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The Burden Of The Bullish-Bearish Meme: Unleash The Total Power Of Compounding And Large Numbers Laws, Instead

Jun. 01, 2020 3:07 PM ETSDOW, TZA, SPXU, SQQQ, UGLDF, GLD45 Comments


  • Many investors are unnecessarily locked in an onerous bullish-bearish mindset, which severely constrains the earning power of their investment capital trapped in rigid buy-and-hold strategies.
  • There's another way: trade according to the seasonality of systemic liquidity flows, especially during an era when the primary driver of risk asset prices is largess from the Fed/Treasury.
  • Systemic liquidity levels create the base market conditions, but daily newsflow could dictate high-frequency moves; in the absence of compelling newsflow, the market defaults to liquidity imperatives.
  • The very distinct seasonality of liquidity flows provides a basic framework for PAM's so-called "swing strategies." These basically follow the 8 major liquidity flow swings in a year, which tend to tow asset prices along their wake. Even the COVID-19 pandemic hasn't altered the tight linkage of risk asset prices to monetary flows from the Fed and Treasury.
  • Setting investments long or short, depending on the seasonality of liquidity flow, plus judicious hedging and short-term trading in the direction of the liquidity seasonality flow (the "4-D Method"), unleashes the total power of compounding law. Utilizing these methods, PAM expects to deliver super-excellent 2020 year-to-date performance, now running at 1,485.92% (as of May 30).
  • Looking for a helping hand in the market? Members of Predictive Analytic Models get exclusive ideas and guidance to navigate any climate. Get started today »

These are the primary sources of the US financial system's liquidity: The Fed's balance sheet, bank reserves (excess and required), treasury cash balances, and commercial bank loans.

Some definitions:

Fed's Balance Sheet - The Fed's balance sheet is a weekly report presenting a consolidated balance sheet for all 12 reserve banks that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. The report is officially named Factors Affecting Reserve Balances, otherwise known as the "H.4.1" report.

Bank Reserves (Excess and Required) - bank reserves for commercial banks are held in part as a credit balance in an account for commercial banks at regional Federal Reserve banks. This credit balance used to be separated into separate "required reserves" and "excess reserves" accounts. But that distinction stopped after the Fed started to pay interest on all bank reserves. The total amount of FRB credits (bank reserves) held in all FRB accounts for all commercial banks, together with all currency and vault cash, form the M0 monetary base.

Treasury Cash Balances - The Daily Treasury Statement summarizes the US Treasury's cash and debt operations for the Federal Government on a modified cash basis. Deposits are reported as received and withdrawals are reported as processed. This account is maintained at the Federal Reserve. The US treasury pays all non-bank transactions through this account.

Commercial Bank Loans - These are the loans and leases granted by commercial banks. The deposits created as the aftermath of such loans and leases is "new money" without countervailing liabilities. These deposits are major components of M2 Money Supply.

The dynamic between these liquidity sources and risk asset prices

For the most part, risk assets respond mostly to changes in the Fed's Balance Sheet (RBC), the bank reserves at the Fed (BRB), and to Treasury Cash Balances (TCB). Credit creation (black, dashed line, CBC) is

In the first five months of 2020, PAM delivered phenomenal real-money trading performance, the best at Seeking Alpha:

PAM Swing Portfolio, year-to-date (May 30) delivered $17,387.123.25 profit on $1,172,813 capital. Year-to-date performance: 1,485.92%, on 481-69 win-loss trades. Spreadsheet here, and here.

Algo Portfolio, year-to-date (April 24) delivered $17,475,948,95 profit on $1,116,075 capital. Year-to-date performance: 1,565.84% on 483-69 win-loss trades. Spreadsheet here, and here.

In 2019, delivered 97.08% annualized profit, the best at Seeking Alpha.

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This article was written by

Robert P. Balan profile picture

Robert P. Balan runs Predictive Analytic Models, #1-rated trading unit at Seeking Alpha. PAM trades Swiss HF funds using Federal Reserve, US Treasury, and term (money) market liquidity data flows as basis for trading decisions. He is domiciled in Zurich, Switzerland.

