Ok, so perhaps there’s some recency bias here as the most recent bullish Risk Reversals I’ve put on have worked. Really though, all that has done is remind me that...

Stacking Credentials: A CPA’s Perspective on Pairing the CPA with CMT Designation - Part 1 of 2

John Letizia II, CPA, CMT, CFTe

Book review - Day Trading the Dow Mini: A Practical Guide for Market Participation by Brad E. Stych

Jim Erdmier, CMT

Brad Stych’s “Day Trading the Dow Mini” is a complete trading guide. Many books published today simply dive into technical analysis, fundamental...

Global Ex. US Return: A Challenging Year for Passive Management

Shane C. Murphy, CMT

2021 highlighted the momentum-like nature of market cap weighted indices. Despite all the chop we saw from the average stock in the US, an index like the S&P 500 was...

Applications for New Association Directors

Salma Abdulla, CFA, CMT

The Governance Committee of the CMT Association Board of Directors is now accepting applications for new Directors for the fiscal year commencing July 1, 2022. The Board is seeking to...

January 2022 CMT Newsletter

Marie Penza

Membership

The CMT Association would like to congratulate the following members on their new positions:

Pawandeep S Bhatia, Management at Electrum Portfolio Managers

Updating Your Profile

Please take a...

Updates from the Eastern Hemisphere

Joel Pannikot

Wish you all a happy new year!

The new year dawns on a new world where new waves of a global pandemic are slowly turning endemic. This is a world...

President's Letter

As we begin the new year, the Board of Directors and Staff have initiated the annual strategic planning process. The CMT Association’s fiscal year begins July 1st, so the next few months are prime time to discuss anything and everything having to do with how the Association is managed, including who serves on the Board. Speaking of which…

The Board nomination window is now open for CMT members to submit proposed candidates for Director at Large positions for FY 2023. Please see the article in this month’s Technically Speaking written by Governance Committee Chair Salma Abdulla that explains Director qualifications and how to nominate someone.

Member nominations are the source of new Board candidates to fill vacancies created through term limits, attrition, and strategic additions. So, we take nominations very seriously and highly appreciate your submissions.

Per our Bylaws, the Governance Committee is responsible for overseeing the board refreshment process, which includes conducting board performance evaluations and ensuring the Board has qualified members with diverse skill sets that benefit the Association. Importantly, the Governance Committee is also responsible for evaluating committee structure and performance, overseeing proposed changes to our Bylaws having to with operational matters and the rules for membership, and making recommendations to the Board about how best to execute the Board’s responsibilities, such as overseeing the Staff’s performance.

The Board recognizes the importance of having strong candidates in leadership positions within our Association and that the responsibilities of the Board, the members of the various committees, and even special working groups, are all interrelated and should be viewed holistically. The Board of Directors is currently seeking candidates for the upcoming FY 2023 election who will bolster our expertise in specific areas, explained below, and help to round out our overall ability to oversee the Association’s activities.

We have seen very strong growth in CMT Program enrollments within the Asia Pacific region (APAC) in recent years. The Board has subsequently sought to add Directors residing in APAC countries who will be best qualified to help oversee our growth in the region. Directors Chinchalkar, Coutts, and Homma have been instrumental, and we are looking to add to this team of APAC Directors in FY 2023.
Our CMT Program, managed by CMT Program Director Stanley Dash, is the gold standard in professional designations for technical analysts. Both the Staff and Board of Directors appreciate that current members will benefit from growing the size of the Association through greater operational leverage. Therefore, the Board is currently seeking candidates with prior career experience in marketing, branding, and social media.

Director candidates should have enough time to dedicate strictly to board related activities. While there are many ways to volunteer your time and effort to the Association, Directors’ attention should be focused on the operations of the Board.

I have served on the Board since 2014 and, in my evaluation, our current 14-person roster is full of excellent volunteers and leaders. But we have the opportunity to improve our Board even more this coming fiscal year. Please consider nominating a qualified candidate or nominating yourself should you want to serve, and feel free to email me at president@cmtassociation.org if you have any questions.

