Manuel Ochoa: Part I
TradingMarkets.com co-founder and hedge fund star Manuel Ochoa, spoke to Marc Dup mso-ansi-language:EN-US;mso-fareast-language:EN-US;mso-bidi-language:AR-SA – in March 2000. In this interview, Ochoa provides more details of his macro style of discretionary and systems trading.
Marc Dupee: Tell me a little bit about the hedge funds that you manage.
Manuel Ochoa: The style of the trading that’s done is called “global macro,” as opposed to other styles like “event driven,” “distressed securities,” “market timing” (which means the guys are only trying to time the stock market)…there are various styles that they classify you as.
Dupee: How would you define the global macro style of trading?
Ochoa: Global macro is just basically instead of trying to pick winning stocks, for example, you just try to determine whether the market’s going to be going up or down. What you do is just buy the whole basket of stocks like the S&P 500 futures. So you’re making a macro call instead of making a micro call like stock pickers do.
Dupee: Which markets do you trade?
Ochoa: All the major financials globally like U.S. stock market, U.S. bond market, European stocks, European bonds, Asian stocks, Asian bonds.
Dupee: So you trade indexes on all of those?
Ochoa: Yeah.
Dupee: And you trade at different exchanges too, or mostly in the U.S.?
Ochoa: No, all different exchanges.
Dupee: What parameters do you use or how do you decide to get into the market?
Ochoa: Basically a blend of technical indicators and fundamental data that comes out pretty much every day. You just start getting a picture of what’s going on, and what the markets are thinking, and then you start seeing when people start getting real scared when all this bad news starts coming out and then you see how that interacts with price action. On the other end of the spectrum, you start seeing how when people start getting really euphoric when all these bullish reports come out on the economies. You see how price action acts in conjunction with those reports and then you just see patterns that start to develop. Basically that’s how you get a feel for what your strategy is.
Dupee: So for technical indicators, for instance, maybe could you give an example of recent trades in currencies, bonds or a stock index with specific parameters that got you into a trade? Maybe you could qualify what the fundamental overtones were?
Ochoa: Let’s see, what would be a good example? Data would be, on a technical level, the S&P 500 a couple of days ago where you see the price action. During that current period of time, it was just basically the Nasdaq stocks that were getting sold off hard due to profit taking and then what you saw was bearish comments coming out from the various sources. Then you see accelerating downward price movement in the Nasdaq…
Dupee: You’re talking about that three-day decline from its highs (through March 15), where the Nasdaq declined 11%?
Ochoa: Yeah. And then you look at the S&P 500 and see that it’s basically got downward pressure but it hasn’t really taken out any major recent support levels and so what that’s telling you is that the sell off is basically a function of having rotation going on where there’s money leaving high-tech stocks but a lot of the money is going back into the stocks that haven’t been doing as well, like the S&P 500 and the Dow Jones. That’s like a tip off, basically. So then you look to see if there’s any type of catalyst that’s going to come out to cause a type of a rally. And then yesterday when we got the PPI report which came in pretty much as expected–there weren’t any big surprises in it–when you consider that over the last 12 or 18 months, the market’s been really wary of inflation, that’s basically a catalyst for a sigh of relief. Selling was concentrated on the Nasdaq. That was a good trade setup to go a long and it worked out. It doesn’t always work out. Sometimes you’re wrong but those are the times that you want to be trading because when you’re right, those are the times when you’re really right.
Dupee: Were you long on 3/15/00?
Ochoa: Yeah.
Dupee: So when Nasdaq was selling off, selling down hard…
Ochoa: Yeah, then I started buying S&Ps. I saw the S&P 500 was still in a congestion zone and hadn’t really taken out the recent lows.
Dupee: The 3/8/00 low?
Ochoa: And even before that, I think.
Dupee: Yes, there was a lower low on 2/28/00.
Ochoa: Yeah. Those lows right around there. If we had taken those lows out afterwards, I would have thrown the towel in. But I knew there was going to be a bottom somewhere right around there. And it worked out. It doesn’t always work out though. Sometimes you’re wrong, you know?
