Jun

10

Daily all time highs in SP 500 (natural log) vs date.

 For example latest record close for S&P was 1951.27, ln(1951.27)= 7.576

 At times a new ATH follows closely after another ATH, but at other times there is a considerable gap or "bullopause".

 The last Major Bullopause lasted 1375 trading days, from October 10, 2007 when the S&P failed to exceed its prior close of 1565.15 until March 28, 2013 when it set a new record close at 1569.19. From then until now the pauses have been quite short, none exceeding 34 trading days and usually much shorter.

May

1

Speaking of trends how does the May-Oct (April 30-Oct 31) period perform as a function of the YTD performance as of April 30?

SP500 (1951-2013) Dec 31-Apr30 returns were sorted:

"-" is down more than 2%. 
"+-" was flattish, return between -2% and +2% (2014*). 
"+" was up more than 2%.

Sorted this way, the returns for the 6 months following YTD-Apr 30 appear to continue the trend:

One-Sample T: May-Oct-, May-Oct+-, May-Oct+

Test of mu = 0 vs not = 0

Variable      N     Mean     StDev   SE Mean       95% CI             T
May-Oct-   17  -0.0408  0.12458 0.0302  (-0.1048, 0.0232)  -1.35
May-Oct+-  11   0.0059  0.0897  0.0270  (-0.0543, 0.0662)   0.22
May-Oct+   35   0.0389  0.0680  0.0115  ( 0.0155, 0.0623)   3.39

* YTD as of 4/30/14 is 1.93%

Apr

5

 Ukraine buys almost all its energy (natural gas) from Russia. Revenues from natural gas sales are a primary source of income for Russia.

Because of the recent disagreement between Ukraine and Russia, Russia is raising the price of natural gas it sells to Ukraine.

Ukraine is almost broke and can't afford the increase in the natural gas price because it would be forced into bankruptcy.

Obama(the USA) just announced the United States is giving Ukraine $1 billion to assist in paying for the higher priced natural gas it buys from Russia.

So, the United States is actually giving Russia $1 billion because the money is just passing through Ukraine.

The first question: Has Putin figured out a way to raise the price of his natural gas sales and make the U.S. pay for the increase?

Next question: Was he really in the KGB or was he a commodities trader?

If this analysis is accurate, Putin just got Obama(the USA) to pay him $1 billion by holding a press conference and trucking some troops across town from the Russian Navy base in Ukraine.

Who is the smartest guy in the room now?

Anatoly Veltman writes: 

You are absolutely correct, Kim. I thought Obama was actually scoring a PR point on this one, not Putin.

Kinda like a chess gambit, where Obama sacrificed a bishop (1bn) to buy time and check-mate (16bn) Putin.

Mar

30

 2014 Payscale College ROI Report

Rocky Humbert writes: 

One cannot help but note the irony of Dr. Z posting this "data". I dare say, based on his seemingly unremitted skepticism towards the markets, he would not invest the tuition in equities, but would instead hold cash ensuring with certainty a negative after-tax, real return (comparable to the eponymous Goshen College). If one lacks confidence in stocks 20 years hence (despite history), why would one believe that these numbers have any predictive value over the same period? More substantially, the study is based on a static view of the world. Geologists and petroleum engineers are currently in short supply. But the market will surely respond to that with a glut in five to ten years. Picking a college based on this data is like buying Blackberry when it was "da bomb." Similarly, it seems that the study gives no account to GPA, major, or post graduate study. In the best case, these numbers will be ignored. In the worst case, this sort of thing will turn into the next-gen US News rankings. Either way, they do not reflect the many intangibles associated with higher education nor with any real forecast of individual results. Lastly and most importantly, I am extremely dubious about the accuracy of the numbers. I have never been asked by my Alma Mater about my income. And if I were, I would err on the low side to reduce my attraction to the every vigilant alumni fundraisers.

Kim Zussman writes: 

I cannot vouch for the calculator's accuracy, but if you look further it allows screening by major, as well as adjusting for financial aid. It was shared in part because it seems ironic to rank an educations ROI; not just because it resembles predicting markets long-term, but especially the implication that education is primarily to earn money.

It remains that universal skepticism is the hallmark of good science anywhere outside New Haven, CT.

Feb

19

I believe there are 4 cases, conventionally called:

h(t) > h(t-1) and l(t) > l(t-1) an uptrend day

h(t) < h(t-1) and l(t) > l(t-1) an inside day

h(t) > h(t-1) and l(t) < l(t-1) an outside day

h(t) < h(t-1) and l(t) < l(t-1) a downtrend day

Victor Niederhoffer writes: 

Excuse me? 

Alex Castaldo replies: 

OK, OK, let's call then upshift day and downshift day then.

;-)

Kim Zussman adds: 

What about outie and innie?

Using SPY (2000-present), checked for outside days (today's high > yesterday's high, today's low < yesterday's low). Then checked the return for the next day.

Days after outies were also checked if the market was up-trending (20DMA > 100DMA), and, in addition to up-trending, if the intra-day return was up (C>O). Here are the c-c returns after (vs zero), for all days (c-c ret), all days after outside days outie+1), days after outside days and up-trending (and 20>100), days after outside days and up-trending, and the outside day was up intra-day (and C>O):

One-Sample T: c-c ret, outie+1, and 20>100, and C>O

Test of mu = 0 vs not = 0

Variable        N       Mean     StDev   SE Mean       95% CI             T
c-c ret         3550   0.00022  0.0131  0.0002  (-0.0002, 0.0006)   1.01
outie+1         353   0.00049  0.0118  0.0006  (-0.0007, 0.0017)   0.77
and 20>100  234   0.00061  0.0090  0.0005  (-0.0005, 0.0017)   1.03
and C>O       89    -0.00047  0.0090  0.0009  (-0.0023, 0.0014)  -0.49

Zeroish, with none significant, and days after outside days and up-trending winning the race at 0.06% per day avg.

Feb

6

 In the short term trading world is it better to diversify and trade many things or specialize and trade just a few. I am in the later camp, as it takes all my usable mind capacity to manage just one or two positions concurrently.

Others prefer to trade many instruments saying it increases opportunity and reduces risk by diversifying. However in futures trading, and short-term in particular, there is no Markowitz "free lunch" that comes from diversification which applies only to stocks. By trading more instruments it does perhaps give you something to do when other markets are slow. This however could also be viewed as a negative, and maybe it is better to not be in the markets at times. It makes sense to me to trade based on opportunity. Yet, in practical trading-life these opportunities are so difficult to find, it takes being a specialist to uncover them.

In angling, I am a bit of a hybrid. I specialize in flyfishing, but I will go after anything with gills and scales and recently added the beloved carp to my list. In economics, comparative value tell us to specialize and has been the source behind much advancement. Ben Green traded just horses and the occasional mule. Bacon just bet on the ponies. Specializing served them both well.

Anatoly Veltman writes: 

The main advantage of algo trading is the ability of your portfolio to simultaneously participate in all futures you've pre-programmed. Certainly that's an impossible task for a manual trader

Kim Zussman comments: 

Duncan isn't trading index futures lunching with Markowitz? (Albeit less so than before the period of widespread indexification).

Feb

3

Using SPY (93-2013), here is comparison of return for 1st day of month (close last day of prior month to close first day of new month) vs. all days in the period:

Two-sample T for 1DOM ret vs all dat ret

                      N    Mean    StDev  SE Mean
1DOM ret      250  0.0029  0.0136  0.00086  T=2.8
all dat ret     5270  0.0004  0.0122  0.00017

For 1DOMs following a down month as we just had, checked 1DOM returns when the prior 20 trading day return was down more than 2%.  Here again compared to return of all days in the period:

Two-sample T for 1DOM <-2% vs all dat ret

                           N    Mean   StDev  SE Mean
1DOM <-2%      60   0.0012  0.0200   0.0026  T=0.32
all dat ret        5270  0.0004  0.0122  0.00017

>>not as good

As to whether 1DOM has become DUM, attached is a chart of mean 1DOM return by year.  Recent years 2008 and 2011 have undermined the pattern (the last year on the chart is 2014, which represents one data point = 1st day of January)

Gary Rogan writes: 

A steep multi-year rise making equity values fairly expensive, buying on the dips always having worked in recent past, and then a reduction in liquidity. Three was no other specific catalyst for the equity markets to unravel, but it was an end of an era: the enthusiastic dotcom era, and this is the beginning of the end of the era of "the market goes up because the Fed will always save the day, so any bad news is good news".

Steve Ellison writes: 

 Three years ago, I posted on a variation of this idea that was published by Norman Fosback in 1976 and added stats from 2005 to 2010: http://www.dailyspeculations.com/wordpress/?p=5867 . When an idea has been known this long, it would be surprising if it worked at all. There was even an ETF a few years back that was only going to be invested on the 1st of the month. I don't know if it has survived.

I found that, over a very long period of time, this idea could still lead to good returns, but there were periods lasting a year or more when it did not work. As Steve Irwin found, the crocodiles hate you and might be waiting for you at the same spot you jumped in last time.

Jan

26

SPY lost 2.5% last week. It has been 23 weeks since it dropped more than 2%. From 1993-present, checked for weeks down more than 2%, and the wait time (in weeks) between such drops. Then checked return of the following weeks.

First here are mean return weeks after 2+% drops regardless of wait times:

One-Sample T: nxt wk

Test of mu = 0 vs not = 0

Variable    N      Mean     StDev   SE Mean          95% CI            T

nxt wk    151  0.0020   0.0400  0.0032  (-0.0044, 0.0084)          0.62

Mean up 0.2% with SD of 4%

Here are mean returns of weeks after 2+% drops, for waits between such
drops longer than 20 weeks:

One-Sample T: nxt>20

Test of mu = 0 vs not = 0

Variable   N       Mean     StDev   SE Mean          95% CI             T
nxt>20    12  -0.0021  0.0192  0.0055  (-0.0143, 0.0101)       -0.38

>>Down -0.2% with about half the volatility: SD = 1.9%

(volatility clusters).

This is consistent with the sign of slope coefficient for regression of
next week's return vs wait time (though NS):

Regression Analysis: nxt versus wait_1

The regression equation is
nxt = 0.00240 - 0.000071 wait_1

Predictor        Coef    SE Coef      T      P
Constant     0.002405   0.004269   0.56  0.574
wait_1     -0.0000706  0.0003814  -0.19  0.853

S = 0.0403364   R-Sq = 0.0%   R-Sq(adj) = 0.0%

>> rather than waste time on analysis it is easier to just wait for Rocky's calls.