Contributor(s)

Brett Villaume

Brett Villaume is Past President of the CMT Association, having served on the Board of Directors from 2014 to 2023. Additionally, Brett is a Financial Advisor at Equitable Advisors, LLC (member FINRA/SIPC) based in San Francisco, California. Brett previously served as Director...

Tail Risk Pricing Post-Pandemic

The Pandemic Crash was the fastest drop in history from all-time highs to correction territory.

Hedged traders were not totally immune to the panic, but their portfolios were more stable and better prepared to capitalize on the subsequent rally than those without portfolio protection.

VIX hedging strategies or buying deep-out-of-the-money (OTM) put options (i.e., “unit puts”) were incredibly effective during the Pandemic Crash. However, today’s pricing of VIX options and OTM puts has dramatically reduced the same strategies’ price efficiency and downside protection.

Traders talk about VIX and SPX tail risk pricing being astronomically high compared to before the pandemic. How significant is this price change? What has happened to the price of downside protection?

We studied almost two decades of deep-OTM SPX put option pricing data to get the answers.

Hedging Tail Risk with OTM Puts

A unit put is a far out-of-the-money put contract with Greeks that do not follow the uniform patterns of closer-to-the-money contracts. Low delta unit puts react uniquely during volatility events. Worried investors buy downside protection en masse, causing a positive feedback loop, creating an “explosion” in far OTM put pricing.

This explosion provides downside protection that can protect an investor from disastrous losses and possibly even turn a profit during significant market volatility.

Numerous authors have described the repricing of low delta options during volatility events. See Chen and Sebastian’s The Option Trader’s Hedge Fund for further discussion on unit puts or Krishnan’s The Second Leg Down for more on options pricing in a volatile environment.

For example, you could hedge by regularly buying the front month, .05 delta SPX put option. Figure 1 shows the profitability of a series of those individual trades, rolling into new contracts at 15 DTE. Each data point in the plot is a particular trade’s profit or loss.

While the hedge was effective during the March 2020 volatility, the contracts typically leave the buyer with a loss. This creates a long-term portfolio drag, shown in Figure 2 by plotting this strategy’s cumulative profit (loss).

The protection from unit puts was well worth the cost during the Pandemic Crash. But, the constant put buying in the years leading up to the crash created substantial portfolio drag. What does pricing look like today?

SPX Options Pricing Case Study

Using SPX options data from February 2005 through March 2021, we evaluated pricing based on contract delta and days to expiration (DTE) to see the magnitude and duration of pricing volatility.

We analyzed 15 unique combinations of DTE and deltas. We considered 30, 45, 60, 90, and 120 DTE contracts, each with the .03, .05, and .10 deltas.

We calculated the mid-price for the contract that best fit our criteria each day at 3:45 PM EST. We evaluated all expiration types, tracking the contract that best matched our defined DTE and delta, regardless of weekly, monthly, or quarterly expiration. We split our data into equal-sized pre and post-Pandemic Crash datasets.

Pre-Pandemic Crash Dataset: 10/24/2018 – 3/16/2020 (n=348)
Post-Pandemic Crash Dataset: 3/16/2020 – 7/30/2021 (n=348)

Figure 3 shows the average contract prices before and after the Pandemic Crash.

The blue points correspond to the right-side axis and show the percentage change between pre and post-pandemic pricing.

The average price increase for all definitions of unit puts shown in Figure 3 is 89%.

All unit-put definitions showed a sustained pricing increase following the Pandemic Crash, but these differences were higher in longer DTE and lower delta contacts.

While there are clear relationships, the right-side y-axis’ relatively narrow range of +80-100% shows us that the differences in price increases between contracts are fairly small.

Looking at pricing from a different angle, Figure 4 shows contract pricing for the .05 delta, 30 DTE puts and .05 delta, 60 DTE puts, overlayed with VIX values.

Notice that while the VIX has settled closer to its long-term average, the pricing for both contract types remains elevated after 2020.

So, what has happened to the price of downside protection? Since the Pandemic Crash, hedge pricing has dramatically risen, with long-dated, low delta options experiencing the highest increase.

Next month, we’ll explore how long it typically takes for pricing to normalize after a volatility spike and why today’s pricing is so different.

