Dec20/Jan21 by Luckbox Magazine

The Art & Science of Forecasting Your guide to making better predictions

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The very best in gear, gadgets, games & more P LUS

Outlier Predictions for 2021 Meet the Superforecasters Award-Winning Whiskeys

the control freak's guide to life, money & probability

december 2020 / january 2021

The Art Science Forecasting &

14 The Prediction Trade

Put away the crystal ball, throw out the tea leaves and stop digging into goat entrails.The pioneers of Superforecasting explain how nearly anyone can use science and a touch of art to become better at divining what lies ahead.

22 The Superforecasters Here’s the story of a college-based team of students, faculty and volunteers who bested government intelligence community prognosticators and in the process gave birth to Superforecasting.

26 Betting Against the Political Polls

America’s faith in polling took another beating in the 2020 elections. So, what’s left? A professor explains why betting markets are hard to beat, and how pollsters try to look like winners even when they repeatedly lose.

28 Luckbox Readers vs. Market Experts The magazine pitted readers’ predictions for how the drama of 2021 will unfold in the markets against forecasts by a panel of revered traders. Here’s what’s ahead—as viewed by both groups.

PAGE

30 Luckbox Lookback

So how has this nearly twoyear-old magazine fared with predictions for the markets, elections, sports and society in general? Take a look at this recap for the answer. The editors can explain the two glaring missteps: Blame Covid.

luckbox | december 2020 / january 2021

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Talking heads. Their time is up. It’s our time now. Explore your ﬁnancial curiosity. dough.com dough is a registered broker dealer offering self-directed brokerage services. *regulatory & other fees apply. member FINRA/SIPC. ©2020 dough.

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editor in chief ed mckinley managing editor yesenia duran associate editor mike reddy technical editor mike rechenthin contributing editors vonetta logan, tom preston creative director jacqueline cantu

Favorites revealed at the debut of the Whiskey and Barrel Consumer Choice Awards

contributing photographer garrett roodbergen editorial director jeff joseph

P. 40

tactics

trades

life, luxury & the pursuit of happiness

essential trading strategies

actionable trading ideas

contributor’s guidelines, press releases & editorial inquiries editor@luckboxmagazine.com

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GIFT GUIDE

33 The Luckbox Gift Box

CHEAT SHEET

Market INSERT

Awareness

CHERRY PICKS

55 More Bang for Your Buck

subscriptions & service service@luckboxmagazine.com

LIQUID ASSETS

BASIC

FUTURES

media & business inquiries publisher: jeff joseph jj@luckboxmagazine.com

NORMAL DEVIATE

INTERMEDIATE

Luckbox magazine, a tastytrade publication, is published at 19 n. Sangamon, Chicago, IL 60607

40 These Spirits are in Your Future 42 Counting on Volatility

49 Big Moves are Price Predictors 50 Delta Values ADVANCED

TRADER

44 Meet John Carter

52 Make History Work For You

WELLNESS

46 Put 2020 to Bed CALENDAR

47 The Event of a Lifetime

56 Pairs Trading Futures THE TECHNICIAN

58 2021 Portends Some Trends to End

DO DILIGENCE

FAKE FINANCIAL NEWS

Editorial offices: 312.761.4218 ISSN: 2689-5692 Printed at Lane Press in Vermont luckboxmagazine.com

62 Volatility is Predictable

Luckbox magazine

10 Seven Predictions for 2021

LAST PICTURE

64 Lucky Man

@luckboxmag

On the cover: Illustration by Doug Chayka

2019 & 2020 Best New Magazine Folio Award for Custom Content

luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!

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comments, tips & story ideas feedback@luckboxmagazine.com

luckbox | december 2020 / january 2021

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THE ISSUE WITH FORECASTING No chance of escape Now self-employed Concerned, but powerless An empowered and informed member of society, pragmatism not idealism Will not cry in public Less chance of illness Calm, fitter, healthier and more productive A pig in a cage on antibiotics —Fitter Happier, Radiohead (1997) This column always begins with song lyrics relevant to the issue’s theme. For the magazine’s current foray into forecasting, Radiohead’s Fitter, Happier from the 1997 album OK Computer seemed just right. It predicts a technology-driven world of selfindulgent consumerism, alienation, isolation and political malaise. In short, it forecasted the way life has actually turned out in 2020. The song’s unearthly vocals were generated by a computer’s text-to-speech engine and bring to mind Stephen Hawking’s voice generator. A Pitchfork music reviewer recalls the “now selfemployed, concerned but powerless” lines as part of a “conversation between Siri and a gig-economy millennial who’s just signed a Change.org petition but can’t make it to the protest because he needs to live-tweet the Oscars.” And don’t forget that the band Wilco is credited with predicting the 9/11 attacks in

Yankee Hotel Foxtrot and that Notorious B.I.G. foretold his own demise in Ready to Die. But, Luckbox usually doesn’t rely on musicians for predictions. In this issue the magazine delves into some offbeat prognostications in Fake Financial News (p. 10), airs readers’ thoughts on black swans on the facing page, offers some of our own wry expectations for the future (“20 Predictions for ‘21 and Beyond,” p. 8) and explores Good Judgment Inc.’s scientific approach to becoming a better forecaster in this issue’s special feature section on the art and science of prediction (p. 14). As for outlier predictions, 2020 produced far more than most years. But just the same, the entire team at Luckbox is betting on a happy, healthy and lucky 2021 for you and your loved ones. Ed McKinley editor in chief

Jeff Joseph editorial director

Thinking Inside the Luckbox

Luckbox is dedicated to helping active investors achieve skill-derived, outlier results. 1 Probability is the key to improving outcomes in the markets and in life.

2 Greater market volatility brings greater opportunity for traders and investors.

3 Options are the best vehicle to manage risk and exploit market volatility.

4 Don’t rely on chance. Know your options because luck smiles upon the prepared.

two ways to send comments, criticism and suggestions to Luckbox Email feedback@luckboxmagazine.com Visit luckboxmagazine.com/survey A new survey every issue.

luckbox | december 2020 / january 2021

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WHAT IS THIS THYNG?

Open Outcry Luckbox asked readers the following question: What do you predict will be the next unanticipated event to take Americans by surprise now through the end of March?

“Folks are underestimating the long-term impact of COVID-19 on the economy, the death toll and the standard of living in the United States. The gap between the rich and poor will widen, homelessness will surge, perhaps one-third of restaurants will close permanently and more waves of COVID will occur.” —Miriam Sexton, Dunedin, FL “We are in store for a bit of good news, so I would predict an announcement of diplomatic relations and some level of understanding between Iran, Saudi Arabia and Israel.” —Jason Inman, Bexley, OH “Two things that we can always count on are the consistency and predictability of human nature, and the unpredictability of human irrationality. The full extent of the economic damage created by the COVID-19 pandemic has not yet been realized at a national level, and if the rate of Fed stimulus is unable to keep pace with the rate of economic disruption, the cumulative effects will begin to manifest, which could serve as a trigger for irrational human behavior.” —Bevan Jones, San Diego

“The most likely unknown is Chinese action in Taiwan—whether that’s a true invasion or something like what they did to Hong Kong. They have a U.S. that is in complete disarray, solely focused on the election and the potential for a lame duck president who has shown that if he loses he will spend the months before the inauguration continuing to attack political norms. If China was waiting on the ‘right time’ to make a move, this is it.” —Matt Heid, Queens, NY

Take the reader survey. Luckbox may publish your comments!

“I see major risks in the European Union destabilizing further, which could result in a significant crash in the EU stock market and the euro. This could take many years, though.” —Maximilian Wolkner, Germany

THYNG, an augmented reality app, links Luckbox magazine articles to additional digital content. Simply scan any page with a THYNG icon to view video footage on a digital device.

“Look for a change in Federal Reserve Bank leadership that will introduce an increase in interest rates, and a higher rate of Russell 2000 declines over the next three to six months—greater than 5% because of small business defaults. I think this will also extend into the financial sector in the short to intermediate term.” —Patrick Quinn, Avon Park, FL

1 Download the free THYNG app

“In the Decision 2020 issue, I enjoyed the fact that the Electoral College piece and the analysis of the stock market were apolitical. Overall, I like how Luckbox really tries to explore all sides of topics to find out what’s most likely to happen (not just what we want to happen).” —Justin Rhodes, Pompton Lakes, NJ “My assumption is that the Luckbox staff have a political bias, but the ability to keep that bias in check for the sake of the readership is a sign of professional journalism that is so lacking in the mainstream media. Elections are not decided by wishful thinking, contrary to what the MSM seems to be striving for, and maintaining a broad perspective is essential to navigating the markets and the world.” —Bevan Jones, San Diego

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2 Select the “Targets” mode, scan any Luckbox page that contains the THYNG icon

“I read just about every page of every issue and, as I have mentioned in previous surveys, I appreciate the Tactics and the Trades sections. I read a lot on this subject, and if I learn just one thing it is worth the read.” —Gerry Schacher, Edmonton, Alberta

3 Take the latest reader survey. Luckbox may publish your comments!

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SHORT INTEREST

20 PREDICTIONS FOR ’21 AND BEYOND Luckbox tries its hand at forecasting with 20 outlier predictions for the next two years

BUSINESS An unprecedented 5G-fueled increase in data breaches and cyber crime The spread of 5G will help malicious actors execute attacks and move data more quickly. Expect a new cyber insurance industry to emerge as a result. But be prepared for more deepfakes and attacks on remote workers’ laptops. Villains will also hack Amazon drivers’ computers to perpetrate high-tech porch pirating, and weaponized machine learning attacks will plague networks. Trump keeps the light on for you Posting losses and wallowing in debt, Trump’s hospitality empire will continue to bleed post-presidency. But he’s seen the 2020 electoral map and knows where to resurrect his brand. So Trump International Hotel Management will pivot and invest in or develop a budgetconcept lodging chain targeting middle Americans in flyover states. Best Bet: Red Roof Inn. The 18-hour city comes to the suburbs During the pandemicinduced decline of urban metropolises, Americans have been turning their attention to second-tier “18-hour” cities that offer services, amenities and job opportunities that rival those of “24-hour” cities. Places like Raleigh, Nashville, Tampa, Charlotte, Boise, Tucson, Chattanooga and Salt Lake City have

viable infrastructure, robust economies and low taxes. The next trend: 18-hour suburbs. (You heard it here first.) As millions continue to work from home, offices in city centers will reduce footprints or relocate. Some urban dwellers will move to the suburbs, and long-time suburbanites will eliminate their commutes. Thus, suburbs will respond by providing shared offices and better housing, transportation, entertainment and Wi-Fi.

monopolistic behavior, Sens. Elizabeth Warren and Ted Cruz will find a common foe. In response, Amazon will proactively split off AWS to get ahead of looming antitrust headaches.

Move over Starbucks— a new “third place” is emerging Third places are where people spend time between home (first place) and work (second place). Starbucks CEO Howard Schultz perfected the concept. But WFH is making the second place irrelevant, and social distancing is making the third place toxic. So where will Americans go? Luckbox foresees a movement to convert sprawling, anchorless retail malls into high-concept yet functional shared office centers replete with high-tech office amenities, food courts, yoga studios, networking events, lectures and entertainment. WeWork reimagined.

Ghost kitchens rattle chains Finding their niche during the pandemic, delivery-only restaurants are poised to disrupt everything else on the restaurantindustry spectrum. Look for new regional ghost kitchen brands to appear and compete with quick-service, fast-casual and casual dining chains. Ghost-fil-A?

Amazon spins off the cloud Amazon Web Services’ cloud-computing business remains one of Amazon’s biggest profit centers. In Q3 2020, AWS operating income totaled $3.45 billion—57% of Amazon’s overall operating income—yet represented only 12% of Amazon’s total revenue. As the Federal Trade Commission and the House Judiciary Committee intensify their scrutiny of Amazon’s alleged

Working from home is not working There’s a consensus that WFH increases worker output. “People who WFH are 47% more productive,” according to Apollo Technical. But look for a slew of surprising new studies highlighting data that signals lower marginal labor productivity and documenting lapses in motivation, accountability and accuracy. The findings will send employers scrambling to identify new incentives to bring employees back to the office.

PHOTOGRAPHS: (RED ROOF INN) ERIC GLENN / SHUTTERSTOCK.COM; (AMAZON) COURTESY OF AMAZON; (LAPTOP) SHUTTERSTOCK.COM

By Jeff Joseph

luckbox | december 2020 / january 2021

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PHOTOGRAPHS: (CARLSON) WIKIPEDIA; (OCASIO-CORTEZ) REUTERS/MIKE SEGAR; (NOEM) ERIN BORMETT / ARGUS LEADER VIA IMAGN CONTENT SERVICES

MARKETS

MEDIA

The Federal Reserve won’t raise interest rates through the 2022 midterms Meet the new boss, same as the old boss. Easing just gets easier.

Presidential Parler After Twitter bans Trump, the former president will move many of his 90 million followers to Parler. The two-year-old social media app’s growth is fueled by conservatives’ and free speech advocates’ angst about Silicon Valley’s “censorship.” At press time, Parler was the No. 1 social media app in the Apple iOS and Android stores.

The U.S. dollar will shed 10-15% before recovering There’s no escaping record deterioration of the U.S. current-account deficit. Time to pay the piper—China. CRISPR whisper The 2020 Nobel Prize in Chemistry was awarded “for the development of a method for genome editing.” That method, called CRISPR, enables scientists to precisely cut any strand of DNA. CRISPR could become the motherlode for biologists, who have demonstrated that they can use it to alter the DNA in organisms ranging from butterflies to humans. Another beneficiary is CRISPR Therapeutics (CRSP), which has traded above $100 since November after climbing from the mid-30s in March. The implied volatility (IV) of CRISPR is a high 75%—generally twice that of biotech stocks. That Nobel Prize went to the company’s cofounder, Emmanuelle Charpentier, so Luckbox likes CRSP on 15% pullbacks and expects cash prizes to follow.

Jeff Bezos buys CNN After Bezos bought the venerable Washington Post in 2013, the paper doubled its web traffic and became profitable within three years. Meanwhile, AT&T is buried in debt, media executive Jeff Zucker is losing his luster and ratings lag behind main competitors Fox News and MSNBC. CNN is still profitable, and Bezos has the requisite billions.

Carlson gets a raise CNN ratings have nowhere to go but down as Fox News assumes CNN’s role as “pessimist in chief.” In 2020, Sean Hannity was the highest paid anchor at $40 million, followed by ABC’s Diane Sawyer ($22m), Robin Roberts ($18m), George Stephanopoulos ($15m) and CNN’s Anderson Cooper ($12m). In October, Carlson delivered the highest primetime rating averages in cable news history.

POLITICS Red star rising Newly elected 25-year-old congressman Madison Cawthorn took out President Trump’s preferred primary challenger on the way to beating his Democratic rival in North Carolina’s 11th Congressional District.

Andrew Yang will run for mayor in NYC Outgoing Mayor Bill de Blasio’s pandemic-fatigued burroughs embrace Yang’s universal basic appeal.

Blue star rising In his short political career, Conor Lamb, 36, has taken out two Trump-backed Republican challengers, most recently for Pennsylvania’s 17th Congressional District seat.

Kristi Noem rises in the GOP Since gaining national exposure as a prime-time speaker at the Republican National Convention, South Dakota’s first female governor and former two-term U.S. representative will become the leading GOP candidate for vice president in 2024. Haley-Noem.

Alexandria Ocasio-Cortez will form a new political party The Democratic Party coalition will fracture as moderates hold off progressives in policy and messaging disputes. Bernie Sanders will back AOC’s effort to launch a new political party.

Republicans will take the House in 2022 It’s simply the way the pendulum swings.

