Modern Trader - June 2018

2Takes
Tariffs
on
5 Power Trading
Techniques 31 New Timely
Trade Ideas 46th Anniversary
Year
Dumping indispensable trading data since 1972 “Best Business to Business Magazine”
— Niche Media Awards
Volatility:
Hedge
Funds’
Return
Driver
Crypto ABCs
& a New Index
Trade Will
Tariffs
Wars
End
Bull
Run?
Artful Investing:
06.18 • issue 544
moderntrader.com
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06.18 • Issue 544
Trade Wars & the

Return of Volatility
FEATURE STORIES
30 Protectionism, Tariffs
& Trading a Trade War
A close look at market opportunities
from trade war chaos.
36 Trade Wars, Stock Index
Futures & Interest Rates
Can low interest rates deliver
the equity bull market through
the latest market threat?
40 Target Volatility: Equity Hedge
Funds’ Real Source of Alpha?
Active hedge funds deliver a
30 passive solution in Target Volatility.
46 Mainstreaming cryptocurrencies
As cryptocurrencies grows as an asset
class, its constituents and potential
investors need an index to benchmark
performance.
78 Energy Outlook
2020 Crude Vision
80 Futures
Trading system shopping
40
82 Closing Tick
Managing change is ultimate
investment strategy
Cover Art N E Torello

Crude Folio Eddie Award: Best Single Article Business, Banking & Finance
Vision (April 2017—The Banana Republic of Snapchat), Finalist • Folio Eddie
Award: Best Full Issue Business, Banking & Finance (January 2017—
Cannabis), Finalist • Min’s Magazine Media Award: Best Single Magazine
Issue (January 2017—Cannabis) Finalist • Min’s Magazine Media Award:
Best Cover Design Portfolio, Finalist • Nichee Award 2017: Winner Best
Business-To-Business Magazine Of The Year • American Society Of
Magazine Editors People’s Choice Award: Winner Best Political Campaign
46 78 Cover Of 2016 • Min’s Magazine Media Award: Best Feature Article (July
2015-Sell Stocks Now) Finalist • Folio Eddie Award: Best Editorial Full
Issue Business, Banking & Finance (July 2015—Premiere Issue) Finalist
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4 | MODERN TRADER | June 2018 M o d e r nTr a d e r. c o m

TRADE WITH A CLEAR ADVANTAGE.
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Commission comparison is based on published website commission schedules for retail accounts, as of 3/13/2017, for E*Trade, Schwab, and TD Ameritrade for online U.S. equity trades. For E*Trade: $6.95
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§
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Reliability, Research Tools, Investment Research, Portfolio Analysis and Reports, and Educational Resources. January 2017: Fidelity ranked in the top two in all 13 categories. Fidelity was named first in Research
Tools, Portfolio Analysis and Reports, Investment Research, Educational Resources, and Planning Tools. January 2018: Fidelity ranked in the top five in 13 out of 14 categories. Fidelity was named first in Trade
Reliability, Site Performance, Customer Service, Research Tools, Investment Research, Low-Cost/Free ETF Trading, Portfolio Analysis & Reports, Educational Resources, and Investment and Retirement Planning
Tools. Results in 2017 and 2018 were based on having the highest Customer Experience Index within the categories composing the survey, as scored by 4,752 and 5,052 respondents, respectively, in the survey
conducted by Investor’s Business Daily’s polling partner, TechnoMetrica Market Intelligence. © Investor’s Business Daily, Inc. All rights reserved.
Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2018 FMR LLC. All rights reserved. 791958.11.0
06.18 • Issue 544
MODERN TRADER
Editor-in-Chief
Daniel P. Collins
dc@moderntrader.com
Managing &
Digital Editor
Yesenia Duran
yd@moderntrader.com
Features Editor
49 Garrett Baldwin
Contributing Editor
Murray A. Ruggiero, Jr.
TRADES 24 Spin-Offs 67 Advanced Technique
13 Buy IQ – Baidu Cryptocurrencies from Creative Director
= 24% upside the Inside Out Nicholas E. Torello
Apple building
a bullish base 26 COT 72 Paper Trade Advertising
Richard Holcomb
14 Sell Weaker dollar pushing Implied vs. Realized
Non-Endemic Ad
Buffett bailed on IBM. currency, Treasury & Volatility & the VIX Solutions
Is Watson next? equity sectors ads@alphapages.com
AFTER THE BELL
15 Buy 27 ETFs THE ALPHA
Enron’s successor, Artful Investing PAGES, LLC
Leveraging the
EOG, is a buy Chief Content
herd mentality 49 Art as an Investment:
Officer & Publisher
16 Sell The pros & cons Jeff Joseph
TECHNIQUES & TACTICS
Is Whirlpool @alphapagesceo
53 The nexus of
circling the drain? 57 Chart Patterns jj@alphapages.com
art & finance
Volatility & FANTAG Modern Trader
17 Earnings
Stock Patterns 54 Breakout Magazine
The slippery slope
Crude technical The Alpha Pages
of steel tariffs 61 Technique 107 W. Van Buren
continuation
18 Industries Stormy Channels Suite 204
Two hot computer DEPARTMENTS Chicago, Ill. 60605
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23 Options 55 picks & Gartman’s Reprints
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Trade war trade gold call
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6 | MODERN TRADER | June 2018 MODERN TRADER.COM

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OPENING BELL
2Takes
Tariffs
on
5 Power Trading
Techniques 31 New Timely
Trade Ideas 46th Anniversary
Year
Industry insights from a

28-year trading industry veteran. Dumping indispensable trading data since 1972 “Best Business to Business Magazine”
— Niche Media Awards
Volatility:
Trade war Hedge
Funds’
trending
President Franklin Roosevelt is famous
Return
Driver
Crypto ABCs
for the statement, “The only thing we have
& a New Index
to fear is fear itself.” It is one of the most
repeated presidential quotes. It basically
suggests that decisions born of fear often
turn out bad, sometimes even disastrous.
What brings this quote to mind is the
burgeoning trade war brought on by the
current administration. Fear of the fruits of
globalization and a misunderstanding of Trade Will
Tariffs
Wars
trade deficits has led to this trend toward End
protectionism. Bull
Most financial professionals detest Run?
tariffs. They point to examples from the
past —Smoot-Hawley — as evidence of how Artful Investing:
disastrous this rode can be. “Free markets 06.18 • issue 544
moderntrader.com
the Nexus of Art & Finance
for free men,” has been a constant theme
of the trading world. Artificial barriers to
trade are seen as an inefficiency that dis-
torts markets.
With a great deal of debate regarding sees a potential trade war as just another We also address the return of volatility
what proposed tariffs will mean for the bearish stumbling block for our current in this issue. And in “Target Volatility:
economy, we present contributions from bull market to overcome. Bush argues that Equity Hedge Funds’ Real Source of
two authors that take a different view of a the basis for this bull market is the histori- Alpha” (page 40), Michael Rulle presents
potential trade war in this issue. cally low interest rates that have persisted compelling research indicating that target
It does not really debate the merits since before the 2008 credit crisis. Since, volatility strategies are the key to active
of tariffs — which is probably OK by our on a relative basis, interest rates are still investment outperformance.
readers — but see historically low, a trade Finally, the tariff debate continues to
them as a symptom war or threat of a trade evolve. As I write this, the exemption to
of something greater Fear of the fruits war should be easily proposed steel and aluminum tariffs for
going on. The interest- of globalization overcome. Canada, Mexico and the EU is no longer
ing thing is that while ... has led to this Zimmerman, on the valid. Whether that will still be the case
Walter Zimmerman trend toward other hand, produces when you see this is a question. Regard-
(see “Protectionism, protectionism. some disturbing histor- less, the chance of a trade war in various
Tariffs & Trading a ical precedents. The iterations will persist, and is still dangerous
Trade War,” page 30) main one being a com- for markets.
and Alan Bush (see “Trade Wars, Stock parison to the period pre-Great Depression
Index Futures & Interest Rates,” page when the U.S. Government inexplicably
36) both see a trade war as a symptom, cut taxes, particularly for top earners and
their market outlooks are diametrically businesses, despite a thriving economy.
opposite. Sound familiar?
Zimmerman believes that a potential We are not in the prediction business, Daniel P. Collins
trade war is born from fear in the markets but the historical background provided here Editor-in-Chief,
that have yet to be realized, while Bush is always good to understand. @moderntradered
Send your comments, criticisms and suggestions to openoutcry@moderntrader.com

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[1] Options involve risk and are not suitable for all investors. For more information read the “Characteristics and Risks of Standardized Options”. For a copy, call 312 542-6901. [2] The IB commission
rates shown are the average of the client commissions for trades executed in March 2018 and are subject to minimums and maximums as shown on the IB website. Some of the firms listed may have
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[4] $1.00 commission minimum. 06-IB18-1175CH1165
SHORT INTEREST
Real talk on business, finance, politics & alternative investments.

Q By Daniel P. Collins
“Reaching this settlement “Robinhood’s

in principle with the U.S. founders
Department of Justice … is the and their
price we have to pay for the Merry Men
global ambitions pursued by of venture
this bank before the crisis.” capitalists
That quote is from Royal Bank of Scotland CEO Ross McEwan announcing that RBS
has agreed in principle to a $4.9 billion fine to settle charges of wrongdoing related to its
sale of mortgage-backed securities in the United States that contributed to the financial cri- should be
very pleased.”
sis. RBS stock rallied following the announcement as some investors feared the fine could
be as high as $10 billion. A loose translation of “the price we have to pay for the global
ambitions pursued by this bank,” in this context seems to be, “Well, everyone was doing it.”
That quote is from EquityZen
co-founder Phil Haslett following
free online broker Robinhood
“AT&T hiring Michael Cohen Markets Inc.’s most recent round
of funding. The electronic stock
as a political consultant brokerage pushed its valuation
was a big mistake.” to about $6 billion, up from $1.3

billion last year. Robinhood’s
co-founders Baiju Bhatt (33) and
You think? That is from a memo AT&T CEO Randall Stephenson sent to employees Vlad Tenev (31) together own
regarding the revelation that AT&T — among other firms — hired President Donald Trump’s about one-third of the company
attorney Michael Cohen as a consultant, paying him $600,000 via Essential Consultants (or $1 billion each on paper),
LLC. That is the LLC Cohen set up to pay adult film star Stormy Daniels $130,000 according to an analysis by
for a non-disclosure agreement regarding an alleged affair with Trump in 2006. After EquityZen. Robinhood plans on
several attempts at an explanation, AT&T said it hired Cohen to provide “insights into using the funds “to go from a full-
understanding the new administration.” service investment company to
AT&T is in the midst of a controversial merger with Time Warner that is under antitrust a full-service consumer finance
review by the Department of Justice. company,” according to Bhatt.
“Whatever they’re buying is non-U.S. They’re buying

beans in Canada, in Brazil, but very deliberately not
buying anything from the U.S.”
That is agribusiness firm Bunge Ltd. CEO Soren Schroder confirming to Bloomberg China’s move to stop purchasing U.S. soy-
beans.
While President Trump says a trade war will be easy to win, don’t tell that to Midwestern soybean farmers. Bloomberg reported
that in the two weeks ending April 19, China canceled a net 62,690 metric tons of U.S. soybean purchases for the marketing year
that ends Aug. 31, according to the U.S. Department of Agriculture.
China is estimated to purchase roughly 30% of its soybean needs from U.S. farmers, which total about $14 billion a year.

“Our partnership is Open Outcry
MODERN TRADER welcomes comments,
formed at the compliments or critiques from readers. .
intersection of
technology and
purpose.”
That is BlackRock COO Rob Goldstein in a press
release announcing his firm’s partnership as an “anchor
investor” with micro-investing app Acorns. Acorns’
investment model allows people to automatically invest
spare change from everyday purchases into diversified ETF
portfolios. Send your comments and suggestions to
The two firms have reached an agreement through which openoutcry@moderntrader.com
they will pursue new technology-enabled tools for Acorns’
users. As of March 31, 2018, BlackRock managed approxi-
mately $6.317 trillion — that’s a lot of spare change.
“Today’s decision
Why the is a victory for
Cryptocurrency
World is the millions of
Watching Americans who
South Korea seek to bet on
sports in a safe
That is a headline from a February story in Bloomberg. It
noted that among traditional currencies, only the U.S. dollar
and regulated
was used more than the Korean won to trade the major
cryptocurrencies and that the won accounted for more than
10% of trades in Bitcoin for much of the second half of
manner.”
2017. Bloomberg also cited that the Korean won was the #1
currency for transactions in Ethereum for most of 2017.
The story noted that demand for cryptocurrencies was so
great that at one point in January cryptocurrency prices in That’s Geoff Freeman, president of the American
Korea were trading at a 50% premium to those in the United Gaming Association, following a May 14 Supreme Court
States. The Korean government banned initial coin offerings decision invalidating a 25-year-old Federal law that effectively
and was considering banning exchanges, noted the story,
prohibited sports betting outside Nevada. The case arose from
which asked “What’s next?” The answer came on May 11
when South Korean prosecutors raided the offices of major New Jersey’s attempt to offer online sport gambling, which
cryptocurrency exchange Upbit. South Korea has been was opposed by all the major sports leagues and the NCAA. It
cracking down on the cryptocurrency industry to combat is likely to lead to an expansion of sports gambling in various
excessive speculation and illegal activities. states and tribal areas.
M o d e r nTr a d e r. c o m Issue 544 | MODERN TRADER | 11

You could pay 40% more per trade.
But you know better.
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Restrictions apply: The standard $4.95 commission does not apply to foreign stock transactions, large block transactions requiring special handling, or restricted stock transactions. Foreign ordinary shares that trade online in the U.S.
over-the-counter (OTC) market and do not settle in the U.S. will have a $50 foreign transaction fee added to the cost of the transaction. All broker-assisted and automated phone trades are subject to service charges. See the Charles Schwab
Pricing Guide for Individual Investors for full fee and commission schedules. Employee equity compensation transactions are subject to separate commission schedules. Multiple-leg options strategies will involve multiple commissions.
Enroll in the offer and make a qualifying net deposit of $100,000 to earn 500 commission-free online trades. Limited to one account per client. Trades are good for two years and include only base equity, ETF, and options commissions
and option per contract fees up to 20 contracts. Restrictions apply. See schwab.com/trading or call us for terms and conditions. Offer may be changed or terminated at any time without notice.
©2018 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. (1017-70FG)
31
Trades
High conviction ideas from top traders, analysts & insiders
Apple building AAPL

Buy trigger:
a bullish base
$190.25
Target: $220
Stop: $185
Q By Doug Busch
Apple (AAPL) has a big APPLE INC. (AAPL)
say in where Nasdaq goes Source: ChartSmarter
as the largest piece of
index comprising 7.3%. The
technology behemoth is
up 11% year-to-date, 25%
over the last 12 months and
sports a dividend yield of
1.5%. Earnings have been
mostly higher with gains
in three of the last four
quarters. The stock began
a sharp rally at the end
of April, which pushed it
$25 higher (15%) over the
following four weeks.
AAPL closed every week
of May above $180, a num-
ber which posed significant
resistance in January and
March. It is acting well
following its breakout from
a double-bottom trigger of
$179.04, which was taken
out on May 4.
Buy AAPL on a break
above the bull flag trigger
at $190.25, which carries a
measured move to $220.
Doug Busch (CMT) This month in TRADES

trades U.S. equities using Buffett baled on IBM: The slippery slope Will protectionist IQ – Baidu = 24% upside 24
Is Watson next? 14 of steel tariffs 17 fundamentals match
technical analysis with an technical outlook? 20 Weaker dollar pushing
Enron’s successor, Two hot computer currency, Treasury
emphasis on Japanese EOG, is a buy 15 networking stocks 18 New Zealand bears 22 & equity sectors 26
candlesticks. Is Whirlpool circling Three electronic Trade war trade 23 Leveraging the
@chartsmarter the drain 16 measuring plays 19 herd mentality 27

TRADES SELL
Buffett bailed on IBM:

Is Watson next?
Q By Joseph Parnes
IBM
Sell
$139-$149
Target $109
Stop $154
In the 1968 movie, 2001: A Space Od- shrinking faster than the growth of its Hathaway (BRK-B)
yssey, the spaceship’s advanced cognitive new business initiatives, as its cognitive liquidated its entire stake
computer, HAL — which is “foolproof and solutions segment is the only one of its five of IBM in Q4 2017. IBM’s overall lack of
incapable of error” — suffers a malfunction major divisions functioning with improved growth has been evidenced through its Q3
that leads to the derailment of the mission. margins. IBM’s reported Q1 2018 earnings 2017 numbers, down 2% for the year and
International Business Machines Corp. of $2.45 per share on revenue of $19.1 its Q1 2018 unsatisfactory reassurances.
(IBM) has been commonly associated billion vs. the consensus estimate of $2.40 IBM’s finance chief James Kavanaugh
with the naming of HAL (attributable to per share and revenue of $18.7 billion noted that its Q1 2018 numbers were
movie myth), but in reality IBM’s enhanced led to immediate investor unhappiness lower due to its storage segment. IBM’s
computer solutions may not be enough to with both its margin and its strategic statement that it has “all the confidence in
save its mission to drive revenues from its restructuring plans. While it announced the world” that it can improve the storage
downward trend as a short position. better-than-expected earnings and revenue, segment by the second half of 2018 seems
IBM, the Armonk, New York-based IBM reaffirmed guidance for 2018 earnings eerily reminiscent of HAL’s “enthusiasm and
company founded in 1924, has been faced of $13.80 per share. This was IBM’s first confidence” in 2001’s fated mission.
with a drastic and lengthy transition from its revenue growth after 20 straight quarters of
prior business segments due to its declin- decline, and the chances this will continue TECHNICAL PICTURE
ing sales of its legacy server hardware. This throughout 2018 did not impress, leading The lack of enthusiasm for an IBM recovery
led to IBM’s “strategic imperative” mission to an $8.77 (6%) opening gap lower on by the markets is matched by a challenging
to reinvest and focus within emerging April 18. technical picture (see “IBM death cross”).
markets, including cloud computing, data Although there was some success The February sell-off pushed IBM below
analytics, mobile technologies and social reported by its cloud and autonomous both its 50- and 200-day simple moving
and security services. This shift in con- database products in relation to its average (SMA). This followed a golden
junction with its seemingly flat year-over- competitors (a growth of 15%) the market cross-inspired rally in January. Although
year reported margins have led to investor was still skeptical. Viewed in the most IBM rallied above both its 50- and 200-
hesitancy and apprehension. favorable light, this can be seen as a mixed day SMA in March, it failed to take out
Its other business segments have been success, as Warren Buffett’s Berkshire its January high. On April 17, IBM failed
to take out the March high and set a
double-top resistance level at $162 as it
IBM DEATH CROSS awaited its post-close Q1 2018 earnings
IBM entered a death cross on May 11, after setting a double top this past spring. announcement.
Source: eSignal The disappointing announcement
coupled with technical weakness led
to further losses. With its stock trading
below both its 50- and 200-day SMA, IBM
entered a death cross on May 11 as the 50-
day SMA crossed below the 200-day SMA.
The next support area is the 2017 low of
$139.13, but strong downward momentum
should be able to take that out.
The author has short holdings in IBM.
Joseph Parnes is an independent

RIA with more than 30 years of trading
experience, with a focus on short
selling. @joseph_parnes

BUY TRADES
acreage in the “sweet spots” in U.S.
Enron’s resource plays, which are relatively small.

The rest of the acreage in each play is not
as productive and needs much higher oil
successor,
prices to be economic. There is a scarcity
of premium resources in any play. EOG
now holds sweet spots across all six major
resource plays, which minimizes single-
EOG, is a buy
basin geologic risk.
In 2016, it adopted a new standard of
capital discipline called “premium drilling”
with a premium well defined as one
generating a minimum 30% direct
Q By Paul Kuklinski Buy
after tax rate of return at $40 per
EOG barrel. At a $60 per barrel oil
EOG Resources (EOG) is the premier leases. In 2005, EOG was the Price Target: price, its premium wells generate
$209
onshore U.S. crude oil producer, capable of first to apply horizontal drilling to an after tax rate of return of more
sustaining many years of very high produc- the Barnett Shale deposit in Johnson than 100%. First year production
tion growth supported by its exceptional County Texas. from its 2016 premium wells was twice
acreage position and industry-leading In 2007, it was an early mover in hori- as large as its non-premium wells, while
technical advances. The stock is currently zontal drilling in the North Dakota Bakken finding costs were half as large. EOG’s
trading at $103 per share (as of May 5) and Shale region. In 2010, it concluded horizon- premium resources produce more oil from
has an upside target of $209 per share, tal drilling for unconventional oil trapped in fewer wells.
which is more than double its current price, shales in the lower 48, which proved to be As a result, its U.S. operations break
over the next 12 months assuming a $62 an industry game changer and captured the even at $30 per barrel, competitive with
per barrel WTI crude oil price. first mover advantage in a number of plays. producers in the Middle East. U.S. industry
It is the successor of Enron and is the Historically, EOG has been almost resource plays generally require $40 to
second largest U.S. onshore (lower 48) oil entirely focused on organic growth, while $65 per barrel and deep water production,
producer with 2017 crude oil production of maintaining low costs and low debt levels. and 13% of world oil supply, which requires
335 thousand barrels daily (MBD), just be- During the years, it has consistently gener- $50 to $65 per barrel. Conventional
hind Chevron (CVX) and ahead of Exxon ated the highest return on capital employed onshore lower 48 and oil sands production
(XOM) and Occidental Petroleum (OXY). in its peer group. require $65 to $75 per barrel.
It was an early mover in the unconven- To develop the best competitive EOG’s 2017 production increased 9%
tional shale revolution in identifying the position in the industry, EOG’s strategy year-over-year to 690,000 barrels of oil
best geologic plays and capturing the best over the years was to identify and acquire equivalent per day with an 11% increase
in the United States to 551,000 barrels
DOUBLE UP of oil equivalent per day. U.S. production
EOG recently broke a four-year double top and has the potential to double in the was 61% oil, 16% gas liquids and 23%
next year. natural gas.
Source: eSignal
Company guidance provided indicates a
17% increase in overall production in 2018
to 710,000 barrels of oil equivalent per day.
Rapid growth at similar rates will continue
thereafter with current oil prices. The Perm-
ian’s Delaware sub basin is the primary
driver of growth.
That growth holds the potential for the
price of EOG to double in the next year.
Paul Kuklinski, founder of

independent research firm Boston
Energy Research, selects equity
investments in the energy sector for
major institutional investors.