Jan

24

SPY 20 day range (defined as 20 day intra high - 20 day intra low ) / (Avg(20 day intra high, 20 day intra low) printing a value of 1.97% = (184.94-181.34)*100/(184.94+181.34)/2

Not many instances since 1993.

Paolo Pezzutti asked:

Kora, what are the implications from a practical perspective?

Kora Reddy replied:

12/13 times SPY (for interleaving trade samples) closed higher 20 days later, but the sample size is too low to make a bullish bet.

3/4 times for the non-interleaving samples, SPY closed higher …

12/13 times SPY closed higher than the current close in the next five days at some point of time ( i.e first profitable exit, otherwise exit at fifth day at close.)

Kim Zussman expands:

Dividing SPY into non-overlapping 20 day periods (counting back from 1/22/14 to 1993), I checked for Kora's low range periods.

Range = 20D HI / 20D Low
 
The most recent range appears to be the lowest in the series, 1.0198 (1.98%)
 
There were 11 other instances of 20D range <3%; and the next 20D appears to be very bullish:
 
One-Sample T: nxt 20d ret
 
Test of mu = 0 vs not = 0
 
Variable N Mean StDev SE Mean 95% CI T nxt 20d ret 11 0.0146 0.0161 0.0048 (0.0038, 0.0255) 3.02
 
Here are the instances:
 
Date H/L nxt 20d ret
04/07/06 1.023 0.022
12/16/93 1.023 0.023
04/08/13 1.024 0.036
08/18/05 1.024 0.015
07/27/93 1.024 0.028
01/14/94 1.026 -0.005
06/22/05 1.026 0.009
12/20/13 1.026 0.015
01/25/07 1.027 0.021
10/12/95 1.029 0.019
04/01/93 1.029 -0.022
 
avg 1.025 0.015

Jan

13

At least in terms of small cap, the recent ratio of growth to value is subdued compared to 2000-02. Attached is ratio of small cap growth ETF to small cap value ETF (IWO/IWN).

Jan

7

The first 3 trading days of 2014 have been declines in the S&P 500. Going back to 1960, there have been only 6 other years starting with 3 consecutive down days. Here are the returns of the following 3-day intervals:

Date DDD   nxt3

1/3/2005     0.005

1/2/1991     -0.030

1/2/1985     0.009

1/3/1978     -0.028

1/3/1977     0.004

1/2/1968     0.012

avg -0.004

Jan

2

One notes the SP500 (SPY) has gained 5.6% for the two month period November-December, since the statistical study below was posted:

"The Jan-October return of the SP500 index for the period just ended was +23%. This 10 month return is 4th highest since 1971 (4th out of 42 years).


Over this period, for Jan-Oct returns over +10%, the following two month returns were up (2-month return of the next Nov+Dec), an average of 4.9% with 16/18 positive:

Date       Jan-Oct   nxt Nov-Dec

10/1/1975 0.299 0.013
10/2/1995 0.266 0.059
10/1/1997 0.235 0.061
10/2/1989 0.226 0.038
10/1/2003 0.194 0.058
10/1/1991 0.188 0.063
10/1/1980 0.181 0.065
10/3/1983 0.163 0.008
10/1/1986 0.155 -0.007
10/1/2009 0.147 0.076
10/1/1996 0.145 0.050
10/1/1976 0.141 0.044
10/1/1985 0.135 0.113
10/1/1998 0.132 0.119
10/3/1988 0.129 -0.004
10/1/2012 0.123 0.010
10/1/1999 0.109 0.078
10/2/2006 0.104 0.029

Dec

15

How can the US diet be so horrible when over the past 100 years US life expectancy has increased about 60 % ?

(Graph is average male/female life expectancy 1900-98 from a Berkeley source )

Hopefully the government will continue to protect us from capitalist farmers.

Longevity has also increased as a result of the absurd US medical system. This too is now finally being rectified.

Note the drop ca 1918 from the flu epidemic. How will vaccine manufacturers of the future can find ways around bureaucratic limits on profit in the liability minefield?

Dec

9

The attached chart plots weekly closes of DJIA (DIA ETF) per the corresponding long-bond price close for that week (TLT).

The irregular line follows the relationship over time, from 7/02-present.

As the line moves from lower left to upper right, stocks and bonds are both rising (higher slope means rate of increase stocks>bonds, and vice versa).

From 7/02-10/07, stocks rose faster than bonds but both increased.

From 10/07-3/09, stocks declined while bonds increased.

From 3/09-7/12, stocks and bonds increased - with greater variation than the 7/02-10/07 period.

From 7/12-present, bonds have generally declined while stocks continued to increase.

The recent move went from upper-right to lower-left (bonds and stocks both declined), a pattern that appears rarely in the chart.

Benian motion instead of Brownian?

Dec

1

For the last 30 years (1/84-present), at the end of each month Mike bought $1000 worth of SP500 index.

Akira (who lived in the US) also bought $1000 every month of his country's stock index — the Nikkei 225.

Both dollar-cost-averagers invested a total of $358,000.

Attached are the equity curves of Mike and Akira (not accounting for dividends, transaction costs, currency slippage, etc).

Mike's SP500 investment is now worth $1,200,054. Akira's Nikkei investment is now valued at $386,106.

[DCA = Dollar Cost Averaging].

Nov

25

Some preliminary thoughts on the running median 2, 3, 4, 1, 7, 8, 9, 3.

A moving median of the first 5 is 3, of the next 5 is 4, of the next 5 is 7, of the next 5 is 8– it's a good indicator of trend. First recommended to me 53 years ago by Fred Mosteller, Chairman of Harvard's first statistics dept.

It is more stable than the moving average as outliers are removed from sample. It is easy to compute fast with computers for small running numbers like 5 or 100 by repeated sorts. For higher numbers, you can form two groups, those below the median and those above. As a new number comes up you place it in one of the two groups if higher or lower and take away the oldest number. Then adjust to make the two groups equal again. It is not used as much as the moving average so it shouldn't be hurt by front running or spikes when cross over occur. It has a defined distribution when the underlying distribution has inordinate extreme values as frequently occurs with Cauchy or similar distributions with infinite variance.

It's probably a good thing to use when using nearest neighbors as predictors, i.e using the median and running median to compute your predictors. It deserves testing in real life markets for real life applications.

Ralph Vince writes:

It is the indicator of "expectation," as evidenced by human behavior itself, and not the probability-weighted mean.

Bill Rafter adds: 

Moving medians have some distinct advantages.

They represent real values that occur. For example, taking the average of 1, 2 and 5 gives you 4, which never occurred, whereas the median 2 did occur. Continuing with the same series, should subsequent values in the series be less than 5, the value of 5 will not occur as a moving median. Hence, the moving median eliminates outliers.

One of my appliances has three thermometers to measure temperature. The value displayed is the median (and hence a series of moving medians). Should one of the thermometers be broken, or distorted by being in a particularly hot or cold spot, the median will still give me the best estimate. This elimination of outliers is very useful.

Should you have data whose importance relies upon only crediting occurring values and need to eliminate outliers, then you should test moving medians. We ourselves had experimented with them regarding price series and written extensively about them, but do not use them in our current work. Our reason is that we consider the outliers in a price series to be particularly important.

Kim Zussman adds:

The following is a plot ratio of SP500 (10 week moving average) / (10 week moving median) for the recent 5 years (SP500 weekly close data).

Nov

19

Examine the enclosed chart and answer the questions below:

1. What does the historical record of the Japanese stock market imply about the existence of bubbles?

2. (honors) What does it say about assumptions regarding long-term return of claims on earnings streams?

3. (law students) What effect has Japanese government had on their stock market long-term? Would the result be different were the default world currency were the Yen?

Nov

4

 I have a hypothesis that older people with money to invest put too much value on youth in their investments, i.e, that they think that young people and things that young people buy are better than other things. I wonder if this is because of their desire for immortality or just a rejection of their loss of virility. I looked for articles that were relevant to this hypothesis but not having the scope or sweep of Pitt, or Mr. E, I have not yet struck pay dirt.

Vince Fulco writes: 

Add to the mix of hypotheses, worry about not keeping up or relevant on world developments, IT, or scientific advancements. It is exhausting for some generations given they were raised with sliderules.

Scott Brooks writes: 

Isn't it fair to say that the growth companies of yesterday are the value companies of today?

Older people probably want, at least, some growth in the portfolio, so they invest some of their money with the younger generation who generally more innovative and/or more attuned to "newest" innovations and idea's that come out.

This makes me think of the thread that we had on the open list last week about music. The older we get, the less we are attuned to modern (innovative?) music. We become entrenched in what we know and what impacted our lives growing up.

My theory is that the growth stage of our lives occurs during our teens, 20's and 30's. In our 40's we begin to transition into entrenched value stages and by our 50's (and one), we are value driven.

I think this applies to music and investing.

However, if we are smart (and I'd like to think we are…..at least some of the time), we inherently understand that "youth innovates and invents" and we want to be a part of that.

And since by the time we are in our 40's (and up) we have the money, we are the ones that the "youthful innovators and inventors" come to for cash to fund their ventures. And if we missed the Angel/VC and even IPO stage, we'll still invest a portion of our portfolio's with them to harness their vision……and recapture some of our own lost youthful vigor and insight.

Kim Zussman adds: 

Perhaps this wasn't the case before Microsoft (Apple, Google, Facebook, etc) showed that young computer mavens could hit it big, and that nerds will rule the world. People who came of age in the PC era.

Weren't the big success stories pre-1980's stodgier companies?

Scott Brooks writes: 

Wouldn't it be fair to say that GM, Ford, IBM, were the growth and innovative companies of the Henry Ford and Bob Hope Generations?

IMHO, every generation has their MSFT or AAPL, or GOOG……it's just that by the time we know about them (we being the next generation), they've become value companies.

The car companies and airline companies of our parents generation were the equivalent to the computer companies of our generation.

Pitt T. Maner III adds: 

 One would think that the influence of youth is increasing due to the higher use of the internet by the over 50 crowd (which includes me).

