(You will need your own daily bar-chart of the US 30-yr future going back a couple years to enjoy this post.)


As you might recall, last November the Bond put in a huge upside spike and downside reversal that played havoc with the purely-systematic trend traders. Dunn, the most straight-up/ABC trend follower of them all, with a billion dollars under management, got hammered to the tune of down over 23%. Other players, like Hawksbill, escaped the executioner only through the fortunate application of discretion overlaying their systems. Meanwhile, Bill Eckhardt - with near a billion under management but governed by his "chop filter" - basically sat on the sidelines.


One common thread running through all my posts has been that the environment dictates the kinds of traders which evolve. As such, when the environment changes, and you know what kind of traders are living in it based on previous environments, you can very crudely predict the texture of the chart in the near future, based on the errors of existing traders flailing in a vacuum of the anomaly they have evolved to exploit, and new anomalies sitting there under-exploited. It would seem such a major event in the bond would have to echo in the form of such a detectable change in the texture of the chart.


A quick look at the chart will confirm this hypothesis. From January 2000 - the epicenter of serious losing period for a lot of system traders - through November 2001, you had a fairly uniform chart texture in the bond. If you consider A to be the 1-day price range, B to be the 5-day price range, and C to be the 15-day price range, over this period you will notice that A and C were large relative to B.


In other words, traders who entered or exited too quickly or too slowly woudl have gotten chopped up, while the traders who used, say, a 5-day move to extrapolate a 15-day move should have grown steadily over this period. And that is just what we saw, with the real simple, mainstream traders like Dunn and Hawksbill being up over 100% over this period. But if you take a trader who uses a large A as a contrary indicator on B - a chop filter - you would have someone who basically sat on the sidelines and didn't grow at all.


Now consider the events of November. To a trader who uses a large A to stay on the sidelines, the big upswing and reversal woudl have eben invisible. To a fast-entry/fast-exit trader - who uses A or A+1 as positive-coefficient indicator - the move would have been viewed as two profitable trends, an uptrend which they could have gotten in at the front end of, and a down trend which they would have gotten in at the front end of. For a medium timeframe trader, November was buyign at teh high and selling at the low, and for a very long or slow trader, it was still big enough to catch them at both ends, but less severely.


So what we should have had is an expansion of traders who enter based on - and therefore exacerbate - short-term moves, and a contraction of traders who exacerbate medium-term moves. Meaning, the A-based traders should begin to expand B relative to A, and the B-based traders should contract C relative to B, more or less. And that is just what we saw in Decemeber, Jnauray, and, most of all February - typical-to-large 1-day range, a huge or proportional 3-day range, and a relatively small 15-day range.


So this would seem to explain why Bill Eckhardt, after sitting on the sidelines basically for two years, finally came in and took his beating. Both the fast traders, and the traders who use A relative to B as a sit-it-out filter, came in like crazy and got their heads handed to them. Meanwhile, for the slightly bigger-picture traders, most of this action was invisible, and they only lost a little money.


So, now for the question, assuming this persists, what will be the next texture? In my opinion, that will depend on whether any large trends actuallyu emerge. If not, the medium and long-termers will stagnate, while the fasties and arbs contract, leaving the environment under trader for the next trend in any timeframe. If a large trend does emerge, the fasties will chop themselves up around it, until the fade and teh arbs becoem valid again, while the medium-termers will do so-so and expand at the long-term rate.


In short, see who does well and evolve proactively or in anticipation to fade chop in their timeframe and, whoever contracts, look to fulfill their role the next time their kind of move emerges.


eLROY