Melania Trump will file for divorce ... … and publish a best-selling autobiography while scoring the cover of a major fashion magazine.

december 2020 / january 2021 | luckbox

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FAKE FINANCIAL NEWS

Here comes another year. But it can’t get much worse than 2020. Can it? By Vonetta Logan

Meatless everything Look for 2021 to go down as the year of fake meat. Beyond Meat (BYND) benefitted from the at-home cooking trend, and its stock hit new highs. Private companies,

PHOTOGRAPHS: (CYBERTRUCK) TESLA.COM; (THEATER) SHUTTERSTOCK.COM; (MEAT) COURTESY OF BEYOND MEAT

Seven Predictions for 2021

very November, after all the leftover turkey has been eaten, a group of Wall Street analysts gathers at a secret location to mete out predictions for the upcoming year. Trends are analyzed, forecasts are made and charts are backtested. Then, when everything is finally ready, they print out the results on a single Excel spreadsheet and light it on fire. White smoke billows from their all-male athletic club, signaling that next year’s forecast has been made. One of the most legendary analyst prognosticators, 87-year-old Blackstone Advisory Partners Vice Chairman Byron Wein, has largely faded from public view. But he resurfaces from time to time, and his annual list of 10 Surprises always makes headlines. Much like Punxsutawney Phil, or a liver spot on an old person, Wein’s sporadic appearances are always geared to surprise and shock. “Every year, I take $1 million of my own money and invest it in the 10 Surprises because I want my money to be where my mouth is,” Wein said in an interview posted on Money & Markets. In 2019, Wein’s wieners (he should really start calling them that) netted a 28% profit. Not bad for five minutes of work. Too bad he doesn’t have an OnlyFans.com account. But in a year rocked by the pandemic, the market made moves no one saw coming. So, a lot of his 2020 forecast seems delightfully antiquated, like human-tohuman contact. Wein thought FAANG stocks would struggle in 2020 (Narrator: They did not), that Boeing would fix its problems (um…), and that Brexit would be a solidified deal (wrong-o, chum). He also thought self-driving cars would be crashing left and right, but Tesla has reached the stratosphere, and Elon Musk is wondering how to colonize Mars. So, for this prediction issue, Luckbox asked this writer to come up with my own 2021 predictions, even though I am not an analyst, I don’t believe in fundamentals and I am pretty sure Jerome Powell has a restraining order against me.

luckbox | december 2020 / january 2021

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such as Impossible Foods and Incogmeato (this straight-up wins for best name), also gained market share. Innovative companies in The Valley are also working on eggless eggs and milkless milk, which will both pair nicely with sexless marriage. Rise of the electro-sexual Expect the dawn of the hyper aggro-electric truck in 2021... TRUCK YEAH! General Motors (GM) unveiled its all-new Electric Hummer, with an astounding 1,000 horsepower and enough pound feet of torque to compensate for even the smallest of male members. The electric behemoth will set you back at least $112,000, and it’s not the only aggro-truck up for grabs. Nikola (NKLA) will continue to make headlines with its “will it, or won’t it exist” electric truck, and startup Rivian has the blessing of Jeff Bezsos of Amazon (AMZN), so you know it’s Illuminati approved! Plus, the truck that started it all, the blocky Tesla (TSLA) Cybertruck (opposite page), should start rolling off the assembly line. Not sure the dude bros know that electric trucks are quiet and that therefore no one can hear your masculinity when you bear down on them on the highway. But, alas, at least it’s good for the planet. Peloton expands to more parts of life The hit of the pandemic has definitely been Peloton (PTON). No forecasting could have predicted the elimination of Peloton’s main competition: actual gyms. Customers who wanted a safe way to exercise at home found wait times for the bespoke Pelotonconnected fitness bikes and treadmills stretching into weeks. While Peloton’s margins on the bikes are slim, at 37%, users still have to plunk down money every month to use the bikes to their full potential. Those of us who can’t afford the bikes can still give Peloton our money to use their app while we piece together a bike from the discarded Peloton boxes of our wealthier neighbors. Now that we have a national mandate to wear yoga pants all the time, we see the fitness trend staying strong in 2021. The all-encompassing drive-thru We predict the end of chain restaurants—all of them replaced with a massive repaving of suburbia into an all-drive-thru zone.

Still, national chains have pivoted quickly to mobile ordering, drive-thrus and contactless delivery. In fact, as we roll into yet another wave of COVID, it’s the traditional sit-down brick-and-mortar restaurants that are waving the white flag. It’s happening because after months of eating their own cooking for the first time, a lot of people decided to opt for takeout or drive-thru. Burger King (QSR), Wendy’s (WEN) and Chipotle (CMG) all announced design plans for drive-thru-only stores. We think the restaurant biz should take it one step further and also help our failing infrastructure by transforming toll lanes into fast food drive-thrus. Yes, we’re heading to Wisconsin, but can we also get a No. 6 with no tomato and a Diet Coke? Netflix will feature Zoom cast reunions One casualty of the pandemic that isn’t about to rebound anytime soon is the movie theater industry. AMC (AMC) theaters are offering a $50 million stock sale to stay afloat, and tentpole blockbusters with James Bond, Batman and Wonder Woman have all been pushed off until who knows when. Disney (DIS) decided to release several titles either for free or for a fee on its streaming service, Disney+. The Hamilton musical, slated for theatrical release next year, was a pleasant free surprise for the site. Disney’s Mulan, for $30, didn’t fare as well. Amazon has announced it’s releasing Coming 2 America in December for Prime customers, after they’ve paid $125 for the privilege. Christopher Nolan’s Tenet, the only real blockbuster that was released, has made $300 million globally, but most of that was from overseas and came from countries that had their anti-COVID act together. Netflix (NFLX) says its stable of content is strong and that it doesn’t anticipate production hiccups in the next year. Joe Rogan 2024 In a move few could have anticipated, the guy who was on News Radio and made 24-year-olds eat Madagascar cockroaches on Fear Factor has become one of the highestpaid podcasters of the new decade. His $100 million deal with Spotify (SPOT) remains a revenue-generating point of contention as he continues to feature controversial

“Innovative companies in The Valley are working on eggless eggs and milkless milk, which will both pair nicely with a sexless marriage.”

guests, such as Alex Jones, Kanye West and, um, Miley Cyrus? We think he’ll parlay this success into an eventual political run culminating in Rogan! the Musical in the year 2070, written by the sentient AI of LinManuel Miranda. Bubbles and personal domes You could go all-in and bet on the biotech sector with companies like Eli Lilly (LLY), Moderna (MRNA) and Regeneron (REGN), but we think those stocks are already priced to perfection. Things get fun in the personal protective equipment sector of the market and the nascent companies making “personal safety domes” and our favorite—murder-hornet protection suits. Not since the full-body condom scene in Naked Gun has full-body protection been so comical, yet so necessary. The Shield Pod from a company called Under the Weather offers this solution, and more are slated to hit the market. And what does one wear when fighting giant venomous hornets? A snazzy suit that officials in Washington state donned in their nighttime raid of a murderhornet hive. Five stars! Those are my predictions for 2021, but the real winners will be to continue to sell premium and to hope for two-sided action. No one can really predict what’s going to happen, but the only way to benefit is to be engaged. And involvement by retail traders is one trend from 2020 that we hope stays strong for a long time. Vonetta Logan, a writer and comedian, appears daily on the tastytrade network and hosts the Connect the Dots podcast. @vonettalogan

december 2020 / january 2021 | luckbox

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The Art Science Forecasting &

The best forecasters incorporate both art and science into their prediction process, but the emphasis falls on the science. Mysticism, luck and fate are almost nowhere to be seen.

luckbox | december 2020 / january 2021

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IN THIS SECTION

The Prediction Trade

22 26 28 30

The Superforecasters

Betting Against the Political Polls

Markets: Forecasting 2021

Luckbox Lookback

ut away the crystal ball, throw out the tea leaves and stop digging into goat entrails. In this special section on prediction, the pioneers of Superforecasting explain how nearly anyone can become better at divining what lies ahead. In fact, they say a few budding prognosticators can even join the ranks of the elite forecasters. But cultivating that ability to make better predictions requires measuring the accuracy of forecasts. It’s the kind of accountability notably lacking in many circles, including among the talking heads on CNBC who get away with repeatedly getting it wrong. For a better understanding of the clear thinking that’s foundational to good forecasting and vitally important to traders, Luckbox visits forecasting expert Barbara Mellers in this section. Mellers recalls how she and Philip Tetlock started and sustained the Good Judgment Project, a government-funded inquiry into improving forecasts for the intelligence community. The section also highlights a professor who lauds the accuracy of prediction markets, checks in with a panel of heavy hitters for their 2021 market forecasts and looks back at the hits (and a couple of misses) among recent Luckbox predictions. What’s more, the issue’s prediction articles aren’t confined to this special section. Columnist Vonetta Logan presents some entertaining takes on the future, and editorial director Jeff Joseph shares his view of what’s to come in 2021. No one knows for certain what will happen, but this section shows how to make better forecasts.

december 2020 / january 2021 | luckbox

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THE ART & SCIENCE OF FORECASTING

The Prediction Trade Science with a touch of art has replaced mysticism as the preferred method of foretelling what lies ahead BY ED MCKINLEY

he word “Superforecasting” doesn’t carry any hidden meaning. “Super” means far above average, and “forecasting” is the act of making predictions. So, Superforecasters are simply much better than most people at calculating what lies ahead, whether the subject is stocks, options, elections, sports, warfare or just about anything else. Search “Superforecasting,” and most of the results point to a book that came out five years ago: Superforecasting: The Art and Science of Prediction by Philip E. Tetlock, a professor at the University of Pennsylvania and its Wharton Business School, and Dan Gardner, a senior fellow at the University of Ottawa’s Graduate School of Public and International Affairs. In their book, Tetlock and Gardner contend that most “experts” make predictions with accuracy that’s only slightly better than chance. But with training, clear thinking and scientific rigor—as well as a measure of natural talent and some good mental habits—Superforecasters learn to make better-than-average prognostications and can even beat the subject-matter experts by a wide margin. The book springs from the work Tetlock pursued with Barbara Mellers, his spouse and research partner. The couple led a University of Pennsylvania team called the Good Judgment Project that identified and trained Superforecasters as part of a government-led tournament of forecasting (see “The Superforecasters,” p. 22). Tetlock and Mellers later started Good Judgment Inc., a commercial enterprise that uses Superforecasters to make forecasts and trains forecasters for businesses and governmental agencies (see “Forecasting as a Livelihood,” p. 19). Art or science? Outsiders often wonder if Superforecasters, who are formally defined as the top 2% of forecasters, approach

luckbox | december 2020 / january 2021

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THE “BIN” MODEL FOR FORECASTING

B I

Bias impairs forecasting, but an observer can spot it, and a forecaster can learn to set it aside

Information enables a forecaster to make accurate predictions

Noise can seem relevant to a prediction but really isn’t and can lead a forecaster astray

Forecasting Checklist An expert on forecasting calls “checklist” one of his favorite words because it suggests using a process to arrive at a conclusion. In fact, a checklist can help any serious person become a better forecaster, says Warren Hatch, CEO of Good Judgment Inc., a company that makes forecasts and trains forecasters. This checklist emerged during a conversation with Hatch: Take the outside view instead of the inside view. In other words, don’t start by thinking about the attributes of individual candidates for president—start by considering facts like how often an incumbent is re-elected. It’s called the base rate.

What a Forecast Means Probability forecasts reflect degrees of belief and can be wrong in only two cases. First, if a forecaster says there’s zero probability and the event occurs. Second, if a forecaster says there’s a 100% chance the event will occur and it doesn’t. That’s why polls and prediction markets that gave Hillary Clinton something like a 70% chance of winning the 2016 presidential election weren’t wrong when she lost, according to Barbara Mellers, a professor at the University of Pennsylvania and an expert on forecasting. “They’re on the wrong side of maybe,” Mellers says of those predictions from four years ago. “A 70% chance that Hillary will win implies a 30% chance that Trump will win, so they weren’t wrong.”

Next, write down the information under consideration for the forecast. That crystalizes one’s thinking and creates a record for future reference. It defines the event that’s being forecast so that observers know whether or not a forecasted event has occurred. It helps eliminate the hindsight bias of saying “we knew that all along” after inaccurately forecasting an outcome.

Writing down a forecast also helps with the next step of comparing one’s forecast with other people’s forecasts and pooling information to improve the forecasts. Think of each forecaster’s prediction as a piece of the mosaic.

Update the forecast as new information arrives. Failing to do so can be the worst mistake a forecaster can make.

Keep score. Determining the accuracy of forecasts not only reveals who’s best at forecasting but also opens the door to feedback.

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prediction as an art or science. The Good Judgment Project researchers answer that the ideal forecasting model employs both but leans a bit more toward science. It begins with science because Superforecasters take the “outside view,” as described in the work of Israeli scientist and Nobel laureate Daniel Kahneman. That means starting the forecasting process with data and establishing a base rate. But the work doesn’t end with the data—Superforecasters don’t just crunch numbers. The art comes in when they evaluate other factors relevant to the situation. Take the example of predicting the outcome of an election. Researchers

Bias almost inevitably creeps into the forecasting process.

can quantify the power of incumbency based on history. That’s the outside view. But they shouldn’t discount the influence of a scandal. It’s the inside view. Balancing the inside and outside views to predict the result requires the deft touch of an artist. But Superforecasters shouldn’t work alone on the tasks of quantifying and then qualifying information. The best predictions evolve from the interplay of Superforecasters. When Superforecasters with diverse backgrounds arrive at the same conclusion by following different paths, their combined knowledge yields an extremely strong conclusion. If one arrives at Conclusion X via Path A, and the other reaches Conclusion X by traveling Path B, their combined confidence in Conclusion X increases. Stated another way, if both say Candidate A has an 80% chance of victory, combining their forecasts might yield a 90% chance of victory for Candidate A. But that’s not the only good way of predicting future events based on the wisdom of the crowd.

Polls and prediction markets The Superforecasting experts respect polls and prediction markets but emphasize that the two models are based on different questions. Pollsters might ask who will get a respondent’s vote. Prediction markets ask who a bettor thinks will win the election. In other words, the poll asks what the respondent is going to do, and the prediction market is based on what betters think will happen. If a poll of 100 people shows a 55 to 45 split, that means one candidate has a 90% probability of winning because whoever’s leading by 10 percentage points wins 90% of the time. So, a candidate can have a high probability of winning even if the margin’s thin. Still, forecasting is trickier than that statement might suggest. It’s difficult to keep irrelevant factors out of the mix. Noise Bias almost inevitably creeps into the forecasting process. Once it’s identified, forecasters can work to counteract it, but identifying it is the hard part. In fact, some researchers

WHAT WILL THE CLOSING PRICE OF STOCK IN TESLA BE ON DEC. 31, 2020?

More than $400 96% Between $350 and $400.00, inclusive 4%

*as of Nov. 18, 2020

PHOTOGRAPH: PHOTO BY JL/SIPA USA

319 Public Forecasters on gjopen.com (not Superforecasters) | 1625 Forecasts*

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A Forecasting Library Superforecasting: The Art and Science of Prediction By Philip E. Tetlock and Dan Gardner The Bible of Superforecasting, published in 2015 and based on academic research funded by a U.S. intelligence agency.

Thinking Fast and Slow By Daniel Kahneman A Nobel laureate’s guide to decisionmaking, published in 2011.

Perfectly Confident: How to Calibrate Your Decisions Wisely By Don A. Moore Having some confidence pays off, but overconfidence can derail decisionmaking, a book published in 2020 says.

ASKING THE RIGHT QUESTION In the Good Judgment Project’s effort to improve forecasting, the organizers stress the vital importance of basing predictions on cleanly resolvable questions. In other words, the questions should leave no doubt about whether an event has occurred or not. “It’s not easy to write forecasting questions with those properties,” notes one of the project leaders. When project members agree on whether or not an event has occurred, they can then test the validity of predictions and quantify the accuracy of the forecasters. As forecasters built a history of right and wrong predictions, the project could recognize the best as Superforecasters.

Forecast or Prediction? Luckbox tends to use the words “forecast” and “prediction” interchangeably, but forecasting experts at Good Judgment Inc. express a slight preference for “forecast.” “The word ‘prediction’ is often associated with crystal balls, goat entrails, Nostradamus and certainty about the future—this event will happen,” says company CEO Warren Hatch. “It’s also sometimes connected to gambling, which is a different thing.” “Forecasting” is simply thinking probabilistically about the future—this event might happen, Hatch says. Good forecasters tend to avoid phrases like “a real risk,” or “a distinct possibility” because they can straddle the 50% probability line, which can make the forecaster right no matter what happens. Instead, Hatch prefers the precision of numbers, a shared language that he says fosters critical thinking and accountability.

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find that bias is hardwired into the human psyche and nearly impossible to eradicate. One way of detecting bias is to recognize that a forecaster is repeating a viewpoint, data set or piece of information that doesn’t correlate with what really happens. An economist, for example, might keep predicting year after year that a double-dip recession appears imminent, but one almost never occurs. In another example, nearly every press release on almost any corporate merger cites important synergies, but many of the combined companies don’t work out as planned. Thus, the economist’s predictions and the corporate executives’ rationales amount to nothing but noise. Retrospect reveals such noise, but recognizing it in advance remains a formidable task. Take the example of the recent presidential election. President

Trump’s polling numbers seemed impervious to criticism and allegations of scandal. If pundits had kept that in mind, they would have realized the headlines carried less weight than in typical elections. Thus, the news reports were noisy, and opinion-makers should have seen that the election would be closer than the polls indicated. The Good Judgment Project has arrived at that type of thinking with the help of scientists who came before them. The project’s precursors The origins of good forecasting stretch far back in time to methods like observing the flight patterns of birds to predict coming storms. It continued during the Renaissance with the development of calculus, the study of how things change. Probability theory came along in the 17th century, and modern statis-

tics with its standard deviations made its debut in the late 19th and early 20th centuries. Future studies came of age after WWII and gave rise to futurists like Alvin Toffler. Predictive analytics and databased forecasting came along in the late 20th and early 21st centuries and brought more-structured and quantifiable forecasts—the quantification of forecasting by assigning probabilities. Giants in the progression of forecasting have included Isaiah Berlin, who published an essay called The Hedgehog and the Fox, which grew into a book by 1953. Its roots were in the ancient Greek idea that a fox knows many things, but a hedgehog knows one important thing. He divides writers and thinkers into two groups: those who view the world through the lens of a single idea and others who draw upon many experiences.

Superforecasters, who rank in the top 2% of forecasters, approach prediction as both art and science—but with the emphasis on science.