1. "Baby Boomers Driving Technology Wave":

'What explains the rapid pick-up of tech tools among the older crowd? "The younger investor is usually an influencer towards their parents in terms of technology," says Ryan by email.

The numbers dovetail findings by the Pew Research Center's Internet & American Life Project that more than half of adults 65 and older are online today. They're flocking to YouTube, social networks and shopping sites—while also growing more comfortable using banking and other financial services online. They form a surprisingly active demographic for Facebook, where 57% of those 50 to 64 are on the social network, according to Pew.'

So you might look at who are the main internet influencers with respect to individual stocks and the stock market and older internet users. For instance Cramer appears to have a fair amount of online "clout" with respect to stock selection as might several others on CNBC.

2. There are many companies trying to figure out and somewhat quantify who the influencers are– such as Klout.

3. This is a recent paper on the influence of the collective mood state on Twitter with respect to the market.

Behavioral economics tells us that emotions can profoundly affect individual behavior and decision-making. Does this also apply to societies at large, i.e., can societies experience mood states that affect their collective decision making? By extension is the public mood correlated or even predictive of economic indicators? Here we investigate whether measurements of collective mood states derived from large-scale Twitter feeds are correlated to the value of the Dow Jones Industrial Average (DJIA) over time. We analyze the text content of daily Twitter feeds by two mood tracking tools, namely OpinionFinder that measures positive vs. negative mood and Google-Profile of Mood States (GPOMS) that measures mood in terms of 6 dimensions (Calm, Alert, Sure, Vital, Kind, and Happy). We cross-validate the resulting mood time series by comparing their ability to detect the public's response to the presidential election and Thanksgiving day in 2008. A Granger causality analysis and a Self-Organizing Fuzzy Neural Network are then used to investigate the hypothesis that public mood states, as measured by the OpinionFinder and GPOMS mood time series, are predictive of changes in DJIA closing values. Our results indicate that the accuracy of DJIA predictions can be significantly improved by the inclusion of specific public mood dimensions but not others. We find an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the DJIA and a reduction of the Mean Average Percentage Error by more than 6%.

4. That reminds me of these websites

tickertweets

Marketpsych

avoiding the herd

5. This influence effect on the older investor might have to be considered with respect to the depressing findings asserted by this research:

"Examining the economic costs of aging, we find that older investors earn about 3-5% lower annual return on a risk-adjusted basis. Collectively, our evidence indicates that older investors' portfolio choices reflect greater knowledge about investing but their investment skill deteriorates with age due to the adverse effects of cognitive aging."

David Lillienfeld writes: 

And the problem is that it's unclear that there's any company to take over the place of MSFT, AAPL or GOOG besides AMZN, which can't seem to earn any money (real profit, not just revenues). I had hoped that my now, there would be some suggestion of which companies those may be, but I'm not seeing them.

Scott Brooks writes: 

You could have said almost the same thing about railroads…..then came big steel.

You could have said almost the same thing about big steel….and then came GM.

You could have said almost the same thing about GM…..and then came IBM.

You could have said almost the same thing about IBM…..and then came MSFT.

You could have said almost the same thing about MSFT…..and then came GOOG.

You could have said almost about GOOG…..and then came……?

You have successful well run companies that create cash flow and then use that cash flow and credit to buy up smaller (other) companies….and become dominate.

Isn't that just the way the eternal business cycle works?

Isn't that really just the way of mankind and government?

Nov

4

The Jan-October return of the SP500 index for the period just ended was +23%. This 10 month return is 4th highest since 1971 (4th out of 42 years).

Over this period, for Jan-Oct returns over +10%, the following two month returns were up (2-month return of the next Nov+Dec), an average of 4.9% with 16/18 positive:

Date Jan-Oct nxt Nov-Dec
10/1/1975 0.299 0.013
10/2/1995 0.266 0.059
10/1/1997 0.235 0.061
10/2/1989 0.226 0.038
10/1/2003 0.194 0.058
10/1/1991 0.188 0.063
10/1/1980 0.181 0.065
10/3/1983 0.163 0.008
10/1/1986 0.155 -0.007
10/1/2009 0.147 0.076
10/1/1996 0.145 0.050
10/1/1976 0.141 0.044
10/1/1985 0.135 0.113
10/1/1998 0.132 0.119
10/3/1988 0.129 -0.004
10/1/2012 0.123 0.010
10/1/1999 0.109 0.078
10/2/2006 0.104 0.029

Richard Owen writes:

Great work! If you dial it back a day or two and bolt on 87, I wonder what it looks like as an average.

Oct

29

Using Robert Shiller's monthly data* (1900-2013 ), I constructed SP500 earnings yield:

E/P = (monthly earnings) / (SP500 price)

(Note this is conventional earnings yield, rather than his P/E adjusted with earnings smoothed over 10 years)

Shiller's data also contains contemporaneous "long interest rate"; GS10, which is 10 year Treasury Constant Maturity Interest Rate.

Used E/P and long interest rate to construct a "FED model": (E/P) - (long interest)

E/P - long interest is plotted monthly from 1910 - 2013 as the blue line.

For each month, mean monthly stock returns were calculated for the future 36 months (3 year mo avg return), plotted contemporaneously in red.

The FED model generated with this data is a great deal less stable than corresponding future stock market returns. This is in contrast to one of Shiller's main observations that stocks are too volatile compared to expected dividends (earnings, etc). It is an article of faith that investors and scientists are forced into stocks when bond yields are small compared to earnings yields. If this were true one would expect a more stable relationship than observed here.

Instead it appears the FED model changed around 1980; with E/P getting smaller than long interest rates - making the curve go negative. Recently it has trended back up as bond yields dropped and earnings stabilized. Perhaps we are headed back to an older religion.

anonymous writes: 

Please elaborate on your statement: "It is an article of faith that investors and scientists are forced into stocks when bond yields are small compared to earnings yields. If this were true one would expect a more stable relationship than observed here."

I don't understand your logic. Which are the independent variables? In the arbitrage-free model, isn't everything explained by the equity risk premium — which is yet another independent variable? And isn't the Fed model essentially a Cauchy (ratio) Distribution? I believe your comment therefore is to be expected. Please direct me to any academic papers (not popular press) where Shiller cites the Fed model. I thought his point is that stock prices move around a lot more than the underlying earnings/dividends. Is that incorrect? 

Oct

21

 It begins with a new uncertainty, we're going to attack Syria, we're going to default on our debt, a Middle East fight, in conjunction a 1 1/2 % decline or more in stocks or bonds then fighting between the conservatives and the liberals a call by Buffett and Krugman for government intervention and more service revenues. A resolution with a big stock market rise to new 20 day highs an end with blame being put on those who wish lower service revenues and reduced intervention and unanimous agreement that we should never strive for reduced intervention again, and tea party types must go back to caves. How would you improve this or possibly profit from it?

Anatoly Veltman writes: 

But of course crisis starts on the way up. It's been said that no market has ever topped because someone sold massively short at the high. Any decline from the high is merely profit taking, not new shorting. So the beginning of crisis is such overvaluation that's liable to cause aggressive profit taking.

Gary Rogan writes: 

The way to predict the quick resolution of the next crisis is to figure out who is in control of the mechanics. While there was some ambiguity in this one, John Boehner played a truly masterful role in its handling and supposedly (although not by all accounts) received a standing ovation and no blame in the end by most of his tea party opponents, a deliberately induced case of the Stockholm syndrome. Next time he initiates a crisis (and there will be two opportunities early in the new year) bet on a timely resolution, and this time probably a couple of days before the deadline, as in this last one he was almost by his own admission compelled to give his tea party "friends"/antagonists as much rope as was needed to supposedly hang themselves and this will likely not be the case in the future.

Kim Zussman writes: 

Doesn't seem that ambiguous.

When the Organizer and his operatives said to worry the market worried. When the conscientious objectors gave up it went up.

We were re-elected and you will go quietly.

Oct

15

From Anatoly Veltman:

I just saw this Weekly SP chart, and it's honestly… Ugly (link).

I can't imagine how we're supposed to be Bullish on such chart. Mock me all you want, I am no buyer here, sorry. I'll probably miss another tremendous growth opportunity.

Victor Niederhoffer comments:

Needless to say my silence about the chart interpretations should not be taken as acceptance. And aside from the ecology of markets, deception, avoidance of fear, relation to music and barbeque and sport, longevity, board games, etc, the whole genesis of this site from its founder was to avoid such mumbo jumbo.

Gary Phillips writes a poem: 

beware of greeks bearing gifts
and single data points
they support a myopic view
and play into the hands of the deceivers

at any given point in time
an equally compelling case
can be forged in either direction
depending on one's bias

the thing about charts
is that they fail to let one see
the markets for what they are,
but instead, for what they appear to be

Kim Zussman writes: 

Charts! Charts!
Like musical Tarts
The more you looks
The more it smarts

So look away
From Siren curves
Or you will get
What you deserves

anonymous writes: 

I refer everyone to Bruce Kovner's quote regarding the utility of charts below. If you have a better track record than he does, then you are entitled to mock his wisdom. I will gladly wager that no one who is reading this comes anywhere close to his long-term, continuous, audited track record.

There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he's not going to take a patient's temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is – whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge. Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates anew chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.

Gary Phillips writes: 

Indeed, I look at 22 charts on 4 screens myself. But, what I should have said while in my rush for cynicism, is no one single chart stands out and provides me with a competitive advantage or a forward-looking view of the market; at least not in the time honored edwards and magee kind-of-way. But when charts are related to a broader network of market events, themes, and correlated markets, etc., and provide (to borrow from the chairman) a consilience, then one can assess the departures from value that govern trading opportunities. which is what, I may say, you do so well.

Victor Niederhoffer adds: 

Please forgive my not using the term "armchair speculatons" or "furshlugginer" with reference to all those untested hypotheses and impressionist descriptives but not predictive things about chart movements and also ideas about secular bearish markets when we are within 1% of all time high, and a Dimson 1 buck in 1899 would have risen to 60,000 at present.

Scott Brooks writes: 

I say this respectfully. Vic and I have jousted on this front several times (and I believe the back forth has always been good natured). But my overarching point on secular bear/bull markets is valid to the average investor.

The extreme highs and lows we've experienced since 2000 is all well and good for the speculator who can take advantage of the market ups and downs.

But to the average 401k investor, 2000 - 2013 has been the lost decade (plus 3+ years).