Dupee: Twenty points on the S&Ps is a lot.
Ochoa: If you can’t risk at least 20 points on the S&P per contract, you probably shouldn’t be trading it because the best S&P traders are the guys that can put big enough stops where they’re not going to just get stopped out all the time. Either that or you’d better start trading S&P minis. If the guys are risking $2 or $3 per contract, I guarantee you that, assuming they’re even profitable, they’re nowhere near the profitability level of the guys that are risking $20.
Dupee: How do you place stops?
Ochoa: Most of the time, it’s a question of recent volatility. If you know the recent volatility on the S&P is fluctuating and the average daily range over the last couple days has been $25, you have to assume that from one day to the next it will be somewhat close to that same level of fluctuation. So you kind of extrapolate that. Other times, you can get lucky. You can use a tighter stop than that based on just chart points and the number of potential catalysts in the next 24 hours. Then you can use an even tighter stop.
Dupee: By catalysts, you mean…?
Ochoa: Like a report. If a report comes out and it’s bullish, or it’s an inflation-friendly PPI report, you know your stop’s not going to get hit anyway because you’re going to be right right away and the S&P 500 blow back futures are going to gap up on the open anyway. So it’s a combination of different setups. You can trade S&Ps on purely a mechanical basis, but there are certain things that you’ll never be able to do as well as actually being able to understand what’s going on and really see why things are moving and what potential moves are going to come up in the future. You can’t program that into a trading system.
Dupee: If the stops that you place are not mechanical…
Ochoa: Some of them are.
Dupee: But it sounds like they’re mental stops and then it sounds like you’ll qualify them if the context and tone of the market has changed…
Ochoa: Yes, basically. It’s a discretionary process, that’s what it is.
Dupee: Your stops are discretionary?
Ochoa: Yes, sometimes, it’s for a technical reason that you take a trade, sometimes it’s a mixture of technical and fundamental. But the best way to trade S&Ps or any market is that you only trade it at the times when you know there’s a report coming out and if you’re right, the market is going to immediately move in your favor. Rather than just putting a trade on, you know, from one random day to the next where you don’t have any market-moving event taking place and you’re just sitting there in the market hoping that it’s going to edge up your way.
Dupee: Do you have rules for stops?
Ochoa: Just basically like I told you the average true range where you know, I’ll know that I’ll have to use at least a $25 stop as that’s been the average range in the last couple days in the S&P.
Dupee: So you’ll use the average true range from wherever your entry point is and if it drops below, that’s where you’re out?
Ochoa: Yes, and sometimes I’ll use just chart points I like.. where if you know that it makes a new low on the S&P, and you know that the reason it’s going to be making that new low is because bearish data came out on the PPI, then even though the average true range was, let’s say, $25, you know that really in actuality you don’t have to use $25 stops because most likely it’s just going to keep going against you if it goes past, like, $12 and $13. Because you know what’s going on. A lot of fundamental investors, there’s a lot of them out there…are going to look at that PPI data and they’re going to get scared and they’re going to start selling stocks. The S&P will be down 40. So why wait until it’s down 25 when you can get out when it’s against you when it’s only down 12?
Dupee: During this big price run-up following the bullish PPI (on 3/16/2000), you say you had taken a long position. What were you looking for in terms of your price objective or your price target?
Ochoa: Originally, if you read the archives, I was looking for a 1430 profit target. But then what happened was that the market rallied so much the day before that we already had a $35 rally, which is a bigger-than-average profit–at that point… I looked at my other positions but you look at how much money you already have on the table and then to me, it was like sensing that the market was already anticipating that it was going to be a friendly PPI report. So part of that discounting process already started happening. Usually, that’s the way it will work. But this week was the exception because it didn’t work out that way. In actuality, I would have been better off holding out, because the next day we got that huge rally in the S&P where it was up $65.
Dupee: You got out before then?