TRADES SELL
Whirlpool Corp. (WHR) has continued to make lower lows
Is since failing to take out resistance at $200 on several occasions

last summer. WHR is a durable-good laggard; down 10% year-to-
date, 16% over the last 12 months and sports a dividend yield of
Whirlpool
3%. Earnings momentum is going the right way with back-to-back
quarterly gains following quarterly losses of 10.5% (Q3 2017) and
6.3 (Q2 2017) .
The stock is higher five of the last seven weeks, but fell 7.1%
circling
the last week of May with the largest weekly volume of the last
five years. Whirlpool recorded an ugly bearish engulfing candle
with resistance at the 200-day simple moving average, a line that
provided support back in 2016 and again last October through this
the drain?
Q By Doug Busch
February. Support has now become resistance. Short WHR into
the weekly candle at $154.25.
Sell
Doug Busch (CMT) trades U.S. equities using
technical analysis with an emphasis on Japanese
WHR candlesticks. @chartsmarter
Trigger: $154.25
Target: $130
Stop: $159
WHIRLPOOL CORP. (WHR)

Source: ChartSmarter

EARNINGS TRADES
The slippery
minimize disruption due to tariffs, and that
might be truer now than of other periods.
U.S. companies have a lot going for them;
they have a ton of cash on their balance
slope of
sheets, corporate earnings have been
coming in strong, they just received a huge
tax cut and the economy is relatively strong.
Companies shouldn’t have to lay off
steel tariffs
workers as a result of the tariffs in the near-
term, but that doesn’t mean they won’t. We
could also see a scenario in which all of the
bonuses and raises companies handed out
as a result of tax cuts are not repeated in
Q By Christine Short the future as they try to offset the higher
cost of steel inputs.
Most retrospective analyses of the
Tariffs on imported steel and aluminum as a measure to create jobs in the George W. Bush Administration’s 2002
were initially ordered by President Trump struggling steel industry, which has been steel tariffs concluded that they were
in March, but subsequently pushed off in decline for 20+ years, the adverse unnecessarily costly when compared to
until June 1. While nothing has been effect of such a move will hurt steel input the jobs they saved, but did not prompt
imposed yet, tariffs were top-of-mind for industries such as automobiles, aerospace any sort of major economic disaster (see
U.S. corporations during first quarter and construction. Those industries are “Steel tariffs case study”). The chart
earnings calls. estimated to employ 80-times as many shows that for a year after steel tariffs
Roughly a third of companies within the people as steel companies. Research by were imposed, employment in that industry
S&P 500 mentioned tariffs during their Trade Partnership Worldwide estimates plateaued, but then continued its descent
quarterly call, with half of those being net job losses will total 150,000; for every due to a global trade war. President Bush
unconcerned about the impact of tariffs on one job created, five will be lost. Due to the officially lifted the tariffs in December
their industry, and the other half expecting high level of competition around the globe 2003, and steel industry employment
tariffs to have a negative impact. Mentions for companies making steel components, again remained steady.
were concentrated in the industrials some analysts suggest the impact to jobs There is also the impact on consumers.
industry, likely due to the fact that it could be almost immediate as increasing Tariffs will inevitably lead to more expensive
contains many steel input companies that costs make them less competitive. goods. However, the expectation is that
would be taking the biggest hit. However, companies tend to be good the price increases would be relatively
While the tariffs were initially announced at restructuring their supply chains to moderate, and the U.S. consumer is very
healthy now and likely could handle it.
Regardless, job losses or increases
STEEL TARIFFS CASE STUDY
in the cost of certain goods are not the
Seasonally adjusted employment in U.S. iron and steel mills and ferroalloy
production declined after the 2002 tariffs, but not at a greater pace than before biggest problem. That would be the ripple
they were in place or after they were lifted. effect these tariffs will have if affected
Source: U.S. Bureau of Labor Statistics & Bloomberg View countries decide to retaliate by enacting
tariffs on American goods, which would
hurt all U.S. exporters. Affected countries
may retaliate by carefully targeting their
tariffs on American goods to cause the
utmost economic or political pain in sectors
such as agriculture. Beyond that, these
measures could undermine the entire
system of global trade, which the United
States helped build.
Christine Short, Estimize senior

VP, is an expert in corporate earnings
who produces content highlighting
Estimize data. @estimize

TRADES INDUSTRIES
Two hot computer

networking stocks
Q By John Blank
With mega cap FANG Tech names like populated with 10 companies, many of industry rank gets fresh support from
Facebook (FB) blowing up, it might be which are small cap names. seven positive earnings estimate revisions
time to look at smaller cap tech names; in And there’s a bullish tell; the Computer and only two negative revisions across
industry niches less known. Networking Zacks Industry Rank is the companies. This niche is growing in
One niche fits that bill well. The currently at #41 out of 265 industries (top vitality within the information technology
Computer Networking industry space is 16%). That is exceptional. This top Zacks ecosystem.
To no surprise — given the aggregate
TOP-RATED INDUSTRIES earnings estimate revision data— this niche
Top stocks in top-rated industries is one place you can still make returns.
Source: Zacks The 2018 year-to-date shareholder return
Top Zacks Industries with Stocks for this industry is 15.2%. The S&P 500
is flat at -0.23%. Any broad headwinds
Industry Top Stocks
the rest of the stock market faces are not
Office Supplies ACCO AVY
hitting as hard in this sector, if at all.
Household Appliance ELUXY WHR Traders and retail investors often fear
Building Products: Air/Heating AAON FIX LII what they don’t know. With that in mind
Publishing: Books JW.A SCHL let’s look at the technology behind the
Consumer Products: Misc Staples ENR NWL TUP Computer Networking sector.
Insurance: Accident & Health AFL EIG TRUP A network consists of two or more
Machinery Tools ATU KMT SDVKY computers that are linked in order to
Consulting ACN FCN IT share resources (such as printers and
CDs), exchange files, or allow electronic
Semiconductor Equipment AEIS AMAT KLAC
communications. The computers on
Office Products DLX HNI KNL
a network may be linked through cables,
telephone lines, radio waves, satellites or
NET NICHE infrared light beams.
These two stocks underperformed their sector In short, a computer network,
year-to-date and are Zacks’ strong buys.
or data network, is a digital
Source: eSignal
telecommunication network, which
then allows its various nodes to share
resources.
Two successful Computer Networking
companies with strong business models
worth exploring are Netgear (NTGR) and
NetScout Systems (NTCT):
Netgear: This $1.7 billion market cap
stock holds a Zacks #1 (STRONG BUY)
rank and also holds a desirable long-term
Zacks VGM score of B.
NetScout Systems: This $2.6 billion
market cap stock holds a Zacks #1
(STRONG BUY) rank. However, it holds a
less desirable long-term Zacks VGM score
of C.

INDUSTRIES TRADES
Three electronic
measuring plays
Q By John Blank
TOP-RATED INDUSTRIES The

Top stocks in top-rated industries
Source: Zacks
semiconductor
Top Zacks Industries with Stocks
industry
Industry Top Stocks
related stocks
Uniform and Related SGC UNF CTAS have worked
Retail - Regional Dept. Stores DDS M KSS extremely well.
Steel - Speciality ATI HAYN VLPNY
Electronics - Parts Distribution ARW AVT WCC
Wireline - Non US CHA TLTZY SPKKY last year. As of April 25, 2018, the
Auction - Valuation Services CPRT BID LQDT Electronics/Measuring Instruments
10-company industry group is up +9.9%
Oil & Gas - Integrated Emerging Markets CEO SNP EC
over the previous three months vs. a drop
Electronics - Measuring Instruments ATEYY KEYS INTT of 5.5% in the S&P500. The group has
Agriculture - Operations ADM CVGW LMNR outperformed the broader market over
numerous time periods (see “Beating the
market”).
BEATING THE MARKET
The Zacks 10-member Electronics/Measuring Instruments group has The Semiconductor Industry-related
outperformed the broader market over the short- and long-term. stocks have worked extremely well. This
Source: Zacks supplier niche, in that large tech hardware
space, is no exception.
Electronic/Measuring
Period iShares-S&P 500 (IVV)
Instruments
Here are the best
1 Month 2.93% 3.31% three stocks in this group
3 Months 9.91% -5.51% 1. Advantest (ATEYY): This is a $3.8
billion market cap Zacks #1 Rank
YTD 20.78% 0.30%
(STRONG BUY) stock.
1 Year 44.33% 15.76% 2. Keysight Technologies, Inc. (KEYS):
3 Years 10.74% 32.89% This is a large cap stock, with $10.3
billion in market capitalization. The
5 Years 93.45% 82.80%
Zacks #1 Rank (STRONG BUY) is the
sole stock metric flashing attraction.
The Electronics/Measuring half of a stock’s price movement can be 3. InTEST Corp (INTT): This is a very
Instruments industry is staying red hot in attributed to the sector that stock falls small cap stock, with $74 million in
a flat market. in. In fact, the top 50% of Zacks ranked market capitalization. The Zacks #2
By late-April, this tech stock group was in industries outperform the bottom 50% by a Rank (BUY) is only one attraction to
the Top 5% (#14 out of 265) of industries factor of more than 2 to 1. this little known company.
Zacks ranks. We counted four upgrades This is an enduring top-down strategic
in covering analyst earnings estimates and idea for finding outperformance. Look at the John Blank is the chief equity strategist
zero analyst downgrades. collective performance of the Electronics/ at Zacks. He covers the global financial
Our research has shown that roughly Measuring Instruments sectorover the markets for Zacks.com. @johnblank100

TRADES CYCLES
Will protectionist
fundamentals match
technical outlook?
Q By John Rawlins WALMART (WMT)
Quant Cycles (formerly called the Cycle Projection Oscilla-

tor) is a technical tool that employs proprietary statistical
techniques and complex algorithms to filter multiple cycles
from historical data, combines them to obtain cyclical
information from price data and then gives a graphical rep-
resentation of their productive behavior. Other proprietary
frequency domain techniques then are employed to obtain
the cycles embedded in the price.
WALMART (WMT)
Walmart (WMT) has suffered sharp declines since the market
peak in late January, without the subsequent rebound the broader
equity market has seen. That is probably due to its exposure to a
potential trade war with China, where a great deal of its products
PEPSICO (PEP)
are manufactured.
Walmart did begin to rebound in early February, but took another
leg down as tariff rhetoric from the President heated. The Quant
Cycle analytics expected the downturn in Walmart to bottom out in
mid-April before beginning a strong bullish period. It has not turned,
pushing WMT close to oversold territory while expecting a strong
upturn, very bullish. The bullish outlook for WMT is expected to
persist well into Q4. This makes Walmart a strong buy, especially if
talk of a tariff cools down.
PEPSICO (PEP)
Like Walmart, Pepsico (PEP) turned lower as the market peaked in
January and failed to rebound. In fact, PEP has seen sharper declines
in the period between mid-April and mid-May than off the late January
highs. This has occurred despite the Quant Cycle analytics indicating
a mid-April reversal. This has put PEP in solid oversold territory with MICROSOFT (MSFT)
a bullish outlook. PEP’s bullish Quant Cycle outlook is not as sharp
and is not expected to persist as long as WMT, but it is starting from
a stronger (more oversold) base. The bullish cycle in PEP is expected
to last until the end of the summer before turning lower.
MICROSOFT (MSFT)
Despite the fact that many analysts see the technology sector
having greater exposure to a potential trade war with China, Micro-
soft (MSFT) has been on a bit of a tear. MSFT had quickly recovered
from the late January/early February weakness and made yearly
highs in May. This despite a relatively weak Quant Cycle outlook for
the first four months of the year. That also is changing as the Quant
Cycle analysis shows a bullish outlook for MSFT. In reality, MSFT

CYCLES TRADES
Quant Cycle cyclical analysis

can work with trade war
fundamentals.
EURO has been in an upward trend since the beginning of April, but it is
not close to being overbought and the Quant Cycle expects MSFT’s
upward trend to persist through September before turning lower.
EURO
Since toying with parity (100) to the U.S. dollar at the end of
2016, the euro currency had been on a tear up until early 2018.
After bouncing around its three-year high between 122.00 and
126.00 for the first quarter of 2018, the euro had dropped eight
handles this spring at the time of this writing. The move has placed
the euro near oversold territory in its Quant Cycles analysis just as
the Quant Cycle anticipated a sharp upward cycle. This makes the
euro a solid buy. The Quant Cycle expects the euro to rally sharply
for most of the summer before peaking sometime in August. At that
point, the euro is expected to reverse lower and possibly test the
current lows.
SOYBEANS
SOYBEANS
Of all the commodity markets that could be affected by a trade
war with China, soybeans are on the top of the list. It was widely
reported in May that China canceled massive amounts of U.S.
soybean purchases, which led to further declines. Soybeans had
sold off close to $1 per bushel since setting a 14-month high (and
double top) at $10.82 on March 2.
Quant Cycle analysis has soybeans setting a bottom in late June
before drifting higher through the growing season. Quant Cycle
analysis shows soybeans peaking in late September during harvest
and then turning significantly lower, which would match seasonal
tendencies.
WHEAT
WHEAT Wheat has been in a consistent upward trend in 2018 interrupt-
ed by a bearish correction in March and again in May. The May
correction may provide a buying opportunity as the Quant Cycle
analysis moves from moderately higher to sharply higher in May and
June. At that point, the Quant Cycle expects wheat to turn sharply
lower and test the March correction low below $4.50 per bushel.
Any mid-summer rallies could serve as significant shorting oppor-
tunities, as wheat is expected to tank in late summer before leveling
out in the fall.
John Rawlins is a former member of the CBOT with

more than 30 years of experience in trading and research.
He co-developed the Cycle Projection Oscillator with an
aerospace engineer. @cpopro1

TRADES FOREX
New Zealand
The pair got off to a stellar start leading
upt to 2018, rallying from the bottom of the
range near 0.6800 in mid-December up to
nearly the top of the range above 0.7400 by
bears
Q By Matt Weller
late January. Rates then spent the next three
months consolidating within the smaller
0.7200-0.7400 range before a big break-
down in late April.
From a price action perspective, the late
April breakdown showed an historically
When it comes to the forex market, the making it a key cog in the global carry trade. rare streak. From “Tax Day” on April 17 until
New Zealand dollar punches well above Due to these factors, the performance of April 26, NZD/USD traded lower for eight
its weight. New Zealand famously has a the New Zealand dollar/U.S. dollar (NZD/ consecutive days. Since 1982, a sample
larger population of sheep than people, USD) currency pair has been closely cor- that includes nearly 10,000 trading days,
and the country’s GDP ranked just 70th related with traders’ risk appetite, which is a this represents only the 20th such eight-day
among individual countries last year (behind previous tailwind that died down at the end bearish streak.
powerhouses such as Greece, Uzbekistan of January. While the historical record suggests that
and Ecuador). Since cutting its benchmark interest rate rates often see a near-term oversold bounce
Nonetheless, the New Zealand dollar, to a record low of 1.75% in late 2016, the after such streaks, the medium-term outlook
colloquially referred to as the kiwi, is the Reserve Bank of New Zealand has been on surprisingly favors the bears. During the
10th most traded currency, involved in 2.1% hold for 18 months. By contrast, the Federal last 19 occurrences, NZD/USD has seen
of forex transactions. Reserve has raised interest rates on six an average gain of 0.5% over the week
From an economic perspective, the kiwi occasions during that same period, bringing following an eight-day losing streak. Looking
is a quintessential commodity currency, the Federal funds rate to near parity with out a bit further, the performance during the
with its performance closely linked to the New Zealand’s. Despite the narrowing next month is less compelling (an average
value of its major exports, primarily dairy interest rate gap, NZD/USD has held up gain of just 0.05%) and during the next
products, beef and lumber. In addition, the relatively well, carving out a broad range three months, the average NZD/USD return
country has historically offered relatively between 0.6800 and 0.7500 during the last following an eight-day bearish streak is
high interest rates for a developed nation, two years. actually slightly negative.
This is a pattern we’ve identified in a
variety of currency pairs, as well as other
The kiwi’s April weakness could markets: While long streaks of consecutive
lead to further weakness, and a days trading in the same direction can get
overdone in the short-term, they often signal
test of support at 0.6800. a continuation in the same direction over
medium-term horizons.
KIWI RANGE As for the NZD/USD, the relative interest
If the April weakness in the kiwi continues, support at the bottom of its two-year rate advantage should continue to shift in
range could be tested and serve as a long entry. favor of the greenback this year. That said,
Source: TradingView, Faraday Research
the Federal Reserve is, by its own admis-
sion, nearing its target interest rate; so the
Reserve Bank of New Zealand could look
to take that advantage back in 2019, if the
global economy continues to grow apace.
Technically speaking, swing traders should
continue to keep an eye on the 0.6800-
0.7500 range; a breakout could foreshadow
a continuation in the same direction, but as
long as those levels hold, the longer-term
technical bias in the pair remains neutral.
Matt Weller is a CFA charterholder

and senior market analyst for Faraday
Research. @mwellerfx

OPTIONS TRADES
Trade war trade

Q By Dan Keegan
In the 2016 presidential election, Donald imported steel. This was good for steel Trading a Trade War
Trump’s two main issues were immigration and aluminum producers but not so great It could be that the trade issue will be
and unfair trade practices. Immigration for the manufacturers who used steel and resolved. There is a strong incentive for
has continued to be a hot issue since aluminum. President Trump to settle things. There are
President Trump was inaugurated in In 1817, economist David Ricardo plenty of electoral votes in the farm states.
January of 2017. developed the classical theory of In the meantime, there should be plenty of
The Perdue-Cotton bill arguing on comparative advantage. For example, if volatility. John Deere & Co. (DE) is a major
behalf of favoring skilled workers as one country’s climate has an advantage farm equipment manufacturer. The 52-
immigrants led the news for a while. The in growing apples while the other country week range for DE is $109.79 to $175.26.
Deferred Action for Childhood Arrivals has an advantage in growing oranges, it DE is currently trading at $135.33, which
(DACA) fix that looked like it was going to makes sense that each country grows their is in the low-to-middle part of its range. DE
sail through before it was derailed is yet specialty and import the other country’s has a very reasonable price to earnings
another example. Lastly, the border wall specialty. This winds up being a win-win ratio of 30.76.
has been a constant source of debate. for both countries. That is except for the One way to take advantage of impending
It does appear to be all talk, however. apple growers in an orange suited country volatility is to buy a straddle. This means
Congress only appropriated only $1.6 and vice versa. Those people also vote, you buy the at-the-money calls and puts. A
billion for the construction of the wall. so the ideal world of free trade is often straddle anticipates a move in the stock but
The issue of unfair trade practices sidetracked. doesn’t have an opinion as to whether the
seemed to be dead in the water. Trump’s Sometimes a trade war breaks out when stock moves up or down.
economic team’s history was cool to the tariffs are being imposed on a tit-for-tat When you buy a straddle, you want plenty
idea of tariffs. Every time the President basis. One sector of the U.S. economy of movement, and when you short a straddle
brought up the subject they were able that would be badly hurt by a trade war you want as little movement as possible. In
to diffuse the subject. Peter Navarro, is agriculture. The trade in farm goods late April, the DE 2018 May 135 calls had
a trade war champion, was able to reduces the trade deficit. As a leading a delta of 0.57. This means that each call
circumvent the President’s economic exporter, farmers have done quite well in represents 57 shares. The DE 2018 May
team and get Trump’s ear. On March 8, recent years. A reduction in exports would 135 puts had a delta of -0.43. This means
2018, Trump announced a 10% tariff on drain revenue and cause a bear market in that each put represents 43 shares of short
imported aluminum and a 25% tariff on farmland. stock. When the straddle is bought 20
times your equivalent share position is long
VOLATILITY SPIKE 280 shares. Long options are a wasting
The average true range—an indication of volatility—of DE has nearly doubled since asset. The time value that wastes away
February. While the price of Deere stock has dropped in this period, it also has for each day is $13. That is a total loss of
displayed strong upward corrections highlighting volatility.
$520 per day. A few days of little movement
Source: eSignal
can really hurt. Each day the rate of decay
increases the closer it gets to expiration
day.
Traders can hedge this position with a
short straddle. The weekly options that
expire on May 4 decay at a much more
rapid rate since expiration day is only four
days away. The delta for the May 4, 135
calls is 0.54 and the corresponding puts
have a delta of -0.46.
Selling the straddle 10 times would
represent 80 short shares of stock. The
daily decay for each call and put is $25 a
day. Since it is a short position, the decay

TRADES SPIN-OFFS
One sector
of the U.S.
economy
that would be
badly hurt by IQ – Baidu
a trade war is
agriculture. = 24% upside
Q By Joe Cornell
collected amounts to $500 a day. The
net decay is a loss of $25 daily. Since Shares in iQIYI (IQ), a Chinese Netflix- agencies and recognizes revenue net of
there are only four trading days left, the style video streaming service controlled these commissions. IQ also derives an
net decay will become more positive with by search giant Baidu Inc. (BIDU), fell increasing portion of its revenue from other
each passing day. during its trading debut on March 29. sources, such as subscription services and
If DE expires at 135 the position will be The Beijing-based iQIYI sold 125 million sub-licensing of licensed content to other
profitable. If DE moves up or down three U.S. depositary shares at $18 per share, video websites. The company intends to
points it should be a breakeven. The DE which was in the middle of its range. The use 50% of the funds (a little more than $1
weekly expired on May 4, at $137.29, company raised $2.25 billion in its IPO, billion) raised to produce new content.
making it marginally profitable. It would which was the largest of the year. The Baidu, which means a “100 times,” is a
lose more money if it followed the trend shares closed down 14% on the first day of leading Chinese-language Internet search
for another three points. Beyond that trading, valuing iQIYI at about $11 billion. engine (Baidu.com) with about 80% of the
it would become profitable again. Of Baidu offered about 17% of its ownership search market in China (Google is Baidu’s
course, the position could be even more in IQ and remains a controlling shareholder main competitor, with about 20% of the
profitable if prudent judgments are made post-IPO (see “BIDU/IQ split,” below). Chinese market.) Baidu offers news, MP3,
while making adjustments. IQ is an online video platform with a video and image searches. It earns nearly
The calculation for this trade is the content library that includes copyrighted all of its revenue through online advertising
continued saber rattling between the movies, television series, cartoons, variety services. To reap the rewards of a market
United States and China on trade. As the shows and other programs. The company that consists of a whopping 470 million
president makes belligerent comments derives a majority of its revenues from Internet users, the company has had to
and China responds with its own threat online advertising services. IQ offers accept a massive government bureaucracy
of tariffs —like stating it will halt soybean commissions to third-party advertising and its censorship rules.
purchases — the market will exhibit
volatility. Traders can reestablish their BIDU/IQ SPLIT
long straddle position like the example Source: Spin-Off Research
above, adjust it and take profits as the
markets reacts to the ebbs and flows of
the political posturing.
This can be an effective strategy
throughout the summer for markets —
stocks, futures and exchange-traded
funds — that are tied to agriculture, which
will be particularly vulnerable to a trade
war or simply trade war posturing.
Dan Keegan is an experienced

options instructor and founder
of the options education site
optionthinker.com.

SPIN-OFFS TRADES
ORGANIZATION STRUCTURE
Source: Spin-Off Research
Deal Rationale
China, with its rich demographics, has
proven to be one of the most lucrative
markets for e-commerce and content
streaming. IQ is an early player to capitalize
on this trend. Over the years, the rivalry
between IQ and its close competitor, Youku
Tudou (now part of BABA), has intensified.
The separation is primarily about
positioning IQ as a leading player in the
Chinese online video streaming market and
developing an acquisitive currency, which
will enable IQ to grow in a consolidating
market.
With $2.67 billion in fiscal year 2017
revenues (a 55% growth rate) IQ trades
at a backwards-looking valuation of 3.25X
estimated valuation/fiscal year 2017
revenues. If one extrapolates IQ’s growth
forward you see about 40% revenue
growth in fiscal year 2018 ($3.74 billion).
This suggests that IQ currently trades at
2.3x estimated valuation/fiscal year 2018
INSIDE THE NUMBERS revenue multiple. Netflix (NFLX), by
Source: Bloomberg/Spin-Off Research comparison, trades at a robust 8x forward
revenue. IQ trades at a deep discount to
Netflix.
Valuation
As the largest streaming player in China,
IQ is well-positioned to flourish from the
growth in entertainment and Internet
spending that has been accelerating in
China during the past decade. The current
modest valuation does not reflect this
potential. Based on a price/forward sales
multiple implied by Alibaba’s (BABA)
acquisition of Youku, we estimate IQ’s
As the largest streaming player valuation at $14.5 billion or $20 per

American Depository Share (ADS). Each
in China, IQ is well-positioned iQIYI ADS is currently trading at $16.10 as
of April 3. This suggests 24% upside to our
to flourish from the growth in estimated value of $20 per ADS.
entertainment and Internet Joe Cornell is the founder and

spending that has been publisher of Spin-Off Research, a
chartered financial analyst and author of
accelerating in China. “Spin-Off to Pay-Off.” @spinoffresearch

TRADES COT
A look at long-term trends of commercial interest in the

CFTC’s “Commitments of Traders” report.
Market
Net
Commercial
Commercial
Trader
Trend,
Sideways, Weaker dollar
pushing currency,
Position Momentum Reversal
4 Week Net
Currencies
Change +/-
AD
BP
4,906
-54,485
Positive
Negative
Reversal +
Reversal - Treasury & equity
CD
DX
EC
33,118
-2,458
-191,187
Positive
Positive
Negative
Reversal +
Sideways
Reversal -
sectors
JY -11,287 Negative Reversal - Q By Andy Waldock
SF 16,133 Positive Sideways There’s a picture taking shape in the macroeconomic world
MP -104,962 Negative Reversal - that can be seen in the correlated actions of the most significant
Grains traders in the currency, interest rate, stock and precious metal
BO -40,649 Negative Sideways markets. We’ll deliver the data and the markets. You can draw your
C -290,009 Negative Reversal - conclusions as to how it all plays out amid a trade war backdrop.
KW -37,971 Negative Reversal - Beginning with the currencies, we see several signs that
S -140,694 Negative Reversal - point toward a weakening U.S. dollar. The euro currency makes
SM -154,750 Negative Reversal - up 57% of the U.S. Dollar Index futures contract, and while the
W 24,859 Positive Sideways index remains in neutral territory, circumstantial evidence via the
O -2,010 Negative Reversal + individual currency pairs shows that they are ganging up on the
Rates greenback.
ED* 4,697,351 Positive Reversal + Commercial traders have pared their short position in the euro.
FN* 778,459 Positive Reversal + While still negative, they’ve been covering their short position since
TY 566,052 Positive Reversal +
the euro’s February high rather than adding to their short position
on the market’s consolidation above $1.24.
US 31,928 Positive Sideways
Stronger evidence comes from the Australian dollar, Canadian
Metals
dollar, British pound and Japanese yen, which contribute another
GC -188,865 Negative Sideways
third to the U.S. Dollar Index. Commercial traders have added
HG -25,277 Negative Reversal +
nearly 10% to their increasingly bullish Canadian dollar position
PL -28,491 Negative Sideways
and 5% to their Australian dollar position. The British pound
SI -2,637 Negative Reversal +
remains relatively neutral, but the trend has been higher and the
Energy commercial traders have only recently begun to sell into the rally.
CL -724,564 Negative Reversal - They seem content to let the pound test the $1.50 Brexit breakout
HO -35,908 Positive Sideways level before asserting any real selling pressure.
NG 71,174 Positive Sideways Lastly, the recent buildup in commercial positions short the yen
RB -85,833 Negative Reversal - was clearly a hedge based upon the March contract’s expiration
Softs as their total position dropped by more than 40% upon March’s
CC -48,373 Negative Reversal - expiration. The Japanese yen futures are now well supported above
CT -103,692 Negative Reversal - the 90- and 120-day moving averages, and above the downward
KC 33,865 Positive Reversal + sloping trend line, which dates back to the 2012 high.
OJ 2,031 Positive Sideways Briefly touching on interest rates show the continuation of
SB* 126,225 Positive Reversal + record buying on the short end of the yield curve we discussed
Meats last month. The Eurodollar set another new commercial net-long
FC 2,875 Positive Reversal +
record along with the five-year Treasury note.
Meanwhile, the 10-year Treasury notes are within 10% of
LC -32,603 Negative Reversal +
surpassing the record they set this March. Sympathetically,
LH 11,931 Positive Reversal +
commercial trader momentum in the 30-year Treasury bonds has
Indices
now turned positive. Collectively, they make a strong case for the
DJ -21,691 Negative Sideways
February high yield marks to hold awhile.
ES* -436,038 Negative Reversal -
We can’t discuss interest rates without discussing the stock
ND 11,915 Positive Sideways
market. The S&P 500 futures are 10 times larger than any of the
RU -241 Negative Sideways other stock index futures contract. Therefore, when the commercial

