Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.



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James Tar: Tennis and Markets

Tennis is a game that demands accuracy, as does trading. If you can't keep the ball in the court and in play, the rules command that you can not win. Lots of factors influence the ability to keep the ball in the court: your skill, the skill of your opponent, your equipment, your opponent's equipment, the quality of the court. As a former competitive player who played the challenger and satellite circuits, I played in tournaments all over the world, on courts that didn't have proper lines with fish nets as the nets. The conditions were tough, but they were the same for each player. Just like the markets. Now, given that a court is perfect, your equipment sound, your skills intact, the one thing that influences accuracy that you can not control is the wind. As you may have seen yesterday at the US Open, wind is a player's worst nightmare. Imagine hitting a ball perfectly up the court, three feet inside the line, and having it be pushed wide of the court because of a 40 mile per hour gust. What started with technique resulted in a loss. Your skill was perfect, but the wind ruined y our opportunity for success. How do you play and trade in Windy Conditions? Well, though the wind is perceived as being predictable, it can be extremely random, especially in a stadium. What goes left, suddenly turns right. The key to playing in the wind is to widen your margin of error. If shots are moving three feet right or left after you impart direction on the ball, you have to make adjustments, or, keep the ball closer to the center of the court. Play the middle. The markets have winds too. Sometimes they blow up, sometimes they blow down, with some interference and momentary reversion within each gust. As Specs, we deal with winds every day, but there are many different types of winds in the market than those on a tennis court created from mother nature. The moves alone are winds. Trend followers need winds to blow in a consistent direction. Mean reversionists need the winds to change direction. But levels of uncertainty, fear, risk tolerance/risk avoidance are also winds, and these winds influence the levels and activity in the market. It's easier to go for the line and make bigger bets when these types of winds are manageable, predictable and vice versa. My Steakhouse Indicator, Ferrari Indicator, and Commission Indicator tell me that there are a lot of these types of winds blowing at the moment, very few are playing close to the line.