Thursday, May 31, 2012

do away with the fed with the dow/gold ratio

hate the fed? if you want to see the market position corrected for all monetary interventions (and/or inflation) then look at the dow/gold ratio. here's a picture of what i'm talking about:

5 year chart of the dow/gold ratio, weekly aggregation period.
the reason why this works is that the ratio tells you the value of the market in terms of a commodity that is an inherently stable store of value. gold reserves grow by roughly 2% a year and are not depleted much by industrial applications - very high percentages of all the the gold ever mined is still in circulation.

however, i do not endorse a gold standard. the reasoning i employ to come to this conclusion involves understanding why it was that the us gold standard was dropped. the basic overriding reason was that a gold standard potentially cedes control of the economy to foreign powers. if you have a real gold standard then you cannot then also prevent redemption. since the us currency is the reserve currency of the world then foreign countries are required to hold dollars. if foreign countries start redeeming their reserve dollars then this reduces the liquidity of the dollar thus pushing the dollar up in price. a strong dollar makes a recession worse by pricing us goods and services too high for export. the 30's depression, it is widely acknowleged, was made worse by france when france got nervous and redeemed dollars. france again began redeeming dollars in 1970 and president nixon, well studied in the depression economics, was quick to shut it down by shifting to a non-commodity standard, or fiat currency. from this viewpoint i would have to question the intelligence and/or loyalties of any politician that endorses a return to the gold standard.

here's how to create a dow/gold ratio chart on the thinkDesktop platform from td ameritrade.

Saturday, May 19, 2012

pay attention to the weekly chart with pps

last month was disappointing for me. let's just say that profits for the year have been eroded. that deserves no pity and i mention it only to 'splain why i have not posted for while. its been a period of soul-searching and self-doubt. i mean, how can i put my stuff out there without being a master of the universe!? so i have to remind myself that the blog is about sharing a learning experience and i am, after all, only a smalldog investor. alas, the learning experience involves hindsights, so here is what i have learned this month - pay attention to the weekly chart with pps!

here's a picture of what I'm talking about:

weekly chart of spy with pps indicator
first of all, the weekly charts provide a cleaner view of the market for monthly spread trading. i am switching into a monthly spread trading style because i have some opportunities developing that will not allow me to watch the market intraday. even for intraday, it is my experience that support and resistance levels drawn from a weekly chart carry much more significance.

secondly, the pps (person's proprietary study, available in the free thinkdesktop platform from td ameritrade) indicator is the small up and down arrows. my observation is that if i had put on a vertical spread at the time and direction of the arrows i would have been generally happy with the results.  with hindsight, i certainly would have been better off had i at least used the circled arrow as an opportunity to close my longs (woulda, coulda, shoulda.)

john person, the proprieter of the pps study, does not disclose its workings (you can listen to john on the sept 28, 2011 recorded seminar.) there is speculation that pps measures this or that moving average crossover but jp has denied this. i prefer to think that pps is what is known as a feed-forward network. a feed-forward network is the static, non-learning, part of a neural network - it emulates the neural workings of a highly trained savant. if pps is a feed-forward network then it wouldn't help me to know its inner workings because it would be just a matrix of weighting numbers. in any case, it is my observation that pps does identify reversals sooner than most other indicators and i plan to weight it more heavily in my own neural network.

lastly, i am looking at weekly charts now because they work better with my seasonality studies, sdi_seapro5 and sdi_seapro7. the seapro (seasonal projection) studies plot the average seasonal move starting on a specified anchor date. the reason i think they work better on a weekly rather than a daily chart is because of calendar issues. you see, the number of trading days in a year can vary on the year (leap years have 253 bars, and weekends don't always fall on the same dates.) going back 252 bars on daily chart does not always get you back to the same, year-ago date on the calendar, just more-or-less the same date. also, the number of trading days per year varies by the product. futures and forex products do not take all of the holidays that the us stock market does, so they have 8 more trading days in a year, or 260, more or less. however, there are far fewer deviations from a 52 week trading year*, so it is a better comparison to average the performance of the weeks that are multiples of 52 ago.

so here's how my weekly chart looks with these seapro studies:
weekly spy with pps and seasonal projections
the solid purple line is a projection of an average of the last five 52-week seasons anchored on the current week. the green line is the same projection anchored 10 weeks back. looking forward it looks like the market is on track to erase the gains for the year, retesting the 2011 close (blue dots from the sdi_yearclose study on sideline,) sometime in june. however, i would not be at all surprised, this time, if a green pps arrow appears and we bounce before june as this market has been surprising even the seasoned pro's, judging from what i hear on tastytrade.

*2007 had 53 weeks because the 53rd week began on december 31, according to the way tos delineates their weeks.