ETF TRADES
The Eurodollar
set another new
commercial
Leveraging
net-long record
along with
the five-year
the herd
Treasury note.
mentality
Q By Matthew Litchfield
traders create a ruckus in the S&P 500
futures, we take notice. They’ve both The reality of life at a quantitative fatal in the long term.
sold more in a single week (383k) than research shop is that our work has less to Easily recognizable are cases like retail
any week since September of 2007 do with developing algorithms to predict investors piling into technology stocks
and set a new net-short record (436k), the future and more with finding new ways in the late 1990s creating the Dot.com
eclipsing their previous record from No- to use already proven concepts, especially bubble. Even supposedly sophisticated
vember of 2006 (411k). Actions speak those contrarian ones found in behavioral investors aren’t immune from the herd
louder than words. finance. mentality. Case in point, the recent
Finally, the most fully developed trade Consider the most widely-known whipsaw in the U.S. dollar that had steadily
of these setups lies in the silver futures. phenomenon of “herding” where investors weakened throughout 2017 despite clear
Silver miners’ hedging of anticipated seek safety, either from potential losses communications from the Federal Reserve
production keeps the net commercial or missed performance, by jumping onto that it was going ahead with monetary
position in the COT report in negative already established trends in the hunt for tightening.
territory. However, it is currently a “sure thing.” Investing with the herd isn’t Expectations that the Trump
the least negative it has ever been necessarily bad, especially if it offers a administration would push for a weaker
and, therefore, a new bullish record. confirmation signal of an early trend. Trend dollar combined with profits made by
Furthermore, volatility has continued following is one of the most successful early short sellers in the dollar created an
to decline since February as the investment strategies, but the results, “inverse bubble” such that Reuters pointed
commercial traders have gained market especially if you are late to the party, can be out in an April 13 article that traders’ short
share. This behavior is increasingly
bullish, and strongly suggests a
DOLLAR REBOUND
breakout sharply higher and a test of
The dollar appears to have reversed a long-term downtrend.
$18 per oz.
Source: eSignal
Collectively, commercial traders
are forecasting a weaker dollar and
stock market along with rising silver
and Treasury prices (declining yields).
The silver setup is very similar to the
prediction of higher coffee prices late
spring/early summer from last month’s
column.
Andy Waldock is a futures trader,

analyst and founder of brokerage firm
Commodity & Derivatives Advisors. He
specializes in analyzing the CFTC COT
data. @waldocktrades

TRADES ETF
The recent pop in the dollar

could signal we’re in the
early stages of unwinding
the dollar-short positions.
positions had reached record levels last largest currency fund, the PowerShares contracts in place to hedge out any foreign
seen just before the dollar’s big rally in DB US Dollar Bullish Fund (UUP), carries a currency risk. While originally intended for
August 2011. 0.8% expense ratio and given fairly anemic investors looking to add international beta
The recent pop in the dollar could signal returns for extended periods; long-term without currency risk, the combination of
we’re in the early stages of unwinding investors can see their returns quickly that risk and equity beta can be remarkably
the dollar-short positions, and with nearly eaten up by fees. attractive in the right moments.
40 levered and unlevered currency funds Bold investors can take a chance on Consider the historical returns for the
representing most of the world’s major VelocityShares, which recently launched iShares MSCI EAFE ETF (EFA), Xtrackers
economies to choose from, most investors a series of 4x levered currency funds, but MSCI EAFE Hedged Equity ETF (DBEF)
can find an exchange-traded product to clients using our Quant Screener to rank and the U.S. Dollar Index (see “Hedging
play that trade (see “Dollar rebound,” page our coverage universe based on price currency risk,” left). While the dollar’s gains
27). But if you’re serious about betting momentum would see a veritable who’s have been fairly limited so far this year, its
on (or against) the dollar, you might want who of hedged equity funds with 10 names strong performance is already helping push
to look further afield. While these funds in the top 25 alone—nearly all European or dollar-hedged DBEF ahead of EFA while
can offer nearly perfect correlations to broad international funds. only charging an expense ratio of 0.35%.
the underlying currency, smaller funds First launched in 2011, hedged equity So why pay PowerShares DB US Dollar
can suffer from high bid/ask spreads and funds are exactly what the name implies, Index Bullish Fund ETF (UUP) 0.8% to only
nearly all such funds also carry what have offering exposure to a common interna- gain dollar exposure when you can buy
become relatively high fees. Even the tional equity benchmark but with futures dollar and equity exposure for less than half
of that?
The problem of course is trying to
HEDGING CURRENCY RISK gauge not just the potential direction of
Source: Morningstar.com, Stockcharts.com the dollar but the possible rate of change
as its sometimes highly volatile moves
can quickly devour any equity gains. The
greenback’s weak performance last
year ate heavily at DBEF’s returns while
European equity weakness in 2014 and
2015 ate at some of the dollar’s returns
leaving owners of UUP ahead of the game.
But given that European stocks have
ceased underperforming domestic names
after years of weakness, now might be the
time to consider leaving the dollar bulls
behind for a different herd.
Matt Litchfield is the content editor for

ETF Global at ETFG.com @etf_global

C O V E R S T O RY
Trade Wars
& Volatility
FEATURE STORIES
Trade Wars, Stock

Index Futures &
Interest Rates
36
Target Volatility:
Equity Hedge Funds’
Real Source of Alpha?
40
MODERN TRADER
explores the effect of a
potential trade war on
U.S. equity markets. Will it
end the bull run or will low
interest rates allow U.S.
equities to maintain its
momentum? Read on. We
also attempt to identify the
key drivers of active equity
hedge funds.
30 | MODERN TRADER | June 2018
C O V E R S T O RY
While many analysts believe trade wars are

bad for markets, sometimes markets can give
clues to the environment that breeds trade
wars. What today’s markets telling us
Protectionism,
Tariffs & Trading
a Trade War
Q By Walter Zimmermann
“History doesn’t repeat itself but it often rhymes.” three months. Then Smoot-Hawley’s impact as a tax hike began
That famous quote, often attributed to Mark Twain, is to be felt. And then the bottom fell out of world trade as other
commonly used to explain humanity’s inability to learn from our countries retaliated with their own tariffs. This act helped grease
mistakes. Whether you believe that history repeats itself, rhymes
or that we are capable of learning from it,
the slide from an American recession to a powerful global
ª
the current trade war dust-up has some
historical precedence. CURRENT CREDIT BUBBLE
Under President Calvin Coolidge, Equity market peaks are often punctuated by peaks in negative
credit balances, which often portend a bursting bubble.
Treasury Secretary Andrew Mellon
Source: ICAP
repeatedly slashed taxes for the wealthy.
The largest tax cut was passed in 1926.
The top tax rate for the wealthiest was
slashed from 46% to 25%. The middle
class got next to nothing. The entirely
predictable result was a massive tax cut
funded speculative bubble in the stock
market. That bubble famously burst on
Oct. 31, 1929.
Realizing that they had better give
something to the middle class, especially
after the bursting of the stock market
bubble, The Smoot Hawley Tariff Act
passed the Senate on March 24, 1930
and was signed into law by President
Herbert Hoover on June 17, 1930. This bill
was passed despite the vigorous protests
of virtually every well-known economist.
And it was passed to “create American
jobs.”
It did create American jobs for about

C O V E R S T O RY
TECHNICAL EVIDENCE
The Shiller P/E ratio, just peaked and retreated from a 61.8%
Fibonacci retracement from its last two extremes signaling that
January may have set a significant top.
Source: ICAP
rising fears. This transition from roaring

euphoria to rising fear was a reversal
in the collective consciousness, and
the stock market accurately revealed
that reversal. It is a historical fact that
speculative bubbles never slowly deflate.
WAVING FURIOUSLY Bubbles always burst. It is a law of
The Jan. 26 top in the Dow Jones Index could be the completion of a collective human behavior.
typical five-wave Elliott Wave cycle.
Something like Smoot Hawley
Source: ICAP
would be impossible in a healthy and
sustainable bull market. Tariffs and
protectionism are expressions of rising
fear and pessimism in the collective
mood of the nation. A bull market is
the expression of rising hopes in the
collective mood. This mood reversal from
hope to fear was a reversal from “Yes
we can” to “We cannot unless we get
protection.” The transition from a stock
market bubble to tariffs and trade wars
allows us to closely track the cyclical
reversal in the mood of the collective
consciousness, and perhaps now more
than ever.
Several markets are showing signs
depression. Long live the law of adverse consequences from of being overheated, these potential bubbles are driving
short-term thinking. protectionist tendencies, and their ultimate bust will be proof of
So how the heck did the United States move so quickly from this and not simply a reaction to it.
the roaring 20s to protectionism? The key was the massive
stock market bubble. The equity bubble was an expression of Bubbles & What They Mean
the epic wave of euphoria unleashed by the unprecedented tax Speculative bubbles never slowly deflate, and the bigger
cuts. Extremes of euphoria are simply not sustainable. Like a the bubble, the bigger the ensuing bust. A comparison to
sugar buzz, big tax cuts create an unsustainable spike in wild- conditions that led to the dot-com bubble’s sudden end in
eyed optimism. The ebbing euphoria was quickly replaced by March 2000 should give investors a lot to consider as the
warning signs of another bubble
continue to multiply. From its 5,132 peak
Like a sugar buzz, big tax cuts of March 10, 2000 to its 7,637 peak of
create an unsustainable spike March 13, 2018, the Nasdaq Composite

Stock Index is up 49%. The S&P 500
in wild-eyed optimism. Index is up 85% from its March 2000

Speculative bubbles never
slowly deflate. Bubbles
always burst; it is a law of
collective human behavior.
peak at 1,552.87 to the 2,872.87 high on Jan. 26, 2018. (see We’ll have to wade into some technical analysis terms here to
“Current credit bubble,” page 31). make our case, as demonstrated on the chart of the Shiller P/E
Beyond the extraordinary heights of the major indexes, there’s ratio (see “Technical evidence,” page 32). We use Fibonacci
another signal of record high bullish euphoria out there, and it Retracements — a set of ratios that help predict where market
should be a real concern. Margin debt has grown 140% from trend reversals tend to land — and apply them to the commonly
the dot-com boom peak of $125 billion to the recent $300 used S&P 500 valuation measure, the Shiller P/E ratio, a
billion level. This is a signal of severe downside risk. Margin cyclically adjusted number derived from the price divided by the
calls are why bubbles always burst and never slowly deflate. 10-year moving average, adjusted for inflation. What we see is
Once equity prices retreat enough to trigger margin calls, the that Shiller P/E ratio just peaked and retreated from the 61.8%
risk becomes a cascade of long liquidation. Fibonacci retracement of the December 1999 to March 2009
Why the bearish view? Because pricing patterns repeat drop. The risk is that the Schiller P/E just completed a bear
themselves, and as a technical analyst it’s hard to avoid seeing market correction of the losses from the 1999 peak. Based on
the parallels. The S&P 500 is more richly priced than at any the Elliott Wave patterns, the risk investors face is an eventual
point in history, including 1929 — except for the final leg up of retest of the 2009 lows.
the dot-com bubble. Arguably, no one wants to ever again see Again, we’ll have to get visual to explain why there’s heightened
such monstrous valuations as those in the peaking of the dot- bubble risk now, this time looking at the Dow Jones Industrial
com bubble, though there will doubtless be those bulls claiming Average. There are very few technical tools for dealing with the
that “this time will be different.” excesses of world class speculative bubbles, but the Elliott Wave
channel is one of those tools. The Elliott
SPECS AHEAD OF THE MARKET Wave channel (see “Waving furiously,”
While the recent rally in crude oil has just taken WTI beyond its 2015 page 32) is a support line drawn through
recovery high, small speculators have record long positions. the lows of waves 2 and 4, and then a
Source: CFTC
parallel resistance line drawn through
the high of wave 3. The final wave 5 peak
should overshoot the resistance line, and
then keel over into a down trend. The Dow
Jones Industrial Average looks very much
like a textbook example of an Elliott Wave
channel peak of the entire advance from
the 2009 lows.
Energy Bubble?
Crude oil and the huge amount of
money in long crude positions is a
complementary worry here (see “Specs
ahead of the market,” left). There is no
precedent for the extent of the bullish
euphoria in crude oil. There’s an almost
religious faith among oil bulls in the
durability of the OPEC-Russia ª
C O V E R S T O RY
Tariffs and protectionism are

expressions of rising fear and
pessimism in the collective
mood of the nation.
alliance, which has limited production

FOLLOW THE LEADER and kept prices rising. There’s a curious
The price of crude oil tends to drop following significant breaks in equities. lack of concern among the bulls that
Source: eSignal prices could get high enough to unleash
a new tsunami of non-OPEC crude oil
output — a distinct possibility now that
U.S. sanctions on Iran could cut its
production. And if the stock market is in
a bubble that is very bad news for crude
oil bulls. Every time an equity bubble
has burst crude oil prices have been
slammed (see “Follow the leader,” left).
Consider also that in the old days,
before the North Sea, Alaskan North
Slope and deep-water Gulf of Mexico
fields went on line, there was a multi-
year time lag between an OPEC-driven
rise in crude oil prices and the ensuing
surge of new non-OPEC output (see
“Vicious cycle,” left, below). The OPEC
dilemma is the nature of the markets:
OPEC cannot sustain both high prices
and market share. First, OPEC cuts
VICIOUS CYCLE output to raise prices, prices then
The OPEC dilemma is its battle between maintaining market share rise; and then new non-OPEC output
and supporting the price of crude oil.
Source: ICAP
increases to fill the void caused by
the OPEC cuts, prompting OPEC
producers to fight to regain market
share by boosting production, which
leads to a supply glut and falling prices.
And when OPEC cuts output again the
cycle repeats, but this cycle happens
faster now.
Prolific fracking programs have
resulted in several thousand drilled
but uncompleted wells in the lower
48 states – about 7,700, according to
recent estimates from the U.S. Energy
Information Administration. With a
high enough price this underground

THIS MAY LAST
The history of commodity boom and bust cycles as measured by
Thomson Reuters indicates that the January 2016 low will follow the
1986 bust cycle that suggests further losses in commodities.
Source: ICAP
Commodity Cycle
In the broader commodities market,
the long-term pattern of the Thomson
Reuters Equal Weight Continuous
Commodity Index, which covers 17
different commodity futures, suggests an
extended trading range from 2016 (see
“This may last,” left). There is a major low
every 15 years, but a major commodity
boom only once every 30 years, and the
interaction between them really makes
the upside limits clear. There’s evidence
for a boom about once every 30 years.
Once equity prices retreat This evidence can be found in the history
of longer standing markets like cotton,
enough to trigger margin calls, copper and corn. The cycle outlook from
the risk becomes a cascade of the 2016 lows is not for another boom.
The precedent from 2016 is the trading
long liquidation. range from 1986, not the unfolding
boom from 1971 or 2001. This sector is
storage will start to flow into the markets. And then there’s seeking out the upper reaches of an extended trading range and
Saudi Arabia, one of the world’s three largest oil producers and is not poised for another boom.
always a major force in the market. Its state-run oil company, The warning signs – and the complex interrelationships of
Saudi Aramco, is planning an initial public offering – the date is these markets – are there in the pricing patterns. Investors should
a bit of a moving target – but as the most profitable company in take these into account as they form their outlooks for the near
the world, there’s a strong Saudi desire to keep oil prices high and longer term.
to get to the top end of its valuation range, pegged anywhere
from $2 trillion to $10 trillion. The risk here is that the Saudi Big Picture
desire for high oil prices to ensure a big, fat Aramco IPO payout Most people who trade and follow the markets see protection-
will unleash yet another tsunami of new non-OPEC output. ism, tariffs and a potential trade war as bad for the markets. But
The other factor working against oil prices staying high trade wars are not necessarily a choice, but a reaction to fears
is seasonality. The pre-season crude oil rally is a winter to in the economy. Those fears are real and clues of weakness can
spring event, followed by a spring to summer drop. When last be divulged in market technicals. We suggest here that several
summer’s shallow seasonal dip could not even correct 50% sectors are showing evidence of a bubble, that bubbles always
of the prior advance, my 2018 spring target became $71.24 burst, and that one result of a burst bubble is always a rapid rise
(which was slightly breached in mid-May). These spring peaks in collective fears. These fears create the perfect environment for
almost always occur on Mid-East fears. A Mid-East fear event is global trade tensions. Subsequent market breakdowns are the
almost as reliable a spring seasonal signal as the first robin. result of this cycle and not simply a reaction to poor decisions on
trade.
Walter Zimmermann is the Chief
Every time an equity bubble Technical Analyst at ICAP-TA. He has

been a cycle-based technical analyst
has burst, crude oil prices have from more than 30 years focusing on ma-
been slammed. jor markets and the petroleum complex.

C O V E R S T O RY
A trade war threatens this long bull equity

market, but low interest rates still has its back.
Trade Wars, Stock

Index Futures
& Interest Rates
Q By Alan Bush
It was late February 2018 when the opening salvos of a U.S. imports, including soybeans, pork, beef, recycled aluminum,
burgeoning trade war were fired as President Donald Trump steel pipes, fruit, wine, planes, automobiles and chemicals. Many
announced plans to impose a 25% tariff on all steel imports and economists now see a risk that the world is headed toward an all-
10% on all aluminum imports. But it wasn’t until April when those out trade war and one that the World Trade Organization (WTO)
plans began to take form. President Trump ordered tariffs on steel may not be equipped to manage.
and aluminum imports and, pending a public comment period,
planned tariffs on still more products from China (see “Trade war Will this Crisis be Different?
heats up,” below). From when the recession lows for stock index futures were made
on March 9, 2009, there have been a variety of geopolitical events
The $50 billion in tariffs on Chinese imports was in retaliation
for what he called decades of intellectual property abuses. As a that have temporarily interrupted the price advance. The key word
result, there were sharp declines in stock index futures. is temporary because every time traders and analysts have be-
China responded with tariffs of its own and threatened more tocome too focused on the geopolitical risk-off event of the day, eq-
come when China’s ambassador to Washington said China will uity markets have been rescued by central bank accommodation.
take countermeasures of the “same proportion” and scale if the The recoveries were often swift with new highs not far behind.
United States imposes additional tariffs on Chinese products. In fact, since the lows were made more than nine years ago,
there have been a multitude of geopolitical issues that temporarily
China quickly hit back with a list of similar duties of up to 25% on
pressured stock index futures. Many of
TRADE WAR HEATS UP them appeared insurmountable at the time,
Equity markets sold off as threats of a possible trade war picked up. with little hope of being resolved any time
Source: eSignal soon, and were feared to have catastroph-
ic consequences for the stock market
and the global economy (see “Recovery
busting scares,” right). In the early stages
of the bull market for stock index futures
there were times that these negatives
came in faster than some central banks
could ease credit conditions, including the
European Central Bank, the People’s Bank
of China and the Bank of Japan; and faster
than the Federal Reserve and the Bank
of England could talk back their hawkish
rhetoric.
These scares included the following
examples.

been the second weakest performance
RECOVERY BUSTING SCARES period for equities during this recovery.
There have been several market scares that temporarily halted the recovery
that began in March 2009, but all were overcome thanks to global central bank China Economic Slowdown: In early
monetary policies. 2016, there were fears of a severe slow-
Source: eSignal down in China’s economy, which is the
world’s second largest. Chinese economic
growth slowed markedly and the country’s
central bank expected growth in 2015 to
have been the slowest in a quarter of a
century. After growing 7.3% in 2014, the
economy was thought to have expanded by
6.9% in 2015. In addition, the central bank
forecast that it may slow further in 2018 to
6.8%.
Global equity markets nosedived on Chi-
na’s economic woes with one trader saying
the markets were “bordering on the edge of
panic.”
Brexit: In the aftermath of the U.K. vote
to exit the European Union, the Dow Jones
European Debt Crises: The European sovereign debt crisis Industrial Average futures were predicting that the gauge would
was a multi-year series of problems that started in 2009 when the open down nearly 650 points. Prior to the vote, the polls were pre-
world first realized Greece could default on its debt. In three years, dicting the U.K. would remain, so it was quite a surprise when the
it escalated into the potential for sovereign debt defaults from leave vote prevailed. There were widespread predictions that the
Portugal, Italy, Ireland and Spain (also known as PIIGS). The Euro- pro-Brexit vote would not just derail the British economy, but could
zone debt crisis was the world‘s greatest threat in 2011, according be disastrous to the global economy as well. The market reacted
to the Organization for Economic Cooperation and Development, negatively to the vote, but quickly recovered.
and resulted in the largest correction in equity markets during the China Currency Devaluations: There was pressure on stock
current recovery — more than 20%. However, equities rebounded index futures and the world faced deflation shocks when China
relatively quickly and took out the May 2011 highs the following devalued the yuan at an accelerating pace. Exporting deflation
February. from China to the rest of the world was thought to have potentially
Annexation of Crimea by Russia: The Crimean peninsu- disastrous consequences. Equities dropped for a period along
la was annexed from Ukraine by the Russian Federation in early with crude, but rebounded as the market has with the rest of the
2014. Ukraine and many world leaders condemned the annexation post-recovery crises.
and considered it to be a violation of international law. This was Tensions on the Korean Peninsula: Rising tensions between
followed up by incursions into Ukraine by Russian troops without the United States and North Korea brought a wave of falling stock
insignia, which heightened tensions between Russia and the West. prices, as worried investors moved funds out of equities and into
Still the market basically sloughed this off. safe-haven vehicles such as U.S. Treasuries and precious metals.
Crude Oil Price Collapse: Many analysts saw the drop in Political Turmoil in Washington: A cascade of controver-
crude oil prices as a precursor to a period of poor performance in sies in Washington politics spilled over with a focus on the 2016
global stock markets. Crude oil and equity market prices often fall in presidential election. Hillary Clinton was the assumed frontrunner
tandem, as was the case during the financial crisis of 2008-2009. and represented the status quo. Donald Trump was the wild card
Equity markets saw a pair of 10% corrections in late 2015 and early that threatened a potential trade war and greater uncertainty. This
2016 as crude oil dropped below $60 per barrel. This has arguably threat came to fruition on the night of the election and the market
discounted it all in one day. The market
China’s ambassador to has been mostly oblivious to subsequent

controversies.
Washington said China will take New Highs after Every Geopolitical
countermeasures of the “same Risk since 2009: Every time stock index
futures fell due to the bearish geopolitical
proportion” and scale if the United influences in the last nine years the break
States imposes additional tariffs was short-lived, as prices recovered and

ultimately made new highs.
on Chinese products. In hindsight, there was no need to be

C O V E R S T O RY
Remember that the Fed funds rate was as

China quickly hit back with high as 20% in 1980 and averaged close to
a list of similar duties of up to 10% the 1980s. European central banks in
the late 1970s and early 1980s had corre-
25% on U.S. imports. spondingly high interest rates as well.
Currently, the European Central Bank
overly concerned about the adverse market impact of the multiple remains extremely accommodative as it continues to implement
European debt crises, the Ukraine conflict and Russian sanctions, its asset purchase plan (quantitative easing). Analysts expect the
the oil market collapse, China’s economic slowdown fears, China’s central bank of the Eurozone to make a decision in June or July to
currency devaluation, the Brexit vote, ongoing tensions on the Kore- possibly phase out its bond-buying program by December. The
an peninsula or ramped-up political turmoil in Washington. European Central Bank said in a statement that it would continue
And now we have the global trade issues. The current trade situa- to buy 30 billion ($36.4 billion) a month of Eurozone bonds
tion has the potential to have a greater effect on stock index futures at least through September and will leave its key interest rate
than the other geopolitical events that took place during the past unchanged at -0.4%.
nine years, but only if it gets out of hand. And the market could be The Bank of England’s (BoE) key interest rate peaked at 17%
more vulnerable to topping out with many of the factors that drove in 1979. Currently, the BoE’s main interest rate stands at 50 basis
a bullish consensus, such as the tax cut and regulatory relief priced points, which is the lowest it has been since the BoE was founded
into the market. However, the biggest bullish driver for equities, in 1694. Financial futures markets are predicting the central bank of
relatively low interest rates, remains. the UK will not raise interest rates any time soon.
It is extremely uncertain as to when the trade issues will get With some overseas interest rates remaining near or at historical
resolved. There is reason to believe that the trade war will probably lows — and in many countries interest rates are still negative — there
drag on for a while, and in this politically dominated environment, is still plenty of accommodation left in the domestic and internation-
it will be difficult for stock index futures to advance, particularly if al banking systems.
a trade war escalates. However, there are already signs that the Now we have the trade tensions between the United States and
Trump Administration will not push matters too far, especially if they China that caused many analysts to declare that global economic
can appear tough and be able to claim a victory. It is safe to say the growth will be stymied, which will result in a protracted decline in
trade issues will eventually be “resolved” without a full-out trade war stock index futures. At least that was the consensus view on the
and once they are, the bullish interest rate fundamentals will take initial news of the escalating trade tensions.
over, just as they have since early 2009. However, we are already seeing what appears to be a better tone
The historically low global interest rate environment can be to the U.S./China trade situation when senior officials at the State
expected to once again rescue stock index futures. In spite of the Council, which is China’s cabinet, said China is planning to lower
steady interest rate hikes from the U.S. Federal Reserve — three tariffs on imported cars. An announcement was expected to be
quarter percent increases in 2017, with a total of three more antic- made as early as May.
ipated in 2018 — U.S. interest rates are still historically low as the It is fair to say that in the broad scheme of things there is never
current Fed funds target is 1.50% to 1.75% (see “Fed funds, still a any more or any less risk of geopolitical threats in the world. There
bargain,” below). are only changes in perception and the amount of attention paid
to the various risks, new and old, that have
FED FUNDS, STILL A BARGAIN been with us since the beginning of time.
Despite the increased pace of tightening from the FOMC, the Fed funds rate is still It will probably be the case that like all the
at historically low levels and still extremely accommodative.
other geopolitically motivated downdrafts
Source: Federal Reserve
in stock index futures during the past nine
years, the current trade tensions will only be
able to temporarily keep stock index futures
under pressure before the bullish influence
of the still historically low global interest rate
influence dominates and takes stock index
futures higher.
Alan Bush is Senior Financial Economist at

ADM Investor Services, Inc. He focuses on
the global macroeconomic outlook and cen-
tral bank policies and how they impact the
price direction for stock index, currencies
and interest rate futures markets.