Yeah, they've continued making deposits and benefited from DCA'ing. But for far too many of working class Joe's, there is very little gain outside of deposits.

The trader can benefit from the market movements. Johnny Lunchbucket has no idea what to do except to move his money around chasing last years returns, and after a few years of that, he is just flat out frustrated. Johnny Lunch Bucket and Working Class Joe do not care that the market is near all time highs. What they intuitively know (maybe even only on a subconscious level) is that even though the market is near all time highs, they've lost something far more important–13+ years of time for that their money should have been, but wasn't, compounding.

I'm not trying to be contentious with the Chair….I'm just trying to present a different POV that many on this list never experience….the plight of the average investor.

Gary Rogan comments: 

Scott, the average investor is handicapped by having the urge to sell low. If you sold during the 2008/2009 lows and waited to get in you are certainly left with a very negative impression of the market that feels like a bear market. The only feasible way for an average investor to think about the market is to look at their 45 or so year workspan as the period to evaluate market performance. 13+ years should mean nothing in that frame of reference. Now, if you start investing when you are 55, it means a lot, but you are doing the wrong thing so getting the wrong impression comes with that.

It is true, in my opinion, that the market today is expensive by such measures as total capitalization to GDP ratios. This is somewhat likely to limit returns in the next 15 years although it means very little for the next say 7 years, but within any 45 year period starting from 45 years ago to 45 years into the future market returns are likely to remain close to their historical average (barring a major calamity). The average investor who knows next to nothing should learn this very simple behavior: put a certain percentage of your income into stocks every year, and stop complaining.

Scott Brooks responds: 

The best thing that the middle class working man who who is NOT eligible to invest with top tier money managers (due to accredited investor rules) and is stuck with 15 expensive mutual funds in his 401k or his cousins fraternity brother as a broker or some State Farm guy as his insurance agent, is TIME.

Over time he can make handle the ups and downs. But the fact that the S&P peaked at around 1550 in '00, and is now in 2013 getting ready to hit 1700 means he wasted 13+ years with less than a 1% average annual growth rate. Sure, he picked up a point or two in dividends and maybe benefited from DCA'ing….assuming he wasn't one of the many that stopped putting in money into their 401k's for whatever reason (got scared, saw his pay cut or his job outsourced or his spouse got laid off….or whatever)…..but when you subtract out management fees and 401k fees, he almost certainly netted 1% and maybe less.

That my friends is a secular bear market…..and that's the world that 90% of America has lived in for the last 13+ years.

We gotta remember that people on this list are not like the rest of the country, and it's easy to lose sight of that.

I hope it is clear to everyone that I don't pretend to be something that I'm not. I don't pretend to be a counter or even a trader. I'm a simple man who was raised in a lower middle class world and 90% of my family still lives in that world. I'm not trying to raise anyone's ire with these posts. I'm just trying to shed some light on a subject that is very real…..

And maybe somewhere in my words there is a way to create even more profit for those of us that are blessed with:

1. a brain that works better than 95% of the population and
2. have a burning desire to use that brain to it's fullest.

Oct

3

 "Business Insider: The Stock Market Looks Like 1967 All Over Again"

A chart overlay showing similarities between the S&P in 1993 and this year appears below in this article. I have seen other overlays by the bespoke group showing almost exactitude with this market and I believe 1926 or some such. Harry Roberts, where are you, with your proof that random charts look just like stock market charts. What are the chances that such idempotent overlays would occur by chance if you could pick out the closes match over the last 93 years or so.

Rocky Humbert adds: 

And 1954 too. From that link:

U.S. stocks are trading virtually in lockstep with 1954, the best year for American equity and the time when shares finally recovered all their losses from the Great Depression.

The Standard & Poor's 500 Index's returns in 2013 are tracking day-to-day price moves in 1954 almost identically, according to data compiled by Bespoke Investment Group and Bloomberg.

In no other year are the trading patterns more similar to 2013 since data on the index began 86 years ago. The correlation coefficient between this year and 1954, when the benchmark gauge rose 45 percent, is 0.95 out of a maximum of 1.

Kim Zussman writes in: 

Using SP500 weekly returns for 2013 (Jan - Sept), checked correlation of these 39 weekly returns with weekly returns of prior 39 week periods back to 1950.

Here are the 10 most correlated:

Date          Correl     Month

09/30/13     1.000     9

01/05/70    0.506      1

04/11/55    0.506      4

02/19/80    0.482      2

07/26/65    0.479      7

11/12/12    0.476      11

07/21/97    0.450      7

06/21/04    0.448      6

09/21/64    0.436      9

04/08/85    0.431      4

The current 39 week period correlates perfectly with the current 39 week period.

Next closest correlation was the period ending January 1970.

The most correlated Jan-Sept period ended Sept 1964, which along with $7.95 will buy a cup of coffee.

Sep

19

Is there a better way to map time-series data to reflect the (presumably) non-linear perception and memory of market events?

Log transformation of the price axis seems a reasonable approximation for reaction to price. But what about transformation of timescale as well? How long do significant market events influence current judgement, how are they weighted, and at what rate does this influence fade in comparison with recent events?

Let's assume that traders are not influenced by events more than 1600 trading days ago. SP500 daily return 1960-present was log transformed:

lnRET = ln (today's close / yesterday's close)

These traders care more about recent events than past events. Partly because memory is not conserved, and partly because many processes in the biological world are more logarithmic than linear (eg visual and auditory dynamic range). "Countback days" are simply the count of days from the present to the past, from 1 to 1600. Weighting consisted of scaling each day's lnRET by it's respective ln(countback day)

Current "return perception" of SP500 is the sum of 1600 prior lnRET values, each weighted by ln(countback day):

Current return perception = sum (1-1600) {lnRET/lncountback day}

This process was repeated back in time, starting from March 2013 to Jan 1960 (attached)

current transformed perceived return = sum (lnprice/lncountback days)

The chart of current return perception shows an all-time peak in year 2000. There were large amplitude variations in the 1970's-1980's, then in the early 90's return perception took off. In terms of 1600 day perception, the 2001 bear market never fully recovered, and the 2008-09 decline appears similar to the bear market ca early 1970's.

Sep

13

 Voyager 1, launched back in 1977, has become the first man-made object to pass into the unknown vastness of interstellar space. News Report.

I have a serious challenge for you. Name a single man-made device that has worked continuously for 40+ years without any human physical intervention. The winner will receive Rocky's usual prize: A unique gift of dubious monetary value.

Chris Cooper has a go at it: 

There must be any number of vintage self-winding watches that still work. If it must be wound, does that still match the spirit of your inquiry? Of course, there are many watches and clocks which must be wound by hand that are still operating. You can find some self-winding watches for sale on eBay.

Kim Zussman replies:

I am man-made and have worked continuously for well over 40 years (though currently half time for the government).

Bill Rafter adds:

Without doing any looking, there are lots of low-tech human creations that have survived the test of time. Many dams have performed their functions for decades and even centuries. I'm not speaking of hydroelectric dams, but simple river control devices. The Marib dam in Yemen is still there (after two millennia) and would be working if there was enough rainfall. Many artificial harbors also have exceptional longevity. Some Roman harbor constructions are still operational; the Romans having been expert in concrete manufacture. And don't forget Roman roads.

In more recent times, I am certain there is some electrical cable that is still functioning from half a century ago, if only to ground lightning rods.
 

Sep

2

Evidently the "red line" was the one crossed from below by the market in the last minutes Friday.

Aug

23

 "A Penny Saved is a Partner Earned: The Romantic Appeal of Savers"

Abstract:

The desire to attract a romantic partner often stimulates conspicuous consumption, but we find that people who chronically save are more romantically attractive than people who chronically spend. Saving up to make a particular purchase also enhances one's romantic appeal, as long as the planned purchase is not materialistic. Savers are viewed as possessing greater general self-control than spenders, and this perception mediates the relationship between spending habits and attractiveness. Because general self-control also encourages healthy behaviors that promote physical attractiveness, savers are viewed as more physically attractive as well. However, general self-control is not always coveted in potential mates: dispositional and situational factors that increase the need for stimulation reduce the preference for savers. Nevertheless, capitalizing on the general preference for savers over spenders, people are more likely to deceptively describe themselves as savers when completing a dating profile than when completing a private questionnaire. Our work sheds light on how a fundamental consumption behavior (spending and saving decisions) influences the formation of romantic relationships.

Aug

22

 The fact that the Dax was up 3 ratio points against the US markets shows that the largesse of the flexions on our numbers is not withheld from those who make recipes for the bernaise and bechamel sauces in Brussels .

Alan Millhone writes: 

Dear Chair,

Am afraid the bernaisacky sauce might upset my stomach.

Note Dow was below 15. That is upsetting enough to many without adding any sauces.

Sincerely,

Alan

Kim Zussman writes:

It was dyspepsia from absence of Bernanke sauce.

Peter St. Andre writes: 

I really need to write a little poem that starts with "Ben Bernanke makes me cranky"…

Gary Rogan contributes: 

There once was a man named Bernanke

Engaged in some bad hanky panky 

But he went AWOL

and skipped Jackson Hole 

And now the markets are cranky.

Craig Mee adds: 

Bernanke the captain of Fed
Resembles Titanic's, Smith Ed
Evades all bergs, engines full out
Bond infinity, no damnable doubt
"Untapered, untwisted, now screwed", he said.

Aug

19

 Many years ago one followed the Wall St. Journal stock-picking / dart throwing contest. The Journal claimed that the expert stock pickers were well ahead of the darts over many iterations. Holdings in those days were all mutual funds or indices. So for a first foray into individual stock ownership, I bought shares of "TCBY treats" - a frozen yogurt franchise - which was touted by the analyst in WSJ dart contest.

His analysis was, "The balance sheet looks good". I checked his background and he seemed well educated and reputable (remember this was pre-enlightenment vis. shibboleths of Ivy degrees and name shops).

I never checked the balance sheet because it was unlikely my novice reading would provide more insight than the market, and in any case the analyst was trained, experienced, and (in essence) endorsed by WSJ.

Some time later the analyst could point to brief intervals when TCBY was higher. However as you might guess the stock went into a long/slow slide into oblivion.

Following recommendations without understanding their basis and the motives of the recommender is risky business.

