Finance | Alessandro Perilli

Asset Class Total Returns Since 2011

peris — Thu, 04 Apr 2024 11:10:37 +0000

“Next quarter for all practical purposes is done already and it has probably been done for a couple of years”

peris — Mon, 04 Jul 2022 15:26:04 +0000

In a talk at the Internet Association’s annual gala last week, Bezos was talking about what makes his e-commerce and cloud company tick. As well as being customer focused, the CEO also said that the company is “long-term oriented”.

“I ask everybody to not think in two-to-three-year time frames, but to think in five-to-seven-year time frames,” Bezos told an audience in Washington, D.C.

“When somebody … congratulates Amazon on a good quarter … I say thank you. But what I’m thinking to myself is … those quarterly results were actually pretty much fully baked about 3 years ago. Today I’m working on a quarter that is going to happen in 2020. Not next quarter. Next quarter for all practical purposes is done already and it has probably been done for a couple of years.”

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The terms “bull” and “bear”, referred to financial markets, originated in Britain in the early 18th century

peris — Sat, 21 May 2022 07:50:19 +0000

According to Anatoly Liberman, a linguist at the University of Minnesota, the use of “bull” and “bear” to refer to financial optimists and pessimists, respectively, originated in Britain in the early 18th century.

“Bull” evoked the bellowing of an eager buyer. “Bear” appears to have come from an early proverbial expression, “to sell the bear’s skin before one has caught the bear”—an apt metaphor for a short sale, in which a trader sells borrowed shares in hopes of buying them back at a lower price.

The terms “bull market” and “bear market,” however, didn’t arise until the 1850s, says lexicographer Barry Popik. Even then, they often referred to only a single day’s action.

“The market was feverish this morning, with slight advances in some securities and a falling off in others,” reported the New York Herald on Oct. 28, 1855. “It would, undoubtedly, have been a bull market but for the report…of two or three failures.”

As late as 1874, when Matthew Hale Smith published his chronicle “Bulls and Bears of New York,” the term “bull market” still looked strange to readers. “They never buy on what is called a Bull market,” Smith wrote about leading speculators, “but always when stocks are low.”

For decades, bull and bear markets referred not to long-term moves in the stock market as a whole, but to ephemeral price action in a single asset.

“The bull market in wheat Saturday lasted about an hour,” reported The Wall Street Journal on May 15, 1899.

“I couldn’t stem the bull market” in one day’s trading of an Iowa railroad stock, said a character in Edward Everett Rose’s 1910 novel, “Father Kelly of the Rosary.”

The very first issue of the Journal, on July 8, 1889, reported: “The bull market of 1885 began July 2,” with the average price of 12 stocks (including Pacific Mail Steamship and Western Union) at 61.49, and peaked May 18, 1887 at 93.27. That was nearly a 52% gain.

But the Journal didn’t define a bull market, and many decades would pass before it did.

Charles Henry Dow, co-founder of the Journal, wrote—not very helpfully—in 1902: “It is a bull period as long as the average of one high point exceeds that of previous high points. It is a bear period when the low point becomes lower than the previous low points.”

Even during the roaring 1920s, the Journal rarely used the term “bull market.”

In December 1949, the Magazine of Wall Street wrote: “It is simply not possible to arrive at a precise definition of so variable a thing as a bull market or bear market.” Settling on “a considerable rise in stock prices over a considerable period of time,” the magazine cited the action in the Dow between May 1947 and June 1948—an 18% gain—as an example of a bull market.

The 20% threshold for bull and bear markets began to take hold only “in the latter 1950s and early 1960s,” said John Prestbo, former markets editor at the Journal. “It became the seed around which consensus formed, helped partly by the financial press [including Dow Jones, the Journal’s parent] adopting it as a simplistic—and brief—definition.”

An article in the New York Times on July 23, 1962, pegged May 28 of that year as the beginning of a bear market. That was the day the S&P 500 was first down 20% from its high in 1961, according to Birinyi Associates, a research firm in Westport, Conn.

The 20% threshold took a long time to gain traction, however.

