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Tuesday, November 29, 2022


Former SAC Portfolio Manager Breaks Down His Trading Day Routine

In a time of daily market chaos, former SAC PM and founder of DataTrek Research Nick Colas shares a review of his daily market-watching routine. The 3 key events are the open, the trading session itself, and the close. Each has its own dynamics, and collectively they are a conversation between markets and traders/investors. As Colas notes, “even the longest-term “buy and holder” can benefit from a bit of daily market awareness. The year, after all, is 220 trading days strung together. Even if most of them mean nothing to long-run returns, there is always a reason the critical days turn out the way they do.”

* * *

“Nicky … Let’s hold hands and watch the open.”

That odd invitation came from a veteran salesperson just after I started my first sell-side analyst job at the old First Boston in the fall of 1991. He was dead serious. I was, well, confused. Not wanting to offend one of the firm’s top producers, I acceded. Thankfully, the rest of his row on the trading desk joined hands as well. We all stood in line, watching the screens as US markets opened at 9:30am.

As each symbol came to life, the group cheered or groaned. I was still confused.

“What’s so important about the open?” I asked. The salesperson, seemingly happy to teach a rookie, responded “It’s the first tick of the day … We are watching our clients’ biggest positions. Once everything opens, we know if they will be in a good mood when we call them to pitch new ideas.”

I thought this was overly simplistic until, many years later, I started managing a trading book myself. Then I learned that, in fact, not only the open matters a lot. Every trader knows that three things happen every day: stocks open, they trade, and they close. The dynamics of each slice of the day are quite different, and there is money/knowledge to be made/gained in each of them.

Basically, I think of the trading day as a conversation between the market and investors/traders. There is a beginning, middle, and end of that interaction. It can be a happy interaction, or confusing, or just downright nasty. And every day brings a new conversation based on new information and refreshed market expectations.

Here are some of the key datapoints I look at every day going into the open, then through the session, and finally at the close:

8:00 am – 9:30 am

  • The first thing I look at when I wake up is US equity index futures. I also glance at them before I go to bed, and the difference between the two can be instructive in terms of market sentiment when the cash market finally opens.

  • Then I move on to overseas stock and non-equity markets: is anything really breaking down/up? The latter category includes currencies, gold, oil, and European sovereign bonds (mostly the German bund). I don’t really bother to track virtual currency prices, but plenty of smart traders I know do monitor them, especially on Sundays before equity index futures open at 6pm.

  • If there is any pre-open economic news, I look to see how markets respond as those datapoints are released.

  • Watching to see how US Big Tech is trading pre-open is also helpful, since these names make up almost a quarter of the S&P 500. For example, this morning I was very curious to see how Tesla was trading after its earnings call. Specifically, I wanted to see if it would break or hold its 1-year low of $205/share.

What I am looking for is consistency and, separately, any new 52-week highs and lows. For example, if US Treasury yields are making new highs and stock futures are up, that’s an internal inconsistency that makes me suspicious of any pop at the open. The same idea goes for non-US currencies just now given how relentlessly weak they have been all year.

9:30am – 4:00 pm

  • Lately I have been watching how the VIX trades intraday. If stocks are selling off and the VIX gets to 32 – 33, I start looking for a reversal higher. If we are not at a +32 VIX, I tend to not trust any intraday rallies.

  • I also look at the 5-day intraday S&P 500 chart throughout the session. This is especially important just now, as many traders are looking for a bounce in US equities. They will want to see a consistent uptrend to hold their courage.

  • I also keep tabs on 2- and 10-year Treasuries and Fed Funds Futures via the CME FedWatch tool throughout the day, as well as intraday US equity sector performance.

  • This may just be an old trader’s superstition, but I tend to discount any large moves between 11:00 am and 2:00 pm unless there is a clear catalyst that explains them.

  • The last 40 minutes of the day matter a lot. This is when human and algorithmic traders start evaluating how much they have left of the day’s buy/sell orders and if/how to get them done by the close.

4:00pm and after

  • My primary focus is on whether the close is higher or lower than the open as an indicator of how the day really went. If we opened up 2 percent but close only up 0.5 pct, that’s a bad day from a market psychology perspective. If we opened down 2 percent and ended the day up 0.1 pct, that is a very good day. We could use some of those days right now, but they have been thin on the ground.

  • There is an old saying that “retail investors open the market, but institutions close it”. The data we look at suggests that is true, and it provides some context for the previous point. It is more important to overall market direction that institutions be net buyers at the close rather than retail bid up stocks at the open.

  • I finish the day by looking at how any important stocks with market-moving news traded after hours.

If you are a buy and hold investor, you might rightly ask “why do I need to pay attention to daily moves?”. The short answer is that you don’t. The longer reply is that, in my view, it makes you a better steward of your and (if applicable) your clients’ capital. Over the years I have found that the ability to weather volatility is directly correlated to knowledge about the fundamental drivers of asset prices. A calendar year is 220 consecutive trading days. Even if daily volatility makes most of them irrelevant to annual returns it is still helpful to keep tabs on the issues moving asset prices.

I will close out with a somewhat related story, this time from my B-school days at the University of Chicago. On the very first day of Corporate Finance/Investments class, the professor announced a pop quiz by unveiling a chalkboard with 10 questions. Each was simple: where did the S&P, 10-year Treasury, yen/$, and other major markets close the prior day. When he collected all our answer sheets and looked at them, he let out a long sigh. They were mostly blank.

Then he said “Every answer to these questions is in the Wall Street Journal almost all of you have folded up on your desks. If you can’t be bothered to know them, I’m not sure it’s worth my time to teach you anything.” His point, in case it needs clarification, is that keeping close tabs on asset price movements across a wide range of markets is the prerequisite for being able to contextualize future returns.

I have never forgotten that lesson and, combined with all the years I have spent staring at screens, they all deeply inform everything we write for you each day. Both devils and angels are in the details.

This post was originally published on this site

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