Rocky Humbert writes: 

Dr. Zussman is absolutely correct. One should never ever listen to any recommendations or thoughts that I espouse as my motives are suspect; my analytics are flawed; and my thought processes are clouded by insomnia and senile dementia. (I view these albatrosses as my secret edge in the markets.)

Furthermore, I myself follow Dr. Zussman's advice religiously and assiduously avoid reading newspapers or books, avoid conversations with intelligent people and spent 23 hours per days in a saline-filled sensory deprivation tank (from which I emerge to occasionally pen SpecList posts.)

Gary Rogan writes:

I have been told by many people, on multiple occasions, and for a variety of reason to avoid stock tips, mainly because you can never know exactly why the person likes them and also because they are unlikely to fit into your "trading system" (and I would guess investment system). I find this advice hard to evaluate. I suppose if one knows some stats of the person's previous picks this makes it easier. If you can deduce that the person isn't simply talking their book, that's probably better as well. But fundamentally, a stock can't know that someone has recommended it to you. If you have a system, you should at least know whether the person intends for the pick to be a short-term trade or a long-term investment and judge accordingly. Rocky doesn't give a lot of stock tips, so what should one think of one when it suddenly appears? Hard to know. On the other hand, I think I have a pretty good idea who Rocky really is and he is an upstanding member of the community with a good track record, and can't possibly be thinking of moving AAPL significantly by talking about it here, so is it really wrong to follow his recommendations?

Aug

9

A question for Kim or Victor: Since IWM has more stocks than SPY, does it follow that daily returns on IWM are closer to the Normal Distribution than SPY? - A Reader

Victor Niederhoffer replies:

It does, as a consequence of the Central Limit Theorem .

Kim Zussman replies:

Let's look at it empirically. Here is the "Anderson - Darling" test for normality of daily SPY returns, 2000-present (SP500).

Next is the same test for IWM (Russell 2000 ETF), 2000-present.

Rocky Humbert writes: 

Vic, I'm not sure that the central limit theorem is the right paradigm. An unknown is whether the covariance within the two groups is sufficiently different to offset the CLT. I have never tested this. And testing is tricky because you need to use compounded total returns with dividends reinvested. The index and stock prices produce misleading results because dividends are greater for big caps.

Intuitively, I believe that most of the perceived differences can be explained by 2 things:

1) the dividends…which is really just a duration effect and 2) the reality that companies leave the R2k only when they are incredibly successful or when they die. Stocks only leave the SP500 when they die. They never leave the SP500 and go to the R2k when they are successful. So over time, the perceived differences are a micro sampling of a survivor bias between the 2 indices. Not sure how to test this theory…

What we do know is the implied volatility of r2k is almost always higher than the implied volatility of the SPX. I think this could be an analogue to the fact that out of the money puts are more expensive than out of the money calls. Put another way, if you are long SPX and short r2k in equal dollar amounts, you will usually make money during violent and persistent market downdrafts. I think this is proof that the distributions are different.

Victor Niederhoffer writes: 

Those are good points you make about areas that I should have considered in estimating the departures and distributions of comparative performances. It is also amazing to me that the statistical tests, especially the Kolmogorov Smirnov, show such departures. I am a great believer that the risk premium on untried and small stocks is much bigger and that they should perform better and that buying two handfuls of them will have a limiting distribution that converges to a return a percentage or two above the 8 % you get from the average NYSE stock. I must go back and check my premises. It reminds me of how I told the people in my family to buy the riskiest vanguard over the counter fund, and they tell me that they are always getting notes in the mail that the funds I recommended are being sued by their holders as the worst performing funds in history due to all sorts of wrongs of a practical and theoretical nature. I mean this response in a humble and appreciative way although it is sometimes hard to communicate that by email in the face of all the errors that are elicited.

Ralph Vince writes: 

Like everything else in this realm, it depends on the unit of time used in analysis. If you use annual data, things play much more nicely to Normal. The shorter the time unit used, the less so.

Jul

8

Interesting article by Vivek Wadhwa in Technology Review "Silicon Valley can't be copied".

(Regrettably omitting the role of resourceful governance).

By 1960, Silicon Valley had already captured the attention of the world as a teeming technology center. […] French president Charles de Gaulle paid a visit and marveled at its sprawling research parks set amid farms and orchards south of San Francisco.

Soon enough, other regions were trying to copy the magic. The first serious attempt to re-create Silicon Valley was conceived by a consortium of high-tech companies in New Jersey in the mid-1960s. [The plan] could not get off the ground, largely because industry would not collaborate.

In 1990, Harvard Business School professor Michael Porter proposed a new method of creating regional innovation centers. […] Sadly, the magic never happened—anywhere. Hundreds of regions all over the world collectively spent tens of billions of dollars trying to build their versions of Silicon Valley.

The reasons [for Silicon Valley's unique success] were, at their root, cultural.

Californian Stefan Jovanovich adds:

There is an element that is not mentioned. California, for better or worse, has always been the place people went to strike it rich. People came to Silicon Valley for the same reason they went up into the Sierras or stayed in San Francisco and sold shovels in the 1850s - they intended to make their fortune, not just get a "good job" (pun intended). What literally disgusts those of us who loved the place is that the same greed exists today but the enterprise is almost entirely directed to fleecing the government in the name of (pick one) "curing cancer, saving the environment, some other socially responsible activity that just happens to attract a good deal of non-profit and government cash". As one of our friends, who left for Idaho a decade ago, said, "Sleaze is always a part of the hustle that comes with "making it new"; but now the whole state is the music business without any new music - everything is just sampling what has already been done and filing a claim to protect what was not even invented in the first place."

Carder Dimitrioff speculates:

Actually, it could be argued that Silicon Valley is a replication of Boston. Up until the Nixon Administration, the greater Boston area was the nation's technology highway. Fed by Lincoln Labs, MIT, Harvard, Northeastern University, Boston University, Boston College, University of Massachusetts, Worcester Polytechnic Institute, Clark, Rensselaer and other great technology centers, companies like MITRE, DEC, Polaroid, WANG, and dozens others popped up all over Boston's Route 128.

Then, Massachusetts became the "one and only" state not to vote for Nixon in 1972. Nixon was from California. Silicon Valley is in California. Maybe there is a connection?

Peter Saint-Andre writes:

I forwarded this article to Jim Bennett (co-author of "America 3.0") and he noted:

"One of the under-appreciated factors was Stanford's rule that allowed professors to work part-time for companies and take stock options in pay. Most universities forbid that as being vulgar, as gentlemen are not supposed to engage in trade."

Carder Dimitroff replies:

In my experience, most technology professors in the Boston area were part-time academics. Most wanted to start their companies based on their areas of interest. Most Boston area universities allowed such.

EG&G is an early example. The letters represent the names of three MIT professors. My dad was one of their first ten employees. He worked under Doc Edgerton - not in MIT or Lincoln Labs, but in EG&G, Inc. This was decades ago.

One of my beefs with MIT is their lack of dedicated faculty. Even professors in their Sloan School spend most of their time in consulting firms. A lot of their faculty seem like they are adjunct professors.

Jun

16

 I have recently had a lot of pain related to a problematic tooth. It is a tooth that has been giving me trouble on and off for years and I have no idea why. Dentists have suggested it suffered some type of trauma when I was younger, but if that was It I don't remember the event.

Went to the emergency room last January (weekend, regular doctor closed) because I was in massive pain over the holiday weekend.

It turns out that it had become infected and was putting pressure on the nerve in the Jaw. Since that time I have had a root canal on the tooth, but that did not solve the problem. I have had two other procedures, the last one this morning because the prior one did not heal properly and got infected again. Really aggravating experience, no need to go in to details. Today I am holed up recovering, jaw aching on a beautiful day.

The thing is, back in January, I had a gut reaction that the best thing to do would be to just forget all the treatments and have the problematic tooth yanked out. Based on the trouble it had caused me to that point, it just seemed to be the solution that made sense — likely to be final and just "end" the problem.

Yet, I was told that was too extreme and "the tooth could be saved" etc. No professional I spoke with thought it was a good idea, in fact they seemed astonished that I suggested it. And today, after treatments and quite a bit of discomfort, things not going right, etc, I am inclined to think my initial hunch was correct. Forget treatment. Just get rid of the problem.

I wonder how often this happens.

A clear cut solution to a problem exists, but a bunch of complex alternatives are presented and the resolve to do what is likely required to the end the problem with certainty is dampened. Not to push the analogy to far, but does this not also happen in trades, businesses, and relationships that are going wrong. Rather than end a problem trade, it is easy to tinker with it, look for hedges, "scalp" around the position, etc. but instead of a resolution only more pain is created. Or a relationship that has stopped working — "keep fixing it" but only more delays for the inevitable split which is more painful than a clean break.

It is hard to tell what is hindsight quarterbacking, and what is a life lesson. In this case I am still not sure which it is. I wonder if there are any general rules or ideas that can be applied to these situations to give better outcomes.

anonymous writes:

Absolutely, the best case is to always treat (your tooth or a losing trade), like it was bad meat and spit it out. Deal with it immediately, no messing around, just take the hit and get over it. Bad trades, like bad relationships, have a way of metastasizing into something worse, and the old cliche comes to mind, "Your first loss is the least."

Personally I remember once having a relationship with a nice gal that went south (but as a guy I was totally oblivious to the whole thing and didn't see the obvious signs). I was out with the lady in question in public at a restaurant and she gave me "the blow-off speech." I was so confused that I didn't even see it coming (One could make a case that infatuation is insanity). In retrospect, I should have gotten up, picked up the check, paid her carfare, bid her adieu, and walked out, never to see or communicate with her again…..like one exits a bad trade. Instead I lingered for months in an emotional limbo, like a sick puppy, suffering great humiliation and many bad feelings. In retrospect, like a bad trade, that relationship wasn't worth it and there was no bargaining, hedging, covering it with options that was going to save it. It had to be pitched immediately, and I broke my cardinal rule by not pitching it (emotions again).

Bad trades, like bad relationships can teach one many lessons in life and trading if one listens to what the situation (market) is telling you. If only, when dealing with that person, I had used my trading persona instead of my emotional side, I would have not lingered in emotional limbo for months.