@rthysmith

Contributor(s)

Ryan Hysmith DBA, CMT

Ryan loves thinking about, talking about, and writing about markets. Ryan is the Chief Market Strategist for Option Alpha, a no-code automated trading platform for stocks and options. Before joining Option Alpha, Ryan taught undergraduate finance and worked in institutional fixed-income sales....

Reminiscing the early days of the CMT Association

What was the TA world like in the earliest days of the Market Technicians Association? Not at all like the world we enjoy today! Read on; we’ve come a long way…

The MTA started out as an informal group of market technicians in 1970 and 1971. Ralph Acampora and the late John Brooks then spearheaded a move to create a more formal, more professional organization. The result: The Market Technicians Association of New York, founded in 1973. In its’ earliest years, it had two key objectives: the professionalism of technical analysis and the sharing of knowledge among technicians. Now taken for granted, they were far from it back then.

PROFESSIONALISM

As part of the formal creation of the MTA, in 1972 John Schulz wrote the MTA Principles and Policy, which articulates the reasons why we created the MTA superbly well. Parts of that Principles and Policy statement follow, but I strongly urge you to read the whole document. You can access it here: https://www.walterdeemer.com/weassert.htm

The Association asserts, in sum, that the technical analysis of stock price movements and of the supply-demand relationships underlying them is a valid, indeed an indispensable, element in the formulation of a “reasonable basis” for investment decisions.

The Association dedicates itself to the widest possible dissemination and acceptance of these principles and to promote the highest achievable standards of professional conduct, effort, and scholarship among its members in all areas within the purview of technical analysis.

Schulz even mentioned behavioral analysis — long before it became widely recognized:

The tendency of price trends to persist and of investors’ behavioral patterns to recur enables the technical analyst to recognize and anticipate potentially favorable or unfavorable investment environments. Indeed, the recognition of extremes in investor psychology is one of the technical market analyst’s unique contributions to the field of investment techniques.

And that marked the very beginning of the long, hard road that ultimately led us to the CMT Association and the CMT program, which have played such important roles in making technical analysis an accepted professional field.

SHARING OF KNOWLEDGE

Before the MTA came along, the prevailing modus operandi among technical analysts was “Well, I’ve discovered the Holy Grail — and I’m darned if I’m going to let the whole world in on it.” Technicians making public presentations (and even private ones to me, as a buy-side analyst) thus all too often described the methodology behind their amazing indicator or trading system as “proprietary” or “my work” and left their audience with just the end result. I cannot emphasize strongly enough the huge amount of technical analysis that was kept behind curtains in those days; we were all pretty much on our own.

The MTA changed all that. It strongly and actively encouraged the sharing of research in monthly meetings, an annual seminar, and a monthly newsletter and quarterly journal. As a result, technicians found themselves working with an ever-expanding body of knowledge.

So the next time someone greets you as a market technician with respect, not scorn, and the next time you learn all the details about a new analytical technique, think about what things were like in the pre-MTA world. It hasn’t always been like this.

Contributor(s)

Walter Deemer

Walter Deemer is a founding member and past president of the CMT Association who began his Wall Street career in July 1963 as a Merrill Lynch research trainee. In April 1964, Walter moved to Merrill Lynch’s Market Analysis Department, where he worked...

Capitalizing on New Year Short-Covering Opportunities

For the last few years, one of the things we love to look at is tax-related short-covering opportunities as we enter the New Year. It’s a play on the old “Dogs of the Dow” theory, where you buy the highest dividend-yielding companies relative to their stock price that is presumed to be near the bottom of their business cycle. Instead, we’re looking for companies where shorts who have big gains will wait until just after the New Year to cover their positions so they can wait a year to recognize the profits. This might allow us to identify stocks with an increased chance at an early-year short-covering rally. As a firm that focuses on long premium options strategies, these are the kind of risk/reward scenarios we look for to maximize our potential gains from taking on the added leveraged risk.

