Sunday, October 31, 2004

Second Guessing Your System

System trading can be difficult. I'm at all-time equity highs with my trading accounts. My systems have performed extremely well during the month of October. But, sometimes you get torn between your personal feelings about the market and your systems direction.

I've read many blogs expecting a post-election rally. Then on Bulls & Bears I noticed every person on the show from Gary B. Smith to Tobin Smith are expecting a post-election rally. This concerns me greatly. Because you know what? I'm expecting a post-election rally too. What happens when everyone leans to one-side? The other side is the place where money is made.

Normally the market is forward looking. But, every so often the market condenses the length of its viewpoint. Instead of looking 6 to 9 months ahead...a single event draws the market's attention...distracting everyone away from the big picture. I'm afraid that's what is happening now. All market participants are focusing on the Presidential Election...and that's it. Every since I noticed that everyone was leaning to one side...I've been asking myself, "What will market participants have to look forward to after the election?"

I've searched my brain all weekend for the answer to that question. And I keep coming back to oil prices. I'm afraid once the election is over...the fog will clear and everyone will then see the real effects of high oil prices. Earnings will be effected. Period. Consumer spending will be effected. Period. There's no denying this. Whoever is elected President cannot change what has already happened. High oil prices have effected our economy. In the next few days investors will again turn their attention to this matter.

Of course, this goes completely against what my systems are trading. Heck, I have 5 systems long the QQQ right now. All expect a minimum of a 5% up move in the QQQ. Only .60% move has occurred since the systems have been triggered. So, we still have a ways to go system wise.

Due to the confusion of my hunch and my systems I reviewed the Nasdaq, S&P 500, and DJ-30 charts. I wanted to see where they were trading in relation to their trendlines. You'll see in the following 3 charts that 2 of the 3 are hitting the top of their downtrend channels.

After reviewing these charts, the chances for a mid-term rally after this election look bleak. In fact, analyzing the charts did nothing but confirm my hunch that we're in a top in the market...loaded with many players on the wrong side.

I'll be the first to strength is my systems. I'm a good trading system developer. In fact, 98% of my equity performance over the past 3 years have come from my systems. My trading instincts do not perform as well. So, my initial impression is to keep my systems going and let them do their job. But, it sure smells like a nice little opportunity to cash out near the top of my equity curve, short the market, and buyback my systems at a much better price. Of course, many system traders have fallen prey to this exact syndrome of second guessing. Can I stay strong? Or do I know better than my systems? Looks like I'll find out in the next few days.

Until then...

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