This supports a great case for dispassion, and a big part of the Masonic obligation is to "learn to subdue your passions." But like the ying and yang, good things happened out of that debacle and I ended up seeing a very cultured, erudite, successful, powerful, and beautiful woman that I married a few months ago. I'm happy for the first time in five years, and that's what's important. Bad teeth, bad trades, bad relationships…..get rid of them, they are just nuisances that get in the way of life.

A commenter adds: 

But that thinking of could have, would have, should have is very deadly in the markets. Although hindsight is always 20/20, my eyesight of 20/100 does not allow such indulgences and my defensive game does not allow for such risk. I'm trying to make money, not keep my finger in the dike like the little Dutch boy. The Dutch boy was wasting his time. 

Gary Rogan writes: 

Bad women and bad teeth rarely get better by themselves, although some teeth that seem to need a root canal sometimes do. Equities do it a lot more frequently, so to this day I don't know how to reliably tell when a bad equity trade needs to be spit out. "Your first loss is the least" obviously applies to some situations, but for instance I still own a stock that lost me 20% two days after I bought it, 50% three months after I bought it, but now two years later it's up 70%, having been up 120%. Rocky talked a lot about his thoughtful decision to exit HPQ back when it was relentlessly moving south, but it's back. What used to be RIMM is still in the dump, but someone who bought it in September doubled their money. If you could always make a wise decision by just getting out of a (currently) losing trade, everyone would be a lot richer than they are.

Rocky Humbert responds: 

Mr. Rogan,

Indeed HPQ has been inexorably working its way back and may keep climbing. Who knows? What we do know is what  the S&P index has done subsequent to my exiting HPQ. And we also know what  other alternative investments (gold, real estate, etc) have done over the same period of time. Taking the hit and putting the (remaining) capital into the alternatives would have been better than suffering. Hence in these matters, one must consider not only the ongoing pain, but also the opportunity cost. To the extent that one is monogamous, the analogy holds for personal relationships.

Is there an opportunity cost for teeth? Not sure.

Gary Rogan replies: 

Sure, there is always the opportunity cost. The question is, how well do we know it in advance? My point was that if say you bet all your money leveraged 10 to 1 on wheat, and your position is down 10% you may want to exit, but if you own 100 stocks and one is down 10% or 50% or even 90% what to do at that point outside of any tax considerations and without any additional information isn't exactly clear. Given my preference for 52 week lows in the absence of any other information it may make sense to buy more or do nothing. If the sudden move lower really attracted your attention, and upon further study you conclude that this is only the beginning, of course you may want to sell. But then a sudden move up or a long period of flatlining or something you happen to read or hear may attract your attention as well.

A commenter writes: 

The key phrase that piqued my interest was when you said, "you bet all your money leveraged 10 to 1 on wheat." Why would you "bet" all your money? Wouldn't you want to just "bet" a small part of it, and keep the rest of your powder dry? Anyways, betting signifies gambling, and gambling is wrong.

Gibbons Burke writes: 

Anonymous, I am like you—I don't see any value in pissing my money away in a known negative expectation game, so I sympathize with your view. I have never found enjoyment in gambling, personally. But I can't extrapolate from my subjective view and experience onto the world because everyone's utility and entertainment functions are different.

Gambling in the United States has several positive social functions… State lotteries support education of children… Gambling on Native American reservations is a voluntary form of reparations to that people… and, it gets money out of mattresses and back into economic circulation, transferring capital from those who are not prudent in their stewardship of that capital (otherwise they wouldn't be gambling, would they) and putting it into hands where it will be more efficiently employed.

Part of the freedoms cherished in this Constitutional Democratic Republic is the freedom to act the fool, on occasion, as long as you don't infringe upon the rights of others, or forsake the duties to yourself or those in your charge. 

Kim Zussman adds: 

You would not have regretted your decision to accept professional opinion / treatment had everything gone well.

The mistake is assuming you could have made a better decision - to extract the tooth - simply because in hindsight the treatments have not worked.

For any decision there is a range of outcomes. Perhaps your treatment had 80% chance of success (defined as rapid pain reduction, elimination of infection, and saving the tooth). But so far you are in the 20%, and for you the failure feels like 100%. "If only I'd extracted"

Do you expect portfolio managers or sound strategies to never lose, or abandon them only when they do? (Buy high / sell low)

Dentist and physician success rates are mostly unknowable but patients use cues to evaluate them. Cues such as trusted referral, reputation, diplomas, demeanor, looks, office decor, exhibited technology, etc.

Your treating dentists are simultaneously incentivized to obtain good results (reputation, future referrals) as well as make money (perform treatment). Those with consistently poor results have trouble competing with those with good results, and you are less likely to wind up there. 

Jun

3

Inspired by the concept of burnout from the medical world, it might it be useful for traders to review every once in a while as a tool for when to take a break.

Or conversely take out the cane.

May

14

 I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.

My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.

Probably another sleepless tonight tormented by that devil.

Gary Rogan asks: 

What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?

Tim Melvin writes: 

I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.

Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.

Gibbons Burke writes: 

 Here is something I posted here before on this distinction…

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.

The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

Kim Zussman writes:

One gambles that Ralph and/or Rocky will comment.

Leo Jia adds: 

From the perspective of entering trades, I wonder if one should think in this way:

speculators are willing losers who often win; gamblers are willing winners who often lose.

David Hillman adds: 

It is rare to find a successful drug lord who is also a junkie. 

Craig Mee writes: 

One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."

Bill Rafter comments: 

Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 

 Anton Johnson writes: 

A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.

Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.

Jeff Watson writes: 

I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 

anonymous writes: 

Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."

That's how a compulsive gambler responds.

Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.

Anton Johnson writes: 

It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.

Gibbons Burke writes: 

That's the essence of my distinction:

"gamblers are willing losers who occasionally win"

That is, gamblers risk their capital on propositions where the odds are either:

- unknown to them
- cannot be known

- which actual experience has shown to have negative expectation
- or which they know with mathematical precision to be negative

They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.

"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:

- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience

They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.

If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.

There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.

Duncan Coker writes: 

I found Trading & Exchanges by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."

He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.

May

8

This chart plots compounded return for SPY day and night (open-close, close-open) for the prior bull market of 3/03-10/07. Most of the period's gain occurred overnight, though day returns were strong in the initial rally. The overnight returns were consistently good over the period.

This is a similar chart of compounded SPY day and night returns for the recent bull market 3/09-present. Unlike the prior one, the current bull market was up both day and night with advantage going to daytime returns.

One possible explanation would be the visible hand of Ben and Co: heavily pulling levers during market hours to maximize return (of voters).

Apr

30

In 2013, stock market return for January - April is about 12% (SPY: Dec 31 - end of april). Going back to 1994, regressed subsequent May- October returns against return of prior Jan-Aprils shows a positive correlation:

Regression Analysis: May-Oct versus Jan-Apr

The regression equation is
May-Oct = - 0.0107 + 0.753 Jan-Apr

Predictor      Coef  SE Coef      T      P
Constant   -0.01071  0.03092  -0.35  0.733
Jan-Apr      0.7530   0.4125   1.83  0.086

S = 0.115422   R-Sq = 16.4%   R-Sq(adj) = 11.5%

Though not quite significant, in the absence of a miraculous recovery in economic activity (and unlikely FED tightening), the regression equation suggests another +7% through October. 

Apr

23

There is always something new to someone with many gaps in knowledge like mine. And the minimum spanning tree which I saw in an astronomy article "bootstrap, data permuting and extreme value distributions" by Suketo Bhavsar (which I couldn't understand but sent to Dr. Z  as he could and Mr. Grain who could also understand it and it seems like a very good thing for technical analysis. But I will have to study it when not losing in market (all too rare). 

Kim Zussman adds: 

The article is unfortunately significantly beyond my boundaries. Observationally I would worry also about what we can see vs what is obscured by interstellar dust, but presumably they adjust by using infared (which penetrates dust better).

But I see your point vis traded price path:

"The Minimal Spanning Tree or MST (Zahn 1971) is a remarkably successful filament tracing algorithm that identifies filaments in galaxy maps (BBS; Ung 1987; BL I). The technique, derived from graph theory, constructs N - 1 straight lines (edges) to connect the N points of a distribution so as to minimize the sum total length of the edges. This network of edges uniquely connects all (spans) N data paints, in a minimal way, without forming any closed circuits (a tree). In order to distil the dominant features of the MST from the noise, the operation of "pruning" is performed. A tree is pruned to level p when all branches with k galaxies, where k < p, have been removed. Pruning effectively removes noise and keeps prominent features."

Victor Niederhoffer writes: 

But it's descriptive right? I don't see anything about how to use it as predictive?

Kim Zussman replies: 

They seem to be trying to lift signal (filaments) from background noise. Do you think some market moves are signal and others noise?

Victor Niederhoffer responds: 

Yes. Like when bonds and stocks are both up on the day. The green on our chart or a break of a round number. Like an orgasm. But I can't understand the astronomy of the Indian paper so can't unravel it. 

Apr

12

 Today was a day that I lathered the face at 7:00, and checked on the prices and the shaving cream is still there. Gold down a nice 35 bucks and bonds up a point and stocks down 8. The Dax down 150 and crude down 2 bucks. A take away from the trading. When the pain is too great to withstand adding to the position, and you utter an "oh , no!", that's when you should be standing solid as a stone wall and adding to the fortress, I think.

Vince Fulco writes: 

I've been looking at some historical chart of the softs and other extreme situations recently and per the Chair's comments it is remarkable how quick and painful the washout can be before the trend changes direction violently and puts on multiples of the initial move.

How many times if we just walked away from the desk for a couple of hours to read, jog, or do anything, would we return back to clover? If only one had the fortitude to stand firm at all times.

Kim Zussman writes: 

A possible key is a human inability to shift attention time-scales, i.e, if one is used to thinking (stressing) ticks (minutes, hours, points), it's hard to switch to weeks or months, then back again — in order to be profitable under different states of the market.

It may also help explain early buying and selling.

Apr

8

Chart is labor force participation rate 1972-present. RED arrow indicates infection point.

Apr

3

 Many bearish things about gold lately. That it doesn't go up with no inflation, that we're in recession. That the dollar is going up. That there is great overhand of stocks. I am reminded of a question that I always ask when we hear rumblings that we are going into recession and someone suggests that it is bearish for stocks. I always ask, "what does that have to do with the likely outcome of the stock market? Will the drift be lower or higher?" Oh, I haven't tested that is the unspoken answer. Same for gold. I have not been averse to considering speculative buying of it on all the dips and one is not averse to upholding the spirit of Gavekal idea that it is good to consider things of that nature when caught in Africa by natives, or in large deposits by flexions. One notes a 20 day minimum and is not averse to considering expectations thereafter even before Dr. Zussman runs it on small tab.

