Fundamentals vs Technicals

There are 2 basic types of trading strategies:  1. trend following and  2. counter trend mean reversion.  Back in the 1970s and 1980s, before the growth of trend following CTAs and systematic trading, trend following provided an edge, because movements were slower and not many were trading technical breakouts.  Fast forward to now.  Trend following doesn't work anymore.  If you look up Jim Simons TED talk, he talks briefly about this. 

So if trend following doesn't work, does mean reversion counter trend work now?  No it doesn't, if you look at all the asset classes as a whole.  If counter trend trading worked now, or worked well in the past, you would have a bunch of counter trend trading funds gathering up a lot of assets.  That's not happening. 

This doesn't mean that one can't be successful trading counter trend or trend following.  It just means that just using simple technical rules for trend following doesn't work anymore, and same goes for simple technical rules for counter trend trading. 

If you read the Market Wizards books, back in the old days, fundamentals were the main focus for traders, not technicals.  It is the opposite now.  Technicals now seem like the main focus for traders, not fundamentals.  So in an odd way, there is more edge from focusing on fundamental analysis now than there is in focusing on technical analysis.  But of course, its much easier to look at a chart and be an "expert".  Drawing trendlines and talking support/resistance is easy. 

Reading through SEC filings, seeing where the supply is coming from and where the demand takes more time and analysis.  What I've found out over the years is that it takes a lot more work to be knowledgeable about each individual stock than it is to be knowledgeable about the stock market.  But with that extra work comes a much bigger edge. 

The edges you get in individual stocks, especially small cap and micro cap stocks can be huge, especially if the majority on the other side of your trade are retail traders.  The edges you get in trading SPX and Treasuries is small, and getting smaller. 

As much as hedge funds have underperformed over the years, as a whole, they are still much smarter than retail traders and avoid obvious mistakes.  And a subset within the hedge fund community consistently generate alpha and make it tougher for people like me to make a living from trading. 

It is no coincidence that after an 11 year bull market, you finally have heavy retail participation in stocks.  After a long bull market, the price efficiency of individual stocks goes down, especially retail trader dominated stocks, like what you see in the Robinhood popularity lists.  The edges in individual stocks are getting bigger, while the edges in the SPX and NDX are getting smaller. 

Paradoxically, it is much easier to make money short selling in a raging bull market with heavy retail participation than in a bear market when most stocks are in downtrends.  You see much bigger short term price dislocations from heavy retail trading flows in a bull market like this.  The blowoff top price moves are more predictable than longer term price depreciation in deteriorating businesses. 

Here are 2 charts of retail saturated stocks, GNUS and KTOV.

These are in different phases of the pump and dump cycle.  The price of the stock usually tops out before the numbers of users holding the stock tops out.  Right now, KTOV looks to be where GNUS was 3 weeks ago.  The rise in the number of users holding these pump and dumps is fast, but the decline is very slow.  This means there are a lot of traders unwilling to take losses and have become long term bagholders. 

The flavor of the week changes, last week it was coronavirus stocks, and now it is electric vehicles and EV related stocks.  A few weeks ago it was Black Lives Matter stocks.  The one constant is that after each of these pump and dump cycles, a huge number of bagholders are left, hoping, praying for another pump to get out. 

Looking at the Stocktwits boards for these stocks is like going back 20 years to the dotcom bubble and reading the Yahoo message boards.  The tickers change, but the pumping doesn't.  Have noticed that people have gotten lazier, and are pumping with fewer words.  The quality is the same, which is really bad.

We've rallied the last 2 days on not as bad as expected Covid case numbers and  because we're range bound.  I will wait to put on the SPX shorts again, let the bulls roam and feed for a while.