We’ve run this study since 2018, and the data points towards some significance to this theory. The parameters we have set for high-potential stocks are down more than -10% on the year with short-interest above 10%. As you can see from the table above, stocks that meet this criterion have outperformed for the first week of the New Year with an average return of +5.43%. The most notable statistic, though, is that 66.6% of these stocks beat the S&P 500. This stands out to us and gives us confidence that we have something here that can provide value in the early innings of the New Year.

The table above provides some of the most well-known stocks for this year’s list. When looking at these charts, you need to keep an open mind because they’re not what you’re typically looking for when trading with the trend. You need to venture out and find key gap levels, Fibonacci retracement levels, or previous highs that you can trade against and define appropriate stop levels.

This study didn’t include sectors and industries because we trade equity options for the most part, but if I had to pick one that fits fairly close to the parameters, it would be the cannabis industry. Cannabis bulls went up in smoke with the rest of the speculative frenzy we saw at the beginning of last year and remained a solid short throughout year-end. The ETFMG Alternative Harvest ETF (MJ – 11.09) finished down -25% on the year and peak to trough from February highs to December lows — the industry proxy was down a whopping -68%. But, something seems to happen at the beginning of the year.

Over the past 7-years, January has been one of the most bullish months for the industry. It has shown to be positive 67% of the time with an average return of +12.5%. Maybe it’s due to renewed optimism or hopes for more broad sweeping legislation that would finally legalize cannabis on a federal level. Regardless, data is extremely bullish for the first month of the year. Furthermore, sentiment probably can’t be lower than it is right now. Using a quick way to gauge general public interest by simply using Google Trends data tells us search history for “Marijuana Stocks” is at a 5-year low. So, maybe it’s time to take a shot on pot too.

I’m a trend guy by heart, so it always feels weird taking a contrarian viewpoint on a beaten-down stock or sector. But, when the evidence points towards a great trading opportunity, I’m not going to ignore it; I’m going to trade it, manage my risk, and try to add some opportunistic alpha to my portfolio early on in the year.

Contributor(s)

Matthew Timpane, CMT

Matthew Timpane is a senior market strategist at Schaeffer’s Investment Research. With over a decade of experience in investing, he has a knack for finding unique opportunistic risk vs. reward propositions. His areas of expertise include managing multi-strategy portfolios, trend-following, inter-market analysis,...

[Options] My Favorite Strategies: Bullish Risk Reversals

Ok, so perhaps there’s some recency bias here as the most recent bullish Risk Reversals I’ve put on have worked. Really though, all that has done is remind me that I should probably do more of these trades.

In a nutshell, a bullish Risk Reversal is a trade where we short naked puts and use those proceeds to pay for long calls. That’s right, the market pays me to get long!

The trade is put on for a small net credit (ideally), and the short-term goal is to ride an increase in the value of the calls which will allow us to sell a portion of them and use those proceeds to buy-to-close all the naked short puts. This then leaves us long the remaining portion of our calls for free! The calls could eventually reverse on us and go to zero, but we’ll still keep the credit we received when we originally put the trade on (plus whatever credit we may have gained when we sold some calls to close all the puts). This is a great situation to be in!

This type of trade works best on stocks that we’re bullish on and are experiencing elevated levels of implied volatility which is raising options values. We want to sell that juicy premium in the puts to finance our long calls purchase.

I generally prefer large cap stocks that don’t typically exhibit any large gapping price behavior. But the ultimate risk management move in these trades is to size the position such that if we were to get assigned against our short puts (meaning, we become owners of 100 shares of stock per each short put contract we hold), the value of the new long stock wouldn’t represent more than approximately 10% of my trading capital. This may seem conservative to some, or too much for others, but this is the level that feels right for me and my risk tolerance.

Here’s how a typical PnL graph for a bullish Risk Reversal would look:

This is a bullish Risk Reversal trade I did in $FCX November options recently. You can see that with FCX trading around $31.25, I sold the 28 puts for an 87 cents credit, and purchased the 36 calls for a 69 cents debit. The total combined net credit for the trade was 18 cents. So if absolutely nothing were to happen and both of these options expired away worthless, I’d keep that 18 cents as profit. Not what we’re playing for, but better than a loss, right?

We’re still in the trade as I type this, but we’ve already had an opportunity to sell 1/3rd of our calls and I used the proceeds to completely pay for covering all of my naked short puts. So now I’m free-riding some long 36 calls! Yahtzee!