Kim Zussman writes:

Using ETF "GLD" daily closes (12/04-present), new instances of 20 day lows were defined as the first 20 day minimum in 20 days. For these new 20 day lows, the return for the next 5 day interval was positive but N.S.:

One-Sample T: next 5D

Test of mu = 0 vs not = 0

Variable   N   Mean    StDev   SE Mean          95% CI            T      P
next 5D   32  0.0012  0.0317  0.0056  (-0.0102, 0.0126)  0.22  0.828

However 7 of the last 10 instances of new 20D lows have been followed by 5 day periods which were down: 

Date next 5D

02/11/13 -0.027

12/04/12 0.007

10/15/12 -0.005

06/28/12 0.018

05/08/12 -0.040

02/29/12 -0.004

11/21/11 0.021

09/22/11 -0.067

06/24/11 -0.009

01/07/11 -0.007

07/01/10 0.011

03/24/10 0.025

01/27/10 0.020

12/11/09 -0.003

06/22/09 0.017

03/10/09 0.022

01/12/09 0.047

10/16/08 -0.109

07/30/08 -0.032

03/20/08 0.022

08/16/07 0.010

05/10/07 -0.014

03/02/07 0.008

12/15/06 0.011

08/17/06 0.012

06/01/06 -0.026

02/13/06 0.026

12/20/05 0.050

10/20/05 0.026

08/30/05 0.031

07/06/05 0.002

03/22/05 -0.001 

Anatoly Veltman writes: 

Fantastic work, as always. Now, I will ask a few skeptical questions:

1. So you test a historical period which saw the price move from $400 to $1600. Wouldn't you expect bullish historical results of a purchase made just about any random day?

2. So we're having a market in 2013, bouncing around on any piece of planted news from Cyprus, from EU, from Putin, from Japan, from Fed, from WH, from investment banks, from fund characters (the ilk of the upside-down), etc. How will one adjust one's timing of statistically catching the falling knife - given that the timing of such leaks (releases) has significantly changed from the test years?

3. Also, the market mechanism has changed in those 8 years, on two fronts:

-the increased weight of ETFs vs. bullion/futures
-the increased prolifiration of HFT exploratory orders

My gist: it's good to have a study, but there are plenty of caveats that call for increased amount of discretion.

In fact, here is my idea: I've observed this to work at an increasing rate  since the transfer of investment capital from public into the coffers of the banks and funds has been initiated by the Central authority.

So Gold drops too quickly from $1600 to $1563, which rightfully piqued the Chair's interest in the wee hours. So this is what investment banks, playing with unending public capital, do (for a 24-hour play): they buy momentary cheap Gold and sell Oil against it (got to get the quantity mix right). Oil could not be considered cheap following last week's straight rise. Works plenty of times. And when it doesn't (really, once in a blue moon), a short term spread position becomes a longer term hedge, then the books may get cooked, then a rogue trader is disclosed, etc. who knows…But a good statistical trade to be sure. I like it.

Jason Ruspini adds:

If it seems like HFT is degrading certain strategies over time, there might be testable differences between different futures exchanges that support different order types. For example CME supports stop-limits without any additional software, but Eurex and TSE do not. ICE natively supports ice-berging, most don't. HKFE and SFE only support limit orders natively. Does the performance of benchmark momentum or reversion systems on equity contracts differ between these exchanges (without applying slippage assumptions)? They aren't apples-to-apples of course but if HFT has polluted the microstructure for certain strategies, it seems like something should show-up here, even if many participants have ways to create the other order types.

CQG Order Types Supported by Exchange

Ralph Vince writes: 

Interesting points Jason. Timely too, I believe.

When market meltdowns occur, the technologie du jour is the scapegoat. In 1929, it was margin accounts. In 1987, program trading. Tomorrow, HFT.

Not that HFT caused the meltdown, but the fact that they stepped aside and enormous air pockets formed in the faveolate theatre of perceived liquidity.

Mar

10

As usual the reports of employment with all the adjustments to the economic numbers, coming from the government employees at the department chaired by the leader who likes her kids to sing the iron anthem, are designed to increase the importance of the department of the interior and redistribution and vote buying as Nock and Tollison and the public choice people said. First, the revised number from last month (which are 100,000 or so lower than previously reported) + the current number are very poor. And the total is about in line with the past dismal figures. (when will all these revisions be taken into account so that there is not such a big opportunity for the public to do the wrong thing).

The decrease in the unemployment rate comes from all the people who are not looking for jobs because they are on disability or given up hope. Third, the numbers are designed to show that when the rate goes up, they can attribute it to the fact that the survey was taken before sequestration (the economics chair has said this and important pro spending leaders of all sexes have it in her or his talking points already), so that when they report worse numbers in the future they can say it was because of the dreaded effect of reducing gov expenditures over 10 years by 800 billion rather than the fact that the numbers themselves are random.

Kim Zussman writes: 

"What is then the connection between these numbers and the market?"

1. If unemployment and GDP numbers continue to improve, Oval Occupier takes credit and proving that higher taxes are pro-growth
2. If it worsens, it can only be due to House Republicans protecting the rich
3. If unemployment and GDP numbers continue to improve in a world without investment alternatives, stocks go up
4. If it worsens, time for more QE - which is now well known to be extremely bullish for stocks

Paving Wall St for Hillary (sorry Ross).

Richard Owen adds: 

Always get long a fraud short you think is going to print above consensus. Men with gold filings and lucky silver dollars like their trading sardines.

Also, the disenfranchised pipe welder is the new fifties housewife. Instead of the little woman adding her own egg to the betty crocker brownie mix, the oxy acetelene operator adds his own self pity to a bottle of Jack Daniels. Growth in the fifties was still pretty good.

When Kruschev met Nixon and fulminated that Russia would outpace the US inside of seven years, it is easy to look back and laugh. At the time, much harder to be sure Russia wouldn't win out.

Mar

6

Yesterday (3/5/2013) the DJIA passed its all-time high (not adjusted for inflation); the SP500 has only a couple % to do the same.

Going back to 1950, daily SP500 closing prices were identified which were both an all-time high (starting at 1950), AND the first such occurrence in 100 trading days. There were 19 such instances. For these 19 new all time highs, checked the return for the next 1 day, 5d, 10d, and 20d - here comparing the means to zero:

One-Sample T: 1d, 5d, 10d, 20d

Test of mu = 0 vs not = 0

Variable N  Mean   StDev   SE Mean        95% CI            T      P
1d        19  0.0010  0.0059  0.0013  (-0.0018, 0.0038)  0.77  0.451
5d        19  0.0047  0.0117  0.0026  (-0.0008, 0.0104)  1.78  0.092
10d      19  0.0040  0.0185  0.0042  (-0.0048, 0.0129)  0.95  0.354
20d      19  0.0061  0.0257  0.0059  (-0.0062, 0.0185)  1.05  0.309

>>not much; the most promising being the 5 days after new all time highs.  Below are the dates:

Date
5/30/2007
2/14/1995
8/19/1993
7/29/1992
2/13/1991
5/29/1990
7/26/1989
1/21/1985
11/3/1982
7/17/1980
3/6/1972
4/29/1968
5/4/1967
9/3/1963
11/1/1961
1/27/1961
9/24/1958
3/11/1954
6/25/1952

Feb

27

SPY daily data was used to calculate a measure of intra-day volatility normalized to current price:

(H-L) / ((H+L)/2)

SPY data was also used to calculate daily intra-day return: (C/O)-1

These ratios were used to calculate the ratio: return / (intra-day volatility) (return per unit realized volatility, intraday)

The plot of return/volatility over time (1993-present) is here.

The plot looks sufficiently random but for a number of "roundish" points in the 93-94 period. Notice that for most of the series (excepting 93-94), there were no instances of "1" or "-1" (either an up day with intraday return = intraday volatility, or a down day with intraday return = -(intraday volatility) ). But there were several instances of 1, -1 in the earliest period. Also in the same 93-94 period there were a number of "0"s for the ratio - corresponding to zero return.

Hypotheses include problems with the data (Yahoo), and problems with the ETF itself.

Feb

5

Feb

5

 An expert has great comparative advantage in their area of expertise.

They say it takes 10,000 hours of study and mindful practice to become an expert — not to mention the natural talent, and the practice time it takes to maintain expertise.

Since a work lifespan is ~50 years — along with time needed for play, sleep, food, and social interaction — it would be unusual to become expert at many things. Which suggests that the economic fuel of comparative advantage is not likely to go away.

How is expertise possible in ever-changing markets?

Jeff Rollert writes:

I recommend the book Mindfulness, which contains the research work of Harvard psychologist Ellen Langer on observing and problem solving.

I practice some of her ideas when I walk to work…

Jan

30

There is a zero sum part to trading where what one flexion makes, another high frequency or day trader or poor gambler ruined or lack of margined or viged player uses. The win win aspect is that if you hold for a reas period as almost everyone in market is forced to do, you get the drift of 10000 fold a century, except if you lived in the Iron and played a game with kings moving backwards.

Anatoly Veltman writes:

Ok, I'll say it. Drift prevails over a century. And I had no problem with drift as recently as 4 years ago, when the only true drifter I know, a prince of certain oil, was adding to his C holdings by bidding pennies.

I'm having a problem with over-relying on drift now; because now, four years later, you can only bid pennies for C if you add $42 in front of it. All the while the real economic indicators, as Chair pointed out just today, have not and will not improve much any time soon. Now tell me: why assume that there will be much of a drift effect in the near five, or maybe the near ten years? Do you expect policy improvements, or pray for a budget spiral miracle, or Europe culture unity miracle, or what other miracle?

Jeff Watson writes:

Back in 1932, the DJIA made a new all time low that wiped out 36 years of gain. Likewise, the market didn't totally recover from 1969's highs until 1982, and the market has done a 15 bagger since then. I'll stick with the drift, which is a steady wind. 