In January 1967, as the Dow approached a 14% gain from its trough the previous October, the Journal said many analysts were already “pronouncing the words ‘bull market’ again for the first time in a long while.”

On Sept. 13, 1970, with stocks already up 22% off their lows that spring, the Times still thought it was too soon to declare a bull market.

Only after the epic performance of the 1980s and 1990s, when stocks delivered roughly 18% average annual returns, did the definitions with a 20% threshold take hold for good.

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Company insiders often possess only the illusion of knowledge, not the real thing

peris — Sat, 19 Mar 2022 11:28:58 +0000

The most painful perversion of Lynch’s rule occurred in corporate retirement plans. If you’re supposed to “buy what you know,” then what could possibly be a better investment for your 401(k) than your own company’s stock? After all, you work there; don’t you know more about the company than an outsider ever could? Sadly, the ... Read more

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Traders tend to think in terms of important round numbers, such as 10, 20, 25, 50, 75, 100

peris — Sat, 05 Mar 2022 10:54:23 +0000

Traders tend to think in terms of important round numbers, such as 10, 20, 25, 50, 75, 100 (and multiples of 1000), as price objectives and act accordingly.

These round numbers, therefore, will often act as “psychological” support or resistance levels. A trader can use this information to begin taking profits as an important round number is approached.

The gold market is an excellent example of this phenomenon. The 1982 bear market low was right at $ 300. The market then rallied to just above $ 500 in the first quarter of 1983 before falling to $ 400. A gold rally in 1987 stopped at $ 500 again. From 1990 to 1997, gold failed each attempt to break through $ 400. The Dow Jones Industrial Average has shown a tendency to stall at multiples of 1000.

One trading application of this principle is to avoid placing trading orders right at these obvious round numbers.

For example, if the trader is trying to buy into a short term market dip in an uptrend, it would make sense to place limit orders just above an important round number. Because others are trying to buy the market at the round number, the market may never get there. Traders looking to sell on a bounce should place resting sell orders just below round numbers.

The opposite would be true when placing protective stops on existing positions. As a general rule, avoid placing protective stops at obvious round numbers.

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A 3% share price change might be enough to convince market participants that they did a mistake

peris — Sat, 05 Mar 2022 10:49:12 +0000

it was stated that support and resistance levels reverse roles only after a significant penetration. But what constitutes significant? There is quite a bit of subjectivity involved here in determining whether a penetration is significant or not.

As a benchmark, some chartists use a 3% penetration as a criteria, particularly for major support and resistance levels. Shorter term support and resistance areas would probably require a much smaller number, like 1%.

In reality, each analyst must decide for himself or herself what constitutes a significant penetration.

It’s important to remember, however, that support and resistance areas only reverse roles when the market moves far enough away to convince the market participants that they have made a mistake. The farther away the market moves, the more convinced they become.

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The psychology of support and resistance

peris — Sat, 05 Mar 2022 08:39:06 +0000

let’s divide the market participants into three categories—the longs, the shorts, and the uncommitted. The longs are those traders who have already purchased contracts; the shorts are those who have already committed themselves to the sell side; the uncommitted are those who have either gotten out of the market or remain undecided as to which side to enter.

Let’s assume that a market starts to move higher from a support area where prices have been fluctuating for some time.

The longs (those who bought near the support area) are delighted, but regret not having bought more. If the market would dip back near that support area again, they could add to their long positions.

The shorts now realize (or strongly suspect) that they are on the wrong side of the market. (How far the market has moved away from that support area will greatly influence these decisions, but we’ll come back to that point a bit later.) The shorts are hoping (and praying) for a dip back to that area where they went short so they can get out of the market where they got in (their break even point).

Those sitting on the sidelines can be divided into two groups—those who never had a position and those who, for one reason or another, liquidated previously held long positions in the support area.
The latter group are, of course, mad at themselves for liquidating their longs prematurely and are hoping for another chance to reinstate those longs near where they sold them.
The final group, the undecided, now realize that prices are going higher and resolve to enter the market on the long side on the next good buying opportunity.