Keep in mind, when I put these trades on, they don’t always work out. So, another way I minimize the risk of taking a large loss (besides proper position sizing), is to always have a risk management level in mind that is my “uncle” point. It doesn’t need to be anything complicated, but there has to be a level of clear support on the chart that, if broken, represents a clear signal that the bullish trend I’m riding has been busted. Once that level is broken, I’m out. No questions asked.

This is one of my favorite trades because I simply love the idea of having the short puts pay for my long calls position. And I love that I really only lose in 1 out of 5 scenarios — a large adverse move in the underlying. If the stock only goes down a little, stays completely flat, or only rises a small amount, then all the options expire worthless and I keep the initiation credit. And in the last of the 5 possible scenarios — a large up move — I can hit a homerun. I like my chances here.

Have you ever traded bullish Risk Reversals? I’d love to hear how you do it.

~ @chicagosean

Contributor(s)

Sean McLaughlin

Sean McLaughlin is a 25-year trading veteran, with trading experience in US Equities, Futures, Forex, Cryptocurrencies, and a current focus on equities and index options. A Former Member of the Chicago Board of Trade, Sean first began as a high frequency...

Stacking Credentials: A CPA’s Perspective on Pairing the CPA with CMT Designation - Part 1 of 2

Using anecdotal evidence from CMT Association sponsored events, LinkedIn, Bloomberg, and other sources, it seems that CMTs who also hold the CPA designation are extremely rare. The combination for me is attributed purely to my non-traditional career progression. A decade ago, I worked in the M&A tax group at a Big 4 accounting firm. Due to family circumstances, I pivoted my accounting/tax career to trading and ultimately combined my knowledge of accounting with my passion for the equity markets in sell-side research. Most of my sell-side colleagues hold a CFA and/or an MBA with few CPAs or PhDs and even fewer CMTs. I can generally categorize my peers into four categories: 1) some view technical analysis as “voodoo;” 2) some only believe stocks underperform their thesis for unspecified technical reasons when there was no news accompanying an adverse move; 3) some possess a cursory understanding of technical analysis but do not know how to apply it; and 4) some utilize it in the background with little to no public broadcast. All of these categories surprise me, since there is an All-American Institutional Investor category for technical analysis.

The basis of technical analysis is fundamental. Central to Dow Theory is the concept that Dow’s industrial and railroad averages should confirm a move because there is an economic rationale that goods provided and sold to customers should suggest that those goods were transported and delivered. Outside of the meme stock price action this year, companies on their way to bankruptcy generally do not trade in uptrends.

With the advent of intraday and tick charts, digitalization, and automation, the application of technical analysis has flourished greatly since the time of Charles Dow. Nevertheless, the core tenets that Dow postulated in his writings remain at the root of our application. Today some investors use technicals almost exclusively, and with quantitative investing, there is an element of technical analysis necessary in writing many algorithms. Technical analysis has become so encompassing that on a sliding scale from 0 to 100, the integration of technicals with fundamentals could sit anywhere on the scale, with the optimal spot likely in the middle.

CPAs are expected to exhibit professional skepticism which is immeasurable, but essentially requires CPAs to be inquisitive, question reasonableness, and test procedures. This is essentially the scientific method which technicians routinely employ. Furthermore, CPAs are instructed to practice conservatism which essentially instructs an accountant to avoid overstating revenue/assets and understating expenses/liabilities. While applied differently, technicians also exhibit conservatism. We know that most of the indicators in our toolbox are conservative. We look for divergences as a signal not necessarily to go long or short but as an indication potentially to move to cash, which is conservative. Does that mean we may miss a favorable move? Yes, of course! However, we are willing to accept it, because capital preservation in a time of uncertainty might better align with our risk profile.

As a CPA, I know that financial statements are reasonable estimates of a company’s financial position, operations, and funds flow; however, financial statements can be restated or reformatted in a way that negates comparability with competitors. Each company can select its own accounting methodology for various line items, which makes even a comparison of the same line item between two companies in the same sector with roughly the same attributes, difficult. Simply put, despite the time and cost of preparation and the Regulation G requirement to reconcile a non-GAAP measure to a GAAP measure, financial statements of companies are not necessarily comparable and oftentimes are determined using assumptions within defined parameters. In short, accounting is as much an art as a science.