WHO WILL WIN THE U.S. SENATE ELECTION FOR GEORGIA (CLASS II SEAT) IN 2020? 110 Public Forecasters on gjopen.com (Not Superforecasters) | 137 Forecasts* Closing Jan. 5, 2021 Kelly Loeffler (R) 55% Raphael Warnock (D) 45%

*as of Nov. 20, 2020

PHOTOGRAPH: (LOEFFLER) REUTERS/DUSTIN CHAMBERS; (WARNOCK) JESSICA MCGOWAN/POOL VIA REUTERS

THE ART & SCIENCE OF FORECASTING

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Forecasting as a Livelihood Good Judgment Inc., a commercial enterprise that provides forecasts and forecasting training, bases its services on the knowledge, wisdom, expertise and personnel of the Good Judgment Project’s academic research team. The company calls upon about 140 Superforecasters to predict events for dozens of industrial and governmental clients in North America, Europe and the Middle East, says CEO Warren Hatch. It also teaches the art and science of forecasting to clients’ staffs, he says. Hatch came to the helm through a natural progression. He began his academic career at the University of Utah and went on to earn a doctorate in politics at Oxford. Then he embarked upon a career as a Morgan Stanley analyst and portfolio manager. But new challenges awaited. Hatch had read Expert Political Judgment, a book by Philip Tetlock, one of the founders of the Good Judgment Project academic team. Discovering that the project was seeking volunteers who liked to predict geopolitical events, Hatch signed up. As a volunteer, Hatch compiled such an outstanding record of prediction accuracy Warren Hatch that the project recognized him as among the top 2% of its participants and proclaimed him a Superforecaster. When the academic project spun off the company, Hatch became one of the first full-time employees and has since risen to the top spot in the business. He now oversees Superforecasters who come from differing backgrounds and possess divergent habits of mind. But all share a love for pursuing and manipulating information. A third have bachelor’s degrees, a third have earned master’s degrees and a third have obtained one or more doctorates. The company uses skilled generalists among the Superforecasters to bring “fresh eyes” to a subject. That means they’re not encumbered by preconceptions that can become “blinders” to viewing a problem or situation, Hatch observes. “One of the major findings of this research is an increased awareness of this collective wisdom of the crowd and that subject-matter expertise is not necessarily a prerequisite to be able to add value to the forecasting process,” he notes. The only exception comes with highly technical issues—novices may need more time to understand the question than to forecast the result. But the occasional technical roadblock doesn’t faze Hatch, who remains focused on employing the theoretical to interpret practical challenges. “How can you apply your findings in real-world situations to improve real-world decisions?” he asks rhetorically. “That’s been really exciting to do.”

ARE YOU A LATENT SUPERFORECASTER? Ever wonder if you have the makings of a Superforecaster? Find out by putting your predictions on the line in Good Judgment Open (gjopen. com). It’s a public tournament aimed at finding “new blood” for the world of Superforecasting. Prepare to be evaluated on your answers to questions about what’s to come in geopolitics, entertainment, sports and other areas of endeavor.

What we found out, as a simple rule of thumb, is that about 50% of the accuracy improvements that we saw going from the regulars to the [Superforecasters] can be attributed to noise reduction. The remaining 25% is information improvement, meaning that they have more information, and that last 25% will then be bias reduction. —Ville Satopää, INSEAD

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Noted forecaster Nate Silver advises in his book The Signal and the Noise that readers become “more foxy.” He even uses a fox as his logo on the fivethirtyeight.com site. Daniel Kahneman, a scientist mentioned earlier, established a milestone in forecasting in 2011 with publication of the book Thinking, Fast and Slow. Kahneman, an Israeli psychologist and economist, had already shared the 2002 Nobel Prize in Economic Sciences with Vernon L. Smith. In Kahneman’s research into the psychology of judgment and decision-making, he often collaborated with Amos Tversky, another Israeli psychologist. In Thinking, Fast and Slow, Kahneman sets forth the notion that people bounce between two

Forecasting is a skill that can be cultivated, and it’s worth cultivating.

modes of thought. First, there’s “fast,” which he viewed as instinctive and emotional. Second, there’s “slow,” a more deliberate and logical approach. Elsewhere, Kahneman and Tversky explored cognitive biases, prospect theory and happiness. Cognitive bias, a common condition, can lead to an irrational “subjective reality” that deviates from norms. Conversely, people sometimes manage to capitalize on cognitive bias, using it to save time, Kahneman and Tversky wrote in 1972. The duo described prospect theory in 1979, and it became a factor in Kahneman’s 2002 Nobel Prize. It describes the behavior of people who are averse to risk-taking and also give too much weight to events with low probability and not enough to events with high probability. Happiness became more than a vague state of mind for Kahneman, whose quantitative study of well-being, quality of life and satisfaction defined happiness. Another scientist who contrib-

uted to the understanding of the clear thinking that’s needed for sound forecasting was Gary A. Klein, author of Sources of Power: How People Make Decisions. He established that what passes for intuition can actually be a decision based on years of experience and fact-gathering. These scientists, as well as many others, contributed to the notion that good forecasting becomes a matter of distilling events to their essence. The gist Researchers that include Tetlock and Kahneman are working on what’s called “gisting,” the act of peeling layers from an issue to reach its core. If they can reduce a 1,000word report to 10 words, they can filter out the noise and accelerate the sharing of information. Applying the act of gisting to the work of Good Judgment Inc., one key player in the academic and business scenes summarizes the essence of the enterprise this way: “Forecasting is a skill that can be cultivated, and it’s worth cultivating.”

HOW WILL U.S. HOLIDAY SEASON RETAIL SALES FOR 2020 COMPARE WITH THE 2019 HOLIDAY SEASON? 94 Public Forecasters on gjopen.com (Not Superforecasters) | 157 Forecasts* Closing Jan. 1, 2021 Lower by more than 2.5% 7%

Higher by between 2.5% and 5.0%, inclusive 18%

Lower by between 0.0% and 2.5%, inclusive 28%

Higher by more than 5.0% 6%

Higher by more than 0.0% but less than 2.5% 41%

*as of Nov. 18, 2020

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The 10 Commandments for Aspiring Superforecasters Thinking like a Superforecaster may seem like a daunting undertaking. Fortunately, these 10 Commandments serve as a great place to get started, and they don’t require stone tablets.

Triage

Don’t waste time either on easy “clocklike” questions (where simple rules of thumb can get you close to the right answer) or on impenetrable “cloud-like” questions (where even fancy statistical models can’t beat a dart-throwing chimp).

Break seemingly intractable problems into tractable sub-problems.

Break apart the problem into its knowable and unknowable parts. Flush ignorance into the open. Expose and examine your assumptions. Dare to be wrong by making your best guesses.

Strike the right balance between inside and outside views.

Conduct creative searches for comparison classes even for seemingly unique events. Superforecasters form the habit of posing the outside-view question: How often do things of this sort happen in situations of this sort?

Look for the clashing causal forces at work in each problem.

For every good policy argument, there is typically a counterargument that is at least worth acknowledging. Each side should list, in advance, the signs that would nudge them toward the other.

Strive to distinguish as many degrees of doubt as the problem permits but no more.

As in poker, you have an advantage if you are better than your competitors at separating 60/40 bets from 40/60. Translate vague-verbiage hunches into numeric probabilities. It just requires patience and practice.

Strike the right balance between under- and overconfidence, between prudence and decisiveness. 7

Understand the risks both of rushing to judgment and of dawdling too long near “maybe.” Superforecasters realize that long-term accuracy requires getting good scores on both calibration and resolution.

Look for the errors behind your mistakes but beware of rearview-mirror hindsight biases.

Don’t try to justify or excuse failed forecasts. Own them! Conduct unflinching post-mortems: Where exactly did I go wrong? Don’t forget to do post-mortems on your successes, too. You may have just lucked out by making offsetting errors.

Strike the right balance between under —and overreacting to evidence.

Updating beliefs is to good forecasting as brushing and flossing are to good dental hygiene. That said, don’t suppose that updating beliefs is always easy because it sometimes is. Skillful updating requires teasing subtle signals from noisy news flows—all the while resisting the lure of wishful thinking.

Bring out the best in others, and let others bring out the best in you.

Master the fine art of team management, especially perspective taking, precision questioning and constructive confrontation. Wise leaders know how fine the line can be between a helpful suggestion and micro-managerial meddling.

Master the error-balancing bicycle.

Following the commandments requires balancing opposing errors. Just as you can’t learn to ride a bicycle by reading a physics textbook, you can’t become a Superforecaster by reading training manuals.

Excerpted from Superforecasting: The Art and Science of Prediction. (2015) (See p. 17)

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The Superforecasters How a college-based team of students, faculty and volunteers bested government intelligence community prognosticators and gave birth to Superforecasting BY ED MCKINLEY

husband-and-wife team of scientists became giants in the field of forecasting by creating and overseeing the Good Judgment Project, a massive and lengthy academic inquiry into how to train predictors and improve their predictions. In the process, they coined and popularized the term “Superforecasting” and spawned a company that provides forecasts for businesses and governments. “The story started in the summer of 2009,” recalls Barbara Mellers, one half of the research duo. “My husband, Phil Tetlock, and I decided to apply for a contract with IARPA.” That’s the government’s Intelligence Advanced Research Projects Activity, an entity she describes as “the little sister to DARPA,” the much larger Defense Advanced Research Projects Agency.

GETTING PREDICTIONS RIGHT The U.S. intelligence community failed to foresee the 9-11 attacks and erroneously predicted that Iraq possessed weapons of mass destruction. The time had come to find better ways of using the wisdom of the crowd for forecasting. That’s when intel officials hit upon the idea of staging a tournament to challenge academic minds to develop better ways to foretell the future. One of the competing teams—a University of Pennsylvania group called the Good Judgment Project—rose to the challenge and may have changed history. Under the leadership of Profs. Barbara Mellers and Phil Tetlock the Penn group discovered and then pursued Superforecasting.

Barbara Mellers

“We put this grant together as a chance to work together on something that interested both of us,” notes Mellers. She and her husband both teach psychology, and they’re both cross-appointed at the University of Pennsylvania to the School of Arts and Sciences and The Wharton School. They were seeking funds that IARPA awards to projects of interest to the intelligence community. Unlike DARPA, which tends to keep its research classified, IARPA shares some of its findings with the public, which fits with the mission of academia. But a slight misalignment arose when IARPA took three or four months to notify Mellers and Tetlock that their application for a project had been accepted. The delay made things a little “awkward” as Mellers remembers it. By then, She and Tetlock were leaving the University of California at Berkeley to assume their current

Phil Tetlock

positions at Penn. Some of the funding had to filter through UC Berkeley, so the project initially included five or 10 students and faculty members from that school under the direction of Prof. Don Moore. Mellers and Tetlock recruited 20 or 25 students and faculty from Penn, as she tells it. Contingents from Rice University, Hebrew University and other institutions later joined the project. Tournament of forecasting They were working on what IARPA calls an ACE tournament, which stands for Aggregative Contingent Estimation. Think of it as five university-led teams competing to come up with the best probabilistic geopolitical forecasts from a large, dispersed crowd of volunteers. The project got underway in 2011 and continued until 2015. After the second year, IARPA eliminated funding for all of the university

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groups other than the Mellers and Tetlock contingent from Penn. They were declared the winners and for another two years IARPA continued to help fund their research as they competed against control groups and intelligence analysts while also attempting to match or surpass benchmarks. Meanwhile, IARPA set up a prediction market inside the intelligence community. It operated on two levels, depending upon the security clearances of the participants. That meant the university group and the intelligence analysts were basing predictions on the same questions, but the latter had more information because of their security clearances. Just the same, the Good Judgment Project Superforecasters were 30% better than the intelligence analysts. “That was the good news and the bad news,” Mellers wryly suggests. But how did the team from Penn achieve that success? Strength in numbers helped. “We recruited more people than the other teams,” Mellers says. “We had better access to people who were able to get us volunteers.” By the numbers In the first and second years, the Good Judgment Project pooled the wisdom and prediction prowess of between 3,000 and 4,000 volunteer forecasters. Near the end of the third year, Tetlock and Elaine Rich, a pharmacist the project had identified as a Superforecaster, sat for an interview on All Things Considered, the National Public Radio show. Rich explained on the show how her forecasting hobby had blossomed, and her story inspired 20,000 volunteers to sign up for the fourth year of the project. But many balked upon finding how burdensome it was to assemble the knowledge necessary for accurate predictions, and the assemblage of forecasters narrowed to 5,000 or so by the end of the final year.

The Super 2% Meet some of the Superforecasters who emerged from the Good Judgment Project.

Dominic Heaney

Welton Chang

Shannon Gifford

45, Southeast England

37, Washington, D.C.

62, Denver

Occupation: Editor in academic reference publishing

Occupation: Chief technology officer

Occupation: Deputy chief projects officer for the Denver mayor’s office

As a forecaster are you a skilled generalist or an industry specialist? A bit of both. I’ve done a lot of work on geopolitical forecasting, particularly with regard to the regions I cover in my main job. How do you typically use your forecasting skills? I’ve definitely assimilated the art of thinking—in any number of areas, personally and professionally—in terms of “this event has an X% chance of happening,” and writing off things or possible courses of action that are non-starters. What advice would you give to aspiring Superforecasters? Think outside the box, look around arguments, consider base rates as a strong guide and don’t be afraid to be considered contrarian or unconventional if you are well-informed and pay the respect due to the devil’s advocate positions.

How and when did you become a Superforecaster? I got a note from my old undergrad advisor about a tournament being held to gauge political forecasting accuracy. I jumped at the chance. About a year later, I got a note back from the folks running the tournament that my scores were in the top 2% of all of the forecasters. Two years later, I joined the Good Judgment Project as a grad student researcher working directly with Barb Mellers and Phil Tetlock. How do you typically use your forecasting skills? These days, I generally think about improbable but highly impactful events—not quite “black swans,” but more in the gray-colored territory. What advice would you give to aspiring Superforecasters? Examine your sources and assumptions before making any forecasts. And when possible, dive deeply into any topic you’re not familiar with.

When and how did you become a Superforecaster? I became a Superforecaster after the first year of IARPA’s ACE, or Aggregative Contingent Estimation Project. How do you typically use your forecasting skills? The practice of forecasting has made me less likely to jump to conclusions of all kinds and more likely to listen carefully to multiple points of view. It also has caused me to read and think about the news in a much more active way, with much more thought about the downstream consequences of current events. What advice would you give on Superforecasting? Keep an open mind and be willing to change it, update your forecasts regularly, try to be aware of your biases and set them aside, listen carefully to people you disagree with, and try to maintain humility, especially when you’re forecasting an issue or a question in an area you think you know well.

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THE ART & SCIENCE OF FORECASTING

20K

Each year, the project analyzed the performance of each forecaster and assigned them scores, recognizing the top 2% as Superforecasters and directing them to work in teams during the remaining years of the program. “That was our best, strongest intervention,” Mellers says of choosing the Superforecasters and forming the teams. “That was like putting these people on steroids. They were really hard workers, but they worked super-hard when they were together to help each other and do well and compete. It brought together all the things they like to do.” Ten to 15 people participated on each team, and they collaborated via internet chat rooms. “They corrected each other’s mistakes, shared articles with each other, motivated each other,” Mellers notes. “They debated the logic of certain rationales, and they just went to town. It was just remarkable.”

The Superforecasters came from all walks of life—one worked as a plumber and another as a professor of mathematics. Many programmed computers or were employed in other tech-related fields. Whatever their occupations, they all possessed analytical minds (see “The Mind of a Superforecaster,” right).

volunteers signed up for the fourth year of the Good Judgment Project

Superforecasters come from all walks of life— one worked as a plumber and another as a professor of mathematics.

of predictors qualify as Superforecasters

How much better Superforecasters were than intelligence agency prediction specialists

New beginnings Although the IARPA project that gave birth to Superforecasting has ended, the work of the Superforecasters is continuing. Some have formed relationships with Good Judgment Inc., a company spun off from the project to serve clients in the public and government sectors (see “Getting Predictions Right,” p. 22). Meanwhile, Tetlock and Mellers and some of the Superforecasters have formed the Good Judgment Project 2.0 to compete in another IARPA tournament, one that’s exploring counterfactual forecasting. They consider what would have happened if history were changed— if Hitler had been born a girl, for example. “The goal is to help people think about how we can learn from history,” Mellers says. “We do it by intuition and make counterfactual forecasts.” They test the accuracy of counterfactual forecasts by comparing them with simulated games. Both of the tournaments serve a higher purpose, according to Mellers. “You find out very quickly what works and what doesn’t work,” she says of the competitions. “It’s a fantastic way to speed up science.”