All four groups are resolved to “buy the next dip.” They all have a “vested interest” in that support area under the market.

Naturally, if prices do decline near that support, renewed buying by all four groups will materialize to push prices up.
…
Now let’s turn the tables and imagine that, instead of moving higher, prices move lower.
In the previous example, because prices advanced, the combined reaction of the market participants caused each downside reaction to be met with additional buying (thereby creating new support).

However, if prices start to drop and move below the previous support area, the reaction becomes just the opposite. All those who bought in the support area now realize that they made a mistake. For futures traders, their brokers are now calling frantically for more margin money.
Because of the highly leveraged nature of futures trading, traders cannot sit with losses very long. They must put up additional margin money or liquidate their losing positions.

What created the previous support in the first place was the predominance of buy orders under the market. Now, however, all of the previous buy orders under the market have become sell orders over the market. Support has become resistance. And the more significant that previous support area was—that is, the more recent and the more trading that took place there—the more potent it now becomes as a resistance area.

All of the factors that created support by the three categories of participants—the longs, the shorts, and the uncommitted—will now function to put a ceiling over prices on subsequent rallies or bounces.
…
Chart analysis is actually a study of human psychology and the reactions of traders to changing market conditions.

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Each market trend in Technical Analysis is a portion of its next larger trend

peris — Sat, 05 Mar 2022 07:56:04 +0000

Trend is usually broken down into the three categories mentioned in the previous chapter. Those three categories are the major, intermediate, and near term trends.

In reality, there are almost an infinite number of trends interacting with one another, from the very short term trends covering minutes and hours to superlong trends lasting 50 or 100 years.
Most technicians, however, limit trend classifications to three. There is a certain amount of ambiguity, however, as to how different analysts define each trend.

Dow Theory, for example, classifies the major trend as being in effect for longer than a year. Because futures traders operate in a shorter time dimension than do stock investors, I would be inclined to shorten the major trend to anything over six months in the commodity markets.

Dow defined the intermediate, or secondary, trend as three weeks to as many months, which also appears about right for the futures markets.

The near term trend is usually defined as anything less than two or three weeks.

Each trend becomes a portion of its next larger trend. For example, the intermediate trend would be a correction in the major trend. In a long term uptrend, the market pauses to correct itself for a couple of months before resuming its upward path. That secondary correction would itself consist of shorter waves that would be identified as near term dips and rallies.

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Technical Analysis often fails because it’s applied to trendless periods

peris — Sat, 05 Mar 2022 07:52:07 +0000

for at least a third of the time, by a conservative estimate, prices move in a flat, horizontal pattern that is referred to as a trading range.

This type of sideways action reflects a period of equilibrium in the price level where the forces of supply and demand are in a state of relative balance. (If you’ll recall, Dow Theory refers to this type of pattern as a line.)
Although we’ve defined a flat market as having a sideways trend, it is more commonly referred to as being trendless.

Most technical tools and systems are trend-following in nature, which means that they are primarily designed for markets that are moving up or down. They usually work very poorly, or not at all, when markets enter these lateral or “trendless” phases.

It is during these periods of sideways market movement that technical traders experience their greatest frustration, and systems traders their greatest equity losses.

A trend-following system, by its very definition, needs a trend in order to do its stuff. The failure here lies not with the system. Rather, the failure lies with the trader who is attempting to apply a system designed for trending markets into a nontrending market environment.

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Normal movements vs catastrophic movements in the stock market

peris — Sun, 13 Feb 2022 16:30:38 +0000

TOMIC is willing to take the risk of normal moves in the market, such as plus or minus 5% price movement, but it reinsures the catastrophic risk beyond.
To reinsure this risk, TOMIC could buy out-of-the-money puts on the S&P 500 to protect against a large (25%) downturn in the market.

Another alternative to reinsure could be to buy out-of-the-money calls on the VIX. This assumes that a large drop in the S&P 500 would lead to a large spike in the VIX.

Depending on the pricing of the SPX puts and the VIX calls, TOMIC could use one or both options to offload the catastrophic risk.

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