F E AT U R E
The argument over the value of active versus

passive investing is never ending. Here, we
make the case for active hedge funds and
deliver a passive solution in Target Volatility.
Target Volatility:
Equity Hedge Funds’
Real Source of Alpha?
Q By Michael S. Rulle Jr.
According to BarclayHedge, the Hedge Fund Industry, Here, we will analyze the major source of returns that comprise the
excluding Managed Futures, has grown from $500 billion Barclay Hedge Fund Index (BHFI) during that time.
to $3.5 trillion during the 15-year period from 2002 through 2017. There are 14 different categories of benchmarks that are listed by
BarclayHedge. The risk-adjusted returns of
the index are primarily determined by equity
GEDWTR VS. BHFI hedge fund strategies and strategies correlat-
Source: MSR Investments ed to equity hedge funds. We estimate the
index has 80% to 90% of its risk allocated to
equity strategies or strategies that are highly
correlated to equity strategies. Hedge funds,
as represented by the BHFI, can effectively
be viewed as equity replacements. Further,
we also believe that the proper benchmark
for Equity Hedge Funds are Target Volatility
strategies. We will use the BHFI, and two of
its categories, Barclay Equity Long Bias Index
(BELBI) and Barclay Equity Long Short Index
(BELSI), to represent equity hedge funds.
There are three issues we will address
in this essay. First, the BHFI provides little
diversification to traditional long-only equity
SUBSTITUTE INVESTMENT indexes due to its high correlation. Second,
PERFORMANCE METRICS ALPHA
(BHFI) (GEDWTR) equity hedge fund managers outperform
Total annual return 6.52% 9.55% -3.03 traditional equity indexes on a risk-adjusted
Annual excess return 5.12% 8.11% -2.99 basis (this may or may not be surprising
Annual volatility of excess returns 6.16 13.96 to some, but it was surprising to us). And
Sharpe ratio 0.83 0.58 0.25 third, we hypothesize that the reason for
Maximum drawdown 24.09% 50.70% 26.61 this outperformance is that hedge funds
Calmar ratio 0.27 0.19 0.08 engage in a risk premia strategy called “in-
Calmar + Sharpe ratio (CPS) 1.10 0.77 0.33 tertemporal risk parity.” Other terms for this
True annual volatility 8.6 16.12 are Target Volatility and Constant Volatility.
True Sharpe 0.59 0.50 0.09 In other words, this outperformance by
True Calmar 0.20 0.16 0.04 BHFI over long only equities can also be
True CPS 0.79 0.66 0.13 matched by using Target Volatility strategies.

Index Correlation
GEDWTR VS. THE GETV15TR It is generally assumed that hedge funds
Source: MSR Investments create diversification. This can be true, of
course, depending on what investors com-
bine them with. What surprises us, however,
is how highly correlated the BHFI is with
long-only equities.
We first compared the MSR Global
Equity Dollar Weighted Total Return Index
(GEDWTR) to the BHFI. The GEDWTR
consists of seven equally notionally weight-
ed futures contracts (SPX, NDX, DOW30,
FTSE, EUROSTOXX30, DAX and Nikkei).
These are the most traded equity futures
indexes and they represent about 43%
U.S. equities, 43% European equities and
14% Japanese equities. The GEDWTR is a
SUBSTITUTE INVESTMENT traditional long-only equally weighted total
(GETV15TR) (BHFI)
return index that reinvests dividends and is
Total annual return 11.56% 9.55% 2.01
rebalanced daily to maintain equal notional
Annual excess return 10.08% 8.11% 1.97
weightings among the seven equity futures
Annual volatility of excess returns 14.03 13.96
markets. The monthly correlation between
Sharpe ratio 0.72 0.58 0.14
GEDWTR and BHFI is 0.84 and the annual
Maximum drawdown 31.78% 50.70% 18.92
correlation is 0.94. “GEDWTR vs. BHFI”
Calmar ratio 0.36 0.19 0.18
(page 40) provides a variety of perfor-
Calmar + Sharpe ratio (CPS) 1.08 0.77 0.31
mance statistics, some of which may be
True annual volatility 13.78 16.12
unfamiliar. Calmar ratio means annualized
True Sharpe 0.73 0.50 0.23
return divided by maximum drawdown over
True Calmar 0.30 0.16 0.14
the timeframe measured; excess return is
True CPS 1.03 0.66 0.37
the total return less the risk-free rate; and
CPS is the sum of the Calmar ratio and
That is, Target Volatility equity strategies outperform long-only equity Sharpe ratio. We also use the term “true” Calmar. All that True
strategies by a similar amount, just as equity hedge fund strategies Calmar does is use excess returns above the risk-free rate in the
outperform long-only equity strategies (once fees are equalized). numerator rather than total return.
When lower fees are applied to Target Volatility strategies they,
therefore, outperform Hedge Funds. Hence, the proper benchmark Beating Long Equities on Risk-adjusted Basis
for equity hedge funds are not long-only equity indexes but Target We have asserted that the BHFI is virtually an equity replacement.
Volatility equity strategies. That is from an analytical perspective as one cannot invest in the
We are not aware of any studies that have discussed these three BHFI. However, there are practical implications of this we will
topics in an integrated fashion. If our combined hypotheses are discuss. Most essays that compare hedge funds to mutual fund
accurate, this can have a significant impact on how one should view performance, or any long-only equity strategy such as the S&P
the performance of hedge funds. 500, tend to emphasize absolute returns rather than risk-adjusted
returns. Many articles have been written
about the underperformance of hedge
Target Volatility equity funds to equities, but they are not often
strategies outperform long-only discussed in risk adjusted terms. However,

a recent essay by Pensions & Investments
equity strategies by a references a study by Preqin and the Alter-
similar amount, just as equity native Investment Management Associa-

tion (AIMA) shows that hedge funds have
hedge fund strategies outperform outperformed equities on a risk-adjusted
long only equity strategies, once basis. While we agree with their conclu-
sion, we believe that Target Volatility is the
fees are equalized. cause of this outperformance.

F E AT U R E
Before we make that case, we first want to discuss how to prop- parative random walk Sharpe ratios, but higher comparative True
erly compare risk-adjusted performance. Sharpe ratios. In “GEDWTR vs. BHFI,” the True Sharpe ratio for
It is extremely unusual that every hedge fund index and individual the BHFI is 0.61 and 0.52 for GEDWTR. The True Calmar ratio is
hedge funds calculate their Sharpe ratios as if the returns of hedge 0.20 for BHFI and 0.16 for GEDWTR. So, even when we calculate
funds follow the equivalent of Burton Malkiel’s famous “random the risk-adjusted returns accounting for serial correlation in hedge
walk.” Sharpe ratios convey misleading information when this is funds, long-only equities still underperform hedge funds. Further,
done. Hedge fund returns do not follow a random walk. The BHFI GEDWTR has no fees attached to it, while hedge funds tend to
and its components have very high positive serial correlations, charge about a 1% management fee and 20% incentive fee on
typically about 0.30. A random walk return profile has zero serial average. If we were to charge the same 1 and 20 to the GEDWTR,
correlation. We use the term “Adjusted Sharpe,” or “True Sharpe” to the Sharpe ratio of the latter would be 0.38 vs. 0.61 for the BHFI.
account for serial correlation and to differentiate the way we quote This is significant outperformance by the BHFI. Now that we have
Sharpe ratios from how all the various index data providers as well plowed through how to look at risk-adjusted returns, should we be
as hedge funds quote them. surprised at this outperformance?
This is a topic that has been written about for at least 25 years by When we thought about this at first, we were surprised. After all,
many academics and practitioners (including by William Sharpe), this would seem to be prima facie evidence that when adjusted for
and yet, with all the quantitative talent in the industry, this continues equal fees, equity hedge funds provide pure alpha, even if they keep
to be ignored. It is not a coincidence that Sharpe ratios are higher a large part for themselves. Yet, think of all the essays that have
when a random walk is assumed. The Calmar ratio is an intuitive been written demonstrating that passive index funds outperform
and helpful way to understand why the True Sharpe is a better actively managed funds. Vanguard in “The case for low-cost index
measure of risk-adjusted returns. True Sharpe ratios also account fund investing,” and S&P/Dow Jones in “Persistence Scorecard:
for large left tail results (and, perhaps more importantly, left tails yet December 2017” both make compelling cases that passive indexes
to come) as do Calmar ratios. outperform actively managed portfolios. Equity hedge fund manag-
Strategies with higher Calmar ratios tend to have lower com- ers are nothing if not active managers. While higher fees tend to be
part of Vanguard’s and S&P’s arguments
for passive index outperformance, it is not
GEDWTR VS. GETV15TR+ FEES the sole reason. But as we have shown,
Source: MSR Investments equity hedge funds clearly outperform eq-
uity indexes. We believe this performance
is explainable and not merely prima facie
evidence of Alpha implied by Preqin and
AIMA. Outperformance is very likely the re-
sult of a definable risk resulting from Target
Volatility strategies.
Target Volatility &

Risk Premium
A Target Volatility portfolio seeks to maintain
a constant standard deviation of returns. For
example, assume we use a simple rolling
six-month look back period to implement
target volatility. As the underlying volatility
SUBSTITUTE INVESTMENT of the market rises over time to maintain
(GETV15TR) (GEDWTR) the desired target volatility, we will need to
Total annual return 8.31% 9.55% -1.24 reduce the absolute dollar or notional size
Annual excess return 7.15% 8.11% -0.96 of the portfolio. Conversely, if the volatility
Annual volatility of excess returns 13.15 13.96 of the market declines, we would need to
Sharpe ratio 0.54 0.58 -0.04 increase the absolute notional size of the
Maximum drawdown 32.36% 50.70% 18.34 portfolio to maintain the constant volatility
Calmar ratio 0.26 0.19 0.07 of a portfolio. In short, the portfolio will get
Calmar + Sharpe ratio (CPS) 0.8 0.77 0.03 smaller in size as volatility rises and larger
True annual volatility 13.01 16.12 in size as volatility declines. Interestingly, as
True Sharpe 0.55 0.50 0.05 a general matter, we do not observe a sig-
True Calmar 0.21 0.16 0.05 nificant difference in risk-adjusted returns in
True CPS 0.76 0.66 0.10 most asset classes when using either meth-

well-known phenomenon. It is a type of risk
BHFI VS. GETV15TR WITH EQUAL FEES parity strategy (called intertemporal risk
Source: MSR Investments parity) that has been used in various ways
since the early days of the over-the-counter
derivative markets. In addition, there are
many studies which have documented its
relative performance to traditional long only
indexes. In “Equity Investing with Target-
ed Constant Volatility Exposure,” a paper
written by Nicolas Papageorgiou, Jonathan
J. Reeves and Michael Sherris, the authors
conducted an empirical analysis comparing
a constant volatility-weighted (or intertem-
poral risk parity) S&P 500 portfolio and a
constant dollar-weighted S&P 500 portfolio
(the normal S&P portfolio) and demonstrat-
ed that the former portfolio outperformed on
SUBSTITUTE INVESTMENT a risk-adjusted basis.
(GETV15TR) (BHFI)
The authors found the results consistent
throughout sub-periods of time as well. The
timeframe covered was from 1929 through
2013. They calculated the annualized daily
Sharpe ratio 0.54 0.83 -0.29
information ratio (annualized daily returns/
Maximum drawdown 32.36% 24.09% -8.27
annualized daily volatility) of the two port-
Calmar ratio 0.26 0.27 -0.01
folios, which were 0.65 for the constant
Calmar + Sharpe ratio (CPS) 0.80 1.10 -0.30
volatility portfolio and 0.51 for the con-
stant dollar-weighted portfolio. Under the
True Sharpe 0.55 0.59 -0.01
assumption of equal average volatility for
True Calmar 0.21 0.20 0.01
both portfolios, the constant risk portfolio
True CPS 0.76 0.79 -0.03
outperformed by 200-basis-points per year.
In 2017, AQR Capital Management
od. However, the one exception appears to be in the equity markets. produced the paper “AQR - Portfolio Rebalancing: Common
Target Volatility is likely the cause of equity hedge fund bench- Misconceptions,” performing a similar analysis on 17 equity markets
mark outperformance versus long-only equities. While it is not beginning in 1975. Fifteen of the 17 markets had a higher Sharpe
possible to directly calculate the risk weighting through time of ratio when using Target or Constant Volatility than did those same
equity portfolios in the BHFI, our experience tells us that equity markets when dollar weighted. They also found this phenomenon
traders likely de facto engage in this activity purely as a function of primarily worked only in equity markets. Perchet, Corvalho, Heckel
risk management. The use of value-at-risk (VAR) limits provides an and Moulin seek to explain why this phenomenon occurs in their
example of how this can happen. If a trader has a certain VAR limit, paper, “Predicting the success of volatility targeting strategies:
this will incentivize them to increase their position sizes as volatility Application to equities and other asset classes.”
declines and decrease their positions as volatility rises, which is The primary reason they site is that volatility clustering, when
exactly what Target Volatility strategies do. But regardless of the combined with an inverse relationship between volatility and re-
precise cause, equity hedge fund outperformance is very similar to turns, will create higher risk-adjusted returns. This is the case only in
the outperformance one would expect if they did directly engage in equity markets.
Target Volatility strategies. “GEDWTR vs. the GETV15TR” (page 41) compares the perfor-
We need not merely speculate, however. Target Volatility is a mance of the GEDWTR and the Global Equity Target Vol 15 Total
Return index (GETV15TR) from Jan. 1,
2003 through Feb. 28, 2018. Recall, the
The proper benchmark for equity GEDWTR is a traditional long-only total re-
turn index, which reinvests dividends and is
hedge funds are not long-only rebalanced daily to maintain equal notional
equity indexes but Target Volatility weightings among seven equity futures
markets. The GETV15TR is a constant
equity strategies. Target Volatility portfolio of the same in-

F E AT U R E
S&P from 1983 through Feb. 28, 2018

BELBI + BELSI VS. GETV15TR WITH EQUAL FEES also gets similar results. Constant Volatility
Source: MSR Investments equity portfolios do outperform traditional
dollar-weighted portfolios.
What is the risk that Target Volatility
portfolios assume that creates this outper-
formance? It is primarily volatility risk. The
volatility risk is the potential of a sudden
spike in volatility after an extended period
of lower volatility when Target Volatility trad-
ers are likely to be more leveraged. This is a
risk because spikes in volatility are usually
associated with a decline in returns. The
result of taking this risk has been earning a
risk premium, which has created outperfor-
mance. The willingness to potentially suffer
sharp short-term declines in prices when
INVESTMENT one is leveraged (or to underperform when
SUBSTITUTE
PERFORMANCE METRICS (BELBI + ALPHA
(GETV15TR) one is de-levered) is the risk one takes
BELSI)
Total annual return 8.31% 6.98% 1.33 when one uses Target Volatility. Yet, over
Annual excess return 7.15% 5.57% 1.58 the long run, this strategy has paid off with
Annual volatility of excess returns 13.15 7.10 lower maximum drawdowns, higher Calmar
Sharpe ratio 0.54 0.79 -0.24 ratios and higher True Sharpe ratios than
Maximum drawdown 32.36% 24.86% -7.5 long-only indexes, just as equity hedge
Calmar ratio 0.26 0.28 -0.02 fund indexes, have. This is a simplified
Calmar + Sharpe ratio (CPS) 0.80 1.06 -0.26 version of the phenomenon that Perchet,
True annual volatility 13.01 9.18 Corvalho, Heckel and Moulin discuss in
True Sharpe 0.55 0.61 -0.06 greater detail in their paper.
True Calmar 0.21 0.21 0
True CPS 0.76 0.81 -0.06 Hedge Fund vs. Target
Volatility Returns
struments (while 15% is the average monthly volatility of the equity What we demonstrated here so far is simply
markets, the choice of Target Volatility 15 versus Target Volatility 10 confirming the research that we referenced earlier. Constant Volatil-
or 20 does not impact risk adjusted returns). ity portfolios do outperform traditional long-only portfolios. We will
The GETV15TR is rebalanced daily to maintain a constant risk now compare hedge fund returns to Constant Volatility portfolios.
weighting as described above. The Sharpe ratio of the GEDWTR Recall that our hypothesis is that hedge funds’ (i.e., BHFI) Sharpe
vs. the GETV15TR is 0.50 vs. 0.73; the monthly correlation is 0.88; ratios will outperform dollar-weighted portfolios (e.g., GEDWTR)
the comparative Calmar ratios are 0.16 vs. 0.30; the comparative by a similar amount as Target Volatility portfolio Sharpe ratios (e.g.,
excess returns are 8.11% vs. 10.08% and the comparative max- GETV15TR) will outperform dollar-weighted portfolios (i.e., GED-
imum drawdowns are 50.7% vs. 31.78%. These results confirm WTR) once adjusted for fees. A little simple algebra tells us that we
the results documented in the studies we referenced. We also got should expect the fee-adjusted Sharpe ratios and Calmar ratios of
comparable results when comparing dollar-weighted U.S. equities the BFHI and the GETV15TR to be approximately equal.
and dollar-weighted non-U.S. equities to each of their Target Volatil- We will test the hypothesis by assuming the BHFI has average fees
ity equivalents. The dollar-weighted S&P versus the Target Volatility of 1 and 20. We will then compare that to the GEDWTR portfolio (see
“GEDWTR vs. BHFI,” page 40). Then, we
We do not believe it is coincidental will charge 1 and 20 to the GETV15TR and

compare that to GEDWTR (see “GEDWTR
that equity hedge funds outperform vs. GETV15TR+ fees,” page 42). For the
dollar-weighted indexes by virtually hypothesis to be correct, we should expect

the difference between the two pairs of
the same amount Target Volatility Sharpe ratios and Calmar ratios of the BHFI
indexes outperform dollar-weighted vs. GEDWTR and the GETV15TR vs. GED-
WTR to be approximately the same, once
indexes. the fees have been equalized.

When we compare the difference in Sharpe ratios and the differ- Volatility indexes outperform dollar-weighted indexes. This means
ence in Calmar ratios in the BHFI vs. GEDWTR and the GETV15TR that equity hedge funds and Target Volatility indexes have virtually
vs. GEDWTR, we discover the differences are very close when the same results when fees are made equal. We have also demon-
fees are made the same. What this all means is that our hypothesis strated this through a direct comparison of hedge funds vs. Target
appears to hold up. The BHFI outperforms the GEDWTR by a little Volatility indexes. But Target Volatility indexes are indexes. They
more than the GETV15TR outperforms the GEDWTR. The relative are transparent and easily implemented. It would be impossible to
Sharpe outperformance is 0.04 for the BHFI (0.59 vs. 0.55), but charge 1 & 20 for a transparent index. Target Volatility strategies
the relative True Calmar ratios are better for the GETV15TR (0.21 can be viewed as a replacement for equity hedge fund strategies.
vs. 0.20). The relative correlations of the BHFI vs. GEDWTR and Target Volatility strategies not only outperform long-only equities,
the GETV15TR vs. GEDWTR are 0.84 and 0.89. but they also outperform equity hedge funds when fees are fixed
Finally, we directly compare the GETV15TR to both the BHFI below hedge fund fees.
(see “BHFI vs. GETV15TR with equal fees,” page 43) and the In the same way that Vanguard and S&P/Dow Jones factor in
combination of the Barclay Equity Long Bias Index and the Barclay fees when comparing active and passive strategies, we should also
Equity Long Short Index (“BELBI+BELSI”) assuming equal fees factor in fees when comparing Target Volatility strategies to equity
(see “BELBI + BELSI vs. GETV15TR with equal fees,” page 44). hedge fund strategies. A transparent Target Volatility index should
The direct comparison of the GETV15TR vs. the Barclay indexes charge the same as other transparent liquid alternative strategies,
show the Calmar ratios to be almost identical and the Sharpe ratios or no higher than 50- to 100-basis points. We use a 75-basis point
of the Barclay indexes to be about 0.05 higher when we assume the fee (which is high for an index strategy) for a GETV10TR index and
fees are 1 and 20 for the BHFI and GETV15TR. compare it to the “BELBI+BELSI” portfolio.
This result should be an excellent benchmark for equity hedge
Why this matters funds. We can use the same argument that Vanguard and S&P/Dow
We do not believe it is coincidental that equity hedge funds outper- Jones makes when comparing passive and active long-only funds,
form dollar-weighted indexes by virtually the same amount Target except apply it to Target Volatility vs. Equity Hedge Funds. “BELBI +
BELSI vs. GETV10TR with adjusted fees,”
BELBI + BELSI VS. GETV10TR WITH ADJUSTED FEES left), compares a 10% Volatility Global
Source: MSR Investments Equity Index to the BELBI+BELSI portfolio
assuming a 75-basis point fee.
The GETV10TR is an example of a poten-
tial benchmark for equity hedge funds. It is
also an excellent liquid alternative replace-
ment investment for equity hedge funds.
More importantly, we have introduced the
idea that any alpha one thinks that equity
hedge funds provide is derived from expo-
sure to the risk premia strategy described in
this paper – Target Volatility.
We are not aware of anyone coming
to the same conclusion regarding Tar-
get Volatility being the main alpha driver
for equity hedge funds. However, every
INVESTMENT component idea in this article is known and
SUBSTITUTE
PERFORMANCE METRICS (GETV10TR) (BELBI + ALPHA well documented. Technicians can test it for
BELSI)
themselves.
This essay was adapted from a White
Paper by Michael S. Rulle Jr. that one can
Sharpe ratio 0.66 0.79 -0.12
access under “third-party research” on
Maximum drawdown 22.29% 24.86% 2.57
the BarclayHedge Website.
Calmar ratio 0.34 0.28 0.06
Calmar + Sharpe ratio (CPS) 1 1.06 -0.06
Michael S. Rulle Jr. is the founder &
CEO of MSR Investments, LLC. Prior to
True Sharpe 0.67 0.61 0.06
founding MSR in 2008, Rulle was pres-
True Calmar 0.25 0.21 0.04
ident of Graham Capital Management
True CPS 0.92 0.81 0.11
from 2002 to 2007.