I believe that there should be a fusion of the two methodologies – because they are complementary and not incompatible. Marrying the two disciplines enables an analyst to provide a holistic view of not just the company/sector, but the reasonableness of the assumptions – particularly entries, target prices, and valuation. Simply put, it is an alternative path to arrive at the same place – alpha generation.

Using the keep it simple approach, fundamental analysts can utilize technical analysis in the following ways:

Time rating changes
Determine relative strength and rank a coverage universe
Provide clients with perspective during market sell-offs and offer reasonable reversal levels
Adequately explain day-to-day market gyrations especially when there is no news
Identify confluences as a reasonable check to fundamental target prices
Offer clients actionable ideas to generate alpha

In an age when information is widely disseminated, the marriage of fundamental and technical analysis provides a value-added service. Technical analysis typically can be much more objective than fundamental analysis. For example, when drawing support and resistance lines, it is clear where a pivot high or low occurred; they are measurable and objective. Shares, units, or contracts actually traded at a particular level also are measurable. Yes, there are subjective elements to technical analysis and this subjectivity oftentimes causes the skeptics to discredit the entire discipline. But I advocate, especially when dealing with fundamentalists, to keep the approach purely factual and objective. Yes, point out a head and shoulders pattern when you see it but do not lead with it. Instead, lead with the facts and be sure the analysis is understandable to non-technicians. Over time, this approach should bode well for the integration of the two disciplines.

In Part 2, I will highlight the practical reason for the overlay of technical analysis with fundamental analysis.

Contributor(s)

John Letizia II, CPA, CMT, CFTe

John J. Letizia II, CPA, CMT, CFTe is a sell-side equity analyst. Prior to his time on the sell-side, John worked as a proprietary trader employing technical analysis for three years. John also has worked in both KPMG’s and Ernst & Young’s...

Book review - Day Trading the Dow Mini: A Practical Guide for Market Participation by Brad E. Stych

Brad Stych’s “Day Trading the Dow Mini” is a complete trading guide. Many books published today simply dive into technical analysis, fundamental analysis, or trading psychology. One thing I really liked seeing in this book was that it opened with information that is imperative to anyone looking to become a trader. The book first goes over the fundamentals of day trading and then delves into goal setting, what’s required for trading success, and choosing a trading style. The chapter on style is especially important, in my view, because choosing a suitable style for the trader is often overlooked and not given much thought. He even discusses how we need to consider our stage in life when figuring out our trading style.

Having established the prerequisites for successful trading, Brad then dives into more technical matters. Here again, he leaves no stone unturned. He discusses technology and what a trader needs to be aware of, whether it is internet connectivity or the mechanics of a trading platform. Many specific and actionable trading methods and set-ups are discussed for much of the book. One thing I really liked was the “Review” at the end of each chapter. Asking readers to reflect on key concepts, in my experience, is a great way to make sure things “stick.”

There are several chapters that are truly unique to this work. One of them showed a month of trading in the markets from Brad’s point of view. This is a very effective way to demonstrate all of the concepts that the book covered prior to that. In this chapter, he shows charts and talks through them. It really reinforces everything up to that point.

Another unique chapter goes into more detail on how traders actually learn. Brad discusses several different learning methods, from experimentation to imitation. Having read many trading books, this was new and enlightening information to come across for me.

Whether you are a brand new trader or someone who has traded for some time and is looking to expand your trading methods and techniques, “Day Trading the Dow Mini” is a good place to start.

Day Trading the Dow Mini: A Practical Guide for Market Participation (Third Edition)

by Brad E Stych, PhD, CMT

Brightstar Training LLC, 462 pages. $124.95

(Available only from the publisher at brightstartraining.com)

Contributor(s)

Jim Erdmier, CMT

Jim Erdmier, who holds a Chartered Market Technician (CMT) designation, has been trading privately and institutionally for 10 years in equities, FX, and futures. He is pursuing a degree in Finance and Computer Science at DePaul University. Jim is Co-Chair of the...

