[The recent New York Times best-selling book entitled "The Man Who Solved the Market - How Jim Simons Launched the Quant Revolution” reveals the story behind Renaissance Technologies’ signature Medallion Fund – the most successful hedge fund ever. While Simons, former mathematician and code-breaker, did not really “solve” the market, he created a system conducive to extremely profitable trades. His success called attention and validated the use of quant and trading techniques in money management.
In that context, a recent article contribution from Institute member Bob Mann seems very timely. The Institute is happy to have guest expert contributors that we will publish on topics important to our financial services readers.
Bob Mann, CEO of Advisor’s Capital Investments, is an author and expert on market cycles and a market technician with strong support for active money management. He makes his case in his article below for all investors, advisors and money managers to selectively borrow and merge trading tools into their investment methodology. He walks us through three specific trading methods and tools that have provided him with a consistency of results.]
Follow the Money: How Advisors and Asset Managers Can Take Advantage of Smart Money's Big Moves by Robert Mann, CEO, Advisor’s Capital Investments
The stock market has had major gains. The long base stocks are now mountain charts. History suggests that risks are now very high. Fundamental valuations at two times sales also suggest stocks are overpriced based on historical norms. In my opinion this is not a time for long term index investing.
Some famous investors appear to have spidery sensors. They seem to instinctively focus on special situations before large institutions. For the rest of us, following the big money is easier and more scientific.
The largest institutions have amazing success trading profitably day after day in very large numbers. Stocks go up or down based on supply and demand. The great white whales of investing have a tremendous impact on stock movement. They have better information and they receive it faster than other market participants. They also see trade flows that others do not see and they have perfected their skills with AI systems and computer trading designed to enhance their odds of success. Like other great predators they feed on other market participants by knowing their habits. They take advantage of algorithmic traders and investors using stop orders. Often they are positioned already when markets open very strong or very weak. They seem to know market moving headlines earlier than others.
How can you as an advisor or an investor take advantage by following the smart money?
I have found three valuable tools you may use to follow the money:
1. Dark Pool Block Trades:
Focus on monitoring massive block trades in the dark pool. The dark pool is a trading system where institutions may trade with each other in size. These trades are not reported immediately like other trades. They are reported hours later or if trades are done in London they are reported the next day.
You may study more about Dark Pool Trading by reading Stephanie Kammerman’s book, “Dark Pool Secrets”. You can get this book free with a small charge for shipping and handling at http://www.thestockwhisperer.com. This book provides detailed advice about how to use Dark Pool trade prints to profit.
In June 2, 2014 Finra began to make Dark Pool data available. This data was already available to investors and professionals on a real time basis through securities information processors (SIP’s) but the trades were not attributable to a specific Dark Pool. Through FINRA you can get data for Tier 1 stocks on a two week delayed basis and all other NMS stocks are released another two weeks following. There are only a few brokers that have software and a delivery system to see these trades in real time as soon as they are reported. Charles Schwab’s block trade indicator called Street Smart Edge is especially useful. LightSpeed’s Data Trader Pro.com and CBOE’s Livevol Pro Trading platform offer very useful information as well.
Profiting on this information requires an educational component. Often after a trade is reported a stock might go in the opposite direction for a day or two and then make its big move in the opposite direction. A knowledge of chart reading is helpful in determining levels of support and resistance. Stephanie Kammerman has an app which gives both the Dark Pool trades and the support and resistance data each day for a very small monthly cost. Options are often the best vehicle because you may buy both a put and a call for a small cost and have an excellent probability of a high percentage gain, especially when the Dark Pool trades are massive. Usually the stocks make their moves within a two week period.
All trading requires risk management. An investor must employ risk management strategies. Proper trade sizing, diversification, stop loss provisions and hedging when positions are held overnight are used. I have been using Stephanie’s services for about six months and have found following Dark Pool trades to be a significant part of my trading profits.
#2 Monitoring Large Option Trades:
The Najarian brothers seen on CNBC consider monitoring large options trades to be their #1 most profitable investment strategy. In their new book, “Follow The Smart Money” they discuss how they use their valuable information.
I subscribe to a service named Trade-Alert.com . Trade-Alert is a programmable service that reports option trades in seconds from all the option exchanges. I have found that particularly large transactions executed simultaneously across all the option exchanges (in effect taking all options available at a particular strike price) in the same expiration month are the most valuable. It is of particular interest if it is an odd number of options bought at the offering price with a strike price above the current market price and a cost that represents a great deal of money. It is also helpful if the expiration date is not far away from the trade date.
Risk management is important here as well. Do not over buy and do have a plan for risk control before you invest. I have found that I need to execute at a favorable price right away or I need to have patience to enter correctly. Others follow these trades, so you must act quickly or wait for a reasonable entry point.
It took me a while to master my emotions in order to use this information wisely. At first I bought immediately. If I was fast enough I did well, but if I was just a few seconds late, I paid too much and had an immediate loss. I learned to wait for a good set up to buy even if it took a day or two.
#3 Using Artificial Intelligence:
AI is proving a successful tool in the money management business. Artificial neural networks can absorb massive amounts of data, think faster and learn from subtle changes faster than a human can. Large companies have invested vast sums in AI to help them dominate their markets.
Bridgewater Associates, LLC long known as an asset allocator managed the top performing hedge fund in 2018. AI is a core contributor to Bridgewater’s incredible success. The Renaissance Medallion Fund has achieved a new level of dominance and success using AI as reported by Bloomberg but it is no longer available to outside investors.
Thankfully, you do not have to invest tens or hundreds of millions of dollars to successfully implement AI into your practice. Trade-Ideas, LLC is the only commercially available AI service that has delivered positive Alpha over the past three years and even smaller advisors can afford their subscription-based service.
Trade-Ideas has recently implemented a specialized service for advisors only, named Trade-Ideas Wealth for Professionals. This service offers access to the Trade-Ideas AI System called “Holly” together with tested algorithms available daily plus the ability to custom design algorithms to fit your investment specifications. Their new advisor service is useful for both large and small advisors, but small advisors can be very nimble and can execute risk management in a way that larger advisors may not be able to do as well. All advisors can find emerging industry sectors and high alpha stocks more rapidly, but in addition this power allows you to differentiate your firm from your competition.
I use Trade Ideas.com to help me identify when supply and demand is changing in individual stocks before it is recognizable by most advisors and traders. Trade Ideas makes millions of calculations each evening to find the best algorithms for use the next day. During the next day these algorithms select stocks to buy or sell.
It is working for me as well. I have been using it for over a year and it is my favorite system to generate investment ideas for my clients. Implementation does require some training and hand holding. So for that reason, and towards full disclosure, know that I have become an affiliate and plan to consult with other professionals in the use of Trade-Ideas AI systems. Advisors and asset managers should explore and discover more about Trade-Ideas and its financial professional services.
Conclusion - Following the money allows an investor the opportunity to take advantage of a difficult and volatile market environment. The investor can reduce volatility and risk with intelligent trading practices. Advisors can continue to profit in a rising market with less risk and perhaps anticipate better than others when supply drastically overcomes demand and opportunity turns to the bear side.
At a time when advisory fees and trade commissions are dropping, these follow the money approaches that have been delivering positive alpha are suitable for the experienced investor. My positive personal experience with them has given me the desire to be an advocate for these practices.
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