F E AT U R E
As cryptocurrencies grow as an asset class,

their constituents and potential investors need
a benchmark to measure their performance,
and also to invest with.
Mainstreaming
Cryptocurrencies
The creation of bitcoin a few years ago has led to an explosion not be a need for U.S. individuals and businesses to transact in
of cryptocurrencies of various types and with various purposes. cryptocurrencies, any asset class that shows the type of growth
While bitcoin itself was initially viewed as a currency capable of potential cryptocurrencies has is something many investors would
being used as a frictionless way of transacting business across like to gain some exposure to (see “A year in bitcoin,” below).
borders, the onset of the broader cryptocurrency spaces — there As you can see by the performance of bitcoin durng the last
are well over 2,000 individual cryptocurrencies — is less clear. year, there were many opportunities to trade it from either side.
For many, the onset of thousands of initial coin offerings has been Bitcoin rallied by a factor of 10 from mid-July 2017 to mid-
an innovative new way to raise capital. While perhaps useful in its December 2017, and then dropped by more than 60% in the three
own right, venture capital is a distinct purpose far apart from the months following its 2017 high. If you bought bitcoin in July 2017,
creation of a currency used for the transfer of goods and services. you would be very happy, but if you purchased a high-ticket item
One of the goals of a currency is stability, the faith that the value utilizing bitcoin as a currency in July, you would not be happy six
of dollar will be the same, or at least relatively the same in value months later as the money you spent increased by 10x and what
today as it was last week, month or year. The value of currencies you purchased, likely depreciated.
fluctuate versus each other based on the economic fundamentals
of the nations they are drawn on, but there is an element of faith Building a Benchmark
in their value. Sometimes that faith is broken as has been the Hehmeyer Trading + Investments has recently created the
case with multiple currencies during the last decade, such as the Hehmeyer Cryptocurrency Index (HCI) and has launched a
Venezuelan bolivar.
While for many in the United States and
A YEAR IN BITCOIN
Western world cryptocurrencies are a
Bitcoin’s incredible growth and decline during the last year
novelty, there are many places in the world highlights its value as an investment, but also its drawback as a
without a stable currency; and cryptocur- currency.
rencies are a product that can serve as a Source: CoinBase
relatively stable and secure mode of ac-

cepting and transferring payment and t hey
are in great demand. It is in these places
were cryptocurrencies are not a novelty or
potential high-returning investment, but a
necessary tool of doing business.
For the most part, money is not an
investment, it is a tool we use to measure
our investments. In the wider trading
world, cryptocurrencies are growing into
an asset class. And while there might

F E AT U R E
MAKING THE GRADE

The table includes the 14 current constituents of the Hehmeyer
Cryptocurrency Index plus two that are in the running. Hehmeyer
measures the market capitalization of each on a daily basis based
on proprietary measures.
Source: Hehmeyertrading.com
Market Cap Market cap

Rank Rank of the index. The fund is designed to mimic
Crypto Symbol in billions in billions
(May 22) (May 24)
(May 22) (May 24) the index.”
There are 14 cryptocurrencies currently
1 Bitcoin
BTC $138.59 $129.22 1 in the index, which is rebalanced monthly.
The coins in the index are market cap
2 Ethereum
ETH $65.66 $58.91 2
weighted, according to Hehmeyer’s
3 XRP $25.82 $24.79 3 proprietary methodology. HCI tracks more
Ripple than 1,000 cryptocurrencies in selecting
4 BCH $19.66 $18.02 4 the coins to go in the index.
Bitcoin Cash
While Hehmeyer acknowledges the
5 EOS
EOS $11.04 $10.72 5 huge volatility in the space, he says,
“Every portfolio needs a little exposure to
6 Litecoin
LTC $7.35 $7.00 6 cryptocurrencies.”
The index is market cap weighted after a
7 Cardona
ADA $5.98 $5.34 8 72-hour rebalance period before the end of
every month to determine its constituents
8 Stellar
XLM $5.74 $5.52 7 and calculate the different allocations to
those constituents.
9 TRON
TRX $5.10 $4.77 9
Hehmeyer posts on its website the top
10 MIOTA $4.64 $4.02 10 16 coins in terms of its proprietary market
IOTA cap weighting, 14 of which are in the index
11 NEO $3.78 $3.51 11 (see “Making the grade,” left).
NEO
You can see by the table that there is a
12 Dash
DASH $2.95 $2.77 12 fairly significant change in the market cap-
italization of each component cryptocur-
13 Monero
XMR $2.87 $2.73 13 rency on a daily basis. The table shows the
market cap of each cryptocurrency on May
14 NEM
XEM $2.64 $2.40 15 22 and May 24. Some have risen or fallen
in ranking, Bitcoin’s market cap dropped
15 Tether
USDT $2.51 $2.51 14 roughly 7% and Ethereum more than 10%
in just two days.
16 VeChain
VEN $2.16 $1.94 16 While HCI initially looks at a broad swath
of cryptocurrencies, only 124 passed
Commodity Pool to track the index: Hehmeyer Cryptocurrency the initial rule set to potentially be included in the index at its last
Index Fund, which allows investors to make a generic investment in rebalancing. Constituent cryptocurrencies must make up 1% of the
the sector that is based on the overall growth of the sector instead overall market cap (based on that set number) to be considered for
of any one particular coin. the index.
“Cryptocurrencies has characteristics that are more like “At each rebalance period — the first of every month —that
commodities,” says Chris Hehmeyer, founder and CEO of calculation is redone,” says Morgan Culbertson, head of
Hehmeyer Trading Group (HTG), creator of the index. “We created Cryptocurrency Research and Development at Hehmeyer. “We look
an index designed to allow for constituent coins to go in and out at coins that are supported by a specific number of exchanges, so
it may not include [certain coins that may
qualify purely on] market cap.
For the most part, money is not
an investment, it is a tool we use Playing Favorites
A cryptocurrency must account for 1% of
to measure our investments. the market cap of the universe of ª
F E AT U R E
“Every portfolio needs a little

exposure to cryptocurrencies.”
-- Chris Hehmeyer
CRYPTO SECTOR
After steadily climbing from $1 to more than $25 in its first four
years, the HCI climbed sharply in 2017 and corrected in 2018.
Source: HCI
proprietary and are only one measure they

use in selecting and weighting the index.
“We have a few other rules,” Hehmey-
er says. “We make sure they aren’t fiat
pegged. We have a committee that reviews
coin validity, meaning if there is a large
amount of suspicion around a coin, we can
manually override all those processes and
exclude it from the index as well.”
Currently, there is only a small allocation
to the commodity pool base on the index.
“We just launched it in April,” Hehmeyer
says. We wanted to go through the process
of rebalancing it and give the administrator
the ability to go into the wallets and confirm
the balances and make sure our security
measures [are] fail safe before we start
cryptocurrencies they look at on each rebalancing. “We try and soliciting outside money [in earnest].”
keep coins that stay within that 1% level in the index, whereas
coins that are going in and out of it reduce their stage value and A Win-Win
their allocation in the index. It prevents us from buying a lot [of Hehmeyer has a two-pronged approach. As the sector becomes
cryptocurrencies] as coins enter and exit that 1% threshold,” more heavily invested, it will need an index to serve as a benchmark
Culberson says. for investors to measure their performance against. There will
Each coin is weighted within the index based on a 72-hour also be a desire by investors to gain exposure to the sector as an
rebalancing period where pricing and supply data is used to build investment. Investors will be able to gain that access through the
an average market cap value. The actual number of coins in the commodity pool or through other products based on the index.
index will change based in these fluctuations. “We have talked to two exchanges — one of them is very
“If bitcoin dominance grows in the future, the number of coins in interested in listing it as a tradeable product,” Hehmeyer says.
the index may decrease, whereas if bitcoin dominance continues The growth of the cryptocurrency space, both in numbers and
to decrease [and] more coins enter into this 1% window, our index values, has created the need for an index (or indexes) to measure
will collect more and more coins over time,” Culbertson says. the sector. Hehmeyer is banking that this index can serve that
Currently, bitcoin’s market cap is roughly 40% of the sector and purpose.
makes up 45% of the index. The index was priced at $1 when they began their calculation
The metrics for how HCI calculates each coin’s market cap are of it based on the index methodology in May of 2013. It went up
to a high of $220 in December 2017,
then down to $60 and now sits around
As the sector becomes more $86 (see “Crypto sector,” left). “It has
heavily invested, it will need an been a very good indicator of what the
cryptocurrency market in general is doing,”
index to serve as a benchmark Hehmeyer says. “It also would make for a
for investors to measure their very good — though volatile — derivative

product, particularly in terms of options.
performance against. We think it is a very good product.”

AFTERTHEBELL
L i f e , Lux u ry & t h e P u r s u i t o f H a p p i n e s s
In the world alternative investing, you can’t get more alternative than fine art. Here we breakdown the benefits and drawbacks.
Art as an Investment Q By Karim Henide
Investing in art can be very for its ability to protect its value
different than filling out a portfolio and thus withstand times of
of stocks, bonds and perhaps economic downturn. During times
a few alternatives. However, art of uncertainty and/or high volatility,
investments fill the box of many of conservative and risk-averse
the basic attributes one looks for in investors will reduce their exposure
filling out a portfolio. These include to the most vulnerable markets
portfolio diversification, hedging (primarily equities) and shift their
inflation risk and non-correlation capital towards safer assets.
(near zero beta) to the broad Bruno S. Frey and
economy (resilience to recession). Reiner Eichenberger in “On the
Portfolio Diversification: Art return of art investment return
is recognized for its diversification analyses” (1995) argue that
value to a portfolio due to its weak expected volatility (expressed
correlation with equities and bond quantitatively by standard deviation)
markets, thus reducing unsystematic and illiquidity are less sensitive/
risk from the perspective of efficient elastic to extrinsic shocks as
asset allocation. This has been cited the art market is saturated with
in several studies. Furthermore, The consumers and what they define as
Index of Fine Art Sales indicates the pure collectors, anchoring demand.
strong returns potential of art, with Melanie Gerlis in, “Art as an
Andy Warhol
a calculated 10% annualized return Investment? “ (2014) confirms that
(Korteweg et al., 2015). liquidity is one of art’s “most glaring risks.”
Hedging Inflation: J.P.Morgan’s Kyle Sommer argues in “The Research dictates that a phenomenon, termed “illiquidity
Art of Investing in Art,” (Thought Magazine, 2013) that in times premia,” exists across international markets, and, as an intrinsic
of rising inflation, art can be an effective hedge, protecting capital factor, may contribute to the significant returns of art. The concept
against inflation erosion. This was verified by a parallel study into explains the strong, positive correlation between illiquidity and
Turkish art, “Art and the Economy: A First Look at the Market for returns over time the market is believed to compensate/make
Paintings in Turkey,” by Erdal Atukeren and Aylin Seckin. consideration of investors holding less liquid assets.
Recession Resilience: Art is considered a defensive asset Given the relatively lower volatility (standard deviation) profile of
art, it can be used to improve the risk/return trade-off
of a portfolio, thus producing a superior portfolio.
Art is considered a defensive
asset for its ability to protect its Improving Art
Market Conditions
value and thus withstand times Art is becoming more attractive as an asset class
due to its increasing transparency and reduced
of economic downturn. barriers to entry, although, Sommer criticizes ª
AFTER THE BELL ART AS INVESTMENT
Entering the market and managing

art is capital and time intensive; and
art is a relatively illiquid asset class.
the current lack of transparency, attributing it to the commonality Economic Review, 2004). This shift into cultural and leisure
of private transactions, barter and use of art as collateral. spending as incomes rise is described by the wealth effect and is
Research and data are becoming more comprehensive and widely expected to contribute to the further blossoming of the art market
available. Furthermore, components such as the ability to store on a macro-economic level.
artwork offshore render art more lucrative as an asset class, Paul Crosthwaite explains in,” What a Waste of Money :
as collectors can use art as a tax-shield to preserve a greater Expenditure, the Death Drive, and the Contemporary Art Market,”
percentage of their acquired wealth. that from the perspective of private economic gain, investing in art
In 1904, a group of collectors, under the direction of Andre can scaffold attempts of establishing symbolic capital, evidence
Level, saw the inception of an informal art fund, whereby they of one’s knowledge, prestige, status, sophistication and cultural
pooled together their capital and purchased 145 pieces of credibility; access to an exclusive and creative social milieu as one
contemporary art with a view of making money. After a designated accrues wealth.
period of 10 years, the collection was liquidated at auction,
generating a four-fold profit for the group according to Anna Chinese Growth
Jozefacka. Following the compound annual growth rate formula Most recently, China has seen buoyant growth, complemented by
(CAGR), this equates to an annual return of 14.87%. The S&P 500 rapid maturation and economic consolidation. This process minted
delivered an annualized return of 6.08%. a large school of millionaires (from 100 to more than 2,750 in 14
years, 2,650%). This rapid creation of new wealth spurred sizeable
The Wealth Effect investments in the art market, particularly in traditional chinese
As economies mature, economic activity begins desaturating the works of art.
primary sector and populating the secondary and tertiary sectors. Sommer states that, more generally, newly created wealth in
Simultaneously, wages per capita begin to rise, living conditions on emerging markets (such as China, Russia, and the Middle East)
the aggregate rise and per capita disposable income rises. With has increased market participation in the trade, improving market
other conditions remaining the same, this provokes an increase resiliency.
in discretionary spending and consumption of luxury/leisure/non- As well as being a safe asset to hold during times of economic
essential goods. This was described by Martin Lettau and Sydney busts, during economic booms, market sentiment improves and
Ludvigson in “Understanding Trend and Cycle in Asset Values: there is more money in circulation, and thus, investors begin
Re-evaluating the Wealth Effect on Consumption,” (American purchasing more leisure goods.
A key driver in incentivizing investment
A TALE OF TWO ARTISTS and consumption is expansionary monetary
Volatility of average prices for modern artists Damien Hirst and Gerhard policy. These policies are adopted with
Richter. There was a high level of correlation from 1997-2009 and less the intention of restricting money supply,
correlation after 2009.
such as through low (or negative interest
Source: Artnet Analytics
rates). As interest rates are lowered, the
rational investor is inclined to invest their
money in assets to generate a return. The
opportunity cost of not investing increases.
Ergo, as interest rates are lowered,
demand across all asset classes rises- in
particular, art.
The Case Against

Art Investing
There is no getting around the fact that art
is not a typical investment and has unique
problems for investors.
A group of Stanford researchers has
unearthed an upward selection bias in

ART AS INVESTMENT AFTER THE BELL
returns, causing an overstatement Pieces of art may be subject

of annualized returns, which to high volatility as economic
researchers calculate to be roughly conditions shift, and as artists’
6.5% over the period from 1972 work comes in and out of favor
to 2010, not the 10% suggested (see “A tale of two artists,” page
by the Blouin Art Sales Index 50). Notice the high correlation
(BASI), utilizing hedonic regression between the two artists from 1997
with the hybrid model approach. through 2009, and the divergence
Furthermore, the study title “Does after 2009. An investor looking at
it Pay to Invest in Art? A Selection- this might assume the value in the
corrected Returns Perspective,” by first period followed broad sector
Arthur Korteweg, Roman Kräussl, metrics and diverged after 2009.
and Patrick Verwijmeren found that The price of a piece of artwork
art delivered a Sharpe ratio of only is not (positively) linear over its
0.04, while U.S equities deliver a lifetime. Moreover, art does not
Sharpe ratio of 0.30. Over the same render any tangible dividends,
1972-2010 period, being invested only a pleasure/utility dividend
in the (highly liquid) S&P 500 according to Benjamin Mandel.
Andy Warhol
would have delivered an annualised The only capital gains are made
return (CAGR) of 10.07%. on the increase in market value at
sale (from purchase), net costs.
Overlooked Costs Costs are unaccounted for in return
and Considerations index models and can represent
Entering the market and managing a sizeable margin in an artwork’s
art is capital and time-intensive; and price, such indices are thus naïve,
art is a relatively illiquid asset class. and moribund with respect to
Art is not fungible, and cannot be indicating real financial returns.
sold back to a centralized market In between the time a piece
instantaneously as one could do has been purchased to when
with equities. Converting one’s art it comes back to market, there
back to cash — bringing to auction are high transaction costs
and paying related fees— can be implied via taxation, preservation
timely and costly. (potential reparations), storage,
Furthermore, this relies on the transportation, insurance (and
assumption that somebody else related protection), auction house
wishes to buy it, and there is less of commissions and associated legal
a pressing need for a counterparty fees), and expert consultation.
to want to buy a piece of art. In his research, Thomas Fillitz
Investors may be bound by the estimates purchase and resell fees
rules of the club. Informally, there to constitute as much as 25% of
are rules on reselling over short final sale prices
periods of time. Don Thompson
Franz Kline
pointed out in his book “The Market Dynamics
curious economics of contemporary art,” that failure to adhere to The art market and competition within it is highly unregulated
the unofficial rules of galleries and auction houses may adversely according to Gerlis. Monopolies over artwork can be built freely;
impact the reputation of an investor— being blacklisted and cartels can collude and fix prices or bid up prices to an artificially
labelled a flipper— in what is a relationship-centric business. inflated level. Sans legal implication, investors cannot fall ª
AFTER THE BELL ART AS INVESTMENT
according to William J. Baumol.

This dependence on human
behavior, as opposed to measurable
fundamentals, results in an erratic,
unstable and unpredictable market,
a speculative nature that typically
should be avoided by the risk-averse
Hans Hoffmann
investor.
back on the Financial Services Compensation Scheme (UK’s
regulatory authority for authorized financial services firms) or Potential Conflicts of Interest
similar bodies if an investment turns sour. And this is unlikely to One important consideration, according to Thompson, is that
change. The art market is widely deemed a leisurely past-time of all intermediaries act in their own interests. They do not owe
the ultra-wealthy, so there is little pressing moral imperative to their clients a fiduciary responsibility. Their relationship is one
reconcile any governance and oversight. founded on bona fides - and thus, conflicts of interests may arise.
It has been conferred that the art market is a financial bubble, An infamous example of this would be the events that transpired
that the hikes in market value are unsustainable and not rationalized between collector Dmitry Rybolovlev and rogue-dealer Yves
by the underlying assets. The market is propped-up only by Bouvier. Rybolovlev is suing Bouvier in various international
notional demand and herd-mentality competitive bidding of the venues for defrauding him by $1 billion in the purchase of 38
plutocrats according to Crosthwaite. Art critic Brian Sewell works of art. The UK lawsuit also threatens to pull in Sotheby’s
expects a false market implosion. This sentiment was echoed and Samuel Valette, the auction house’s vice chairman, whom
empirically in a recent (BASI-based) study, which concluded that Rybolovlev says was partly complicit in the alleged scam. All
a speculative bubble emerged in late 2011 and was still in a mania parties deny any wrongdoing. Bouvier claims he simply found
phase of formation for Post-War and Contemporary and American and sold art work to Rybolovlev. Apparently Russian oligarchs
Art Market Segments, assuming the relationship that the price of don’t like paying retail. It is a complicated story that that delves
an asset is equal to its discounted expected fundamental value. into the secretive world of high-end art collection.
The random price mechanisms and supply/demand dynamics This is an example of how the art world operates in an
of the art market have been attributed to behavioral theory environment of opaqueness and information asymmetry, a
testament to the true lack of understanding of
the pricing and value of art and the difficulty of
Pieces of art may be subject conducting accurate and truly indicative due
to high volatility as economic diligence.
conditions shift, and as artists’ Karim Henide applies broad analytical

skillset to research the multitude of facets of
work comes in and out of favor. the financial markets.

ART AS INVESTMENT AFTER THE BELL
The nexus of
art & finance
The 2017 Art & Finance Report, produced by Deloitte their focus on art advisory services.
Luxembourg and ArtTactic highlights trends at the nexus of art and Art Secured Lending: The art secured lending market in the
investing. United States grew by 13.3% in 2017. The report also noted that
The report breaks down the art market in six sections: The state art lenders believe that regulation would create new opportunities
of the global art market, art and wealth management, art secured to expand the art market as banks and wealth managers would
lending, art as an investment, art and become more involved.
technology and risk management and Art as an Investment: Lack of transpar-
regulation. ency has made it difficult to gauge the size
Here are the key highlights: of the art investment space and analyze its
The States of the Global Art Market: viability. Lack of mark-to-market valuation is
The report notes that more wealth is expect- another challenge. Wealth managers say
ed to allocate to investments in art, but a that performing due diligence and assess-
more sophisticated and dynamic approach ing viability of art funds are obstacles to
to managing art-related wealth will be growth. However, new investment products
required. The world’s ultra-high-net-worth are being developed to address many of
population grew in 2016 and is expected the shortfalls associated with art investment
to grow an additional 43% by 2026, which funds.
bodes well for investment in luxury items like Art and Technology: As with all indus-
art. A survey of wealth managers indicates tries, technology is playing a bigger role in
that luxury investments have become more the art world. Art-technology start-ups (Art-
popular in recent years. Techs) are building digital business models
Much of the wealth growth will occur that support traditional models instead of
in China, and the study also notes that replacing them. The report notes that online
the Chinese government attaches great Katharina Grosse art sales continued to grow, $3.75 billion in
importance to the development of cultural 2016, a 15% increase from 2015 and now
projects. According to the Asian Institute of Art & Finance, the gov- 8.4% of the overall market.
ernment has emphasized the healthy and regulated development of The industry is looking at new technology to solve age-old prob-
culture and art. lems. The report notes that blockchain technology could revolu-
Art and Wealth Management: A survey of wealth managers tionize the industry by resolving question over provenance (origin
and art professional indicates that there is a trend to include art in and history) and improving transparency, copyright and ownership
investment portfolios. The survey showed that 88% of wealth man- issues.
agers in 2017 believed that art and collectibles should be included Risk Management and Regulation: A broad swath of wealth
in a wealth management portfolio. A large majority of art profession- managers, art professional and collectors acknowledge the need to
als responding noted that while clients invest in art for emotional modernize business practices in the art world to meet the demands
reasons, there is an increased emphasis on art as an investment. of transparency and trustworthiness of a developed marketplace.
The report noted that private banks and family offices are increasing Wealth managers and art professionals both cite authenticity,
forgeries, attribution and undisclosed conflicts of interest as
issues the sector needs to address. However, while wealth
While clients invest in art for managers believe that greater governmental regulation is
emotional reasons, there is an needed to address these issues, more than three quarters
of art professionals and collectors prefer a self-regulated
increased emphasis on art as approach to establish trust and credibility in the art market.
All stakeholders noted that the lack of transparency in the
an investment. art market as a major challenge going forward.

AFTER THE BELL BREAKOUT
Crude technical
continuation
In January 2015, WTI crude oil futures CRUDE BREAKOUT 1

broke below its long-term trendline that Source: eSignal
dated back to the 1998 low of $10.65 per
barrel after an eight-month sell-off that took
crude from above $100 to below $50.
On the last trading day of January 2015,
crude oil rallied close to $3 in the last hour
of trading to settle above that long-term
trendline. We made a note of it at the time,
which seemed to confirm the importance
of this level. The importance was confirmed
during the next several months as the price
of crude oil became attracted to this level,
especially at month’s end (see “Crude
breakout 1”).
Finally, in July 2015, the bears won that
battle and crude settled below the trend-
line, which led to continued weakness, CRUDE BREAKOUT 2
but by the end of August, crude had a Source: eSignal
furious rally to settle once again above the
trendline. After grappling with this major
pivot during the next two months, crude
took another major downturn (see “Crude
breakout 2”).
By May 2016, crude had rallied and test-
ed the floating resistance level once again.
The trendline has served as a guide for
the crude oil market until its recent bullish
breakout. But some technicians prefer to
base their analysis on closing prices. When
we draw the trendline from the 1998 low
matching the monthly closing prices we get
a slightly different trendline that can also
If crude can settle on a monthly

basis above $70.50, it would signal
a much larger breakout. However,
another trendline looms.
BREAKOUT AFTER THE BELL
be helpful. The closing trendline (red line)

served as resistance after crude’s initial re- CRUDE BREAKOUT 3
Source: eSignal
bound from the 2014-15 sell-off. That level
is roughly $70.50 per barrel and has been
breached in May, but not on a closing basis
(see “Crude Breakout 3”).
If crude can settle on a monthly basis
above $70.50, it would signal a much
larger breakout. However, another trendline
serving as resistance looms from the 2008
high to the high prior to the 2014 sell-off.
Crude oil could test that level (currently
in the upper $70 range) if it continues to
rally. The upper trendline and long-term
monthly closing trendline will intersect in
May 2019 around $74.50. Expect a battle
around those two trendlines as crude
nears month end.
BREAKOUT AFTER THE BELL
1 4 7 9 12
2 5 8 10 13
14
11
3 6
Stephen
Kalayjian,
Chief Market 15
Strategist & Co-Founder
Firm: Ticker Tocker LLC
Strategy: Short-term/
market making
Location: New York &
Danbury, Conn.
1 British pound 6 iShares Russell 2000 11 E-mini S&P 500

Index ETF (IWM)
2 Japanese yen 12 Bund futures
7 QQQ
3 VIX ECN (VXX) 13 ProShares UltraShort S&P500
8 SPDR S&P 500 ETF Trust (SPY) ETF (SDS)
4 Euro
9 10: E-mini NDX 14 SPDR Dow Jones Industrial
5 Direxion Daily Small Cap
Average ETF (DIA)
Bear 3X ETF (TZA) 10 Market Watch
15 Market research

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TECHNIQUES&TACTICS
5 Essential, time-tested trading strategies
C H A R T PAT TE R N S
Applying classic chart patterns to current trading opportunities
Volatility & FANTAG

Stock Patterns
Q By Suri Duddella
INSIDE
TECHNIQUES
& TACTICS
Stormy Channels
61
Trade War Trading

64
Cryptocurrencies
The unwavering uptrend in stocks darlings for equity traders during the last In 2017, the Nasdaq from the Inside Out
in the last few years may be seeing few years, especially popular FANTAG composite rose 28.24% 67
disruption with the return of volatility in stocks: Facebook (FB), Amazon compared to 55.06% Implied vs. Realized
2018. Institutional and retail investors are (AMZN), Netflix (NFLX), Tesla (TSLA), for Netflix, 53.38% for Volatility & the VIX
looking for various gauges to measure the Apple (AAPL) and Google’s parent Facebook, 45.70% 72
effect of volatility and how that’s trending Alphabet (GOOGL), which had been for Tesla, 55.96% for
in the coming quarters. Most analysts on a tremendous run (see “FANTAG Amazon, 46.11% for Apple and 35.58%
think there may be more upside and performance,” below). The acronym for Google. In 2018, the rise of volatility
opportunities to come this year even with “FANTAG” (variation of FANG) has has significantly reduced FANTAG stock
(or perhaps because of) the emergence of sprung up to represent high tech stocks performance with the exception of Netflix
geopolitical issues. (see “FANTAG Stock Patterns,” MT (up 62.35%) and Amazon (up 22.35%).
Technology stocks have been the January 2018).
Volatility in the Markets
FANTAG PERFORMANCE Stock traders waited all of 2017 for
volatility to return to the markets to take
FANTAG (a variation of FANG) has sprung up to represent high-tech stocks.
advantage of market trend moves from
Source: SuriNotes
FANTAG Stocks.
12-month 2017 2018 YTD For many years, professionals and retail
Symbol Company Price traders learned to short the spikes in
return return return
AAPL Apple Inc. 175.82 24.65 46.11 3.89 short-term volatility to generate alpha. The
absence of volatility spikes has created
AMZN Amazon Inc. 1441.5 62.94 55.96 23.26
massive momentum-based directional
Facebook moves in equities. In January/February
FB 164.83 18.25 53.38 -6.59
Inc.
2018, the increased volatility disrupted the
Alphabet “short volatility” trade, and even caused
GOOG 1037.98 26.04 35.58 -0.80
Inc.
the liquidation of Credit Suisse’s (CS)
NFLX Netflix 307.78 115.35 55.06 60.34 sponsored Short Volatility Exchange-Trad-
TSLA Tesla Inc. 291.21 -4.21 45.7 -6.47 ed Note (XIV). The rapid return of market
volatility woke up bears as sentiment ª
TEC H N IQ U E S & TAC TI C S C H A R T PAT TE R N S
THE RETURN OF VOL The absence of