The Mind of a Superforecaster The Good Judgment Project identified the best of its volunteers as “Superforecasters” because of their consistently accurate predictions. Superforecasters differ but tend to possess the following traits: High intelligence—but not necessarily off the board Broad domain knowledge, especially of politics High scores on a test of actively open-minded thinking Willingness to seek and consider information contrary to their previous point of view Tendency to enjoy thinking and forecasting Belief that forecasting skill can be cultivated and is not just innate ability or blind luck Scientific worldview Not much faith in fate or luck

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THE ART & SCIENCE OF FORECASTING

Pollsters fared badly in the 2020 elections, especially down-ballot. Were prediction markets a better bet? BY HARRY CRANE

Voters lined up to cast ballots last November in Oklahoma City. Why didn’t pollsters understand the electorate’s intentions?

orecasters are a shifty bunch, adept at concocting preemptive excuses and post hoc narratives for why their projections are right, no matter what happens. They eagerly point out the stupidity of betting markets, such as political prediction market PredictIt.org, yet are reluctant to subject themselves to the markets’ scrutiny. They cite a bizarro ethical code, contractual obligations, conflicts of interest and whatever else allows them to talk a big game while sitting on the sidelines. As Mike McDermott told Joey Knish in Rounders, “You see all the angles. You never have the stones to play one.” We saw it in 2016, when FiveThirtyEight’s 28% win probability for Donald Trump was heralded as yet another success story. Had Hillary Clinton won, their 72% forecast for her would have also been a success. It happened again in 2020. Before the election, statisticians at The Economist, who gave Biden a 95% chance to win, clarified that their model predicted “voter sentiment,” not the election outcome. Nate Silver of FiveThirtyEight published, “I’m here to remind you that Trump can still win: A 10 percent chance isn’t zero.” So, let’s get this straight. If Joe Biden wins, they called it. If he doesn’t, they warned us. Heads they win, tails they win. It may be that 72% for Clinton

PHOTOGRAPH: REUTERS/NICK OXFORD

Betting Against the Political Polls

As the dust settles and final outcomes become clear, who earns the right to sit atop the “most accurate forecaster” throne? Is it the pollsters, who qualify their forecasts with broad-brush asterisks, or perhaps prediction market traders, whose longshots and political biases influence market pricing?

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was right in 2016, and that 89% for Biden was right in 2020. But with all the hedging and excuses, how would we ever know? A week before the election, Silver tweeted, “political betting markets are basically just a competition over what types of people suffer more from the Dunning–Kruger effect.” For context, the Dunning-Kruger effect is a psychological bias that causes people to overestimate their ability to perform a task—in this case, forecast the election. Silver was alluding to the fact that betting markets gave Biden just a 60% to 70% chance to win, far lower than the polls and his model suggested. So, were the markets as irrational as Nate Silver claimed and full of overzealous “MAGA money” as many PredictIt traders contend, or were they pricing in extra information that skewed their probabilities toward Trump? The graphic below shows that the polls were skewed in Biden’s favor, as predicted by the betting markets. This lends some support for the markets’ shading toward Trump, but Biden won anyway. And still there are plenty of reasons why political betting markets might be less efficient than other markets. PredictIt, in particular, suffers from a number of structural limitations and sources of price distortion: a 5,000 trader maximum per contract, an $850 maximum exposure per contract, the limitation to U.S. participants and longshot biases. In addition, many market participants are blinded by their own political biases. So, if any market is beatable, it should be PredictIt. As of Nov. 16, using FiveThirtyEight’s forecasts to bet on each state in the Electoral College would have resulted in a profit of about 4.6% before fees. Not bad at first glance, but after accounting for fees, 4.6% looks more like -0.8%. A losing effort—after all that ranting and raving. Diving deeper, most of the profits

come from the 40 or so races with well-documented price distortions. In every election there are 40 or so states for which the winner can be predicted with high certainty— states such as Alabama, Wyoming and North Dakota for Trump as well as New York, California and Illinois for Biden—but these markets tend to top out in the 90¢-95¢ range as a consequence of PredictIt’s asymmetric commissions and high fees. For example, Biden to win California sold at 94¢ on the morning of the election. Zeroing in on nine of the closest races reported by FiveThirtyEight (Arizona, Nevada, Texas, Florida, Georgia, North Carolina, Pennsylvania, Ohio and Iowa), a trader would lose 9.1% before fees, or 13.9% after fees. Ouch. OK, but adding the states of Michigan and Wisconsin ends up at a 3.3% profit before fees, yet a 2.0% loss after fees. Still a loser, no matter how it’s sliced. If losing 1%-2% doesn’t sound so bad, consider that the house edge at craps is about 0.42% per roll. So you’d be better off rolling the dice than tailing FiveThirtyEight in the betting markets.Remind me again about that Dunning-Kruger effect.

“Were the markets as irrational as Nate Silver claimed and full of overzealous ‘MAGA money’ as many PredictIt traders contend?” Some contrarians will argue it’s not fair to include fees, but the fees cut both ways—they make it harder to profit but also cause market distortions that traders can be exploit. Besides, if you can’t beat the rake, you’re not a winner. Still, they’ll insist they could beat the markets, if only they had the time or were allowed to bet—the old “I would if I could, but I can’t” alibi. I don’t doubt for a minute that the betting markets are beatable, very beatable. It’s just that the major forecasting outlets don’t beat them, though they sure talk like they do. The real beauty of markets is that we don’t need to argue about this. If the markets really are so dumb, then go make some money. Until then, remember what Mikey McD told Knish. Harry Crane is the co-founder of Researchers.One and an associate professor of statistics at Rutgers University. @harrydcrane

2020 Presidential Polling Error by State Red/Blue = Underestimate of GOP/Democratic Support

-15

Source: Flip Pidot (Data as of Nov. 10)

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THE ART & SCIENCE OF FORECASTING

Luckbox Readers vs. Market Experts The Luckbox editorial team uses surveys to gauge reader sentiments ahead of every new issue. This time, the same questions asked of readers were posed to a panel of financial experts. Here’s how the results compared.

What will the returns on the S&P 500 be from its closing price on election eve (3,310) through closing on March 31, 2021?

SM TS

JC RG

RG SM

PERCENTAGE OF LUCKBOX READERS A loss of more than 15%......................................... 7.4 A loss of 10% to 15%.............................................. 6.1 A loss of 5% to 10%............................................... 9.4 A loss of less than 5%............................................. 7.7 A gain of less than 5%..........................................18.2 A gain of 5% to 10%............................................. 29.3 A gain of 10% to 15%............................................14.5 A gain of more than 15%......................................... 7.4

John Carter: A gain of 5% to 10% It looks as though our government will be gridlocked. And when politicians can’t do anything, that’s good for everyone. It also means fewer surprises. Markets hate surprises. Ryan Grace: A gain of 5% to 10% While we need more clarity on the Biden administration’s policy initiatives, the path of least resistance for stocks is higher. The economic recovery is underway, there are expectations of additional fiscal stimulus and monetary policy should remain supportive. Sean McLaughlin: A loss of less than 5% While the trend follower in me wants to pay attention only to price, which seems to be pointing higher, the mean-reversionist in me sees all the economic headwinds related to COVID-19 and has a hard time being bullish.

What will the returns on Gold be from its closing price on election eve ($1,897) through closing on March 31, 2021?

PERCENTAGE OF LUCKBOX READERS A loss of more than 15%......................................... 1.7 A loss of 10% to 15%.............................................. 1.7 A loss of 5% to 10%............................................... 5.5 A loss of less than 5%.............................................. 12 A gain of less than 5%......................................... 26.4 A gain of 5% to 10%............................................. 29.5 A gain of 10% to 15%............................................ 12.7 A gain of more than 15%.......................................10.6

John Carter: A gain of more than 15% I like gold both technically and fundamentally. I read somewhere that there are two ways to end a credit boom. One is you take away the credit. The Fed tried that with QT and nobody could handle it. The other way is to debase the currency. The only way out of our current mess is to inflate our way out of it. Technically and fundamentally, I’m looking for gold to make new highs into 2021. Sean McLaughlin: A gain of 5% to 10% Forming a pretty impressive base for another launch, and more stimulus should help keep a bid under gold. Dylan Ratigan: A gain of 5% to 10% Inflation.

Tom Sosnoff: A loss of less than 5% Buy the rumor (election) and the results.

Ryan Grace: A gain of less than 5% The biggest headwind for gold over the next couple of quarters will be higher real interest rates, which is what seems to be setting up presently.

Dylan Ratigan: A loss of 10% to 15% Tax increases.

Tom Sosnoff: A loss of less than 5% Gold is already overbought.

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What will the returns on Bitcoin be from its closing price on election eve ($13,550.49) through closing on March 31, 2021? SM

How many U.S. deaths from COVID-19 will be reported or estimated as of March 31, 2021?

SEE LUCKBOX READER ANSWERS IN OPEN OUTCRY ON P. 7.

John Carter: I’m looking at COVID-19 and the economy and lockdown. Does this open the door for central banks to adopt digital currency so they can provide stimulus directly without going through the middleman? It’s not going to be a dull year.

JC SM TS PERCENTAGE OF LUCKBOX READERS A loss of more than 15%........................................ 4.6 A loss of 10% to 15%............................................. 3.9 A loss of 5% to 10%..............................................10.2 A loss of less than 5%........................................... 15.1 A gain of less than 5%............................................ 20 A gain of 5% to 10%...............................................17.2 A gain of 10% to 15%............................................ 11.6 A gain of more than 15%........................................17.5

John Carter: A gain of more than 15% For me, bitcoin is where you put 5% of your net worth and forget about it for 10 years. It’s either going to zero or six figures. Sean McLaughlin: A gain of more than 15% If gold moves higher, bitcoin will join with a higher beta. Ryan Grace: A gain of more than 15% I think more investors are starting to look at BTC as an inflation hedge, especially if we see a continued policy shift toward MMT/ UBI, negative interest rates, etc. At its current market cap, it’s a relatively small asset class and it’s under-owned. Dylan Ratigan: A gain of 10% to 15% Inflation. Tom Sosnoff: A loss of more than 15% Bitcoin is currently grossly overbought.

2020 has been a crazy year. If the trend toward uncertainty continues, what unanticipated (black swan-like) events will take the world by surprise? What lies ahead from now through the end of March?

PERCENTAGE OF LUCKBOX READERS Fewer than 250,000..............................................12.9 250,000 to 400,000.............................................47.5 400,000 to 630,000............................................ 24.4 630,000 to 1,000,000.............................................7.1 More than 1,000,000.............................................. 8.1

Sean McLaughlin: Well, by definition, a black swan can’t be predicted. But in playing along, true societal unrest that makes the ‘60s look like a love-in could be the next black swan to catch the markets and economy off guard. Tom Sosnoff: The bond market crashes.

Dylan Ratigan: 630,000 to 1,000,000 Parabolic math.

Dylan Ratigan: Massive military conflict. Ryan Grace: The price of oil goes +$100.

John Carter: 250,000 to 400,000 Right now, the infection rate is exploding, but the death rate seems to be lower as an overall percentage of infections—maybe because the most at-risk are staying home. Sean McLaughlin: 250,000 to 400,000 Fingers-crossed that it’s not worse than this.

John Carter has been a full-time trader since 1996. He is the founder of Simpler Trading. @johnfcarter

Tom Sosnoff: 250,000 to 400,000 Math.

Ryan Grace serves as the chief market strategist for dough, a commission-free stocktrading app. @ryanondough

Ryan Grace: 250,000 to 400,000 This is around the current run rate, though the death rate decreases as we learn more about the virus, more effective treatments are available and we ultimately have widespread distribution of a vaccine.

Sean McLaughlin began his career in 1998 at a proprietary trading firm in Tampa. He now serves as a senior market strategist for TradeIdeas. @chicagosean Dylan Ratigan formerly served as global managing editor for corporate finance at Bloomberg News and today co-hosts the Truth or Skepticism podcast with Tom Sosnoff. @dylanratigan Tom Sosnoff, co-founder and co-CEO of tastytrade, appears daily on programming for the tastytrade financial network. @tastytrade

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THE ART & SCIENCE OF FORECASTING

Luckbox Lookback: Hindsight in 2020 Luckbox launched its debut issue in April 2019, so it’s time to revisit some of the trends, forecasts and investment ideas that have graced the magazine’s pages. Check out these highlights, as well as two understandable lowlights.

Stock Showcase Taking Stock of Winning Picks

Stock Losers

Some of the stocks touted in Luckbox outperformed the S&P 500.

Some trade ideas that appeared in Luckbox didn’t perform as expected. The May 2019 issue carried a bullish story about AMC Entertainment Holdings (AMC), and the SeptemberOctober 2019 issue had two bearish stories about Amazon (AMZN). Since then, both stocks have seen price movement opposite of those expectations. AMC is fighting to avoid bankruptcy while Amazon enjoys surges to record highs. Of course, the cause is no surprise. The COVID-19 pandemic has battered the entertainment industry while driving demand for e-commerce to new heights.

Issue

Article

Author

Ticker

Position

Forecast Outcome

S&P (Benchmark)

+/-% (vs S&P 500)

June 2019

MCHP: Option This Breakout

Doug Busch, Chartsmarter

MCHP

Bullish

+54.8%

+25.5%

+29.3%

July 2019

Google’s Got Game

Ryan Shaw, NinjaTrader

GOOGL

Bullish

+57.4%

+19.8%

+37.6%

Jan-Feb 2020

Getting Real About The RealReal

David Trainer & Sam McBride, New Constructs

REAL

Bearish

+22.1%

+10.5%

+11.6%

Aug-Oct 2020

iHeartMedia: Radio’s Long Game

Kevin Mackie, Seeking Alpha

IHRT

Bullish

+10.3%

+5.4%

+4.9%

*Calculations based on comparisons of opening prices on respective issue publication dates and 11.13.2020

Political Prediction Picks

Which party will win NH in 2020? Democratic

57¢

3¢

Republican

42¢ 1¢

Luckbox contributor and full-time prediction market trader Derek Phillips called New Hampshire for the Democrats back in April, when shares on PredictIt were trading between 50¢ and 60¢. Joe Biden went on to win New Hampshire, meaning those Democratic shares paid out at $1.00 —nearly a 100% return.

luckbox | december 2020 / january 2021

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Trend Tracking 隐形战争

Millions of Uyghurs in China suffer the inhumanity of concentration camps, crematoriums, unrelenting surveillance and forced marriage, leading to genocide BY RUSH A N A BBA S

Twelve million Muslim Uyghurs who make their home in the northwest corner of China differ racially and culturally from the country’s Han Chinese majority. As a result, the Uyghurs have been targeted for ruthless indoctrination aimed at bringing them under the stifling regimentation of the Chinese Communist Party.

Q: Have you texted or sent pictures of your kids to your family in your hometown? A: No. They told me not to contact them more than two years ago, and now I have no idea where they are. Q: Have you contacted your siblings back home? A: No, I have no idea of their whereabouts. Sadly, these are typical, everyday conversations among the victims of Chinese oppression who have abandoned their homes to take flight in the Uyghur Diaspora. Despite the worldwide proliferation of smartphones and the universal convenience of Instagram, Facebook and Twitter, Uyghurs find themselves almost totally cut off from communicating with their loved ones. But that’s just the beginning of the Uyghur horror story. The Chinese Communist Party (CCP) combines racism and cutting-edge technology to assert nearly total control over the entire Uyghur population. The Uyghurs dwell in a constant state of terror and endure unrelenting surveillance and censorship. The CCP denies them freedom of movement, freedom of thought, freedom of religion and freedom of speech. The Uyghurs (pronounced we-gur) have been isolated from the rest of the world since 2017. Even those who have escaped to other countries often fear to speak out because their friends and families back home could face savage retribution. Concentration camps The United States Department of Defense estimates that as many as 3 million Uyghurs—a fourth of the Uyghurs who reside in China—have been herded into concentration

camps that the CCP euphemistically calls Vocational Education and Training Centers. The camps represent the culmination of decades of repressive policies, and the aim is social reengineering, says Darren Byler, a lecturer in anthropology at the University of Washington. Inside the camps, detainees are indoctrinated with Communist Party propaganda and forced to renounce Islam. They’re raped, tortured and forced to undergo abortions, according to Aiman Umarova, a Kazakh human rights advocate. China’s first concentration camp in Xinjiang was built under the “Strike Hard Campaign” in 2014. The camps have grown in size by almost 500% in the past 24 months alone. The Chinese government is building crematoriums in the camps to alter a culture that doesn’t practice cremation, says Foreign Policy, an American news source. Crematoriums in combination with concentration camps bring to mind the Nazi Holocaust. China’s campaign of despotism also extends far beyond the camps, says New Dawn, a Turkish newspaper. Security that’s tighter than George Orwell dreamed of in his novel 1984 has fostered a massive, high-tech police state in the Xinjiang Uyghur Autonomous Region that most of the world’s Uyghurs call home, the paper says. 24-7 surveillance The streets of Xinjiang’s towns and villages are festooned with cameras equipped with facial recognition software. Iris scans identify residents on the flimsiest of pretenses. Police maintain street-corner checkpoints. GPS tracking devices trace the movements of every vehicle, and QR scanning codes help keep track of daily activities in every home, according to Newsweek. While gathering all that intelli-

gence on the Uyghurs, the CCP has also managed to maintain an information blockade so tight that news of the situation rarely reaches most people in many countries. The goal of the incredibly intrusive surveillance and iron-fisted social control is to wipe out Uyghur civilization by force. Their religion has been outlawed. Uyghur mosques, cemeteries and historical buildings have been demolished or turned into entertainment facilities, says The Washington Post. Copies of The Qur’an, Uyghur historical books and cultural materials are burned. Everything that makes the Uyghurs unique has been treated as an abnormality—a disease to be eliminated. That includes language,

PHOTOGRAPH: REUTERS/JORGE SILVA

SINOMUSLIM HORROR

Question: When was the last time you spoke to your parents? Answer: More than two years ago.

luckbox | march 2020

2003-topics-rushan.indd 22

culture, history, religion, identity and way of life. But that’s not how the CCP tells it. According to China’s ambassador to the U.S., Cui Tiankai, Beijing’s regime is turning Uyghurs into “normal persons,” says CNN Philippines. Today, all “normal religious activities” of Islam are banned and labelled as “extreme” and “toxic” under the pretext of the “People’s War on Terror.” No escape My family has not avoided the horrors. After I exposed the atrocities in the camps and the fate of my in-laws, the authorities abducted my sister, Dr. Gulshan Abbas. Surely, my sister, a medical doctor, doesn’t

need job training in a camp. Moreover, she’s not outspoken on political matters. But, unfortunately, her fate’s not unique. Detainees include hundreds of physicians, academics, businesspeople and other professionals. What’s more, the children and the elderly in the camps don’t need job training. Even children who aren’t in the camps have become a target of China’s policies of assimilation and social engineering. The Chinese government is trying to eradicate the Uyghur identity by controlling the younger generation. While their parents are detained in the camps, more than 500,000 Uyghur children have been held hostage in government-run orphanages, where

“Everything that makes the Uyghurs unique is treated as an abnormality— a disease to be eliminated. That includes language, culture, history, religion, identity and way of life.”