Robert Balan has 5 decades of experience in the financial markets. Education in Mining Engineering, Computer Science & Engineering, M.S in Quantitative Finance, and training in Economics led to a commodity analysis career during the commodity boom of the early 1970s. Robert made a switch to global macro focus in the early 1980 when the commodity bull market waned, with specialization in foreign exchange. Robert wrote a very high profile daily FX analysis while Geneva-based (Lloyds Bank Int'l) in the mid-1980s (the first FX commentary with a real global readership, "most accessed" in the Reuters and Telerate networks from 1988 to 1994).

He worked for Swiss Bank Corp and Union Bank of Switzerland (precursors of today's new UBS) as head of technical research in various finance centers (London, New York, and subsequently, head of prop trading at SBC in Toronto ) from the late 1980s to mid-1990s. A stint at Bank of America as head of global technical research followed in late 1990s to the early 2000s. 

Robert returned to Switzerland in 2004 as head of technical research and strategy, and FX market analyst for Swiss Life Asset Management in Zurich. Robert wrote FX analysis and capital markets commentary for Saxo Bank (Denmark) in the early 2000s. He joined Diapason Commodities Management (CH) in Lausanne in 2008 as senior market strategist, and subsequently Chief Market Strategist, utilizing fundamental macroeconomic drivers and structural/technical data in modeling asset price and sector movements. 

Robert wrote a book on the Elliott Wave Principle in 1988, which has been hailed by the London Society of Technical Analysts as best ever book written on the subject. Robert is a member of the National Association for Business Economics (NABE), U.S.A. 

Analyst’s Disclosure: I am/we are short EQUITY FUTURES. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

PAM is short NQM0, ESM0, RTYM0, YMM0, and long GCQO and UGLD

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (45)

12 Jun. 2020
Hi Robert Great article, thanks
How do you see the feds actions this week ? specifically I have been reading the H.4.1 that they published last night and the Balance sheet only went up by 4 billion this week , as oppose to the previous weeks since covid started, it was going up by at lease 60 billion per week, do you think that this is a bearish signal ?
jeandit75 profile picture
We are kind of waiting for the « I told you so » moment
Heimerdinger profile picture
I told you so. You would continue trolling
Hi Robert, any updates to the seasonal liquidity model?
gelstretch profile picture

Just one more suggestion that I have found beneficial in the desire to time the market swings.

Equities, in various degrees of intensity, follow patterns of oscillating price waves over periods of time. This "snake-like" pattern of ups and downs directionally, is often enhanced by influencing momentum that can be traded with success, The trader however must be able to identify these moments in time when the price of an equity is ready to move with momentum. This signal is, fortunately identifiable, and quantifiable. with the right chart indicators.

Knowing this predictable, quantifiable price movement in advance is a major advantage , and even more so if the anticipated direction is also known, and the combination of both of these metrics can, and often, make for very efficient trading but also allows outsized profits. These indicators are in existence and often unknown or ignored by traders to their disadvantage through the loss of opportunity.
Robert P. Balan profile picture
Thanks for your contribution gelstretch.
jeandit75 profile picture
Hello PAM members, how are you enjoying the timing of this short call? Still holding on to those short? When Robert is wrong on equities timing, he is really good at only talking about gold or his past track record
Ninja Trader profile picture
It’s my understanding that Robert called for a market correction around the end of May to the first week of June. Today marks the end of the first week of June, so he’s not wrong. I’m not a PAM member so it’s possible that Robert has changed the timing of his correction call. I suggest you lose the attitude.
jeandit75 profile picture
Well your understanding is wrong
jeandit75 profile picture
Thanks for having removed my previous comment...nope, Robert has made clear he closed all long term positions end of May and was prepared for a 2-3 week correction based on his liquidity seasonality paterns. My point is not that he is right or wrong. I was a PAM member once and was ended for having expressed an diverging opinion on a chat once. Robert As a cocky attitude with members and his chat channels are a total mess. That’s it. Since SA will not allow me to make an honest negative feedback on his service, I use those platform to make myself understood.
Robert, The only time I have seen gold and silver miners with this much "refusal to give up ground".....was the last 2 bull markets. Very concerned that any selling at all of these assets, from this point on this year, will be regretted in short order. Are you going to just hold at some point or continue to trade in and out in this sector? You, of course, knowing what I mean by perhaps missing a very quick large move by not staying long at this juncture. thanks
Robert P. Balan profile picture

Take a look at how much money ($434,488.00) I made going in and out of gold trades in a three day's time, when I was demonstrating to PAM members how it is done. 57 trades; 56 wins; 1 loss (the last one, when I became impatient to end the demo). Try that with buy and hold.