The CBOE Volatility Index (VIX) never breached 20 in 2017 and only settled above
15 on a weekly basis twice. It has been a different story in 2018. volatility spikes has
Source: eSignal created massive
momentum-based
directional moves
in equities.
FACEBOOK PATTERN
Source: SuriNotes
In March 2018, a whistleblower revealed
that Cambridge Analytica accessed
personal data of more than 50 million
Facebook users causing a controversy
regarding how Facebook protected its
users’ information. FB retraced about 18%
and formed a corrective ABC Bearish
pattern. The ABC Bearish pattern entry
was to sell short below $183 with price
targets of $165 and $150. By April 15,
2018, Facebook reached both of these
targets. The future of Facebook is still
positive and Facebook remains in bullish-
trend mode, but many fund managers are
voicing some skepticism regarding the
fixing of recent privacy concerns raised by
the U.S. Congress.
Amazon
started to shift from “buy the dip” to “sell Facebook rose 53.38% in 2017. The Amazon has been rising in a Parabolic Arc
the rally” (see “The return of vol,” above). move was telegraphed by an ABC Bullish pattern since 2005 from a low of $5.51 to
The “FANTAG Stock Patterns” article on pattern, which developed from July 2016 a current high of $1,617 (see “Parabolic
Fantag stocks, MT October 2017, detailed to December 2016, and was detailed Arc: What Goes Up...,” MT November
the chart patterns that were in place in in MODERN TRADER (“Trading ABC 2016). Amazon went up 55.96% in 2017.
the last quarter of 2017, which takes a Patterns, MT December 2016). A long The recent market volatility has finally
look at where those patterns stand given trade was triggered above $117.70. Three caught up with Amazon after President
the return of volatility in the first quarter of profit targets were triggered all the way Donald Trumps’ comments regarding its
2018. up to $180 by January 2018 when FB postal service usage. Amazon has been
reached a high of $195 (see “Facebook an impressive performer for many years
Facebook Pattern,” above). and probably will continue its uptrend after

TEC H N IQ U E S & TAC TI C S
The influx of
volatility in the first AMAZON PATTERN
Source: SuriNotes
quarter of 2018
was long overdue
and inevitable.
NETFLIX PATTERN
Source: SuriNotes
it undergoes a brief correction in 2018.
Parabolic patterns are extremely long-term
patterns, but often return to 50% to 62%
of its prior rise. Even these corrections
could take multiple years.
Netflix
Netflix, the world’s largest video
streaming company, saw great growth in
2017 and is expected to grow more in the
coming years. NFLX has been trading in
a large bullish five-wave pattern (similar
to Elliott Wave) since 2009; from a low
of $2.23 to a high of $204 in 2017. In
2018, Netflix had an impressive run in the
first quarter rising 62.35% year-to-date in
2018 alone.
The emergence of 2018 market volatility
affected NFLX stock as it retraced about
12% to drop from the high of $333 to storage company and solar panel about $140 to $250. TSLA’s recent
$271. Even though NFLX subscriber manufacturing company founded by technological challenges may not continue
growth is increasing substantially its innovative CEO Elon Musk. Tesla into 2018 after impressive years in 2016
in international markets, NFLX may be rose 45.70% in 2017 as it traded in a and 2017. However, for Tesla to produce
reaching the exhaustive phase in its 5th rectangle channel pattern from a low of a short signal based on the rectangle
wave run. There are no clear corrective $171 to $291 (see “Trading Rectangle channel it would need to drop below $171.
signals yet, and upcoming earnings may Channel Patterns,” MT June 2017).
signal some clues for the year 2018. TSLA’s rectangle channel upside targets Apple
were from $348 to $405. In 2018, TSLA In 2017, Apple continued its “Super
Tesla reached a high of $389 and started Cycle” mode as it rose 46.11%. Similar
Tesla is an automaker, energy seeing volatility effects as it retraced to Netflix, AAPL is also trading in a five-

TEC H N IQ U E S & TAC TI C S C H A R T PAT TE R N S
The influx of
TESLA PATTERN
Source: SuriNotes
volatility in the first
quarter of 2018
was long overdue
and inevitable.
GOOGLE PATTERN
Source: SuriNotes
mishandling of public data.

Google has seen a 1.64% correction
so far in a volatile 2018. In April 2017,
GOOG was trading in a rectangle
channel pattern. GOOGL traded above
the rectangle channel upper trend line
in October 2017 to trigger a breakout
trade with a target of $1,059. After
completion of the previous channel,
GOOGL is currently trading in another
rectangle channel between $992 and
$1,186. Watch the channel boundaries
for potential trade opportunities.
The influx of volatility in the first quarter
of 2018 was long overdue and inevitable.
wave bullish pattern with an embedded within $10 of its second ABC Bullish For bulls, it has brought some high flying
ABC Bullish pattern (see “Patterns pattern target of $190. technology stocks back into play, and for
Within Patterns,” MT May 2017). An bears it may produce technical shorting
ABC Bullish pattern (monthly) has Alphabet Inc. opportunities. Keep an eye on the above
been in the works since May 2016 with Online advertising giant Alphabet mentioned patterns for the possibility of
an entry above $111. The first target (GOOGL) has seen excellent growth two-way trades.
range is $138 to $152 and the second since Google’s initial public offering at
target range is $190 to $218. In 2018, $50 in 2004. It has consistently rallied Suri Duddella is a 20-year veteran
AAPL did see a significant correction in to a high of $1,186 in 2018. However, it pattern-based, algorithmic trader
January and February, but recovered to has been recently stuck in the crosshairs and author of “Trade Chart Patterns
make its 2018 high in March and come of Facebook’s privacy issues and Like the Pros.” @surinotes

TEC H N IQ U E TEC H N IQ U E S & TAC TI C S
TECHNIQUE
Trading in the eye of the storm can be risky, but

since volatility can pop up like a summer squall,
traders need a plan to navigate stormy markets.
Stormy Channels
Q By Billy Williams
For a ship to survive massive waves that This aversion to volatility is simplicity while considering the strengths
threaten to engulf the ship or tip it over, understandable to the average trader but to of the market at hand. Volatile markets must
it takes an experienced captain to juggle the pro, achieving superior returns requires be traded differently than neutral markets,
countless factors to form the right decision acting independently against the crowd. such as markets that are range-bound with
at the right time. But, that doesn’t mean you should jump no direction. This requires flexibility on
Weather patterns, gravity and in with both feet without knowing how the your part and knowing your individual risk
underwater currents all affect the oceans’ depth of the side of the pool you’re going tolerance.
tides. They serve as good indicators, but to play in. You still must know how to swim To help, the Tempest Trade Setup will
even with the best technology to interpret and navigate those waters if you’re going to help you navigate volatile markets without
them, it still takes a combination of skill and come out the other side as a winner. being swept up in their currents.
will to navigate them safely. Across the market’s timeframes, price
The same is true for trading the markets. trends begin to crash into each other Tempest Trade Setup Rules:
Volatility moves back and forth between causing huge spikes in daily trading ranges Use an 18-period Moving Average
two extremes, which can rock the shaking out the weaker players and forcing Regression Line (MARL).
confidence of your trading decisions as big institutions to hedge. In bullish markets, use Regression
the markets get thrown into a tailspin. Price becomes more sensitive to Channels to connect two successive price
The unexpected shock and awe from bad news as the media cycle pumps higher highs, or
war, corporate scandal, accounting out negative reports on the economy or In bearish markets, use Regression
irregularities, investor sentiment, financial markets, causing price to become Channels to connect two successive price
unexpected earnings reports and any of a more erratic. lower lows.
dozen other variables can throw the market But, looking closer can reveal trade Set your readings to extend the price
into a nosedive and take you down with it. opportunities just underneath the turbulent lines from the Regression Channels.
This becomes a sign to form a strategy surface. Longs are triggered when price hits a
that takes volatility into account to profit To do that, you just need a few simple new high then trades near the bottom of the
from it rather than become a victim to it. tools to look past the market’s raging front Regression Channel followed by an entry
But, before you do that, you must fully to find the right places to pick your entries above the 18-period MARL.
understand the cause and effect from the and exits. Shorts are triggered when price hits a
market’s turbulent waters, so that you can new low, then trades near the top of the
ride those waves instead of getting taken The Tempest Trade Setup Regression Channel followed by an entry
down by them. When trading in the middle of a volatile below the 18-period MARL.
Conflicting Tide
storm, it helps to use a method based on Netflix (NFLX) provides an
ª
Fast-moving price action can scare most
traders out of the market due to perceived
higher risk. Commonly, traders will sit it out
until things cool off and then re-enter the
Fast-moving price action can
market when things are perceived to be scare most traders out of the market
safer. due to perceived higher risk.
TEC H N IQ U E S & TAC TI C S TEC H N IQ U E
REVERSION TO TREND
The Tempest Trade set-up produced a buy signal in Netflix on Aug. 16, 2017 (first
chart). From that entry point, NFLX went on to trade well above $300 a share with
its primary bullish trend still in force.
Source: eSignal
At any given time, there are a few forces

at work that create waves of panic and
greed. War, surprise earnings, unexpected
political policies, change of corporate
leadership, economic changes, changes in
interest rates and lawsuits are all examples
of external events that you can’t control or
are even aware of at any given time. But,
these types of events can spark extreme
emotional maelstroms of fear and greed
that can disrupt price action and current
trends, or push them further in a given
direction. It also can create higher volatility,
expanding trading ranges to extremes,
which can be multiplied by the velocity of
its movement in a given timeframe.
Like dominoes falling, you can see
volatility picking up speed as fears begin
to rise regarding the loss of and/or missing
out on potential profits. This creates a herd
effect where traders make more emotional
decisions based on price movement with
price rising and falling due to the supply
and demand generated by the heavy trade
orders.
With volatility, you can choose to remain
on the sidelines or get involved in the action.
If you stay on the sidelines, you are safe from
getting caught by an unexpected move, but
example of the Tempest Trade Setup in as a trend filter. The Regression Channel you may also miss out on one of those huge
August 2017 (see “Reversion to trend,” creates a visual of the price range while price moves that volatile markets are famous
above). NFLX traded higher on a huge gap the 18-period MARL reveals where price for.
signaling rising volatility in mid-2017. The should be, but typically will swing back in
bullish trend began reverting to its mean the direction of the dominant trend. Sell Example
during a period of weeks as revealed from Use regression moving averages to track In early 2017, General Electric’s (GE)
the Regression Channel from July 27, 2017 price movement and draw channels from stock peaked and then began to trade
to Aug. 10, 2017. As price traded below high to low, depending on the time frame, downwards. On Feb. 28, 2017, GE
the lower line, the Tempest Trade Setup and then extend the price lines to create stock experienced a series of lower lows
was signaled. Later, on Aug. 16, 2017, a visual. When price and the regression that allowed traders to start tracking its
price traded back up through the 18-period moving average break the channel, traders Regression Channel from those points
MARL triggering an entry at $169.98. should wait until two new price points (see “Lighting a short,” page 63). However,
It is important to remember that if the create the foundation for a new channel. as the downward trend continued, both
18-period MARL trades outside the upper price and the 18-period MARL kept
or lower Regression Channel band, then Volatility & Irrationality trading beyond the upper boundaries. This
the setup is canceled. You can readjust the It is human nature to strive to secure would cause you to keep readjusting the
Regression Channel to the new price high some type of certainty for a particular Regression Channel for an accurate visual
or low to compensate for future setups. outcome. This aspect of human nature sets of the setup. In early May of 2017, price
The 18-period MARL is designed to tell up a conflict between certainty and the traded below the upper channel line then
you where price should be while acting unpredictability of the markets. traded back up to it before crossing ª
TEC H N IQ U E TEC H N IQ U E S & TAC TI C S
LIGHTING A SHORT
A short Tempest Trade Setup in GE was signaled in 2017 after a series of lower
lows. After the entry, GE continued to trade lower, eventually reaching a price low
of $12.73 for a potential gain of 16 points.
Source: aSignal
price can snap back in the opposite

direction.
It may cause the trend to reverse
direction or it may just be a temporary
condition that occurs before the trend
resumes. It is in these moments of trend
resumption where the trading opportunities
live.
Final Thoughts
The Tempest Trade Setup is a good
method in any market or timeframe.
However, it’s important to keep in mind
that entering a volatile market is going to
take more than just a good trade setup or
method. The ability to manage the trade
while being detached from the end result
and maintaining the ability to go from trade
to trade is fundamental to your success.
And, even more importantly, the ability to
know what your risk level is and how to
manage that risk is even greater.
The Tempest Trade Setup is just a
vehicle to get you to your destination, but
your ability to reach that destination can
be mitigated by your ability to operate in it.
There is more to just turning the key and
below the 18-period MARL, signaling a When markets are experiencing high putting the car in drive. You must be able
short entry at $28.70. volatility, extreme price points are caused to adapt to changing weather conditions.
by an imbalance of buying and selling Storms often hit in waves; a wave hits,
Contrarianism orders. Price can be pushed too far, too wanes and then reemerges.
Good trading is based on a foundation fast because one side is more committed Traders need to be committed to the
of healthy contrarianism. Fast-moving than the other. At times, there can be long-term results, not the short-term
markets offer enormous opportunity, but total buy orders with no sell orders and disappointments. While it’s wise advice
there is the risk of getting swept up in the vice versa with volatility steadily rising. to avoid volatile markets, volatility doesn’t
same emotional traps of fear and greed as But, spikes in volatility are followed by a always announce itself, so traders need to
everyone else. However, taking a moment reversion to the mean where price will assume it can hit at any time and have a
to look in the opposite direction while return to its median price point. Like a plan to address it. This will keep you level-
armed with a few basic facts can help you rubber band that gets stretched too far headed and focused in volatile markets and
make the right decision at the right time. before snapping back to its original shape, in full control of the tools that will help you
reach your trading goals.
With volatility, you can choose Billy Williams is a 20-year

to remain on the sidelines or get veteran trader and publisher of
involved in the action. stockoptionsystem.com.

TEC H N IQ U E S & TAC TI C S ADVAN C E D TEC H N IQ U E
ADVANCED TECHNIQUE
The winds of a potential trade war have

been blowing, and no U.S. sector is as vulnerable
to one as agricultural commodities.
Trade War
Trading
Q By Paul D. Cretien
By mid-March 2018, rhetoric regarding with at least equal force. are lower than a year ago — could be
trade relations between the United States Because China imports millions attributed to the threat of trader barriers,
and China began to heat up. President of dollars of American agricultural there is an opportunity for movement
Trump started this earlier in the year with commodities, these are under greater among the similar commodities.
an announcement of steel and aluminum threat than other U.S. exports. “Agriculture
tariffs. Later he focused more on China commodities at risk” (below) shows five ag Pairs Trading
and Chinese officials responded in kind. products: Wheat, corn, soybeans, cotton Included in the five markets in the chart
The heated-up rhetoric seemed to be and cattle. Looking at the cumulative are two pairs of underlying markets that
capable of starting a serious trade war in percentage price changes of the exchange- are significantly correlated. Wheat and
which each country would boost tariffs traded funds (ETF) associated with each corn are always worth inspecting because
that would raise the cost of the other commodity’s July 2018 futures contract, of their long-term tradable relationship as
nation’s exported products. we can see certain qualities that suggest a pair. Wheat is more volatile than corn,
By April, there was a temporary stand- promising trades whether or not an actual causing variations in the distance between
off; however, if either country increases its trade war develops. While some of the their prices that can be exploited for profit.
tariffs, the other is certain to reciprocate weakness — all but cotton and soybeans The basis between the two will typically
grow and then reverse over time creating
spread opportunities.
AGRICULTURAL COMMODITIES AT RISK
WEAT and CORN are the ETFs based
These five commodities would be greatly affected if trade tensions lead to greater
tariffs. Price has already been affected as all but cotton and soybeans have on the Chicago Board of Trade wheat and
dropped in value over the last year. corn futures contracts representing price
Source: Yahoo finance changes for near-term wheat and corn
futures. “WEAT – CORN” (right) shows
that WEAT, the more volatile member of
the pair, might have been bought or sold
several times against the opposite trade in
CORN, the more stable of the pair.
CATL and SOYB are the ETFs based
on the underlying live cattle and soybean
futures contracts. In this pair, CATL is the
volatile member with the soybean ETF
providing the stable background for pairs
trading. CATL and SOYB are especially
interesting at this time, with a potential
trade war between the United States
and China as a possibility (see “CATL –

ADVAN C E D TEC H N IQ U E TEC H N IQ U E S & TAC TI C S
WEAT - CORN Because China

This chart shows that wheat often surpasses corn in value, but typically
will revert to the mean. imports millions
Source: Yahoo finance of dollars of
American
agricultural
commodities,
these are under
greater threat than
other U.S. exports.
SOYB,” below). from South America. The starting positions on April 6, 2018
Soybeans are a large export crop and Trading choices for taking advantage are as follows:
any disruption of that market would cause of pairs that are temporarily out of line • Buy WEAT at 6.42; sell CORN at 18.05
drastic price declines. Therefore, the -15% include futures, options and ETFs. For • Buy July wheat futures at 4.885; sell July
difference between CATL and SOYB may the pairs shown on “CATL – SOYB” corn futures at 3.97
indicate that soybeans are priced high and “WEAT – CORN” we will start the • Buy July wheat 480 calls at 25.125; buy
relative to cattle. The pair might make a prof- following trades and follow the resulting July corn 400 puts at 18.540
itable trade — buying CATL or cattle futures profits or losses through the futures • Buy CATL at 6.055; sell SOYB at
against a sale of SOYB or soybean futures. expiration date in July 2018. 18.835
While China imports both soybeans Based on the charts, the cattle contracts • Buy July cattle futures at 102.775; sell
and cattle (beef products) from the United should gain versus soybean contracts, and July soybean futures at 10.545
States, it is much more dependent on wheat contracts should gain versus corn • Buy July 105 cattle calls at 4.000; buy
soybeans, and a trade war would likely contracts. On April 6, 2018, soybeans July 1080 soybean puts at 24.625
have a greater impact on soybeans. China were overvalued compared to cattle, and
has already moved to import more beans corn was overvalued versus wheat. These trades may be closed out at any
date on which the trader believes there has
been an adequate profit or an acceptable
CATL – SOYB
loss. The trade’s ultimate closing date is
During the last years the price of cattle increased 20% over soybeans, but is
currently 15% weaker than a year ago. This spread has been in a steady trend and July 13, 2018.
has shown less reversion.
Source: Yahoo finance Comparative Pricing
and Volatilities
“Agriculture calls” (page 68) shows the
relative call positions of soybean, corn,
cotton, wheat and cattle in the first week
of April 2018. Wheat has the most volatility
as expressed by the highest options price
curve. Each price curve shows the relative
volatility of the underlying futures contract.
Only two elements determine the curve
heights: time to the option’s expiration date
and the relative volatility of the underlying
futures contract. Because all of the options
in this sample have the same expiration
date, volatility is the only difference. ª
AGRICULTURE CALLS
On April 6, 2018,
Each price curve shows the relative volatility of the underlying futures contract. soybeans were
Source: Barchart.com overvalued
compared to cattle,
and corn was
overvalued versus
wheat.
“Agriculture puts” (page 68) shows that than soybeans. Historically, wheat futures trades above. The relative volatility and
wheat and cattle are the two highest in and wheat ETFs have ranged higher and repeated swings of the more volatile
terms of volatility. These are followed by lower than the more stable corn futures member of a pair above and below the
corn and cotton, and then by soybeans, and ETF prices. Cattle futures and cattle stable member are predictable, which
which has the lowest volatility. ETFs have occasionally strayed higher or should lead to profitable trades for the
The five agriculture commodities lower in price movements than soybean person who is patient enough to follow the
maintain the same structure of volatilities contracts. price changes.
in both charts. Volatility comparisons The two charts, “Agriculture calls” and Now in the second week of April, the
should be of interest in the pairs trades “Agriculture puts,” confirm that the options threats of increased tariffs between the
recommended above. Wheat has had market recognizes the volatility differences United States and China had at least
greater volatility than corn in the recent among the five underlying futures. This temporarily eased so that the turmoil in the
past, and cattle has been more volatile is the basis for our recommended pairs futures and equities markets had calmed
down. The advantage of knowing which
commodities have the greatest volatility
AGRICULTURE PUTS
and how they might be traded in pairs
The five commodities in this chart maintain the same volatility structure
with puts as it does with calls. is knowledge that could be even more
Source: Barchart.com valuable in the event a trade war reignites.
It will increase volatility for all contracts,
but if it doesn’t happen, these tendencies
still provide valuable insight into the
markets.
Along with U.S. farmers, we will
hope for a peaceful and profitable year,
but all followers of these markets and
traders looking to find an edge should
be prepared to trade agricultural futures
and options whatever the political and
economic outcome.
Paul D. Cretien is a financial analyst

and case writer for the Graduate
School of Banking at Louisiana State
University.

ADVANCED TECHNIQUE
In this first of a series of articles on trading

cryptocurrencies, we discuss the basics of crypto
and the blockchain technology behind them.
Cryptocurrencies
from the Inside Out
Q By Murray A. Ruggiero Jr.
The history of cryptocurrencies is short ymous due to a number of cryptographic worked out a plea bargain and suspended
but significant. Here, we will discuss the protocols developed by Chaum. The com- operations in 2009, and then restarted
core technologies of bitcoin and the other pany had made a brilliant product. two years later. Continued attacks on the
current generation of cryptocurrencies In 1993, Chaum invented the digital platform by cybercriminals and use of
including blockchain, cryptography and de- payment system eCash, which was e-gold as favored currency by extortionists
centralized systems. In later installments we perfectly suited to send electronic pennies, and money launderers led to its downfall.
will discuss the crypto markets and specific nickels and dimes over the Internet, as In 1998, WebMoney was created as
projects. Finally, we will develop mechani- transaction fees for small payments using a digital currency, however, it was not
cal trading strategies for these markets. credit cards were simply too high. However, decentralized. WebMoney was based out
Bitcoin was not the first virtual currency. DigiCash declared bankruptcy in 1998. of Moscow and offered many financial
Attempts to establish virtual currencies go Next we had e-gold, founded in 1996 services including peer-to-peer payment
back to 1990. Here’s a brief history. this digital currency was promoted as a solutions, merchant services, online billing
digital currency backed by actual gold. and payments, and even Internet-based
Crypto Forerunners At its peak, it claimed to have five million trading platforms. WebMoney competed
The concept of digital virtual currencies account holders. with e-gold and attracted many users, some
came into existence when electronic money The currency failed to stay clear of for illicit activities from e-gold after it was
corporation DigiCash Inc. was founded by people who used it for illicit activities. The shut down. However, WebMoney made
David Chaum in 1990. DigiCash transac- company was investigated repeatedly changes to its services soon after that to
tions were unique in that they were anon- for money laundering and eventually prevent its usage for illegal activities. It
currently supports a number of international
BUILDING BLOCKS currencies including the British pound, U.S.
The blockchain starts with the genesis block. Our simplified blocks show the dollar, Russian rubles and even bitcoin.
“Hash, Previous Hash” and data. Then we had Internet cash, which
Source: TradersStudio
started in 1999 and collapsed in 2001
after the Internet bubble broke. Internet
cash had patented technology for a secure
Internet payment system that was based on
consumers using a personal identification
number. It also pioneered web-based
electronic cash that verified transactions
without the use of credit cards.
Liberty Reserve, a Costa Rican-based
digital currency launched in 2006, was a
botched attempt to create a centralized
anonymous money transfer business. It
allowed users to open accounts on the
platform and without verification and ª
BUILDING BLOCKS The concept of

All new blocks are recalculated.
Source: TradersStudio
digital virtual
currencies
came into
existence when
DigiCash Inc.,
an electronic
money
corporation,
was founded by
David Chaum in
1990.
send money to anyone. This platform even people under the alias of Satoshi Nakamoto implemented solution enabled specialized
allowed the user account to hide their infor- published a paper called “Bitcoin: A Peer- codes and data fields from the start, which
mation from the people they were receiving to-Peer Electronic Cash System,” that laid was a precursor of smart contracts through
funds from. Platforms like these became out what would become bitcoin. The paper use of a scripting language.
popular for cybercriminals. Liberty Reserve contains all of the key concepts we know Nakamoto created a website with the
was forced to shut down in 2013 by author- today as core technologies: Blockchain, domain name bitcoin.org and continued to
ities from multiple countries including the proof of work, decentralization, immutability, collaborate with other developers on the
United States under the Patriot Act and its payment verification and a double-spend bitcoin software until mid-2010. Around
promoters were jailed for money laundering problem. Even the concept of the 51% this time, he handed over control of the
and supporting illegal activities. attack was discussed. GitHub repository network and handed
Perfect Money, founded in 2007, is Nakamoto released the first version over all the information required to keep
another digital currency platform that works of this software that launched the the project moving to Gavin Andresen.
with multiple currencies including the U.S. network and the first units of the bitcoin This required transfer of several related
dollar, euro, British pound and bitcoin as cryptocurrency, called bitcoins. Nakamoto domains to various prominent members
well as others. Perfect Money’s business released the Version 0.1 of bitcoin software of the bitcoin community, and he walked
increased when Liberty Reserve started on Sourceforge on Jan. 9, 2009. away from the project. Before this time,
to be restricted. Perfect Money offers ser- This new attempt of virtual money Nakamoto made all modifications to the
vices similar to Liberty Reserve, such as no was different than all the earlier source code himself.
requirement for verification. However, it is attempts because it was decentralized Nakamoto left a message in the first two
not available in the United States or for U.S. and completely supported by its own blocks of bitcoin which reads, “The Times
citizens located anywhere in the world. community by design. 3 January 2009 Chancellor on brink of
Nakamoto claimed that he began second bailout for banks.” The text refers
The Birth of Bitcoin working on the code in 2007. Bitcoin by to a headline in The Times of London
In October 2008 , just as the financial crisis its very core design was able to handle published on Jan. 3, 2009. This is why we
stated to accelerate, a person or a group of a broad range of transaction types. The believe that the genesis block timestamp of
18:15:05 GMT on Jan. 3, 2009 is actually
correct. This block is unlike all other
Nakamoto’s known addresses blocks in that it doesn’t have a previous

block to reference. This required the use
contain roughly one million bitcoins. of custom code to mine it. Timestamps for
As of April 17, 2018, this was valued subsequent blocks indicate that Nakamoto
did not try to mine all the early blocks
at more than $8 billion. solely for himself.