Ochoa: Yes. I got out the day before that, because I just thought, “Wait a second. The market looks like it’s already discounting a good PPI report.”
Dupee: You mean even though it rallied a bunch of points the day before, it was discounting?
Ochoa: Because it was already anticipating. There were a lot of people who were already anticipating a friendly PPI report.
Dupee: So you were afraid they would “buy the news and sell the rumor?”
Ochoa: Yes, I was afraid it was already getting too discounted so I said, “You know what, I’ve got a feeling this is going on so I’m getting out at the close.” So I got out at the close. In retrospect, that was the wrong thing to do because the next day, it rallied even more.
Dupee: Did you jump back in?
Ochoa: No, I didn’t. But, you know, I mean you don’t trade based on moves that happened like those in the past two days because those types of moves only happen once a year so if you’re trying to be a consistent money maker, you don’t trade for the things that usually don’t happen, you trade for the things that usually do happen. That was unusual price action that we got Thursday and Friday.
Dupee: How do you usually place your price-target objectives, then?
Ochoa: You know, recent highs and lows. Sometimes, you just trail the stops. Sometimes, like yesterday, there wasn’t even a price objective. It was just kind of like a snapshot of what everybody was thinking. I didn’t even use a price objective there because my price objective was the 1430 area.
Dupee: You mean on Wednesday?
Ochoa: Yes. It all depends. It’s like the pitcher and the batter. Each pitch is never exactly the same as the one before it.
Dupee: Sounds like your trading is basically extremely discretionary. Do you have any hard-and-fast technical rules that help get you in and out of trades, or some type of system? I know you’re a big developer of systems.
Ochoa: Yeah. I do a lot of systems trading but to tell you the truth, I really only apply it to the smaller commodity markets where I don’t have a good knowledge of the fundamental backdrop. That’s mainly what I use system trading for.
Dupee: In which markets?
Ochoa: All the commodity markets, you know, like crude oil.
Dupee: What’s the overview of that mechanical trading system?
Ochoa: It’s a combination of momentum and counter-momentum strategies. For a trend, I would put up like a 25-day moving average and you just trade whatever it’s telling me, whether the trend is up or down.
Dupee: So if it stays above the 25-day, you stay in?
Ochoa: Yes.
Dupee: How would you define a counter-trend?
Ochoa: In a counter-trend, I’m basically looking for prices…I’ll use an oscillator like a RSI. If the RSI gets up too high, then I’ll start peeling off the long contracts.
Dupee: Do you use any type of system like that in the markets that you’re more familiar with like the S&Ps?
Ochoa: I use them in the currencies but in the bonds and the S&Ps, I pretty much stick with the patterns and it’s like I was telling you before; discretionary type of trading.
Dupee: It’s discretionary and it’s your knowledge of the news and your opinion on the news?
Ochoa: Yes.
Dupee: So it’s more fundamental.
Ochoa: But I use technicals too. It’s a combination.
Dupee: Where do you get your fundamental information from and how do you qualify it?
Ochoa: I just basically look for people who know more about the economy than I do and I just read their reports and kind of get a feel for what they’re thinking. Those people are widely read by a lot of big fund managers. Like research reports from major brokerage houses, you know, then I’ll look at Bloomberg financial news, they’ve got stories all the time. You kind of just get a feel of who is doing what, who is good. You just get estimates…consensus estimates.
Dupee: Do you tend to stick with the consensus?
Ochoa: No, not really. I don’t really make my opinion one way or another. I just look for differences from the consensus like where the numbers actually come out vs. the consensus. Then you see price reaction to it and it gives you a snapshot of what’s going on. So many times, when the bonds have a bearish number and they spiked down and that’s it. They’ll spend the rest of the session coming back up again because that news was already discounted. So, even though the number came in more bearish than expected, if you see that the market starts rallying back even though the report was more bearish than the consensus, it tells you that it’s more bearish than the consensus and you know what, everyone that’s sold has already sold. And then you get these slow moves back up. And then if you’re short you probably want to cover and try to get short again at a higher price.
To be continued.