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in my own portfolio, is really a very aggressive approach that utilizes short-selling to make profits in overvalued situations and also trades the S&P to balance the short-term risk in the market. |
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On the other hand, there are hedge funds such as LTCM. As I understand it, hedge funds like LTCM try to capture the difference in spreads between debt instruments of different countries as one of their strategies. In my October 19, 1997, forecast, "Whistling Past the Graveyard" (which correctly anticipated the October 27 collapse), I mentioned that one technical indicator called the "Ted Spread" (the spread in interest rates between T-bills and Eurodollars) had widened to 95 points, and that normally a spread of 85 points would be a warning sign to the markets. Historically, the Ted Spread has been a measure of global risk, because Eurodollars are uninsured, whereas Treasury bills are very safe. Well, using this analogy, it stands to reason that since hedge funds are trying to capture what they think are inordinately wide spreads between issuers of different quality, they are doing what no professional trader should do, and therefore it is not surprising that they should get burned. Putting this another way, they were "fading" a warning sign! They were trying to put their market opinion above that of the market. This is a form of market arrogance, and usually, the practitioners of arrogance eventually have to learn humility. |
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Neal: So you see trading Chicago style as something that must evolve into a combination of technical and fundamental analysis? |
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Tom: Yes. I understand floor traders use this approach already. I believe that every trader would improve their performance if they were to adopt the Chicago-style approach that many floor "locals" use. With the proper application of technical tools, an intermediate-term investment approach will outperform every time, especially because avoiding market downdraft periods will allow the investor to maintain hard-earned profits from bull markets. Investing should be less like rocket science and more |
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