Global Ex. US Return: A Challenging Year for Passive Management

2021 highlighted the momentum-like nature of market cap weighted indices. Despite all the chop we saw from the average stock in the US, an index like the S&P 500 was able to stay above its 50-day moving average 91% of the time. Talk about strength of trend! 2021 was a very difficult year for investors seeking passive exposure to global ex. US equities. It’s easy to point to the monster returns achieved from the major US stock market averages, but around the globe other markets struggled to keep pace. In a passive world, it can feel as if market capitalization is all that matters. Majority of indices are constructed in a way that benefit from a type of momentum due to market cap weighting i.e., A company appreciates in value, simultaneously increasing its market cap, resulting in a larger index weighting and increased influence on the direction of said index. But what happens when the largest weighted components fail to keep up or just downright decline?

Passive global ex. US indices failed to achieve double digit returns in a year the S&P 500 returned +28.8% and the MSCI ACWI returned +19.3%. Due to market cap weighting, majority of these global ex. US indices carry their largest country exposure within Japan, China, and the UK. Even with UK equities returning +16.6% in 2021, an index such as the MSCI ACWI Ex. US displayed a relatively modest return of +7.1%. This underperformance can be attributed to Japan and China failing to participate in 2021’s global equity bull market. MSCI Japan and MSCI China index returned +2.4% and -22% respectively. Below is a 1-year percent scale chart of all three MSCI indices relative to the MSCI ACWI Index.

In terms of global market cap, the US accounts for nearly 60% of the world’s equity market cap. It can be said that a portfolio with greater than 60% allocated to the asset class is “technically” overweight. Wealth managers seeking increased exposure to developed Europe, Asia and emerging markets, saw a significant drag in performance this year. Especially if they sought passive index exposure. 2021 marked one of the widest performance differentials between the S&P 500 and the MSCI ACWI Ex. US over the last decade.

So what’s the deal? Do we remain “over-allocated” to the US or is there opportunity knocking in other parts of the world? The point of this post is not to provide a reccomendation – rather, to point out that despite global ex. US indices underperforming the US so dramatically, there are foreign stock indices in healthy uptrends, performing quite well on both an absolute and relative basis. Below are a handful of country specific indices I’ll be keeping an eye on in 2022.

MSCI Taiwan Index

Nifty 500 Index

MSCI Denmark Index

CAC 40 Index (France)

MSCI Saudi Arabia Index

MSCI Netherlands Index

MSCI Canada Index

MSCI Israel Index

It is not as if we’ll be trading any of these indices directly – but the evidence is there, the US is not the only region of the world that achieved superior returns in 2021. Passive global ex. US investments severely underperformed both the S&P 500 and the MSCI ACWI Index. 2021 is a great example of the shortfalls of passive management as it relates to the international equity sleeve of your portfolio. With 2/3 of the largest country exposures failing to participate in this year’s bull market, the MSCI ACWI Ex. US index never stood a chance.

What’s the solution?

I believe active management within the asset class is worth exploring. Whether that means independent security selection or hiring of a mutual fund manager, there is a need for active management in the international equity space. A review of strategies outside passive indexing is worth our time and attention.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.Please contact your financial professional for more information specific to your situation.

Contributor(s)

Shane C. Murphy, CMT

Shane Murphy is an Associate at Michael Roberts Associates Inc. an independent wealth management firm located in Syracuse, NY. Prior to that, Shane worked in portfolio construction and research for an independent RIA. He also has experience in municipal finance, working at...

Applications for New Association Directors

The Governance Committee of the CMT Association Board of Directors is now accepting applications for new Directors for the fiscal year commencing July 1, 2022. The Board is seeking to build a pipeline of future leaders by identifying members who can help move the Association forward. Directors-at-Large serve a three-year term.