You can see it here: Go where it says: Gold Scalping

thanks Robert.
wisesun profile picture
great. This article explained clearly. now i understand better.
RandyFloyd profile picture
I have nothing of value to add here... i just wish i knew how to trade options and futures so that I could follow along with you using your methods. I tried out your service briefly, it looks amazing... for someone who understands how to implement it haha. My hat’s off to you.
Robert P. Balan profile picture

Thanks for your kind comments.

RandyFloyd profile picture
is it possible to replicate (at least to some degree) your strategy using just ETFs? i wouldn't be expecting the same kind of returns, but at least i'd get the swings...
Robert P. Balan profile picture
A lot of PAM members follow our short-term positioning (2 to 3 weeks) and Seasonal trades (could be as long as 12 weeks) with ETFs. So yes, it is being done at PAM.
Quick question from a novice. If the gains are this predictable & this large; why haven't you compounded yourself/selves into extraordinary wealth? Maybe you have.
Robert P. Balan profile picture
Fair question, but of course you do not know me.

From just more than $1 million capital each in three funds in January 1 this year,, which are now have valuation of more than $18 million plus each -- how do you define compounded wealth? Are you seriously asking or just trolling? Obviously you have not read the article very well or followed the links -- you just want to ask this question. So which one are you?

No offense intended, just curious why that fact has escaped you.
Excellent article. Thank you for taking the time to explain the seasonal liquidity flows. Are you still expecting a near-term market top here as SPX keeps rising through 3,100 level? And does the 13-15 trading day window for a pullback begin once it tops or did it begin on June 1?
Robert P. Balan profile picture

We still have not seen an inflection point develop yet in the case of NDX versus model.

You can monitor the NY close covariances in this link that I provide for you for the next two weeks. After that I will sever the live links.


Thanks for kind comments.
Thanks for your reply. Is it time to view today as a blow-off top and double-down on the shorts, or cut losses?
Thank you for the live link. Jan 1 2019 to Jul 31 2020 is about 83 weeks. The X-axis shows 310D. Is that 310 Days? I am guessing it is excluding weekends. Still doesn't compute to 310 days.

For example, I am deducing that in static.seekingalpha.com/... , 260D computes to 52 weeks.

Alan Longbon profile picture
An article to bookmark as a ready reference that is for sure.
Robert P. Balan profile picture
Thanks Alan for kind comments. You at the PAM chat channels!
gelstretch profile picture
Hi Robert....

Just a brief comment regarding Swing Trade strategies.... Typically a swing trader is looking for trade setups in typical market conditions that will play out over a two to 3 week duration (trading the wave), however in volatile markets as we are now experiencing the usual setups found on Daily or Weekly charts are now of little benefit because the market is moving so quickly with the volatility.

I now suggest a 15 minute chart in order to better time the moves that offer the same opportunity that was previously achieved on the Daily chart.

I am one who appreciates your well grounded analysis !
Robert P. Balan profile picture

We use 1 minute charts to time entry and exit. Aside from that, nothing else. We do not use tech analysis to make our trade forecast.

Thanks for the kind comments.
Thanks Robert, always interesting.
Robert P. Balan profile picture
Thanks for reading the article tman1.
OlderThanDirtDave profile picture
I highly recommend Robert's EW book which he links to in the article. I like it better than Prechter's and I think Robert does a better job of explaining it's strenths, weaknesses and natural limitations.
Robert P. Balan profile picture
Hello Dave,

Thanks for kind words. It's been a while . . .
OlderThanDirtDave profile picture
I've been reading your articles/blogs here and passing them on to Doug Eberhardt's crew, too. I haven't had any wisdom to add or questions per se so I haven't been making any comments (very unlike me, I know :- ) )

I guess the one question with this article would be if there is any way you could see that annual liquidity pattern changing at some point - say Powell deciding to just leave all the taps on and issuing more helicopter money?

Congratulations on this Spring's success! May it continue :-)
Robert P. Balan profile picture
Yes, the seasonality can change, but bureaucrats have a way of hewing to the old ways of doing stuff. So it may change for a while, and then the bureaucrats will revert to the default settings.

Thanks again.
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