A Uyghur protester uses a mask to decry censorship during an anti-China demonstration last year at the G20 summit in Japan.

march 2020 | luckbox

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From Prediction to Product

THE FUTURE OF WORK

High Fiverr

CHINA’S STEALTH WAR

Fiverr connects freelancers and gigs with Amazon-like efficiency, one of the reasons so many new freelancers aren’t looking back. By Mike Reddy

mid a harsh economic landscape, where Covid19 jeopardizes lives and livelihoods around the world, freelancing has emerged as a muchneeded beacon of hope for skilled workers. In the United States alone, tens of millions of people are without work following what the World Bank forecasts will go down in history as the deepest global recession since World War II. Nearly 32 million people claimed unemployment benefits for the week ending July 4, according to the Department of Labor. That number was less than two million for the comparable week in 2019.

Still, many refuse to accept the newfound hardships, instead turning to freelancing sites, such as Upwork, freelancer.com and Fiverr, to put their skills and talents to work. Freelancer.com reported an increase in the number of jobs posted between Q1 and Q2 of 2020 to the tune of over 25%. An Upwork study indicated an estimated 50% rise in freelancer sign-ups since the pandemic hit. Fiverr, too, set record numbers in past months for freelancers joining its platform and creating new gigs. But the growing workforce of freelancers predates the pandemic. According to Upwork and Freelancers Union’s sixth annual Freelancing

in America study, the share of fulltime freelancers was 17% in 2014, and by 2019 it had grown to 28%. A total of 57 million Americans freelanced in 2019, or 35% of the U.S. workforce. Those who have spent a considerable amount of time freelancing know that no two platforms are the same, each with its own advantages and drawbacks. Fiverr’s approach, namely its service-as-a-product model, sets it apart from the competition in ways many users of the site, both buyers and sellers, find beneficial. “We’ve productized these services,” said Brent Messenger, vice president of public policy and community engagement at Fiverr. “And so there’s a catalog of services that you could go through, and it’s like shopping on Amazon.” Essentially, freelancers on Fiverr create listings for their services detailing exactly what they’re willing to do, how long it will take them to do it and what they charge for completing the job. Many listings feature packages or add-ons to custom tailor the services further. Unlike many other freelancer-hiring platforms, Fiverr’s bases prices on providing flat totals for completed work, as opposed to hourly rates, simplifying the process for businesses. “It’s starting with a scope of work up front, and you can work backwards from that,” Messenger told Luckbox. Structuring the platform that way makes hiring freelancers a straightforward process. Instead of posting jobs, waiting for proposals, sifting through them and ultimately negotiating with

the best applicants, business owners can search for exactly what they’re looking for, compare rates and book a gig all in the same day. For the freelancers, gone are the days of searching through job listings, applying to a handful that match their expertise and hoping they’ll be lucky enough to be selected for the gig. On Fiverr, the jobs come to them. It’s not surprising then that along with the shift to working from home came a growing shift to freelancing, a business model built upon working remotely, customizing rates and choosing to take on as much or as little work as one’s schedule allows. While Fiverr doesn’t track the number of part-time versus full-time workers, anecdotal evidence suggests it’s more than possible to earn a competitive full-time wage freelancing. “We can see in our data that there are many people on the marketplace who’ve earned more than a million dollars,” Messenger said. “There are people who start a gig, and six months later they’ve earned $100,000—and there’s just a lot of volume.” But with so many workers flocking to freelancing sites in recent months, one can’t help but wonder if market saturation is becoming an issue. Is there room for new freelancers to find success on a platform like Fiverr? According to Messenger, the number of buyers has been growing along with the number of sellers. “As companies were experiencing the shelter-in-place, they still continued to have needs, and frankly, many more businesses are finding that they have needs that they didn’t know,” he said. “It’s been

Fiverr’s Podcast Called Ninetwentynine, because each episode runs exactly nine minutes and 29 seconds, Fiverr’s podcast is geared toward entrepreneurs and businesspeople looking to learn from others who have found success in their respective fields. Each episode features a different guest, or guests, and explores a rule they abide by for their success. From “Hire the right people” to “Be kind to yourself,” the rules may seem straightforward, but take it from the guests, that doesn’t make them any less important. The entire first season of the show, comprising 15 episodes, is available for listening now.

“People don’t realize how many of their side talents are being monetized by other people on Fiverr.”

Brent Messenger, Fiverr’s vice president of public policy and community engagement

Going GOAT august–october 2020 | luckbox

luckbox | august–october 2020

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Tech evangelist Robert Scoble made eight 2020 predictions in Luckbox’s January-February 2020 issue, one of which was that a new wave of virtual reality devices would hit store shelves. Sure enough, Facebook released the Oculus Quest 2 this past October.

a pretty balanced growth process.” Messenger added that as new people join the platform, Fiverr tracks their behavior to see if it differs from other cohorts on the site. Buyers who came on during the early stages of the pandemic, he said, have been behaving in the same ways as previous buyers in terms of site visits, repeat buying patterns and the amount of time between visits. Of course, making the shift from traditional nine-to-five work to freelancing can be a daunting undertaking, especially for those with no prior experience in the freelance market. For potential freelancers looking to get started, Messenger recommended exploring the site and taking a look at the opportunities. “People don’t realize how many of their side talents are being monetized

8/7/20 11:54 AM

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8/7/20 11:54 AM

Uyghurs in China

Higher Fiverr

Rushan Abbas, founder and executive director of Campaign for Uyghurs, shed light on the Chinese Communist Party’s inhumane treatment of the Uyghur people in Luckbox’s March 2020 issue, The Stealth War with China. The Uyghurs, a minority ethnic group living mainly in Xinjiang, China, endure mass incarceration in so-called “vocational education and training centers,” forced labor and cultural erasure, Abbas wrote. These atrocities were acts of brutality the Chinese government has fought diligently to keep under wraps. But as international awareness has grown, so too has the pressure on the CCP to respond to its harshest critics. In June, President Donald Trump signed into law the Uyghur Human Rights Policy Act, directing the U.S. Department of State to report on the scope of reported Chinese government crackdowns on Uyghurs in Xinjiang. In October, senators introduced a resolution that would declare China is committing genocide against the Uyghurs.

On the day subscribers were mailed Luckbox’s August-October 2020 issue, Podcasts Rising, Fiverr (FVRR) stock prices closed at $114.03 a share. In that issue, which featured a fourpage profile of Fiverr, Luckbox contributing editor Tom Preston wrote that “looking at outof-the-money calls and puts in the October 2020 and January 2021 expirations, calls are trading over the value of equidistant out-ofthe-money puts. That means the market sees more risk to the upside in Fiverr.” That was unusual, Preston noted, because equity markets usually fear big drops in prices rather than big rallies. But his assessment turned out to be spot on. Fiverr stock prices opened at $177.50 a share on Nov. 17, meaning the stock saw a more than 55% increase in value in less than three months.

Which party will win the MT Senate race? Republican

56¢ 3¢ Democratic

44¢ 3¢

In the January-February 2020 issue of Luckbox, Andrew Prochnow detailed the three-way race for the “greatest of all time” designation in men’s professional tennis. In the running are Rafael Nadal, Roger Federer and Novak Djokovic, but Luckbox favored Nadal, who recently won his record-tying 20th major title at the French Open.

Another Darknet Denizen Goes Dark Luckbox’s April 2020 issue dove into the darknet and its shrouded online marketplaces where illegal goods are sold freely. Empire Market, which at the time boasted more than 1 million users and long-term plans, has since “exit scammed,” or abruptly shut down with as much as $30 million of customers’ stolen bitcoin.

Spotify Gets Louder Spotify received extensive coverage in the podcasting-themed August-October 2020 issue of Luckbox. At the time, the company had signed an exclusive agreement with Joe Rogan for his podcast, The Joe Rogan Experience. This November, it dropped $235 million to acquire Megaphone, a podcast hosting company.

As a “more than worthwhile” hedge, Phillips advocated buying Republican shares in PredictIt’s Montana Senate race market. Republican candidate Steve Daines beat Democrat Steve Bullock on election night, making Phillips’ call all the more worthwhile. —another near 100% return.

7,241 Shares Traded

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trends life, luxury & the pursuit of happiness

HOLIDAY GIFT GUIDE

The Luckbox Gift Box The editors savored every product in this guide firsthand in a search for the best in music, books, smoking, food, fashion, games and gadgets

ome publications fill gift guides with pretty pictures of overpriced or impractical merchandise—as long as it’s photogenic. Not so here. Everything in these pages made the cut because it’s an exceptional product, not just a good photo op. Get ready for the best from companies that range from startups to icons.

From Hendrix to Clapton, the list of guitarists who’ve favored Strats is staggering. Competing luthiers can emulate the Stratocaster’s double-cutaway body, but no one can duplicate its distinctive tone and vibe. Fender has been crafting countless variations of the Stratocaster since 1954 and makes this example, the American Professional II, by hand in Corona, Calif. Fender American Professional II Stratocaster $1,500, fender.com

PHOTOGRAPHY BY GARRETT ROODBERGEN

december 2020 / january 2021 | luckbox

trends

Apparel 1. Fitness apparel manufacturer NoBull makes high-performance cross-trainers that look great and function even better. The high-tops, for example, work on every level, doing double duty as athletic shoes and casual footwear. Nobull, Hi-Top Ivy Black Canvas Trainer $129, Lightweight 8.5” Short $72, Curved-Brim Trucker $35 , nobullproject.com 2. After learning of the homeless population’s desperate need for socks, Bombas has promised to donate one pair to a shelter for every pair it sells. By the end of 2020, six years after securing a deal on ABC’s Shark Tank, the company expects to have supplied the needy with nearly 40 million pairs of socks. Bombas features a full high-quality line from cozy to compression. Bombas Men’s Compression Sock 3-Pack $54, bombas.com 3. Nearly everyone carries a cell phone 24/7, so who needs a watch? Well, maybe no one. But greatlooking timepieces will always find a wrist. Boca MMXII combines Italian-made mechanical watches with intricate Mexican wristbands hand-woven from 16 strands of fine multi-colored sheepskin leather. Boca, Primero Black—Yellow Wristband $250, Grand Traveler Beige Silver—Silver Wristband $330, bocatime.com. Use the promo code LUCKBOX on orders over $150 for 20% off. 4. Give the gift of Luckbox. Subscribe for one year and have 10 print issues of the award-winning, largeformat magazine delivered to your door. The offer also includes digital access to every back issue. And, yes, for a limited time new subscribers will receive a free Luckbox T-shirt. Luckbox tee and 10 print issues $39, getluckbox.com. Luckbox tee sold separately $25, tastytrade.com/tt/store

Food 1. Pappy Van Winkle’s bourbons can be very difficult to find and extremely expensive. So when Pappy & Company released a maple syrup with just the right hint of Pappy’s bourbon, Luckbox couldn’t wait to try it. It’s exquisite for pancakes and maple old-fashioneds. Pappy Van Winkle Bourbon Barrel-Aged Pure Maple Syrup $38, pappyco.com 2. How might a break-out cookie taste? You’ll know with the first bite of an amazing pie-crust cookie from Janie’s Life-Changing Baked Goods. They’re beyond great. Pie-Crust Cookie Gift Box (Apple, Pecan, Chocolate & Triple Berry) $40, janiebakes.com 3. Trufflin curates truffle-infused products for food lovers to enjoy at home. The black truffle Sriracha is a standout, a blend of premium fermented chili peppers, savory spices, hibiscus and cold pressed olive oil. Trufflin VIP Set (Black Truffle Oil, Sriracha, Salt, Honey) $94.99, trufflin-nyc.com

luckbox | december 2020 / january 2021

APPAREL

trends

2 1 3

FOOD

december 2020 / january 2021 | luckbox

trends

BOOKS

Books 1. In our non-fiction book of the year, renowned New Yorker music critic Alex Ross reveals how the composer Richard Wagner’s rousing creations inspired generations of musicians, painters and writers, yet simultaneously became anthems for the Third Reich. Find out why Wagner’s devotees have ranged from Phil Spector to Adolf Hitler. Wagnerism: Art and Politics in the Shadow of Music, $40 2. Financial success isn’t only about what you know. It’s also about how you behave. These 19 short stories explore the strange ways people think about money. It’s long-form Luckbox. The Psychology of Money, $19 3. A stunning 544-page visual journey samples the best of everything the world has to offer in the book’s more than 1,000 all-new photographs. 1,000 Places to See Before You Die (Deluxe Edition), $50 4. Factfulness, an essential book that will change the way you see the world, can empower readers to respond to crises and opportunities. It’s your chance to know what you don’t know. Factfulness: Ten Reason We’re Wrong About the World, $28

Music 1. The Crosley Cruiser Deluxe features a three-speed turntable, built-in Bluetooth receiver, attached stereo speakers and an aux input. It’s perfect for first-time vinyl buyers and longtime enthusiasts. Rock retro. Crosley Cruiser Deluxe $70, crosleyradio.com 2. In 2015, legendary 81-year-old saxophonist Wayne Shorter teamed with Wynton Marsalis and the Lincoln Center Orchestra for three unforgettable nights onstage. Our jazz album of the year. The Music of Wayne Shorter (vinyl) $27, towerrecords.com 3. The breakout debut studio album by English alternative rock band Sports Team features feelgood garage punk drawing on Arctic Monkeys, Cage the Elephant, Iggy Pop, Bowie and the Ramones. Deep Down Happy (vinyl) $19, amazon.com

MUSIC 1

Games 1. In Pax Pamir, a beautifully designed interactive board game about politics and power, players work in coalitions to forge a new state after the collapse of the Durrani Empire in 19th century Afghanistan. Game of the year. Pax Pamir (2nd Edition) $119, kickstarter.com and thegamesteward.com 2. Here’s a game of political intrigue and betrayal set in 1930s Germany. Players are randomly and secretly chosen to portray liberals or fascists, and one player is Secret Hitler. The liberals must find and stop the Secret Hitler before it’s too late. Insert your own 2020 political reference here. Secret Hitler $29, various online stores

luckbox | december 2020 / january 2021

trends

GAMES

december 2020 / january 2021 | luckbox

trends

Gadgets 1. Pocketalk, a two-way translation device, is designed for full conversations in 74 languages. It includes two high-quality speakers, noisecancelling microphones and a text-to-translate camera. Pocketalk Voice Translator $299, pocketalk.net 2. Hatch Restore combines a smart reading light, sound machine, wind-down meditations, an alarm clock and a creeping sunrise feature into a single device. Hatch Restore $130, hatch.co/restore 3. The Tactica, a go-anywhere, lightweight, portable pint-sized toolbox, comes with 12 specialty hex bits, Allen wrench and pentalobe drivers. Portable and practical. Tactica MX.02 $19, tacticagear.com 4. The Oculus Quest 2 takes all-in-one virtual reality to the next level. Every detail of the virtual world is made more vibrant, immersive and lifelike with the latest Quest. Oculus Quest 2 $300, oculus.com