In addition to the skills necessary to fulfill the obligations of the role and the desire to serve in a volunteer capacity to help further the mission of the CMT Association, applicants/nominees should exhibit the following characteristics:

PASSIONATE

Have a passion for technical analysis and furthering the mission of the CMT Association

POSITIVE

Encourage a positive and collaborative debate and discussion with a diverse group of volunteer leaders

PRESENT

Able to participate in regular conference calls, serve on various committees, as well as attend the Annual Symposium and other events during the year

PROACTIVE

Be an active participant in discussions, bringing past experiences from inside and outside the CMT to help further the organization

Members, Honorary Members, and Emeritus Members in good standing are invited to submit recommendations for consideration no later than February 21, 2022 via e-mail to admin@cmtassociation.org.

Contributor(s)

Salma Abdulla, CFA, CMT

Salma Abdulla, CFA, CMT is a Portfolio Manager for E. Magnus Oppenheim & Co., Inc. She joined the firm in 2005 and is responsible for equity research and portfolio management. Prior to joining E. Magnus Oppenheim & Co., Inc., Salma worked as...

Updates from the Eastern Hemisphere

Wish you all a happy new year!

The new year dawns on a new world where new waves of a global pandemic are slowly turning endemic. This is a world where we have gone from webinar fatigue to coming to terms with a hybrid life, part virtual, part real.

This new world brings CMT Association tremendous opportunity. Reflecting on 2021, and looking forward to 2022, I want to use this article to keep our members abreast with the developments on our eastern frontier.

APAC Development Committee: In early 2021, the board of directors set up a sub-committee to support our development in the Asia-Pacific region. The current members of this committee are Jamie Coutts (Chairperson), Akira Homma, Akshay Chinchalkar, Ananda Bhaumik and Jigar Mehta
2021 Asia Pacific Summit – October 2,3: This inaugural regional summit built on the successes of Summits in India, the Americas and Europe. It was a success with over 1000 registrations and participation from over 15 countries. The greater success was the involvement of volunteers from across Australia, Japan, Korea, Singapore, Hong Kong, Thailand, Vietnam, Malaysia, Philippines, Taiwan, Pakistan, India, UAE, Saudi Arabia and more
Volunteer Engagement: Across 9 Asian countries, CMT Volunteers have put their hands up to support the growth of our Association. We welcome volunteers to participate.
Engaging Academia: 9 new business schools and universities joined our Academic Partner Program and have actively participated in our initiatives
- Internship Challenge: An APac wide challenge involving schools in our Academic Partner Program engaged students and faculty members, leading to greater awareness of the CMT Program
- Investment Challenge: A pilot version of this virtual challenge was run in India, with over 360 participants. The top 7 performers were even interviewed by a broking house for roles on their prop desk.
- Campus Ambassador Program: 2 students from each of our academic partners are invited to work on campus, in a live project to build awareness about CMT on campus
Employer engagements: We were able to spread awareness about technical analysis and the CMT program across institutional and retail broking houses by organising Client Advisor Workflow Workshops
CMT Association Discord Server: Mohit Handa led the development of a server for the CMT Association on Discord, a communication platform that offers chat, audio and video communication across both desktop and mobile. It was launched as a pilot in India and found to be robust and successful. It is now open for all to join. There are general areas for non-members and premium sections for members.
- Join us at go.staging.cmtassociation.org/discord
Social Media Campaign: Interns from the 2020 Internship challenge worked with us in 2021 and created over 100 pieces of social media content
Participating Prep Providers: A new program for CMT Program prep providers have created opportunities for growth in India, Bangladesh, Myanmar, Mongolia, Singapore and Korea
Corporate Partnerships: Firms like Refinitiv have invited CMT charter holders to conduct knowledge sessions on technical analysis for their customers
CMT Asia Pacific office: Our office in Mumbai is now able to support members and candidates across the Asia Pacific region

In future editions of this article, I will dive deeper into our ongoing efforts and experiments in this part of the world.

Feel free to reach out to me on Discord if you would like to know more. My handle is Joel Pannikot#2112

I wish you and yours a new year full of knowledge, networking and personal growth.

Contributor(s)

Joel Pannikot

Joel Pannikot (pronounced as Punny-Quote) is the Managing Director of Chartered Market Technician Private Limited and serves as the Head of the Asia-Pacific region for the CMT Association. In this role, he is committed to advancing the field of technical analysis through...