Nakamoto was the main miner of early bit-

BLOCK & TACKLING
coin and was awarded bitcoins at genesis
All the contents of a block — timestamp, nonce, data and previous hash—are used
and for 10 days afterwards. Except for test to calculate the new hash.
transactions, these remain unspent since Source: TradersStudio
mid-January 2009. The public bitcoin trans-
action log shows that Nakamoto’s known
addresses contain roughly one million bit-
coins. As of April 17, 2018, this has a value
of more than $8 billion. This would make
this person one of 200 richest persons in
the world, if indeed it is just one person.
Understanding the
Technology of Bitcoin
The blockchain is immutable and distrib-
utive, which makes it almost impossible
to hack, and it also solves problems like
double spending (see “Building blocks 1,”
page 69).
The data plus the previous hash is used
to create the hash for the next block. Think
of the block chain as a kind of spreadsheet
with recalculation only for the current block Another protection of this system, which the system would detect that the chain is
that is being written on. All other blocks did not exist in previous cryptocurrencies different than what the majority of the other
cannot be changed. If we try to change the before bitcoin, was the fact that it was nodes have and fix that chain. This is how
content of a block, it will recalculate the a distributive system. Every node on the distributive feature of the network helps
new hash and break all of the future blocks the system has a complete copy of the with security.
because the previous hash does not match blockchain. This means that if someone Bitcoin uses what is called a SHA256
them, and if we update the previous hash it tries to change a given blockchain, change algorithm to create its hashes. A hash func-
would require recalculating all new hashes data, recalculate hashes and fix the change tion is a one-way encoder you can’t reverse.
(see “Building blocks 2,” page 70). going forward, it would not work because It also has what is called the avalanche
effect, which means small
changes in content create
DIVVYING UP THE SPOILS large changes in the hash
The table shows the number of bitcoin that will exist in the future value.
and estimates when they will be created.
Source: Bitcoinwiki
What is Mining?
Date
Block
Reward BTC/ Year
Start BTC BTC Added End BTC
BTC End BTC% Mining is a way of
reached Era block (estimate) Increase of Limit
processing transactions
2009/01/03 0 1 50.00 2009 0 2625000 2625000 infinite 12.500%
2010/04/22 52500 1 50.00 2010 2625000 2625000 5250000 100.00% 25.000%
on the bitcoin network.
2011/01/28 105000 1 50.00 2011* 5250000 2625000 7875000 50.00% 37.500%
Mining has gotten more
2011/12/14 157500 1 50.00 2012 7875000 2625000 10500000 33.33% 50.000% computer-intensive over
2012/11/28 210000 2 25.00 2013 10500000 1312500 11812500 12.50% 56.250% time and now to mine bit-
2013/10/09 262500 2 25.00 2014 11812500 1312500 13125000 11.11% 62.500% coin you need specialized
2014/08/11 315000 2 25.00 2015 13125000 1312500 14437500 10.00% 68.750% hardware called the ASIC
2015/07/29 367500 2 25.00 2016 14437500 1312500 15750000 9.09% 75.000% machine to do it. Other
2016/07/09 420000 3 12.50 2016 15750000 656250 16406250 4.17% 78.125% currencies like bitcoin
2017/06/23 472500 3 12.50 2018 16406250 656250 17062500 4.00% 81.250% cash or ethereum can still
525000 3 12.50 2019 17062500 656250 17718750 3.85% 84.375% use a graphic card (GPU).
577500 3 12.50 2020 17718750 656250 18375000 3.70% 87.500% In bitcoin there is a con-
630000 4 6.25 2021 18375000 328125 18703125 1.79% 89.063% cept called a Mempool
682500 4 6.25 2022 18703125 328125 19031250 1.75% 90.625% (memory pool), which
735000 4 6.25 2023 19031250 328125 19359375 1.72% 92.188% contains all of the trans-
787500 4 6.25 2024 19359375 328125 19687500 1.69% 93.750% actions. Remember ª
that everyone gets a complete copy of the Another thing that can be changed is cess transactions is called proof-of-work:
blockchain Mempool. Bitcoin creates rules. which transactions are included in the the work of finding a valid hash.
Remember our discussion of the SHA256 block. The pools try different combinations Another competing concept is called
algorithm? It creates a hash value. In of these to be the first with a valid block. proof-of-stake, which is an alternative to
bitcoin, if we just allowed any old hash Then miners work to verify the block. If there reaching a consensus for the blockchain. It
they would be mined out in a few days. is a tie, miners continue to mine the block was proposed by a bitcoin talk forum user
Because of this, they created rules. For and the one that has the longest chain of in 2012 because proof-of-work required too
example, currently bitcoin requires a hash blocks where one miner or mining pool wins much electricity and energy, and miners
with 18 leading zeros. Mining is finding a becomes the part of the new blockchain. felt that mining a single block was a waste
hash value that meets the rules for a given For bitcoin, hash rate is king. In fact, of resources. Also, a few studies have sug-
subset of transactions. Beside this rule, the current number of hashes per second gested that running and maintaining proof-
there are many others. Back in the earlier on the bitcoin network is about 20 million of-work networks is as costly as powering
days of bitcoin, individuals would mine. trillion.In addition, every 2,016 blocks, millions of homes in the United States.
Today mining pools exist where groups of which on average is about every two Alternatively, proof-of-stake is a much more
people pool their resources together to weeks, bitcoin becomes more difficult to user-friendly (and environmentally friendly)
find a solution. Mining pool soft- alternative to proof-of-work.
ware intelligently split the work In this type of consensus mod-
HOW IT WORKS
to avoid duplication between el, the number of coins stored in
We would use the 0.6 BTC from Ron, which would
members of the mining pool. become two spent transactions: 0.5 for the auto shop your wallet is what matters. The
The odds of finding a given and 0.1 back to me. more coins you have, the better
valid value are extremely small, Source: TradersStudio your chances that you will not
currently, there’s a chance to breach the system because you
randomly find a valid hash. This have a vested interest in keeping
is why we need mining pools it running. In proof-of-stake,
and it’s also why it’s so hard to blocks are not mined, but rather
change and process enough forged or minted. The partic-
blocks to attack the system. You ipants who have a significant
would need more that 50% of the stake in the system get selected
hash rate to attack the system; pseudo-randomly for forging
this is called the 51% attack. and then adding blocks onto the
Then you could change enough blockchain.
blocks fast enough to make your This selection progress is
blockchain with the invalid blocks random but weighted based
valid. In addition you would need on the number of coins you are
to do other things like isolating staking. This will allow smaller
yourself while building your stakers to also be selected, so
blockchain. This is also why all stakers have a vested interest.
different exchanges and processors of mine because the valid hash values lower. This is done by applying other factors such
bitcoin require so many confirmations to As of this writing the reward for finding a as how long has the stake been parked.
make a transaction valid. valid block is 12.5 bitcoin, which is split Proof-of-stake is generally applied to those
“Block & tackling,” (page 71) explains among the mining pool or the node that cryptocurrencies that are pre-mined so that
several different concepts in the blockchain, finds it. The person or pool will get the users have access to the coins for staking.
but we would want 18 leading zeros, transaction fees. In case of a pool, the This means that the supply of proof-of-
not four — we are using four to keep our amount of the bitcoin each person receives stake cryptos are fixed from the start and
graphics simpler. All the contents of a block is based on their hash rate (see “Divvying there is no block mining or forging reward
— timestamp, nonce, data and previous hash up the spoils,” page 71). like with proof-of-work.
— are used to calculate the new hash. The Over time, 100% of bitcoin will be The only incentive proof-of-stake forgers
nonce can change from 1 to 4 billion and is created (21 million coins) and there will be have is the transaction fee attached to that
the one thing miners change to produce a no more bitcoins to mine, which will occur block. Some of the crytocurrencies using
valid hash. Let’s suppose we have a mining roughly by 2140. proof-of-stake are dash, neo, cardano and
pool and can run 4 billion nonces in less neblio. Proof-of-stake will be the future of
than a second. The timestamp will update Proof of Stake is the Future handing transactions for a blockchain be-
every second; this number is number of The method that is used in bitcoin and cause of the scalability of the hash rate and
seconds since Jan. 1, 1970. many other cryptocurrencies to mine/pro- the use of power to continue this process.

KEEPING IT SECURE
Here is a basic flow of moving bitcoin. message and a signature. This message
Source: TradersStudio and signature can be decoded and verified
as valid by using a validation function,
which requires the public key input. This is
how we know a transaction is valid and can
be charged against our unspent coins.
What is Smart About Smart

Contracts?
Now that we understand the basics let’s
talk cryptocurrencies. Bitcoin might be the
most popular, but there are thousands of
cryptocurrencies, and dozens that deserve
further scrutiny. They normally break
down into two groups; platform coins, like
ethereum, neo, cardano, stellar and nebio.
These coins are used to do things on the
network for that platform. Then we have
Transactions & UTXOs “How it works” (page 72) shows four tokens. Tokens are projects built on top of
Transactions are money orders to the unspent transactions that add up to 1.8 a given platform’s technology. The most
Bitcoin network that reassign value bitcoin. Let’s suppose you want to buy popular are EC2 tokens, which are built on
from one owner to another. To that end, a car for 0.5 bitcoin. We would take one top of ethereum.
transactions reference pieces of bitcoin or more UTXOs and use them as spent Why does all this matter? Some of the
in the inputs and reassign this value to transactions. blockchain platforms like Ethereum and
recipients in outputs. When the transaction There is no ledger that has the amount Neo have shown to be good investments.
is accepted on the network, the pieces of in anyone’s account, we need to take the The blockchain makes it easier to
bitcoin referenced in the inputs are spent copy of the blockchain and calculate those understand price action of these platforms.
and new “unspent transaction outputs” amounts. This is how a cryptocurrency For example, ethereum is down about 50%
(UTXO) are created according to the wallet works. from Jan. 16 through April 16 compared
transaction’s outputs. UTXO are how every When we open a bitcoin account or to only a drop of 30% in bitcoin. Once
participant in the network keeps track of wallet we have a private key. We keep this you understand the process of an ICO
where the money is in the network. UTXO to ourselves and we also must make sure with an EC2 token, you can understand
are not only created for change, but any we don’t lose it or we will lose our coins what is actually happening. Many large
time a transaction defines a recipient. (see “Keeping it secure,” above). ICOs offered in 2017 are now maturing
UTXOs are spent whenever they get used Here how this works. The private key and coming online. When these ICOs like
as a transaction input. However, even can generate a public key. The public key EOS were offered, they exchanged their
so the transaction remains part of the is what we give people who are sending us new tokens for large amounts of ethereum
blockchain and everyone can look up later money. If we want to send someone else during the ICO. Now they are doing a
where the transaction output was created money, we can use the public key or the crypto version of a stock buyback and
and (eventually) spent. bitcoin address, which is the SHA256 hash buying their coins and selling the ethereum
Therefore, after a UTXO is spent, it’s still of the public key. We only need to give they are holding.
a transaction output (TXO), but no longer people sending us money our public key. This is only one issue you will need to
a UTXO. The private key is used to create a understand before attempting to trade
cryptocurrencies, or derivatives based on
them. In future articles we will discuss how
Studies have suggested that to trade this new asset class and determine
running and maintaining if classical technical trading methods apply

to cryptocurrencies.
proof-of-work networks is as
costly as powering millions of Murray A. Ruggiero Jr. is a trading
system developer and the author of
homes in the United States. “Cybernetic Trading Strategies.”

TEC H N IQ U E S & TAC TI C S PAPE R TR AD E
PAPER TRADE
Traders must consider volatility when trading

a market; including the volatility markets.
Implied vs. Realized

Volatility & the VIX
Q By Yesenia Duran
Volatility trading is the term used to For example, the daily return of an average of observations of option volatility, or a vol-
describe trading the velocity of movement stock, or stock index, is slightly lower than atility index, such as the Cboe Global Mar-
in price of an underlying instrument rather one-twentieth of 1% (0.05%), so using a kets Volatility Index (VIX). VIX is designed
than the direction of price. For example, you mean of zero has little effect on the ultimate to be an up-to-the-minute market estimate
could trade the value of an equity index, but volatility value obtained by the formula, while of expected volatility of the S&P 500 Index
volatility trading typically means trading the it greatly facilitates the calculation. and is calculated using the midpoint of S&P
expected velocity of movement. 500 Index option bid/ask quotes.
Implied Volatility So, what is implied volatility? It’s the vol-
Realized Volatility Unlike the case for realized volatility, there atility that one would have to input into the
There are a few ways in which to determine is no definitive equation for implied volatility. options pricing model in order to arrive at
realized, market or actual volatility. The Typically implied volatility is calculated by the current option price. It is an observable
RealVol daily formula adopted by The Vola- taking the price of an option (usually the phenomenon that, for the most part, the
tility Exchange uses a traditional standard mid-price) and entering it into a pricing implied volatility surface for a wide range
deviation calculation, assuming a mean of model, such as Black-Scholes. Implied vola- of options on a specific underlying asset
zero for the return of the underlying asset. tility is less a calculation and more the result averages to a value that is somewhat higher
than the typical volatility that the asset even-
tually displays (the realized volatility). If that
sounds confusing, it is.
THE LIFE OF VIX
One explanation for this implied volatility/
Source: eSignal
realized volatility premium or gap is that sell-
ers of naked options bear an open-ended,
unlimited risk and, therefore, command from
the buyers, whose risk is predetermined
and limited, some form of extra compen-
sation. Simply, there is a premium cost to
having defined risk.
“Implied volatility represents the value of
volatility of the underlying asset that is fac-
tored into the current pricing of an option;
and realized volatility represents actual vola-
tility that occurred historically,” says Russell
Rhoads, CFA, director of product advance-
ment for global derivatives at Cboe.
The most common way to trade volatility
is via options. The value of an option is

PAPE R TR AD E TEC H N IQ U E S & TAC TI C S
In a rising market, FOLLOWING THE VOLATILITY

The VIX Index reflects the current estimate of expected volatility. It typically
stock prices closes at a price that is higher than the subsequent 30-calendar-day
tend to be less (21-trading-day) realized volatility.
volatile and option Source: Cboe
premiums low—
hence a lower VIX.
affected by several factors known as the of S&P 500 options. This volatility is meant Additionally, there are 24 other volatility
Greeks, but an essential determinant of its to be forward looking, is calculated from exchange-traded products (ETPs) based on
value is the expected future volatility of the both calls and puts, and is a widely used the VIX.
underlying instrument. Other things being measure of market risk, often referred to as The VIX intends to reflect the current
equal, options struck on an equity index the investor fear gauge. estimate of expected volatility and typically
with higher expected volatility will be more Cboe also calculates other volatility closes at a price that is higher than the sub-
valuable than options struck on an index indexes using the VIX Index methodology, sequent 30-calendar-day (21-trading-day)
expected to be less volatile. Options, there- including the Cboe Nasdaq 100 Volatility realized volatility. Since 1990, the average
fore, are a simple way to gain exposure to Index (VXN), the Cboe DJIA Volatility Index spread between the VIX and the realized
the volatility of the underlying. It is possible (VXD) and the Cboe Russell 2000 Volatility volatility of the S&P 500 Index was positive
to create a position that will not be affected Index (RVX). with one exception—2008. “Following the
by price, but gain or lose in value based on Cboe currently publishes data on more volatility” (above) tracks this spread.
changes in volatility. than three-dozen volatility-related bench- Movements of the VIX tend to depend on
The value of an option can be attributed marks and strategies, including indexes that market reactions. For example, on June 13,
to several components. By stripping these track broad-based indexes, sector and com- 2016, the VIX surged by more than 23%,
away, traders can imply an annualized vola- modity-related ETFs, individual equities and closing at a high of 20.97, which at the
tility level that the option’s tick value equates others. The VIX Index methodology is also time represented its highest level in more
to. This is known as the implied volatility. So applied to foreign equity indexes across than three months. The spike in the VIX
an equity index may be trading at a certain North America, Asia and Europe. came about during a global sell-off of U.S.
price and it may have exhibited a certain First disseminated 25 years ago in 1993, equities. This suggests that global investors
realized level of volatility during the previous the VIX was originally a weighted measure saw uncertainty in the market and decided
12 months. Traders can compare this real- of the implied volatility of eight S&P 100 to take gains or realize losses, correlating to
ized level of volatility with the current implied Index (OEX) at-the-money put and call a higher aggregate equity supply and lower
level as seen in the option market. However, options. It evolved to use options based demand, increasing market volatility.
there is a crucial difference; the implied vol- on a broader index, the S&P 500, which is
atility level refers to the annualized volatility intended to allow for a more accurate view Valuing VIX
that is expected over the life of the option. of investors’ expectations on future market Unlike equity indexes such as the Dow
In other words, it is forward looking and re- volatility. Jones Industrial Average or the S&P 500,
flects traders’ current best estimate of what Typically, VIX values of greater than 30 VIX is not calculated using stock prices.
future realized volatility will be. are generally associated with a height- Instead, the VIX is based on options prices;
A popular way to gauge volatility is by ened amount of volatility reflecting market specifically, the prices of options on the
watching the VIX, which is intended to pro- uncertainty, while values below 20 generally S&P 500 Index (SPX).
vide a 30-day measure of the expected vola- correspond to less stressful times in the One component in the price of SPX
tility of the S&P 500. The VIX is constructed markets (see “Life of VIX,” left). options is an estimate of how volatile the
using the implied volatilities of a wid -range Cboe offers VIX futures and options. S&P 500 will be between now and the

TEC H N IQ U E S & TAC TI C S PAPE R TR AD E
VOL SPIKE
Many volatility traders blew up this past February when the VIX spiked nearly causes traders to suggest that the VIX
300% in two days. is broken, because they observe the two
Source: eSIgnal markets moving in tandem. Others view it
as an anomaly when the VIX fails to register
upside increases in volatility.
The daily percentage moves of the VIX
tend to be around four times the percent-
age moves of the S&P 500, but unlike the
stock market, the VIX typically moves within
a fairly limited range.
Another way to look at the moves of the
VIX is to recognize that it is typically a few
percentage points higher than the recent
historical volatility of the S&P 500. Some
traders assume that the future volatility of
the market will be similar to recent vola-
tility, but this relationship doesn’t always
hold (see “Vol spike,” left). Option market
makers will typically price in a premium to
option’s expiration date. This estimate is not the expected 30-day volatility to be at +/- justify the risk they assume in buying/selling
directly stated, but is implied by how much 4.3%, the reported VIX will be 15%. options in the face of this uncertainty, and
buyers are willing to pay for a given option. this premium is typically reflected in a VIX
If the market has been gyrating like mad, What Does VIX Track? value greater than historical volatility.
option premiums tend to be high, whereas In general, option premiums move inverse- Overall, the VIX does a good job of
in a quiet market premiums tend to be less ly to the market. In a rising market, stock reflecting the current emotional state of the
expensive. prices tend to be less volatile and option overall market, such as fear or optimism, but
There are various ways of extracting the premiums low—hence a lower VIX. Declin- that doesn’t mean the SPX options market
volatility information from options prices. ing markets are volatile—just remember the is any better at forecasting the future than
One standard way is via the Black Scholes the old saying is that the market takes the any other market or index, according to
model, but those equations assume that stairs up and the elevator down—and option Vance Harwood, president at Six Figure
volatility will be the same for all available premiums increase. Much of this increase Investing. Traders don’t take the value of
options — something that is definitely not the tends to occur when worried investors pay the Dow as a predictor of the future, so why
case and they also underestimate the risk of a large premium on puts to protect their should the value of the VIX be any different,
a market crash. positions. he asks in an article on volatility for Sixfig-
The VIX methodology uses the prices of While S&P 500 option premiums gen- ureinvesting.com.
many different SPX options’ series to come erally move opposite to the S&P 500 itself, “There are possible ways that a new trad-
up with a measure of expected volatility. they sometimes go their own way. For ex- er can learn to understand the VIX Index,”
The VIX is an estimate of volatility over ample, if the market has been on a long bull Rhoads says. “One is by watching the price
the next 30 days. Stock market volatility is run without a pullback, institutional investors of the VIX relative to price changes in the
typically reported in terms of annualized may become increasingly concerned that a S&P 500. Getting a feel for how the VIX
volatility. correction is overdue and start bidding up tends to behave in response to S&P 500
Volatility tends to not move linearly with the price of puts, which may lead to a spike price changes, or when there are poten-
time, so the annualized number is not 12 in VIX values at the same time the S&P 500 tial market-moving events, such as major
times the 30-day estimate but rather about is increasing. The VIX has historically moved economic numbers, is a good first step in
3.5 times the monthly number. For example, in the same direction as the S&P 500 understanding the VIX Index.”
if the intermediate VIX calculation computes about 20% of the time, and this sometimes When VIX was created it was as a bench-
mark for implied volatility. Innovative traders
have created numerous uses for it. But for
Some traders assume that the future most traders, it is best used as a way to
hedge equity volatility.
volatility of the market will be similar
to recent volatility, but obviously this Yesenia Duran is managing and digi-
relationship doesn’t always hold. tal editor at Modern Trader magazine.