2 1

Smoking 1. The Pappy & Company Tradition cigar features an oily Habano Oscuro hand-rolled wrapper and a fragrant, full-bodied smoke with heavy notes of chocolate, earth and leather, balanced with cocoa and cashews. Pappy Van Winkle Tradition Cigars (Toro size, Box of 10) $150, pappyco.com 2. Plasencia makes extraordinary Nicaraguan cigars. The Alma del Campo offers dominant flavors of rich espresso beans, cedar and creamy peanuts. The new Riserva Original is fruit-forward, with mandarin orange, dried mango and wood notes. Plasencia Alma del Campo (Travesia size, Box of 10) $153, Riserva Original (Cortez size) $9 stick, plasenciacigars.com and cigar stores everywhere 3. Storz & Bickel’s Volcano Hybrid desktop vaporizer is made in Germany and built to last. It can handle any cannabis vaporizing task. Best of breed. Volcano Hybrid $700, storz-bickel.com 4. With an average heat time of 20 seconds and both loose-leaf- and concentrate-vaporizing capability, no one can go wrong with the portable, dependable Pax 3 vaporizer. Pax 3 $200, pax.com 5. Featuring all-new “ExpertTemp” technology, the Pax Era Pro sets its proprietary pod temperatures to the extractor’s exact recommendation. Pax Era Pro $70, pax.com 6. The Hydrology9 blends the best of vaporizers and water pipes into one sexy, leak-proof, liquidfiltration device. Hydrology9 Vaporizer $200, cloudious9.com

luckbox | december 2020 / january 2021

GADGETS 4

trends

SMOKING 1

6 4

december 2020 / january 2021 | luckbox

trends

LIQUID ASSETS

These Spirits Are in Your Future The recently launched Whiskey and Barrel Consumer Choice Awards are based on how people actually buy spirits: price The Price of Perfection There’s almost nothing Luckbox loves more than game-changing outliers and great whiskey, and the firstever Whiskey and Barrel Consumer Choice Awards was the perfect marriage of the two. The debut of this competition was special because the judges chose winners based on how consumers buy spirits: Entries in the blind tasting were categorized and judged in price brackets instead of age statements, regions or finishes. What’s more, vetted consumers outnumbered industry professionals on the judging panel three to one. Some Luckbox editors have spirits industry backgrounds and were invited to participate as industry judges. Only one consumer choice award was presented for each category, and of the 27 chosen, these were the seven Luckbox favorites. To see the full list of winners, visit wabcca.com. Photographed by Garrett Roodbergen at DMK Burger Bar in Chicago’s Lincoln Park

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Tamdhu 12

GOLD Scotch Single Malt Non-Peated Under $80 The two extra years of maturation after the previous 10-year release was well worth the wait. A combination of American and European oloroso sherry casks creates a smooth, buttery palate with balance and a depth of complexity seldom seen in a 12-year single malt at this price. 43% ABV, $70

Kaiyo 7

GOLD Japanese Whisky Under $70 Aged in ex-bourbon barrels and finished in coveted Japanese mizunara oak casks, Kaiyo 7-year has a more complex flavor than its seven years would suggest. Sweet and floral on the nose, with multiple layers emerging from a combination of very different oaks in the maturation. 48% ABV, $49

Teeling Small Batch

GOLD Irish Whiskey Under $50 Blending flavors from former bourbon barrels and former Central American rum barrels produces a big flavor profile of Irish whiskey combined with deep, rich dried fruit. A bit of spice lingers on the palate as a pleasant surprise and blends well with the fruit, bringing a long, enjoyable finish. 46% ABV, $39

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Murray Hill Club

GOLD Bourbon $50-$100 A bourbon blended in the preprohibition style, Murray Hill Club marries 18-year, 11-year and 9-yearold whiskies to create a rich oak and butterscotch flavor with a wonderful underlying spice that carries through to the long finish. This entry impressed most—it’s the Luckbox Editors’ Choice. 51.5% ABV, $99

Old Forester 100 Proof

GOLD Bourbon Under $50 A higher proof than the standard releases and batched from select barrels, Old Forester 100 Proof is a rich, surprisingly complex bourbon with a bit of peppery, sweet spice. The high ABV helps bring out the flavor and character of this long-established and often under-rated brand. 50% ABV, $22

Speyburn 18

GOLD Scotch Single Malt Non-Peated $80-$150 Matured in both American oak and Spanish oak casks, this is a sophisticated single malt that blends the very light and subtle oak of a mature scotch with the rich, smooth and sweet fruit and honey palate that appeals to a whisky drinker. 46% ABV, $145

Catoctin Creek Roundstone Rye 80 Proof

GOLD Rye Whiskey American Under $50 Made from 100% local Virginia rye aged in new Minnesota oak barrels, Catoctin Creek Rye’s tight grain adds to its spice and rich flavor. Caramel on the nose follows to the palate. At only two years old, its warm weather maturation creates a whiskey that performs far above its age. 40% ABV, $39

december 2020 / january 2021 | luckbox

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THE NORMAL DEVIATE

Counting on Volatility Scientists can only guess when the next pandemic or earthquake will strike, but with the help of volatility traders can quantifiably predict stock prices By Tom Preston

on whether a prediction is correct. We can use the quantifiable volatility of Apple (APPL) stock, for example, to see what the probability is that it will be above or below some price by the end of 2021, or next month, or next week or tomorrow. Then we can see at that particular date whether the price of stock in Apple is actually above or below those predicted levels. The volatility of a stock is determined by its options’ prices, which are determined by all the buyers and sellers in the market. The market sets the option prices, and a stock’s volatility can be derived from them. An important thing to know is that a stock’s volatility is an annual number. For example, if Apple has a volatility of 30%, the market predicts there is a 68% probability that it could change 30% or less—up or

Think of volatility as just another term for standard deviation. Police worked to contain crowds that took to the streets of Rochester, N.Y., in September to protest the police killing of Daniel Prude. Let’s hope volatility is confined to the markets in 2021.

down—in one year. The 68% comes from the area of the bell curve that ‘s between one standard deviation below the average and one standard deviation above the average. But to see the probability of what Apple’s price might be in less than a year, convert Apple’s annual volatility into the volatility of a shorter time frame. To do that, multiply the annual volatility by the square root of the fraction of the year you’re considering. For example, if you want to estimate how much Apple might change in 60 days, multiply 30% by the square root of 60/365. That gives you about 12.2%. So, there is a 68% probability that Apple will be between -12.2% and +12.2% in 60 days, which converts to between $100.97 and $129.03 if Apple’s current price is $115.

PHOTOGRAPH: REUTERS/BRENDAN MCDERMID/FILE PHOTO

he year 2020 will be remembered as tumultuous. With COVID-19, civil unrest and a highly emotional and consequential election, it’s a wonder anyone had time to look at the market. But predicting those events is almost impossible. You might have full confidence in a lethal epidemic occurring at some point in the future, but making a quantified estimate of when COVID-19 might have happened is really just a guess. What many people don’t know is that money and investments are more predictable than other types of events. What makes markets different than other events? What enables traders to predict where markets will be in the future? Quantifiable volatility. What’s that? Volatility means how much something changes from an average, and we can stick a number on it. Volatility is just another term for standard deviation. If we can measure the changes and determine the average, we can get a quantifiable volatility. That’s pretty easy to do with markets, but not so easy with epidemics or elections. The reason is that epidemics and elections don’t happen very often, making it difficult to determine an average and deviations away from that average. Scientists try, and we hear about how we’re “overdue” for an outbreak or an earthquake. Then we wait for California to snap off the left edge of the United States, but it doesn’t. At least not yet. On the other hand, the stock market can give immediate feedback

luckbox | december 2020 / january 2021

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trends

The reason you need to use the square root of time is that to calculate the standard deviation, you need to begin with the data’s variance. The variance of any data—such as the price changes of a stock—is based on the square of the difference between the individual data point and the average of those data points. Because there are positive and negative price changes, if you just added them up, the positive and negatives would offset and you wouldn’t get an accurate depiction of how big the price changes were. To determine the variance, the negative values are squared to make them positive, so that when added to the squared positive values, you get closer to an accurate measure of volatility. The standard deviation, i.e. volatility, is the square root of the variance. The variance is proportional to time. Because you take the square root of the variance to get the standard deviation, the standard deviation is proportional to the square root of time. Once you have Apple’s volatility, it’s straightforward to calculate the probabilities of it reaching any price at any time, not just one standard deviation in one year. To do that, we treat Apple stock like a standard normal variable, or rather, something whose behavior can be reasonably modeled on a bell curve, aka the normal distribution curve. The bell curve, the bane of high school grading, shows that most of the time the grades—or Apple stock—are clustered around an average level. Some others are a bit higher and lower, and fewer still are much higher and much lower. If you can plop that data—specifically the percentage changes of Apple stock—on the bell curve, you can calculate the probability of Apple reaching a higher or lower price. The math involved isn’t particularly strenuous, but you don’t want to do it by hand. That’s why you can find those probability numbers on certain trading platforms, like tastyworks. They’re calculated for

The Bell Curve Bell curves result from graphing a normal distribution of variables. The curves got their name from their symmetrical bell shape. The highest point on the curve, or the top of the bell, represents the most probable event in a series of data (its mean, mode and median in this case). All other possible occurrences are symmetrically distributed around the mean, creating a downwardsloping curve on each side of the peak. The width of the bell curve is described by its standard deviation. Financial analysts and investors often use a normal probability distribution when analyzing the returns of a security or of overall market sensitivity. In finance, standard deviations that depict the returns of a security are known as volatility. Source: Investopedia

you in real-time, and they’re one of the most important things to know about how to trade. Here’s what you can’t do: interpret a larger-than-predicted price change as an increase in volatility. For example, if volatility is 30%, and you adjust that down to 1.6% for a one-day, one standard deviation range, what if the stock changes 3.2%, higher or lower? Does that mean that its volatility was actually 60%? No. It means the stock changed two standard deviations. The only way to know whether volatility rose from 30% to 60% is to look at your trading platform. As we look forward into 2021, we

can only hope that the volatility we see is concentrated in the markets and not in the rest of our lives. When we can assign probabilities to our trading and investing, it makes us more confident in taking risks. But when we can’t get a reliable probability of an epidemic or other disaster, all we see is risk. So, if you’re a trader, count yourself lucky. While everyone else is running around screaming, you can calmly bury your head in your trading screen. Tom Preston, Luckbox contributing editor, is the purveyor of all things probabilitybased and the poster boy for a standard normal deviate.

december 2020 / january 2021 | luckbox

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trends

TRADER

5 1

9 10

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JOHN CARTER John Carter, founder, Simpler Trading Age 51 Office Austin, Texas Years trading 31 How did you start trading? I spent my junior year of high school working at a cookie store at the mall making minimum wage. After a while, I saved up $1,000. One night when I got home my dad and his buddies were sitting around the table talking about call options on Intel (INTC) I didn’t know what a call, an option or Intel was, but I was intrigued. I put up my savings and they spotted a 10-lot trade for me. A few weeks later I got my $1,000 back, plus another $800. I don’t even know if the trade worked or not, but I was hooked. I could make money with ideas instead of just my hands. Favorite trading strategy? My favorite trade involves a compression of the Bollinger Bands into what’s known as a “squeeze.” This generates a high-probability situation for a

greater-than-expected move. With that scenario, for a long setup, I like to buy a Delta .70 call 30 days out or longer and then look to sell delta .20 calls against it 10 days out or shorter. In a perfect world, the short calls expire worthless and I let the long calls ride. I’ll do the same trade in reverse for short signals, buying the delta .70 put 30 days out and selling the delta .20 puts 10 days out or less. I prefer to leg into these diagonals, starting off with the long option, then getting a move in my favor for the length of one ATR (average true range) and then using that momentum to leg into and sell the delta .20 options. Average number of trades per day? Five Favorite trading moment or best trade? This year, for me, has all of my favorite trading moments centered around Tesla (TSLA). I’ve done five big trades on it this year. My favorite one was a large 1700/1800 call debit spread when the stock was trading at 1650. The debit spread expired the following week, meaning Tesla had to have a huge move and had to do it quickly. I bought the debit spread at 17 and sold it three trading days later for 86. I was hoping to

1. Charts on various time frames (typically weekly, daily, two-hour and 30-minute) 2. Indexes to get a sense of market conditions 3. List of stocks that meet my setup criteria 4. Fish tank 5. Crystals (it can’t hurt) 6. Headphones 7. Pile of books How I Made $2 Million in the Stock Market by Nicolas Darvas Trading in the Zone by Mark Douglas Letting Go by David R. Hawkins Glorious Accidents: How Everyday Americans Create Thriving Companies by Michael J. Glauser A Good Hard Kick in the Ass: Basic Training for Entrepreneurs by Rob Adams Empire of Debt by William Bonner & Addison Wiggin The Bootstrapper’s Bible by Seth Godin Trading in the Zone by Mark Douglas Instant Income by Janet Switzer 8. Water—2.5 liters/day 9. Email & Slack 10. Trades execution platform

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trends

sell it for $35, but the stock had a huge gap up and just kept running, making it very easy to hold onto, relatively speaking. That was the biggest trade I’ve ever done, netting $3.45 million on a 500-lot trade. Worst trading moment? My worst trading moment happened when I was newly married in the late ‘90s. I was working a corporate job and had built up a trading account of $150,000. I was ready to quit my job and trade full time, but we wanted to buy a house. It’s easier to buy a house when you have a job. We were going to take the down payment of $30,000 from my trading account. One night I started thinking, “I really don’t want to pull my trading account down to $120,000. I know, I’ll just do a big trade, make $30,000, and then I can still have a $150,000 trading account when I quit my job.” The next day I put half my account into OEX [S&P 100] puts. It was doing well, so I put the other half of my account into it. By the close I was up $15,000, so I could probably close it at the open and make my

2012-trends-trader.indd 45

$30K. What happened? The markets gapped up and ran for five days, right into the house closing. I went into “deer in the headlights” mode and froze. I finally got out the day before my house closing. My account had $8,000 left in it. Poof. I ended up maxing out my credit cards to transfer cash into my checking account so we could get the house. I didn’t tell my wife for 10 years. I took six months off and read Mark Douglas’ works on the mental game of trading and worked with a few mentors and started over. My main lesson was learning to focus on the setup and not the money, and from there learning to dissipate my anxiety when it popped up rather than letting it control me. What percentage of your outcomes do you attribute to luck? I’m very probabilities-based. The luck part comes when I’m doing a directional trade instead of selling a credit spread. With a credit spread, you can get sideways action and still hit your profit goal, typically 70% to 80% of max on the credit received. But with a directional trade, the

FAVORITE TRADING BOOK HOW I MADE $2 MILLION IN THE STOCK MARKET by Nicolas Darvas 2018 $14.99 (Amazon) Hardcover (124 pages)

movement of the underlying—how far and how fast—makes a huge difference. Will I get a normal one ATR move, and will it happen over five trading days? Or will it turn into something silly like Tesla and do a three ATR move in two days? The one ATR move hits my probabilities range. But a silly Tesla-like move is a combination of luck that it happened, luck that I was trading a directional long call instead of selling a put credit spread, and the experience to recognize what is happening and to let it ride.

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trends

WELLNESS

Put 2020 To Bed

Over time, a special kind of yoga can help relax the body and mind to promote a restful night’s repose By Lissette Caballero

he year 2020 has been one of the most surreal and stressful in recent history. Reality has shifted, and the resulting worries can hamper the ability to get restful sleep. But yoga has a deeply relaxing practice that can melt away tension and unlock deep restful sleep like never before: yoga nidra. Even yoga students with insomnia and sleep disorders can find relief with the aid of yoga nidra—or yogic sleep as it’s sometimes called. Yoga nidra is deep relaxation guided by someone’s voice, whether in person or via a recording. It is designed to take the yogi through two levels of awareness: the conscious mind and the subconscious mind. Beginning with a step-by-step relaxation of the body, one can let go of the tensions stored in the muscles. This brings release from the conscious mind. But why make the effort to get quality sleep? Because sleep is not just pleasant. Sleep also plays an important role in health. During sleep, blood pressure is naturally lower than in a waking state, allowing the heart to rest and rejuvenate. Sleep also plays a strong role in emotional well-being.It allows the brain to consolidate memories and process information. A chronic lack of sleep may affect memory and make one more prone to anxiety and depression. So how does one practice yoga nidra? When the body is rested and

heavy, focus thoughts on letting go of tension. The person guiding the session asks the student to acknowledge the thoughts occupying the mind and then let them go. Sometimes a visualization helps busy minds really let go. Finally, practitioners allow themselves to be present without following a daydream, and they avoid bringing new thoughts to mind. In this stillness, one can achieve deep rest. Anyone can practice yoga nidra any time of day. Wait an hour after eating or practice on an empty stomach. Practice when feeling physically or mentally tired. If suffering from insomnia or disturbed sleep, practice in bed at night. Practice yoga nidra for five

In this stillness, one can achieve deep rest. 46

minutes to one hour. Some consider a 20-minute practice the minimum for the best effect—enough time for the body to let go of anticipation and enter deep relaxation. But a shorter session will certainly not hurt. Regularly “letting go” of tensions in the body and in the mind increases the ability to recognize and release ruminating thoughts. Practitioners become freer and happier. Rest comes more easily. In this way, yoga facilitates good sleep habits. More rest over time will mean a healthier life overall. Open the augmented reality app THYNG, point it to this page, and try a yoga nidra session!

How to Practice Yoga Nidra 1. Lie down in a comfortable position. 2. Relax the physical body. 3. Relax the mind. 4. Set an intention for the yoga nidra practice. 5. Rotate awareness through different parts of the body. 6. Visualize. 7. Reflect. 8. Revisit the intention for the practice. 9. Return to external awareness.

