The 29 Minute Hedge Fund: Postmarket Update 9/3/09

@fundmyfund made two great comments this afternoon, one that almost sent me to the floor laughing, while eating a sandwich.  The first said, “I’m opening a hedge fund that will be open 29 minutes a day, buy at 3:30 sell at 3:59. I’ve backtested past 6 mo, 81.792% success rate. Not as good as Goldman Sachs 97% but I’ll take it.”  The second said, “back in my day the market rallied in the last 30 minutes almost every day, uphill, in the snow, barefoot.”  That’s the one that almost caused me to choke on my sandwich.

I know many of you out there treat the whole high frequency black box trading thing as somewhat of an afterthought, if not just dismiss it all together.  The point here is that you shouldn’t, because Goldman doesn’t.  Now I’m not talking about the kind of high frequency trading designed to generate revenue from capturing rebates from exchanges by providing liquidity (is it really liquidity they are providing).  I’m talking here about computers making directional calls in the market.

Hedge funds and large banks like Goldman Sachs have teams of people who do one thing and one thing only, they search for patterns.  They search on all time frames and in all markets, because hey, if you have the computing power why not use it.  When they find a pattern that makes them money, they exploit it until it doesn’t work anymore, its that simple.

The reason I bring this up lies in @fundmyfund’s little joke about the market rallying every day at 3:30.  He’s taken the time to backtest this and sees a definite pattern to how the market is acting in the last 30 minutes of each day. Goldman obviously sees this as well, and whether or not they are doing the pushing in the up direction themselves, they are obviously making nice bank on that trade.  Who knows how long it will last, and if we will look back on this period and say, “dam what an easy trade that was, it was so obvious.”  The difference between the good algo shops and the best algo shops is the amount of time it takes for them to find the patterns, and realize when they have broken down.  Keep your eye on this pattern as it may provide clues as to the underlying structure of the market moving forward.

Besides the market going straight up at 3:30 today, not much else happened in equities.  We’ve gone nowhere since Tuesday’s kick in the nuts, and the volatility has been completely absent.  This is to be expected as most everyone is at the beach right now.

The real action is taking place in commodities.  Gold has broken out big time and the momentum traders have come out to play.  I’ve been stalking this trade for a while, and would have gone short just as fast had gold broken in the opposite direction.  Remember that commodities are the purest momentum trading vehicles, they have no fundamental value, they are only worth what you are willing to pay for them, unlike a company with assets and revenue.  I don’t have any targets for where gold is going, and frankly I don’t care, I am only trying to caputre the essence of trend.  The true worth of gold can be found by dividing the collective vanity of the world by their fear of the US dollar being worth nothing more than the paper it’s printed on.

Speaking of trend, has anyone noticed grains are getting mauled.

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