You Then Know Something Went Wrong

You know something went wrong when you see and hear the same memes and no original thinking. This time is different because many people can make profits without understanding markets due of economic policies and price level control.

I know there is something wrong when I keep seeing the same charts with those weekly or monthly RSI indicators spring up like mushrooms in financial media.

I suspect there is something fundamentally wrong going on when I see scores of people becoming overnight fixed income experts when it is clear they lack the knowledge. Fixed income is a mathematical area and not your everyday penny stocks choice.

I am convinced there is something wrong when an increasingly large number of people use data to confirm their bias instead of doing unbiased analysis.

I become very skeptical when the passive indexers, a.k.a. “do nothing crowd”, become arrogant and believe they really know something about the markets instead of thanking the Fed for being so lucky to be making money while golfing.

I am afraid something is not going well when I see suddenly thousands of people out of nowhere posing as blockchain and cryptocurrency experts while the original inventor is hiding in anonymity.

I am also disappointed because the moral hazard of unexpected proportions that central banks have cultivated has had a huge negative impact on quantitative trading with traders getting frustrated and quitting. Central bankers do not want price discovery by traders but they want to be setting the price level in all markets. This is of course a crime against economics and free markets but it will go unpunished.

I have some of my own suggestions reference the above:

The RSI is a momentum indicator and says nothing about tops or bottoms. If the same conditions persist the RSI signals continuation of the trend. It is unexpected events that cause corrections, not RSI values, although markets are more sensitive to shocks when RSI values are extreme, a shock is still needed for a corrections.

Fixed income is a difficult subject. Trying to draw conclusion about the economy or the markets by looking at yield charts or spreads of yields is like looking out of the window in an effort to understand how the weather is going to be in 10 days. Besides, most people with even an MBA do not understand fixed income. This is a highly mathematical market, not for wannabe economists or traders.

I saw someone in Twitter the other day who is infatuated with statistics but a good person otherwise to refer to the fact that there are so many new all-time highs this year alone when in the 2000s uptrend there were only a couple. And what is this supposed to mean?

Someone understanding simple price action will realize that the 2000s was the path towards recapturing the 2000 top highs. It is only natural that there were few all-time highs towards the end of the uptrend. A fair comparison should be made with the 1990s uptrend, as shown in the chart below (from this week’s premium report.)

It may be seen that in the last 252 days there are 77 new all-time highs but in early 1996 there were 91. This means that this current uptrend in not as strong as the 1990s uptrend in this particular sense.

Passive indexers should maybe refrain from appearing as market experts to protect their own dignity. Most of them do not have enough skin-in-the-game for that. They were lucky but if they are forced to trade they will probably lose. The ban on trading by central banks and QE are their only advantages and edge.

As far as all these cryptocurrency and blockchain experts, this is an ominous sign of the times. When too many people who do not understand a subject appear as experts the future is bleak. Bridges will not collapse because not too many can pose as bridge engineering experts but cryptocurrencies and markets in general collapse when too many think they know what they do not comprehend.

One thing I am sure of is that after these markets revert to normality, funds and banks will be looking for real traders but all they will get is some people who were exposed to reckless speculation in crypto markets.

Least, but no last, the crimes committed by central banks have a huge price tag. Someone will pay and it is not going to be them, it is going to be you.

This is what went wrong and why this time if different but in a seriously negative way.

If you have any questions or comments, happy to connect on Twitter:@mikeharrisNY

This article was originally published in Price Action Lab Blog

About the author: Michael Harris is a trader and best selling author. He is also the developer of the first commercial software for identifying parameter-less patterns in price action 17 years ago. In the last seven years he has worked on the development of DLPAL, a software program that can be used to identify short-term anomalies in market data for use with fixed and machine learning models. Click here for more.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Michael Harris

Ex-fixed income and ex-hedge fund quant, blogger, book author, and developer of DLPAL machine learning software. No investment advice.