Lissette Caballero teaches pilates, yoga and breathwork in free live Instagram classes each weekday at @yogatraveladdict Yoga to promote sleep

luckbox | december 2020 / january 2021

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trends

CALENDAR

PHOTOGRAPH: (SEINFELD) YOUTUBE.COM; (SATURN) SHUTTERSTOCK.COM

ASTRO EVENT OF A LIFETIME The biggest astrological transit in centuries will occur Dec. 21, and it’s an important time for traders and investors. It’s called the “Great Conjunction,” and it’s when Jupiter and Saturn meet at zero degrees of Aquarius, appearing as a single star in the sky. Their previous closest encounter occurred back in 1623, and what’s more, Aquarius is an “air sign,” which heralds the official start of the “air economy” for the next 199 years. Jupiter and Saturn have been meeting every 20 years in “Earth signs” since 1842, signifying that the economy valued physical and material things. In an air economy, the economy—and markets— value things of air, such as ideas, intellectual property, technology and global community. Their meeting is especially profound because it occurs just hours after the winter solstice and thus has worldwide implications. Susan Abbott Gidel, author of Trading In Sync With Commodities—Introducing Astrology To Your Financial Toolbox, also edits Red Letter Trading Days, a monthly newsletter. @susangsays

DECEMBER 2-3 Forbes Healthcare Summit Virtual event 5 Repeal Day (End of Prohibition) 9-10 The AI Summit New York Virtual event 10 The Game Awards Virtual event 14 Solar Eclipse in Sagittarius Strong money emotions

21 Great Conjunction, Gann Day & Winter Solstice (Change of trend) 23 Festivus 26-1 2020 Indy Auto Show Indianapolis

JA N U A R Y 1 Brexit (New Compliance Regulations) 1 2021 Rose Bowl Pasadena, Calif. 5 Georgia Senate runoff Election Day 11-14 Consumer Electronics Show (CES) Virtual event 20 Presidential inauguration Washington, D.C.

Festivus If tinsel seems distracting and traditional winter holidays feel tired or overdone, try Festivus, the secular, non-commercialized holiday. Although popularized by the 10th episode of Seinfeld’s ninth season, “The Strike,” Festivus actually predates the show. Seinfeld screenwriter Dan O’Keefe’s father created the holiday in 1966, and it was to take place randomly with no set date. However, after it was written into an episode of Seinfeld in 1997— and celebrated on Dec. 23 on the show—the annual celebration date of Festivus was cemented. So, break out the holiday pole, cook some meatloaf and spaghetti, air family grievances and enjoy a Festivus for the rest of us.

CES The Consumer Electronics Show (CES), first held in June 1967, has blossomed into one of the most highly anticipated trade shows. CES 2020, which ran Jan. 7-10, saw more than 170,000 attendees make their way to the Las Vegas Convention Center, which included nearly 64,000 exhibitors. The most talked-about innovations at last year’s gathering included the Samsung Galaxy Chromebook, the Vizio OLED TV and Impossible brand’s plant-based pork. The all-digital 2021 exhibition will feature keynote addresses by Verizon Communications CEO Hans Vestberg and General Motors CEO Mary Barra.

december 2020 / january 2021 | luckbox

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BECOME A MARKET MASTER!

OPTIONS

FUTURES

tastytrade.com/tt/learn

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tactics

Cheat Sheet #11 Rem o and ve s this ave page !

Market Awareness Getting in touch with your inner guru By Mike Hart

he phrase “market awareness” isn’t commonly used in finance, but it’s essential in the trading world. It’s broad but not specific. It’s not a one-size-fits-all. Think of it as the sum of a trader’s market exposure plus knowledge of current market conditions—everything that sets the stage for assumptions. It also magnifies what traders value as essential and non-essential for any given trade. Ultimately, market awareness differs for every trader. However, certain ways of thinking enhance market awareness. It begins with reflecting on the big picture: Where does the market stand from a macro-economic perspective and what drives it right now? What’s the state of interest rates or where the futures market is trading? Are binary events, such as a presidential election, on the radar? Could other uncertainties play a role? The market and its

Market Awareness • Forms assumptions • Maintains portfolio consistency • Finds opportunities

focus are always changing, and each day presents a different picture. Next, use the VIX index to determine what the market’s volatility is indicating. Is it high or low relative to its historic 30-year mean of 15.5%? Using knowledge of equity indexes is the next step. Compare recent price movement for, say, the S&P 500 or the Nasdaq. This step will include interpreting the level of IV Rank for each. Finally, get specific by gauging what stocks are in play and choosing the best opportunity, based on current market awareness assumptions. This cheat sheet can serve as a guide to the elusive market awareness assumption process. Mike Hart, a former floor trader at the Chicago Stock Exchange and a proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team. @mikehart79

Active Investor Alert! Follow @mikehart79 on Twitter for daily trading ideas and tactics.

Step 1

Step 2

Step 3

Step 4

Step 5

Step 6

Build and develop a long-term view

Watch futures daily

What stocks are moving?

Form an assumption

Make a trade

• Major market indexes

• Build a list of liquid tradable stocks and ETFs

Use IV Rank. Always double-check volatility

• Interest rate movement • Currency movement • Correlations

• Commodities • Bonds

• Which ones are outside of normal range? • Recent price action

• Learn and use the Metric IV Rank • Is a binary event on the horizon, such as earnings or a presidential election?

• Expectation of price movement: bullish, bearish, neutral. • Expectation of near-term volatility levels.

• Choose a strategy that fits an assumption • Double check • Confirm and send

• Is it high? Then sell premium. • Is it low? Then buy premium.

december 2020 / january 2021 | luckbox

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tactics essential trading strategies

BASIC

Big Moves are Price Predictors Big news about big moves—when a stock moves up or down by 2% or more, the probability of subsequent big move increases.

By Anton Kulikov

egular readers of the Tactics section know Luckbox avoids market forecasting in terms of direction. However, recent groundbreaking research by the tastytrade in-house research team shows some predictability in the magnitude of outsized moves (+/- 2% or more) when the first move of such magnitude occurs. For the most part, market moves are independent of each other in terms of direction. In other words, if the market has an up day today, the chance of an up day tomorrow is roughly 50%. However, the magnitude of the move is not as independent as once thought. Looking at the probabilities of certain percent moves (up or down) in the S&P 500 since 2000, one sees that a move +/- 1% or less has the same chance of occurring on any randomly selected day as it does after a move of +/- 1% or less. In other words, if a stock has a small move today, that doesn’t change the chance of another small move tomorrow. It’s similar to the game of roulette, where if the ball lands on black, the chance it will land on black on the next spin doesn’t change. However, with outlier moves (+/2% or greater) the probabilities are

Outliers replicate A big rise in a stock’s price could signal additional big moves lie ahead. S&P 500 Daily % Change Since 2000

Chance of Occurring on Any Day

Chance of Occurring Directly After Move of Such Magnitude

Times More Likely

0.1% or greater

88%

89%

same chance

0.5% or greater

52%

56%

~ same chance

1% or greater

27%

38%

1.4x more likely

2% or greater

24%

3x more likely

5% or greater

0.70%

26%

37x more likely

no longer the same for the first move as they are for additional moves. The row in the table above called “5% or greater” shows that the chance of seeing a 5% move on any randomly selected day in the last 20 years is 0.7%. But if that move happens, then the chance of seeing another move of 5% or greater (up or down) is 26%—an increase of 37-fold. Going back to the roulette example, if these moves were all independent, and if the ball lands on green (less than 3% chance of happening), then the chance of the ball landing on green again right after that remains 3%. With large market moves, however, the chance of another large move is not independent of the first

one. So, if there’s a large move today, the chance of another large move tomorrow is much greater than seeing that first large move. In fact, with a 5% move today, the chance of another 5% move in the next 30 days is 91%. How can traders use this phenomenon to their advantage? The main takeaway is to adjust expectations to anticipate more large moves after seeing one. If traders stay small with options positions before a first large move, they can capitalize on subsequent large moves because they know there’s a higher probability of seeing them.

Anticipate more large moves after seeing one.

Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov97

december 2020 / january 2021 | luckbox

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tactics

INTERMEDIATE

Delta Values Traders can take advantage of the key to estimating that an option will expire in-the-money By Michael Gough

ew traders often think they’re drowning in information when they open their first options chain. Dealing with puts and calls, dozens of strike prices and numerous expiration dates can feel like shopping for a jar of spaghetti sauce in a supermarket aisle jammed with simply too many choices. But after learning the basics of options mechanics, traders should consider a critical column in the options chain: delta. Every options contract has a delta value. In mathematical terms, an option’s delta is the rate of change in an option’s price with respect to the stock price. Another interpretation, perhaps more pertinent to traders, is that an option’s delta is the approximate probability of that option expiring in-the-money. To see this in practice, pull up an options chain on a favorite stock. Notice that the at-the-money (ATM) options—those with a strike price roughly equivalent to the underlying’s current trading price —have a delta of around +/- 0.50. In-the-money (ITM) options, those with intrinsic value, have a delta closer to +/- 1.00; and out-of-themoney (OTM) options have deltas closer to 0. Reframed as probabilities, options with a delta near +/- 1.00 have a near 100% probability of expiring ITM, while those with a delta of +/- 0.50 have a 50% probability of expiring ITM, and so on. Traders can use that information to decide which strike price they want to trade. Because an option’s price is based on the market’s expectation of movement—and the delta

is, too—traders may buy or sell around certain expectation levels with the belief that markets are overstating or understating expectations of future movement. For example, many traders play around +/- 0.16 delta options that represent the market’s expectation of a one-standard-deviation move. By selling the 0.16 delta call and -0.16 put, a trader has created a short strangle that makes money if the underlying moves less than the market’s expectation of that stock’s one-standard-deviation move. Look at the options chain for Apple (AAPL) with options expiring in December. Now, locate the 0.16 delta call and -0.16 delta put. Given those delta values, the market is expecting a roughly 68% probability for Apple to stay within those call and put strike prices by expiration. Put another way, if 100 simulations were run from now until December expiration, the market is expecting Apple to stay within those two levels in about 68 of those 100 simulated paths. Note, however, that delta values aren’t static and are likely to change based on any change in inputs to the option’s price, including time to expiration, interest rates, underlying price and expectation of movement. Just as stock prices update on a microsecond level, delta values do so, too. When trading probabilities, it’s best to manage actively and stay small.

Great expectations The +/- 0.16 delta options approximate the market’s expectation of a one-standard-deviation move in the stock price of the underlying asset.

In mathematical terms, an option’s delta is the rate of change in an option’s price with respect to the stock price.

Michael Gough enjoys retail trading and writing code. He works in business and product development at the Small Exchange, building index-based futures and professional partnerships.

luckbox | december 2020 / january 2021

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tactics

ADVANCED

Make History Work For You Google provides historical stock prices traders can study or use to create a personalized portfolio tracker By Michael Rechenthin

nyone with a Google account can easily download historical stock prices for free. First, head to Google’s version of a spreadsheet, Google Sheets, and start a new document: docs.google.com/spreadsheets. In Cell A1, type the following and then hit “enter”: =GOOGLEFINANCE (“SPY”, “all”, “202001-01”, “2020-10-09”, “daily”). The daily OHLC (open, high, low and close) prices and volume for the symbol SPY from Jan. 1, 2020 to Oct. 9, 2020 will appear. See below: To avoid manually posting start and ending dates and instead get the last month’s worth of data, use the command in Cell A1: =GOOGLEFINANCE (“SPY”, “all”, edate(today(), -1), today(), “daily”). Traders can conduct studies with this historical data, and they can also create a personalized portfolio tracker in Google using real-time (or near real-time) prices. Starting in Column A, create a header and then list the portfolio holdings. Next, in Cell B2, type: =GOOGLEFINANCE (A2, “price”). This will reference the symbol entered in column A2 and get the last price. To get the daily price change, in Cell C2, type: =GOOGLEFINANCE (A2, “change”) In Cell D2, type in the number of shares held. In Cell E2, multiply the last price by the shares held: =B2 * D2. Lastly, in Cell F2, multiply daily change of the symbol in Cell C2 by the number of shares held in D2: = C2 * D2. That creates a simple portfolio tracker, and traders can make multiple variations. Michael Rechenthin, Ph.D., aka “Dr. Data,” is the head of data science at tastytrade. @mrechenthin

The historical record Type the correct code into Google, and get the desired stock prices.

DIY Portfolio Tracker Traders can use Google to track their portfolios in (nearly) real time.

Click here to learn how to tackle losing trades

luckbox | december 2020 / january 2021

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Interest Rates Made Small, Standard, and Simple.

Interest rates have never been lower.* Trading them is easy with S10Y! Small: Easily Digestible Contract Sizes Standard: Tick Sizes and Expiration Date Simple: Holistic Representations of Financial Markets LEARN MORE AT GO.SMALLEXCHANGE.COM/S10Y All-time low in 10-year Treasury interest rate of 0.52% on August 4, 2020, via treasury.gov

ÂŠ 2020 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information presented here is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Trading in derivatives and other financial instruments involves risk.

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trades actionable trading ideas

CHERRY PICKS

R I PE & J U I CY T RADE IDEAS

More Bang for Your Buck By Michael Rechenthin

s a trading vehicle, nothing beats futures in terms of cost efficiency, liquidity and, for some, tax treatment. Take a look below. First, note the “Futures USD Notional,” which is the true (unmargined) size of each product. The profit/loss of a 10% move in the /ES futures would be a $176,800 x 10% =

$17,680 move in the hold of the /ES contract. The “buying power” is roughly $13,200, or 8% of the current value of the index. That’s why futures are so cost-efficient. A very little amount of money is required to trade a large amount of money. First-time futures traders should start small. The Nasdaq (/NQ) can easily move $2,000 a

day, and natural gas futures are inappropriate for novices. Instead, consider the much smaller Small Exchange (/STIX, /SM75, /SPRE or / SFX) or CME Exchange micro (/MES, /MYM, /MGC, /M6E) contracts. Michael Rechenthin, Ph.D. (aka “Dr. Data”), heads research and data science at tastytrade. @mrechenthin

A bright future Minimum Tick Size

Futures Futures USD Approximate Buying Power Correlation Notional Shares of ETF Requirement with ETF

Description

Futures

S&P 500

/ES

0.25

S&P 500 (1/10th size)

/MES

0.25

$1.25

$17,680

Nasdaq

/NQ

0.25

$5.00

$232,000

$ Per Tick $12.50

$176,800

500 SPY

0.98

$13,200

50 SPY

0.98

$1,320

800 QQQ

0.98

$17,600

Nasdaq (1/10th size)

/MNQ

0.25

$0.50

$23,200

80 QQQ

0.98

$1,760

Small Technology 60

/STIX

0.01

$1.00

$5,500

20 QQQ

0.85

$440

Small Stocks 75

/SM75

0.01

20-year US Treasury Bond

/ZB

0.0313

10-year US Treasury Note

/ZN

VIX

/VX

VIX (1/10th size)

/VXM

0.05

Gold

/GC

0.1

/MGC

0.1

Silver

/SI

0.005

$1.00

$5,400

15 SPY

0.85

$566

$31.25

$170,500

1100 TLT

0.90

$5,170

0.0156

$15.63

$138,000

1200 IEF

0.92

$1,705

0.05

$50.00

$24,100

10 VIX options

0.99

$10,670

1 VIX option

0.99

$1,067

1100 GLD

0.98

$12,650

$2,410 $188,000

Gold (1/10th size) Small Precious Metals

/SPRE

0.01

$1.00

$7,400

45 GLD

0.91

$440

Crude Oil

/CL

0.01

$10.00

$40,400

1400 USO

0.95

$5,225

Crude Oil (1/2 size)

/QM

0.025

$12.50

$20,200

700 USO

0.95

$2,613

Euro FX (€ 125,000)

/6E

0.00005

$6.25

$148,000

1300 FXE

0.98

$3,190

Euro FX (€ 12,500)

/M6E

0.0001

$1.25

$14,800

130 FXE

0.98

$319

Small Dollar

/SFX

0.01

$1.00

$14,800

-150 FXE

-0.88

$176

FOREIGN EXCHANGE

METALS

$5.00 $10.00

ENERGY

VOL

RATES

EQUITIES

Traders can magnify their investments and stay liquid in the futures markets.

$1.00

$18,800

$25.00

$121,000

110 GLD

0.98

$1,265

5400 SLV

0.98

$18,700

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trades

FUTURES

A SAV V Y F U T U R ES T RA D ER’S TAK E O N T HE M AR K ETS

Pairs Trading Futures By Pete Mulmat

utures traders have numerous products, tools and strategies to take advantage of price extremes and ranging markets, but pairs trading is something completely different. Pairs trading uses correlations and divergences between two markets to capture a potential profit. While it isn’t riskless, investors who understand how pairs trading works and know how to control risk and manage profits often find the strategy makes a great addition to a trading “toolbox” because it doesn’t depend on market direction. In a pairs trade, traders identify two tradeable products (markets) that correlate in price. That means they have reason to believe that when one market goes up, the other will go down. To profit from that pair, traders open a long position on the

market that they believe will go up and a short position on the market they suspect will go down. Typically, the long market is underperforming at the time the position is opened, and the short product position will be overperforming. Pairs trading operates on the assumption of market neutrality. Essentially, this means that two markets that historically have moved in the same direction will continue to do so. As an example, consider the relationship between two major currency trading markets: the Canadian dollar and the Australian dollar. Canadian and Aussie currency have a strong correlation, equivalent tick sizes in the futures world and a pair with a straightforward 1-to-1 relationship. Pairs traders look for highly

correlated markets—such as equity indexes, precious metals or, as in the example, the foreign exchange market—that begin to diverge in their price movements. Correlations at or above .75 make for the most interesting pairs trades. Finding correlation Correlation between two markets is key to pairs trading. Pairs are perfectly correlated (a correlation coefficient of 1.0) when they move exactly in sync. They are perfectly inversely correlated (a correlation coefficient of -1.0) when they move exactly in sync but in opposite directions. When two products have no correlation whatsoever, they have a correlation coefficient of 0. Since pairs traders are searching for markets that are correlated as closely as possible in the same direction,

Fraternal twins? The Canadian dollar and the Australian dollar have a strong positive correlation in addition to similar tick sizes and a 1-to-1 relationship. /6C - /6A

Pairs may not revert to the norm, so traders should weigh which pairs trades are worth the wait and the risk. 56

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trades

many traders use a correlation coefficient of 0.8 as a cutoff value. These divergences can take place over a period of a few minutes intraday, or over weeks or months in the longer term. Under the assumption of market neutrality, pairs traders expect that the underperforming market (in this case the Canadian dollar) will eventually return to neutral performance, which means a price increase. Meanwhile, the same assumption for the overperforming pair (in this case the Aussie dollar) indicates a price decrease should occur. Mitigating risk? A major advantage of pairs trading is that if the assumption of market reversion is violated slightly, the positions can still be profitable. In an ideal scenario, traders will see the underperforming currency—which they are long—increase in price, while the overperforming currency—which they are short—decreases in price. The trader would close out the positions when the historical correlated relationship between the two markets has reverted.

