Andy Swan » Screw signal….NOISE is where the trade is at

Screw signal….NOISE is where the trade is at

March 11, 2009 – 11:15 pm

You don’t need to listen to ANYONE to make money in this market. In fact, I dare say, that the amount of time one spends reading the blathering of others is inversely correlated with the amount of coin he is banking.

I know this is the case for me.

The reason that I was able to see this rally before it happened was that I have a “gift” (also known as experience, also known as past monetary losses) for understanding the value of noise and its volume level.

Over the past week, I’ve seen little old ladies trying to figure out how to buy gold and short real-estate.

Over the past week, I’ve heard bartenders discussing the ineptitude of over-leveraged bankers.

And, to take the cake, today I saw Goldman talk down Amex in order to give its prop desk a chance to catch up to Tuesday’s amazing action.

All of that was deafening noise. Noise that indicated that, in fact, the entire world was leaning towards the downside (and for the most part, still is!), and would be shifted off balance with the touch of a feather.

And mind you….a feather is all it took. Of course the Citi “we’re profitable except the part where we’re taking massive losses news” was silly. But it WAS positive, even if only slightly.

And when the entire world is already all-in leaning in one direction….THAT is all it takes.

Stop reading my opinion on your stock, despite its likely accuracy.

It’s not the signal you should be after….

High-volume, noise in unison, capable of being silenced with the touch of a feather…..THAT is where the big trades hide.

And the best part is, you don’t even have to look for them. They will come to you via your aunt, a bartender, a taxi driver and Godman analysts all chanting the same hymm in unison.

Just don’t join the chorus.

infoarbitrage

Andy, you are a smart, intuitive trader with fantastic instincts. This is one of the ways your "feel" for the market manifests itself. I've seen you combine both price action and non-price related variables (such as noise) to make intelligent investment decisions. This was a good piece to share. A nice wake-up call.

sanddo

In short, we haven't seen the bottom.

Soren Macbeth

I would suggest that this is just you taking your signal from the noise level, not that you don't need a signal. The level of the noise WAS your signal.

andyswan

I hear you, but I disagree. There is a big difference between recognizing
"noise in unison" and seeking out THE signal(s) that you're going to follow.

Soren Macbeth

I'm not implying that this is always a signal or that it is your only one. simply that you used "noise in unison" as a signal to get long. I agree with your fundamental premise, which I take to be don't always ignore the noise.

derek

Well done, Andy

beanieville

I thought it was Kass and Ritholtz bottom calling that was the trigger?

Bottom calling coming from the usual bears are very powerful.

ivanhoff

Contrary trades are really hard to time. This is why they are best executed by gradually building your intended position. This is what I did with FAZ. I initiated a 1/3 of intended short position on Friday. Added another 1/3 on Monday as I noticed its weakness. On Tuesday morning added another 1/3. Wednesday I saw it dropping below $55 and decided not to be a pig and put a trailing stop to cover my position. Got stopped at 53.

I noticed that your portfolio has positive theta to provide yourself with a little downside cushion. What was your contingency plan if SPX had dropped below 650, where the damage from negative delta and vega would be horrendous.

darin

I entirely agree. In the past I tried reading a ton of news and analysis and it didn't help at all. I trade off charts and if I just focus on that I do well.

Hearing non-traders talk about stocks is so fascinating. Not only because they are usually good contrary indicators, but also because of their strange way of deciding what and when to buy.

avcacio

Nice letter! The feather - it's true!
I felt it the prior evening - seeing the ES Futs climbing...

It's a pleasure to learn from you and still look up to that Range Rover Trade - which I thought was a pretty cool approach to a trade. :) (I have some longs, but still leaning short)

howard lindzon

or follow smart people. i noticed you, roger and a few others I trust getting long or covering, topped off with my same hunches and made the long trade from the beach.

experience helps, but with the new tools like we offer, i cant believe the advantage new investors are getting these days :)

This trade will be very hard. it will happen fast or relentlessly slow. nobody has seen a bear this wicked. good call though i the meantime