CALENDAR
U.S. economic data & select global influences
June: Exit the market

and enjoy the weather
As we mentioned last month, despite The few rare corrective moves in the Vital June Statistics
May’s reputation as being a time to sell, current massive bull market — occurring in
DJIA1 S&P 5001 NASDAQ
other months — June, August and Septem- 2010, 2011 and 2015 — encompassed the COMP. 2
ber, in particular — historically produce much month of June. So given the current market Rank 9th 8th 5th
worse equity market performance. June volatility, it’s a safe bet to fade equities Average % 0.02% 0.23% 0.97%
is a particularly poor performer, averaging in June. The month produced negative Change
negative performance in both the Dow Jones results in the Dow every year from 2005 Up 36 40 29
Industrial Average and the S&P 500. through 2011. Down 32 28 18
June’s weak performance has often been Ironically, despite a better overall Best & Worst % Change
attributed to the broader reduction of market average performance of 0.63% in June, Best 1990 1990 1997
8.3% 9.2% 11.1%
activity in summer months. Many people take the Nasdaq Composite has produced six
time off and often reduce their portfolio. negative monthly performances in June Worst 2010 1962 2000
-7.9% -8.6% -11.9%
The weak performance is real as June during the last nine years, which is more Courtesy of Stock Trader’s Almanac
1
has produced negative numbers in five than the Dow and S&P 500. The bulk of 1950 21971
of the last nine years, during arguably the the Nasdaq outperformance seems to be
strongest bull market of all-time following the based on a massive upward correction there does not appear to be a pairs trading
March 2009 low. from its dramatic bear market in 2000, so opportunity in June.
Reserve Bank of Australia Interest Rate Decision & Policy Statement
PMI Mfg. Index | ISM Mfg. Index | Employment Situation Report
Modern Trader Monthly Trading Calendar - June 2018
Chicago Fed National Activity Index | 3-Month Bill Auction

EIA Petroleum Report | Intl. Trade | Treasury STRIPS
EIA Petroleum Status Report | Durable Good Orders

PMI Services Index | ISM Non-Mfg. Index | Redbook
EIA Petroleum Status Report | Existing Home Sales

Reserve Bank of New Zealand Official Cash Rate
3-Month Bill Auction | Housing Market Index
Bank of England Announcements & Minutes

Treasury Intl. Capital | Consumer Sentiment
EIA Natural Gas Report | Jobless Claims |


Factory Orders | 3-Month Bill Auction
Redbook | Richmond Fed Mfg. Index

Bank of Japan Summary of Opinions
Chicago PMI | Consumer Sentiment

Fed Balance Sheet | Money Supply

Canada CPI | Canada Retail Sales
PPI | EIA Petroleum Status Report
Redbook | Housing Starts

CPI | Redbook | JOLTS
ECB Announcement
3-Month Bill Auction
Wholesale Trade
FOMC Minutes
1 4 5 6 7 8 11 12 13 14 15 18 19 20 21 22 25 26 27 28 29

TRACKING STOCK
MODERN TRADER provides cutting-edge actionable market

research while holding analysts accountable. And, when we publish
specific recommendations, we also will let you know how we did.
Winning:
Monthly market timing, gold rally, pairs
trade picks & Gartman’s gold call
Santa came early Monthly index arb stocks. This January that tendency held
up, although not as significantly as the
historical averages. The Nasdaq was up
508.09 points, roughly 7.3%, while the
S&P 500 was up 150.2 points, roughly
5.6%. The Dow was up about 5.5% (see
“Index arbitrage,” below).
Golden bull
December 2017 January 2018 Dennis Gartman provided a bullish outlook
Each month in our calendar section we The following month we reported on how on gold in the December 2017 issue as
provide an outlook on how the major equity the Nasdaq Composite Index, which well as a road map on how to approach it.
indexes behave in that particular month is heavily weighted in technology and While gold did break through the $1,260
along with the dates of the important Internet stocks, had vastly outperformed per oz. support area Gartman cited, he
economic reports released that month. the other stock indexes in January. In fact, provided a roadmap on trading it. Gartman
We try and dig a little deeper in examining the Nasdaq average January performance, said that gold rallies typically retrace
monthly performance to extract trends. 2.55%, was more than double that of the between 50% and 61.8% before resuming.
In the December issue, while noting the S&P 500, 0.94%, and triple that of the “Golden opportunity” (right) illustrates
typical strong performance of equities in Dow. Given this anomaly, we suggested this tendency as gold retraced 50% from
December, we discovered that in years either a pairs trade or overweighting tech its move from the December 2016 low to
where equity indexes performed extremely
well, they did not outperform in December. INDEX ARBITRAGE
If anything, they underperformed. The chart shows the outperformance of the Nasdaq Composite over the S&P 500
(COMPQ – SPY) in January 2018.
The “Santa Claus Rally” is a long-estab-
Source: eSignal
lished market phenomenon that is often
attributed to end-of-the-year window dress-
ing where portfolio managers buy stocks
that performed well during the previous
11 months so that they can claim it in their
portfolio. Perhaps in years where the broad
market does well, there is less of a need for
window dressing. This appears to be the
case last December as the S&P 500 re-
turned slightly less than 1%, well below its
average (since 1950) of 1.62%. The Nas-
daq Composite returned less than 0.5%,
well of its December average of 1.84%. The
Dow 30 slightly outperformed its average.

TRACKING STOCK
the July 2017 high. This opportunity was

GOLDEN OPPORTUNITY
created in December and led to a $119
Gold saw several strong rallies following a 50% retracement of a rally from its
move. The chart also illustrates Gartman’s December 2016 low. Most recently, it rallied roughly $119 per oz. from December
point as there were two shorter-term after retracing 50%+ of its move from December 2016 to July 2017.
buying opportunities based off of the Source: eSignal
December 2016 low.
He also recommended getting long gold
through the euro or Japanese yen, both of
which have rallied sharply against the U.S.
dollar since December.
December
2017
SIX-MONTH LOOKBACK
Below are the department trade recommendations from our December 2017 issue, along with an
analysis and grades on how they worked out.
Value at the
Dept. Author(s) Security or Sector Forecast Forecast’s Grade Outcome
Publish Date
WRK rallied roughly 15% from entry level to the Jan. 26 market
Buy Doug Busch Westrock Co. (WRK) Bullish $61.33 ∆∆∆∆∆ high before retreating during market correction.
NEW rallied more than 15% from Nov. 1 to the January market
Buy Mike Dudas Newmont Mining Bullish $35.69 ∆∆∆∆ high and took out that high in April, outperforming the broader
market.
BHP rallied roughly 20% from our short target, but missed the
Joseph BHP Billiton Ltd.
Sell
Parnes (BHP) Bearish $42.03 ∆∆ stop loss level and could have been exited with a minimal loss,
or you could still be short.
Nedoss predicted gold would once again fail to break through
the $1,300 level. He was right. In November, gold reached
Charles
Sell
Nedoss
Gold Bearish $1,271.80 ∆∆∆∆ $1,299 before dropping more than $50. You needed to take
profit, however, late in the year gold rebounded and soared
through the $1,300 per oz. level.
Short was bullish gold miners in Q4 2017. The largest gold
Christine mining ETF, GDX, slumped in November before rallying in
Earnings
Short
Gold Miners (GDX) Bullish $22.48 ∆∆ December and January before once again dipping. Currently it
is unchanged from Nov. 1 levels.
A poorly received quiet period announcement led to a 30%
Kemet Corp. (KEM) Bullish $24.82 ∆ drop in KEM Nov. 1 after hours. The stock has marginally
recovered since.
Industries John Blank SRI has rallied steadily since Nov. 1, with one dip back to even
Stoneridge Inc. (SRI) Bullish $22.20 ∆∆∆∆∆ and is currently 20% higher from Nov. 1 levels.
IEC drifted lower in Q4 2017 and Q1 2018 and is currently
IEC Electronics (IEC) Bullish $4.41 ∆∆ unchanged from Nov. 1 levels.
The CPO (Quant Cycle) expected gold to continue lower into
November before reversing higher through year-end and making
Gold Whipsaw $1,271.80 ∆∆∆∆ a significant top early in 2018. The reversal didn't happen until
December, but the gold followed the CPO forecast.
John The CPO (Quant Cycles) presented a smooth move higher. Nat-
Cycles
Rawlins Natural gas Bullish $2.90 ∆∆∆∆ ural gas did not cooperate, but after a sell-off, it rallied sharply
and reversed right on cue.
The CPO (Quant Cycles) forecasted a steady sell-off in the yen
Japanese yen Bearish 114.14 ∆∆∆∆∆ through Q1 2018. The yen dropped 10 handles and bottomed
out near the end of March.
Typically when the commercials are on one side of the market
Andy (short) and small speculators are on the other side (long) the
COT
Waldock
Heating oil Bearish $1.89 ∆ commercials win out. Not this time as heating oil continued to
rally through year-end.
Cornell priced BP at $43.40 after completing spinning off its
Spin-Offs Joe Cornell BP Bullish $40.76 ∆∆∆∆∆ BPMP subsidiary. It reached and slightly surpassed that level in
January and is currently trading at that level.
* Signal initiated prior to publication date. Note: Forecasts are scored ∆ (weakest) to ∆∆∆∆∆ (strongest) based on actual outcomes.

ENERGY OUTLOOK
2020 Crude Vision

Q By Paul Kuklinski
New bunker fuel requirements for the OPEC’s cut could deteriorate and result relates to Iran, China and Venezuela.
maritime industry, which will be effective in oil price weakness. The high current Iran is currently producing 3.81 million
in 2020, will have a large impact on crude risk of a political disruption could lead to barrels-per-day (MMBD), up from 2.91
oil and liquid fuel markets during the next a shortage. Otherwise, the fundamental MMBD in 2015 before sanctions were
five years. An insight as to how trends short- and long-term outlook—upstream and lifted. As of the date of this writing, May 12
will evolve and the final result may be downstream—supports firm to higher prices. is the next date President Donald Trump
gleaned by considering the impact from WTI crude oil is $66 per barrel, with a $5 will decide whether to waive sanctions
a refiner’s perspective. Several items will discount to Brent. Spot Gulf Coast gasoline again, and the decision will be based on
have a bearing on this, particularly OPEC’s prices were $1.87 per gallon in early April, an increase in European commitment. If
response to upstream supply trends, up 10% from the Q4 2017 average. Low sanctions are re-imposed, there will be a
downstream capital spending, the type of sulfur diesel prices are $1.94, up 6%. WTI six-month non-enforcement period to allow
projects being funded, potential political is up 14%. Gulf Coast cracking margins are companies to unwind their commercial ties
upheaval in important oil producing states, comparable to last year. to Iran with a negative impact on Iranian
and the response of marine fleet operators. production. A forced reduction in Iranian oil
In 2018, continued OPEC discipline How We Got Here exports will cause a meaningful increase in
will likely eliminate the surplus in global oil Geopolitical risk likely added several dollars oil prices.
inventories with a balanced market and oil to the price of oil the last few months. WTI China will account for one-third of world
price stability by mid-year (see “Balancing averaged $55 in Q4 2017 and $51 for all oil demand growth in 2018. Its demand will
supply & demand,” below). Yet, there of 2017. Political risk will remain elevated increase by about 500 thousand barrels
is significant risk that compliance with for several months at least, primarily as it per day (MBD). Protectionism poses a
risk. The International Monetary Fund
anticipates a 4.6% increase in world trade
BALANCING SUPPLY & DEMAND in 2018, supporting the growth in world
Both consumption and production of liquid fuels around the globe appear to be oil demand. A slowdown would primarily
relatively balanced.
Source: EIA (Short-term energy outlook, April 2018)
impact fuel demand in the maritime and
trucking industries.
The International Energy Administration
(IEA) estimates a 1% reduction in global
GDP growth, which would reduce global
oil demand.
Venezuela’s dire situation continues to
worsen. The IEA anticipates that by the end
of the year, Venezuela production could fall
to its lowest level since the late 1940s. It
has $1.7 billion in interest payments due
in Q2 2018 and another $1.7 billion is still
in arrears. A $753 million principal debt
payment is due in August.
A reduction in surplus inventories also
played a role in increased oil prices. U.S.
crude oil inventories have fallen 105 MMB
to 429 MMB since last year. They are now
near the five-year average despite a strong
increase in U.S. crude production in the

ENERGY OUTLOOK
Political risk will remain

elevated for several months at
least, primarily as it relates to
Iran, China and Venezuela.
Q1 2018 compared to Q4 2017. While likely eliminate the surplus by mid-year. 2020-mandated change in bunker fuel
gasoline inventories are about the same Since the OPEC production cut was specification to reduce the sulfur limit from
as last year, distillate inventories are 15% implemented at the start of 2017, OPEC 3.5% to 0.5% as an attractive opportunity
smaller. This winter was 10% colder than compliance has been high, except for for them.
last and close to normal. The U.S. market is Iraq, which could add meaningful volumes Planned refining capacity additions
in balance, bordering on tight. during the rest of the year. Libya and the next five years pose a risk to simple
Export demand is very strong. Record Nigeria were exempted from the cut. refineries, which are expected to result
U.S. crude oil exports the last week of in forced closures, particularly after the
March were larger than last year and larger What We Can See impact of IMO 2020.
than two years ago. Crude exports have Demand growth is exceptional. U.S. Diesel and distillate fuel prices in 2020
averaged 1.5 MMBD year-to-date, stimu- refiners continue to operate at seasonal are expected to be much higher in re-
lated by the very wide Brent premium over record levels. Global throughput will also sponse. Some expect the IMO mandate will
WTI. Gasoline exports so far in early 2018 be at a record level of 81.8 million barrels add $7 to the price of crude oil in 2020.
are larger than those from the same time daily (MMBD) in Q2 2018 (1.5 MMBD
the previous year and larger than two years higher than last year). Attractive margins Where the Road is Pointing
ago. Diesel exports are also growing. are expected to continue in 2018 and Assuming the remaining modest surplus
OPEC has significantly reduced its 2019, with capacity well balanced with OECD inventories is eliminated by mid-
exports to the United States. U.S. crude demand. Product prices the rest of the year year as indicated, and without an impact
imports from OPEC in Q1 2018 were down are expected to mirror modest anticipated from unexpected political events, crude
from the prior quarter following a decline changes in crude prices. oil prices the rest of the year are likely to
from Q3 2017. In Q1 2018, crude exports A tight global product market for high- remain comfortably above $60. In addition
to the U.S. represented 7% of OPEC end products is expected to continue to increased geopolitical risk over the
production compared with 8% in Q4 2017, during the next several years. After this period, the run-up in crude prices from
and over 10% in the first half of 2017. year, global oil demand is set to expand mid-2017 to the recent peak did mirror
The global market is close to balance. by 6.9 MMBD during the following five the decline in surplus OECD inventories
OPEC estimates that the Organization for years to reach 104.7 MMBD in 2023, targeted by the OPEC cut.
Economic Co-operation and Development growing 1.4 MMBD annually. During the The latest data indicates global demand
(OECD) inventories are now 207 MMB low- next 20 years, the growth in demand for will increase seasonally in Q2 2018 by
er than a year ago but still 43 MMB larger petrochemical feedstocks will be larger 900 MBD from Q1 2018. An additional
than the five-year average. All of the surplus than the loss of oil demand from the growth 600 MBD sequential increase is projected
is in crude, while products show a deficit. of electric vehicles. in Q3 2018 and 900 MBD in Q4 2018 to
The OECD accounts for 48% of total world Major refiners are looking at the reach 100.05 MMBD.
oil demand. Continued OPEC discipline will International Maritime Organization (IMO) Going forward, movement in fuels and
crude oil prices will likely be increasingly
viewed through a wide angle five-year
In 2018, continued OPEC lens. The final result will be the sum of
multiple impacts, all of which need to be
discipline will likely eliminate monitored.
the surplus in global oil Paul Kuklinski, founder of independent

inventories with a balanced research firm Boston Energy Research,
market and oil price stability by selects equity investments in the energy
sector for major institutional investors
mid-year. based largely on his crude oil outlook.

FUTURES TRADER
An old investment model is making a comeback
Trading system
shopping
In the early days of technical futures trading systems, it was Securities President William Gallwas. “Hypotheticals are
common for retail investors to purchase trade signals for technical potentially misleading. You have seen so many hypotheticals that
systems. You didn’t need to invest in a mutual fund, commodity pool don’t live up to performance. Nothing we show on our website is
or commodity trading advisor; you could respond to an ad for a hypothetical, it is only actual [returns], and that makes it unique.”
packaged technical system with a profitable track record and simply While packaged futures trading systems were more popular and
receive the signals and have you broker trade those signals. available 20 years ago, Gallwas says that they are experiencing a
These systems were widespread and often offered sometimes rebirth.
questionable return statistics; so much so that John Hill created “The reason it is expanding is the client gets a daily result,
Future Truth Magazine in 1985 to test the myriad of available daily information and keeps 100% of the profit; [they] just pay
technical trading systems to make sure they produced what they commission,” Gallwas says. “They pay a higher commission — this
promised. Hill questioned some return claims, so he backtested is not $3 to $4 a roundturn — but that is why the [introducing
the systems himself and provided third-party statistics on the brokers] need this. There is a healthy commission for the IB to
validity of those systems’ performances. market this.”
Ten years later, Striker Securities followed that model, but He describes it as a win-win-win. “Investors in the product make
went one better. They would serve as a broker and only present money, the IBs make a decent commission and from a compliance
actual trading results of the systems instead of just hypothetical standpoint its all actual performance so regulators like it. When
backtested results. you have a business model that is a win-win, it grows.”
“There is no other firm in the industry that shows only actual The structure is relatively simple. Striker lists about 200
performance of third-party trading systems,” says Striker systems, 150 of which are open to the general public. The
FEATURED SYSTEMS
Below are five trading systems Striker recently featured. Investors can view their subscription and commission fees along with
their performance (net of fees) since Striker began tracking them.
Source: Striker Securities
System/ Vista IIB MeanSwing II Pegas 1 CL Gator KC Full Boat

Launch date * (June 19, 2013) (Oct. 4, 2012) (Oct. 22, 2015) (Jan. 4, 2017) (Aug. 30, 2017)
One unit investment $21,500 $15,000 $5,000 $12,000 $30,000
Monthly subscription $96 $100 $100 $80 $300
Roundtrurn
$15 $40 $15 $20 $30
commission
Profit/loss (total) $19,875.29 $42,429.37 $12,680.25 $15,320.82 $8,229.62
Average annual
$4,042.43 $7,599.29 $4,908.49 $11,490.61 N/A
profit/loss
Total # trades $486 $62 367 22 105
Winning Trades $227 $50 203 17 43
Average winners $596.97 $1,443.90 $318.91 $1,268.01 $940.84
Average losers ($406.37) (2,081.30) ($275) ($1,004.75) ($453.96)
Max monthly
($5,968.63) ($10,665.45) ($4,728.31) ($2,472.01) ($5,505.50)
drawdown
* Date Striker began tracking program

FUTURES TRADER
“Institutional guys have

figured out we are showing
valuable information. Some
of these developers are being
bought out by the big boys.” developers. [That] is a big deal. There is no trading here,
so developers look at us and say ‘I can trust you with my
--William Gallwas
algorithms.’”
systems are available through Striker’s IB and white-labeled Developers gain money, exposure and discovery.
and available through 30 participating IBs. Striker publishes “Exposure means more people going to their websites, finding
the results of each system net of fees based on a minimum them and seeing other products they may offer. Discovery is when
investment for one contract (investment unit). The investor pays a large fish with a lot of money discovers them and partners with
a monthly subscription fee based on trading one investment unit them or buys them out,” he says.
and a commission, which varies depending on the system (see That is happening more frequently, according to Gallwas, as
“Featured systems,” left). more institutional focused developers choose to seek exposure.
“Striker was born for compliance. The reason Striker shows Quite a few of the systems on Striker are also CTAs. “They look
performance is to show transparency to the client. We are at Striker and [know] they will appear on 30 broker sights. A lot of
showing performance; we are not promoting the systems, the CTAs are working with Striker, realizing it will create positive cash
promoting came secondary,” Gallwas says. flow,” he says. “Institutional guys have figured out we are showing
All the results listed are net of fees and all the fees are valuable information. Some of these developers are being bought
transparent. out by the big boys. Institutional people have figured out we are
“The client provides a letter of direction to the clearing firm and putting up good statistics. We also are gaining more institutional
the IB, [that says] trade only X system,” Gallwas says. “Letter of accounts, but we are basically offering a retail product.”
direction business has been around for [more than] 20 years, but Furthermore, Striker has no financial relationships with any
it is expanding,” he adds. third-party developer. “I don’t co-own [any of the systems], I don’t
“The developers have trading code that we load on our servers get any kickbacks, there is no money between Striker and [and
and Striker does all the executions. Developers come to Striker the systems we track],” he says. Therefore, there is no bias at
from all over the world and know that if they are live at Striker they Striker; we don’t care [what system] you like, we’re just the firm
are live at 30 other brokerage firms.” that executes and reports the results of the [firm’s system] on the
While they can load the systems at Striker, system developers website.”
can send the signals so they are not giving up their proprietary It is this simplicity that Gallwas cites as the reason for recent
strategies. growth. The model harkens back to the early days of managed
“They can keep their secret sauce,” he says. “Under our policies futures but is alive and well.
there is no employee, house or owner trading. There are no “Striker is the little plant that never went out. We are doing
house systems. Striker therefore has no conflicts of interest with exactly the same things. One of the reasons we survived is
because of the transparency,” Gallwas says. “We’re
kind of like neutral cheerleaders: we hope they all do
“We’re kind of like neutral well, but we don’t have our own money in it. When we
arrive at work every day, we are like air traffic control:
cheerleaders: we hope they we make sure all the planes take off and land, and
all do well but we don’t have everybody is safe and goes home and come back the
next day. That is Striker in 1997 and that is Striker in
our own money in it.” 2018.”

CLOSING TICK
Guest Editorial
Managing change
is ultimate
investment strategy
Q By Neill Vanlint
An ancient Greek philosopher named Heraclitus is said to have keep tabs on all of their operations.
coined the phrase “The only thing that is constant is change.” On top of this, investor demands and regulatory bodies are
Roughly 2,500 years later and these words ring truer than ever. In turning towards sustainability with environmental, social and
the world of asset management, it’s crucial that firms have a grasp governance (ESG) considerations on the rise. There is an unde-
on where things are heading so they can remain competitive, niable trend across the globe where investors want a more social
but it’s becoming increasingly difficult to predict the direction in and environmental approach, and this demand is set to rise as
which things might go. well. Eventually, it’s likely investors will simply expect this to be
incorporated into their portfolio, so firms will need to
factor this into their ongoing strategy. Similarly, alterna-
Geopolitical curve balls, tive investments, such as real estate, infrastructure and
such as the potential for a commodities, are becoming more popular. This is being
spurred on by the ongoing market volatility that links to
Trump-driven tariff-based the current economic and political landscape – another
trade war, are also coming key area that is proving difficult to read.
Geopolitical curve balls, such as the potential for a
around thick and fast. Trump-driven tariff-based trade war, are also coming
around thick and fast. This can prove problematic both
Technology leads the conversation on change, and if firms avoid for risk management, as well as developing long-term strategy.
new initiatives and fail to keep on top of trends they will simply fall Brexit, for example, has surfaced issues on whether or not to
behind. The broadening use of exchange-traded funds (ETFs) and open new offices in other domiciles and, if so, where the best
passive algo-based investing is an ongoing race to use data and place to move would be? It’s not yet clear. All such decisions
analytics to develop the most sophisticated investment strategies. take careful consideration, once again demonstrating the impor-
Firms also need to keep internal operating systems running as ef- tance of asset managers having the ability to make quick but
ficiently as possible. Technology can alleviate administrative bur- also well-informed decisions in order to keep pace with the mar-
dens, as well as improve investment strategy, so it’s important to ket. On the topic of market volatility, decisions need to be made
judge which new technologies are worth integrating and, perhaps as to whether to jump on the cryptocurrency bandwagon, or
more crucially, which aren’t – a classic example being distributed avoid it like the plague. For the moment, generally, firms seem
ledger technology (a.k.a. Blockchain), which people cannot agree to be avoiding crypto, but the topic is not going away.
on what its full effect will be. All this means asset managers need to ensure they are doing
Most firms are still getting used to the changes from MiFID their utmost to keep up with the trends and developing strategies
II and the long-term effects have yet to be seen. But the likes that bear these changes in mind. The future of asset management
of MiFID II, Investment Company Reporting Modernization and remains shrouded in mystery. So whatever materializes, it’s clear
Funding Liquidity will not be the end to all regulation. As the that the ability to adapt may well become the defining feature for
financial industry evolves with new fintech firms and offerings asset managers, both big and small, to succeed.
appearing on the scene daily, and as trading goes ever more
global with accelerated growth in emerging markets, new Neill Vanlint, managing director EMEA and Asia at
regulation will come into play. Looking ahead, firms will have GoldenSource, is head of global sales and client opera-
to examine whether it will be worth investing in developing the tions and is responsible for spearheading the company’s
systems in-house or outsourcing them as well as ensuring they strategic international growth.

The Past 12 Months of MODERN TRADER…
Trade Wars & the Return of Volatility

A broad look at the impact of the current administration’s trade policy. Our contributors discuss
whether current market conditions are providing historical clues for trade policy going forward,
or whether the low interest rates, which are driving the bull market, can overcome the economic
impact from tariffs.
Special Reports included: An examination of the real return drivers of hedge funds, it might
surprise you; breaking down the newest investable cryptocurrency index; Art as an investment;
Off-the-rack trading systems; the volatility of VIX and 31 trading ideas from our experts.
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Real talk on business, finance, politics & alternative investments.

“Reaching this settlement “Robinhood’s

was a big mistake.” to about $6 billion, up from $1.3

“Whatever they’re buying is non-U.S. They’re buying

10 | MODERN TRADER | June 2018 M o d e r nTr a d e r. c o m

M o d e r nTr a d e r. c o m Issue 544 | MODERN TRADER | 11

See how Schwab compares.

commission-free online trades

Apple building AAPL

Doug Busch (CMT) This month in TRADES

M o d e r nTr a d e r. c o m Issue 544 | MODERN TRADER | 13

Buffett bailed on IBM:

Joseph Parnes is an independent

14 | MODERN TRADER | June 2018 M o d e r nTr a d e r. c o m

acreage in the “sweet spots” in U.S.

Enron’s resource plays, which are relatively small.

Paul Kuklinski, founder of

M o d e r nTr a d e r. c o m Issue 544 | MODERN TRADER | 15

Whirlpool Corp. (WHR) has continued to make lower lows

Is since failing to take out resistance at $200 on several occasions

WHIRLPOOL CORP. (WHR)

16 | MODERN TRADER | June 2018 M o d e r nTr a d e r. c o m

Christine Short, Estimize senior

M o d e r nTr a d e r. c o m Issue 544 | MODERN TRADER | 17

Two hot computer

18 | MODERN TRADER | June 2018 M o d e r nTr a d e r. c o m

TOP-RATED INDUSTRIES The

M o d e r nTr a d e r. c o m Issue 544 | MODERN TRADER | 19

Quant Cycles (formerly called the Cycle Projection Oscilla-

20 | MODERN TRADER | June 2018 M o d e r nTr a d e r. c o m

Quant Cycle cyclical analysis

John Rawlins is a former member of the CBOT with

M o d e r nTr a d e r. c o m Issue 544 | MODERN TRADER | 21

Matt Weller is a CFA charterholder

22 | MODERN TRADER | June 2018 M o d e r nTr a d e r. c o m

Trade war trade