But traders can still profit even if only one currency moves. In the scenario in the example, even if the overperforming currency does not fall, as long as the price of the underperforming currency rises more than the price of the overperforming currency rises, the long position overtakes the short position to yield a net profit. The last word Pairs trading involves taking a long and short trade simultaneously in two typically highly correlated markets. A long position is taken when one product underperforms by a certain threshold, and a short trade is taken in the outperformer, with the intent that the markets will eventually revert to the historical norm, thus resulting in a profit. There is no certainty of pairs reversions to the norm, so traders must weigh which trades are worth the potential wait and risk and which are not.

In an ideal pairs trade, traders want to see the underperforming market—which they are long—increase in price, while the overperforming market—which they are short—decreases in price.

Pete Mulmat, chief futures strategist at tastytrade, hosts a number of daily futures segments on the tastytrade network under the flagship programming slot called Splash Into Futures. @traderpetem

Pair it up

/6A

/6C

Correlation between two markets is key to pairs trading.

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trades

THE TECHNICIAN

A V E T E RA N T RA D ER TAC K LES T EC HNICALS

2021 Portends Some Trends to End

he markets—and the Federal Reserve’s efforts to move them—have been in persistently unprecedented territory for more than a dozen years. Looking forward to the new year, there’s no doubt the Fed will keep its hand in the financial markets. So, let’s divine the likely direction of some major asset classes. The nine charts that follow suggest 2021 will be a bad year for equities yet a good one for gold and bonds. Let’s examine some classes one by one.

By Tim Knight

Commodities (DBC)

DBC–Invesco DB Commodity Index 12.95 0.00 0.00% D: 06/24/2010 O: 22.09 H: 22.12 L: 21.21 C: 21.31 Y: 45.05

This chart goes back more than a dozen years, and it features three major reversal patterns, the most recent of which is the largest. At first, it may seem that commodities have little to do with equities, but the profoundly bearish setup of this chart feeds into the notion that a large equity bear market is forthcoming because weaker commodities are a byproduct of a weaker economy. In turn, a weak economy—whose effects have doubtlessly been countered by the Fed’s trillions of dollars of fresh fiat in 2020—will eventually express itself in the form of shrinking equity prices.

42 38 34 30 26 22 18

14 12 2007

Equity/Bonds Ratio

2009

2011

2013

2015

2017

2019

/ES/ /US 18.55 0.22% 1.22% D: 09/25/2020 C: 18.55 Y: 20.43

Combining the anticipated movement of equities (down) with bonds (up), a relatively regular cycle is revealed by way of a predictable relationship between S&P 500 futures and U.S. Treasury bonds. The chart possesses an equal number of topping and bottoming patterns, the most recent a topping pattern. Note that this particular reversal pattern is larger than any of the five that preceded it.

20 18 16 14 12 11 10 9 8 7 6

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

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trades

Russell 1000 Value (IWD)

IWD–iShares Russell 1000 Value ETF 116.29 1.32 1.15% D: 03/14/2011 O: 53.95 H: 54.00 L: 53.08 C: 53.47 Y: 134.62

Until the pandemic struck, this chart wasn’t particularly interesting because it simply followed a smooth course upward for a dozen years. However, what transpired from February through September of 2020 utterly altered the meaning of the chart because of two large changes:

130 110 90 80 70 60

1. The long-term ascending trendline was irrevocably shattered. 2. Even after massive Fed intervention, the only thing the price action accomplished was illustrating that what had once been support had now turned into formidable resistance. In other words, the role of the trendline itself had changed.

50 40 30 2008

Russell 2000 Small Caps (IWM) The exchange-traded fund based on a broader Russell index, the “small caps” IWM, is shown here with a deliberately smaller amount of data: about three years instead of a dozen. Note a couple of remarkable properties of this chart. First, three distinct reversals took place. The first occurred before the Q4 2018 sell-off, the second came in late 2019 and early 2020 before the pandemic, and the third took place late in the summer of 2020. The first two reversals were followed by significant falls, and the third seems to exhibit similar tendencies. The second thing to note is that a clean channel managed to contain the price action following the March 23, 2020 bottom until the downside breakout, commencing the creation of the third reversal pattern.

Triple-Bullish Small Caps (TNA) Normally, it can be misleading to look at any leveraged fund to gain insights into the market. Even some non-leveraged funds are deceptive about the markets they represent, simply because they are imperfectly constructed. For example, it would be unwise to use the United States Oil Fund LP (USO) as a proxy for the long-term trends of the crude oil market, even though the fund is based on crude oil. Over the course of time, however, the chart of the fund looks vastly different from a continuous contract chart of the crude oil market, even though the general uptrends and downtrends match. This is usually even more exaggerated with leveraged funds, but sometimes these funds provide helpful long-term insights. The Direxion Daily Small Cap Bull 3X (TNA), for example, is a triple-bullish fund based on the Russell 2000 small caps. The chart goes back a dozen years and sports three large reversal patterns, each one larger than its predecessor. As highlighted from 2016 to present, the latest reversal setup is nothing short of gargantuan and strongly suggests lower equity prices ahead.

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

IWM–iShares Russell 2000 ETF 146.41 2.34 1.62% D: 11/18/2019 O: 156.41 H: 156.43 L: 155.64 C: 156.21 Y: 170.12 165 155 145 135 125 115 105 95 Mar ′18

Jun ′18

Sep ′18

Dec ′18

Mar ′19

Jun ′19

Aug ′19

Nov ′19

Feb ′20 May ′20 Aug ′20

TNA–Direxion Daily Small Cap Bull 3x S 28.59 1.31 4.80% D: 05/17/2011 O: 21.69 H: 21.86 L: 19.18 C: 19.66 Y: 92.53 95 80 65 55 45 35 25 15 10

2008

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

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trades

Dow Composite/M2 Ratio As noted in a previous Technician column, “A ratio chart is created by dividing the values of one chart by the values of another chart. The simplest way of plotting a ratio chart is by using the closing prices of the respective financial instruments—a chart of Apple (AAPL) divided by Alphabet (GOOGL), gold divided by crude oil, the U.S. dollar divided by wheat, or anything else one might imagine.” In this instance, divide the Dow 65 Composite by the U.S. money supply measurement known as M2. In spite of the equity index being altered by a data set that has nothing do with stocks, the resulting graph is extraordinary. The three reversal patterns are even cleaner than on a normal, unaltered chart, and the behavior of the trendlines is exactly what one would hope to see: a crystal-clear example of how support has morphed into resistance. In this case, the trendline dating back to the major 2008/2009 bear market bottom was broken by the pandemic, and the multi-trillion-dollar bailout from the Fed merely served to push prices back to precisely the underside of the nowbroken trendline.

U.S. Treasury Bonds (TLT)

$COMP / FR:M2 0.495 -0.008 -1.58% D: 08/29/1988 C: 0.258 Y: 0.732 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 0.20

1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

TLT 165.12 0.00 0.00% D: 09/17/2013 O: 86.85 H: 87.61 L: 86.30 C: 87.02 Y: 175.92 175

The world has never been deeper in debt. There are literally hundreds of trillions of dollars of public, private and unfunded liabilities, so it has never been more important—for the sake of debtors—that interest rates remain low. Based on long-term trends, this seems likely to remain the case. The chart of iShares 20 Plus Year Treasury Bond Exchange-Traded Fund (TLT) is on the cusp of what could be another important breakout. Should that transpire, it will be because the market is affirming that lenders are still willing to loan money at historically low rates and that rates are likely to remain low for a long time.

165 160 155 150 145 140 135 130 125 120 115 110 105 100 95 90 2011

2012

2013

2014

2015

2016

2017

2018

2019

The year 2021 will be bad for equities yet good for gold and bonds.

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Dow Utilities (XLU) In a market rife with biotech companies, semiconductor manufacturers, electric car companies and virtual conferencing corporations, a collection of stocks as humdrum as the Dow 15 Utilities might put traders to sleep. But thatâ&#x20AC;&#x2122;s an error because the price action of utility stocks, particularly when rolled up into the index itself, can provide great insights and trading opportunities. This chart of the Utilities Select Sector SPDR Fund (XLU), which is based on the SPDR MSCI Europe Utilities UCITS Exchange-Traded Fund (UTIL), spans three decades and has three principal features. The first, an inverted head and shoulders pattern following the internet bubble, presaged an enormous bull run-up. The second, an extraordinarily clean head and shoulders pattern, preceded the financial crisis. The third, and largest, is the price channel spanning a dozen years which, importantly, was shattered to the downside in 2020. This is yet another piece of evidence that the direction of equities has made a fundamentally important turn.

Gold/M2 Ratio

XLU â&#x20AC;&#x201C; Utilities Select Sector SPDR Fund 58.72 0.95 1.64% D: 04/10/2003 O: 10.01 H: 10.25 L: 9.86 C: 10.01 Y: 67.66 65 55 45 35 25 20 15

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

/GC/FR:M2 0.105 -0.002 -1.77% D: 10/03/1988 C: 0.134 Y: 0.374

The gold market is looking positive on a long-term basis. Whereas the Dow Composite divided by M2 looked decidedly bearish, the gold market divided by M2 looks particularly bullish. The projection has more credence because the long-term chart is a mix of both bullish and bearish patterns, and the most recent bullish base is an exceptionally clean saucer pattern, a classic in technical analysis.

0.38 0.34 0.30 0.26 0.22 0.20 0.18 0.16 0.14 0.12 0.10 0.08 0.06 1980

1984

1988

1992

1996

2000

2004

2008

2012

2016

Changing tides The factors that influence the markets change on a daily basis. Visit slopeofhope.com for updated versions of these charts and to peruse the commentary of fellow traders, each with a different take on what promises to unfold as a terribly exciting 2021. Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.

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trades

DO DILIGENCE

QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND T HEI R PORTFOLI OS

Volatility is Predictable By James Blakeway

wenty-first century financial media strive to gather enough clicks to churn millions of dollars in ad revenue. Those clicks are attained via exciting—or frightening—financial numbers that make for sensational headlines. Only a microscopic subsection of the general population will click a headline that reads, “German Bund Yields Dropped Another 0.05% Today.” So instead, financial journalists reach for a big number headline, like one that reads, “Dow Jones Index Plummets 1,500 points” or “Apple Surpasses $2 Trillion in Market Value.”

Understanding volatility and knowing how to use it can give traders an advantage.

While those articles grab eyeballs, they also make the market seem more intimidating to new investors. The market is already daunting enough for those hoping to take control of their financial future. They have new technology to learn and market jargon to decipher. Should these new investors run away, hire a financial advisor and bury their heads in the sand? Absolutely not. The numbers can seem overwhelming, but it’s important to consider the big picture. On any given day it’s likely that multiple stocks will see 50%-100% increases, or, in some cases, 50% drops. But these are often small stocks in volatile market sectors, such as biopharmaceutical firms whose entire future may be pinned on the success of a single drug. Looking at the macro level and contemplating the stock market as a whole, the percentage moves on any given day become more palatable.

When 30, 100 or even 2,000 stocks are combined in one index, some large moves occur, but nothing close to the 50% single-day moves in some individual stocks. Estimating price movement While it may not be possible to know whether the stock market will move up or down next month, it is possible to estimate the magnitude of the movement in a specified time frame. It’s accomplished by using the implied volatility of the stock, index or exchange-traded fund. Traders can quickly find the implied volatility of any stock or fund on the tastyworks platform. Implied volatility is a calculated value that expresses the annualized estimated percent movement of a financial product. For example, if a stock is trading for $100 per share and has implied volatility of 10%, it’s assumed that one year from today that stock will be trading some-

Evaluate any portfolio with Quiet Foundation

Beating expectations Years of market history shows asset prices fall within a standard deviation of projections more often than the expected 68% of the time.

Index / ETF Time frame

Monthly

Theoretical occurrences within the expected range Actual occurrences within the expected range Data from

Dow Jones Industrial Average

S&P 500 Daily

Monthly

68% 84%

Daily

Nasdaq 100 Monthly

68% 78%

1900 to Present

81%

Daily

Gold Monthly

68% 77%

1998 to Present

77%

Daily 68%

75%

2001 to Present

73%

76%

2008 to Present

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trades

where between $90 and $110. This calculated range is known as one standard deviation, and it’s derived from statistical models. In theory, it’s expected that 68% of the time the stock will fall within a one standard deviation calculated range. Given an implied volatility value, traders can quickly calculate a security’s estimated range for any chosen time frame. Take, for example, the S&P 500 Index (SPX) and its associated Volatility Index, the VIX. If the S&P Index is 3,400 and the Volatility Index is 22, what is the expected move for one day? How about 30 days? Here’s the calculation traders can use to gather these estimated ranges: Expected Move = Price × (Implied Volatility)/100 × √(Days/365) Plugging the above S&P and VIX values into this equation, the estimated one-day movement is 39 points, giving the S&P a daily range of 3,361 to 3,439. Using the same numbers for 30 days gives a range of 214 index points, from 3,186 to 3,614. Remember this is an approximation based on current prices and implied volatility. It’s expected that the S&P will fall within its calculated range approximately 68% of the time. So, is this true? Has the market typically stayed within its range

68% of the time historically? Using published data for the S&P 500 Index and the VIX, traders can calculate historical expected ranges and compare them with the actual realized movement. With data dating back to 1990, they can calculate 30 years of expected and actual moves. Consider the table, which shows that for both daily and monthly expected moves the S&P 500 fell within the range far more often than expected: 78% and 84%, respectively. That demonstrates the principle that volatility, in the long run, is overstated. Do the other stock indexes exhibit overstated volatility? Consider the same test on the Dow Jones Industrial Average Index and the Nasdaq 100 Index. The Dow Jones is often regarded as “blue-chip” stocks that are more stable, but it contains only 30 stocks. The Nasdaq 100 has more components than the Dow but is regarded as a more volatile index because of its tech-heavy concentration. The same test conducted on the Dow and Nasdaq yields similar results for both monthly moves and daily moves (see “Beating expectations,” below left). Perhaps not surprisingly, the Nasdaq stays within its range slightly less than both the S&P and the Dow, yet it’s still about 7%-9% more often than theoretically expected.

$100 current share price 10% volatility $90 to $110 share price expected in one year

Traders can estimate the magnitude of movement for a specified time frame.

Projections come true All of the stock indexes historically stay within their implied volatility projected range more often than expected. The same holds true for other assets. Consider the table’s metrics regarding gold. Gold is often thought of as a volatile “safe-haven” commodity, where the price can surge in times of unease. While not as consistently in its range as the stock indexes, gold still beats the theoretical numbers. Understanding the overstatement nature of volatility helps one become a sensible investor or trader who can sleep soundly at night. Long-term bullish investors should internalize this and know large down days and down months will occur, and that they will have to ignore the noise of those shorter-term moves. Traders can embrace volatility more proactively. Scalpers can use expected ranges to calculate possible targets for taking gains and losses intraday. Premium sellers who short options contracts can place their trades outside the expected move with some confidence they will make money if the stock stays within its range. Large market numbers are off-putting, and understanding volatility can be daunting but traders who take the initiative to understand volatility and know how to use it to their advantage will have an advantage over the competition. As with all aspects of trading, understanding volatility takes patience, dedication and due diligence. James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors.@jamesblakeway

Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.

december 2020 / january 2021 | luckbox

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THE LAST PICTURE Lucky Man

No, this isn’t an aerial view of a frenzied futures trading pit. These men dressed in loincloths are preparng to snatch a wooden stick called a “shingi” after it’s tossed by a priest during the annual “Naked Festival” at Saidaiji Temple in Okayama, Japan.

PHOTOGRPAH: REUTERS/KIM KYUNG-HOON

Whoever grabs the wooden stick is considered the luckiest man of the year.

luckbox | december 2020 / january 2021

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BY 1893 INSPIRED

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11/24/20 AM 2/19/19 10:18 6:16 AM

Making Our Own Luck â&#x20AC;Ś

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11/23/20 11:51 AM

Dec20/Jan21

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December 2020

20 PREDICTIONS FOR ’21 AND BEYOND