Rocky Humbert writes:

There seem to be two sorts of smart-sounding stock market pundits: (1) those who get bearish because prices have risen. (2) those who get bearish because prices have fallen. I am neither smart nor a pundit but my views of the 3-5 year upside from here (small) and current positions (long inexpensive s&p calls) are known to all.

In the face of the current seemingly relentless rise (which has used up a year's drift in 3 weeks)… I confess that I am looking at my new, over 50% combined tax rate, and positing that higher marginal rates disincentive not only my risk-taking, but also my selling (as the taxes discourage my speculative urge to sell now and buy stuff back at hopefully lower prices.)

With this in mind, an academic study might consider whether changes in capital gains tax rates result in more serial correlation (i.e. trending — as I look around three times) SHORTLY AFTER the higher taxes are imposed. And the effect diminishes over time as people become accustomed to the new regime. Obviously I would guess the answer is yes.

Kim Zussman writes:

 Increasing tax regime could be bullish:

1. additional vig against frequent trading (as if there weren't enough already) > 1a. "drift" of holding period toward longer timeframe
2. disincentive to sell = incentive to hold and/or buy (including insiders)
3. restructuring away from dividends toward stock buy-backs

Rocky Humbert writes:

Dr Z may be onto something. Does this mean if Obama raises capital gains taxes to 99%, the stock market will triple over night? 

Anatoly Veltman writes: 

1. I have no problem with counting to include the last few years
2. I have a problem with counting to include anything pre-2007, let alone pre-2001, and even more so pre-1987.

The reason I have a problem with it: historical price analysis, no matter which way analysis is performed, relies on the notion that participants have not largely changed, and that "their" psychology has not changed. This is not the case - if one goes too far back - because financial market mechanism and participant make-up has changed ever increasingly over the past decade.

One of the victims of methamorphosis was "trend-following". I believe that most previosly successful trend-following rules have died in application to regulated electronically executed markets, because most clients are now automatically prevented from over-leveraging. Thus, "surprise follows trend" rule, for example, lost potency. Nowadays, you get preponderance of surprise "against trend". That's a very significant switcharoo, which has put most of famed trendfollowers of yester-year out of biz.

Also, Palindrome was not much off, predicting the other day hedge fund outflows due to old as age "2&20 fee structure". This structure just can't survive the years of ZER environment. Huge chunk of very cerebral participation has been replaced by bank punk punters, gambling public's money for bonuses.

Gary Rogan writes:

The drift seems to be a long-range phenomenon that has existed in different stock markets for a very long time. It is therefore difficult to make predictions of its demise based on any specific factors. One thing is clear: calamities like revolutions end the existence of the market and obviously the drift. Benito Mussolini was very good for the Italian stock market for a long time, and even way into the war it kept up with inflation, but eventually it succumbed to the realities of war (in real, not nominal terms). Granted, Mussolini initially had much better economic policies than Obama, but who would really expect that faschism could coexist with a great stock market? The question still remains: will there be a total wipeout? Short of that the drift is likely to continue.

Il Duce wasn't chosen completely at random, and the question was (just a little bit) tongue-in-cheek.

I could easily make the contention, and a great case, that fascism co-exists with a great stock market right here in the USA.

Ralph Vince writes:

I think we make a huge mistake when we assume that policy affects long term stock prices. Sure, you might have seen events, like a lot of stocks seeing big ex-dates last year, before big tax theft years — but the long term upward drift is a function of evolution. Like our progress has always been — starts and fits.

Sometimes the fits have lasted 950 years! But it always comes around. I like to get up in the morning, put my shoes on, by a few shares of some random something or other. If it goes against me, buy a little more. When it comes around to satisfy my Pythagorean criterion, out she goes.

As I've gotten older, I like to do it with wasting assets, long options.

It makes it more sporting.

Stefan Jovanovich writes:

I wish that we all could agree that prices only count if you can use the money . Zimbabwe's stock market does not have prices for anyone who wants use the money except in Zimbadwe. The Italian stock market was not quite that bad but close enough to make its "performance" entirely fictional from the point of view of anyone wanting to do what people now take for granted - use their dollars to buy/sell "foreign" stocks, close the trades and then take home their winnings - in dollars. That was not possible in Italy after 1922 or in Germany after 1932, for that matter.

As for Mussolini's economic policies, they were far more destructive than the President and Congress' inability to stop writing checks that the Treasury has not collected the money for. In his Battle for the Lira (1926), Mussolini decided that the currency would be fixed at 90 to the pound, even though the price in the foreign exchange market was 55% of that figure. The result was to create an instant bankruptcy for all exporters and those few remaining financial institutions that dealt in international trade. As a result Italy got a head start on the rest of the world; its Depression began in the fall of 1926. But Quota 90 did create a windfall for the Italian industrialists who were Mussolini's supporters; their costs on their imported raw materials were immediately halved. Like the German industrialists after Hitler took power, they saw their order books boom with all the government spending for guns and butter. And look how well that all turned out.

Baldi writes:

Ralph, you write: "As I've gotten older, I like to do it with wasting assets, long options."

Older? You wrote about doing just that in 1992:

"Finally, you must consider this next axiom. If you play a game with unlimited liability, you will go broke with a probability that approaches certainty as the length of the game approaches infinity. Not a very pleasant prospect. The situation can be better understood by saying that if you can only die by being struck by lightning, eventually you will die by being struck by lightning. Simple. If you trade a vehicle with unlimited liability (such as futures), you will eventually experience a loss of such magnitude as to lose everything you have. […]

"There are three possible courses of action you can take. One is to trade only vehicles where the liability is limited (such as long options.) The second is not to trade for an infinitely long period of time. Most traders will die before they see the cataclysmic loss manifest itself (or before they get hit by lightning.) The probability of an enormous winning trade exists, too, and one of the nice things about winning in trading is that you don't have to have the gigantic winning trade. Many smaller wins will suffice. Therefore, if you aren't going to trade in limited liability vehicles and you aren't going to die, make up your mind that you are going to quit trading unlimited liability vehicles altogether if and when your account equity reaches some pre-specified goal. If and when you achieve that goal, get out and don't' ever come back."

Jan

28

 One of the pleasures of visiting the declining city of Chicago (perhaps the next Detroit), is to visit the Seminary Bookstore in their new location, 5727 S. University Avenue, They have a great collection of quasi academic books, i.e. the kind that professors write for popular consumption, and the current text books can be bought a few blocks west at the University Bookstore.

Compared to the old store, it has much more room, much more light and glass windows, and plenty of places to sit and read. And unlike the old store, it's possible to find your way out without being buried by a ton of musty books if you don't get lost in the basement. I am one of those unfortunates who was not educated enough in my college days to have a good grounding in all the disciplines that make up the world of knowledge so I like to update myself periodically in areas that I am weak in or should know much more about, especially for market actualization or knowledge to share with my kids.

Perhaps the list of books I bought might be of interest to some scholars or would be market people. Microeconomics by Besanko and Braeutigan

Industrial Organization by Luis Cabral

Investments Bodie, Kane, Marcus (ninth edition)

Stochastic Modeling Barry Nelson

Scorecasting Moskowitz and Wertheim

The Evolution of Plants Wills and McElwain

Survival by Minelli and Mannuci

Thieves, Deceivers and Killers, Agosta

The Birth of the Modern World 1780-1914

The Lions of Tsavo, Patterson

Modeling Binary Data by David Collett (second edition)

Historical Perspectives on the American Economy, Whaples

Viruses, Plagues, and History, Olstone

Plastic (a toxic love story), Feinkel (for the collab for her new business)

The Power of Plagues, Sherman

Quantitative Ecological Theory, Rose

Think Python, O'Reilly (for my kids who want a job in the future).

Beautiful Evidence by Edward Tufte

All of Nonparametric Statistics by Larry Wasserman

Number Shape and Symmetry by Diane Hermann and Paul Sally

Nonparametri Statistics with Applications to Science and Engineering, Paul Kvam and Brani Vidakovic

Discrete Multivariate Analysis by Yvonne Bishop et al

Modeling with dta by Ben Klemens

Python Essential Reference by David Beaszley

The Origin of Wealth by Eric Beinhocker

America, Empire of Liberty by David Reynolds

The Entrepreneur (classic texts by Joseph Schumpeter) Marcus Becker

A History of Everyday Things: the birth of consumption in France, Daniel Roche

Civilization by Niall Ferguson (the west and the rest)

The Americans (the Colonial Experience) by Daniel Boorstin

Triumph of the City (how our greatest invention makes us richer, smarter, greener, healthier and happier) by Edward Glaeser

The Big Red Book by Coleman Barks (bought by Susan)

The Founders and Finance, Thomas McCraw

A Nation of Deadbeats (an uncommon history of America's financial disasters) by Scott Reynolds Nelson. (this one I have to read immediately)

Rome by Robert Hughes

The American Game: capitalism, decolonization, world domination and baseball by John Kelley ( 173 5 by 8 pages only)

Exploring the city (inquiries toward an urban anthropology ) by Ulf Hannerz

Brokerage and Closure (an intro to social capital), Ronald Burt

All the Fun's in How You Say a Thing (an explanation of meter and versification) by Timothy Steele

The American Songbook by Carl Sandburg (for Aubrey)

The Measure of Civilization (how social development decides the fate of nations) by Ian Morris

Freaks of Fortune ( the emerging world of capitalism and risk in America by Jonathan Levy

The Invention of Enterprise (entrepreneurship, from ancient mesopotamia to Modern times) by David Landes et al
 

I feel like Louis L'amour who gave lists of books he likes to read in The Wandering Man without telling what he got out of them, but I do not have enough erudition to tell based on skimming them how valuable or interesting they are. Any suggestions or augmentations on that front would be appreciated and perhaps helpful to others.

Kim Zussman writes: 

University of Chicago is now ranked #4 by US News — the highest ever. This is a big jump from the era of the low tax predecessor to the former con law professor, and will hopefully have a favorable impact on South side murder rates.

Dan Grossman writes: 

Unintended Consequences by Edward Conard is the best book I have seen on the subprime crisis and current government tax and economic policy.

Jan

28

 I have been doing auto trading of Palm Oil futures for some time using a self-developed system. The system works on the continuous data of the contracts and trades on the most liquid contract.

One morning last week after I started the software before the market open, to my surprise, I discovered the prior day's data was of the wrong contract month. It was not the same as that during the prior day's trading session. Seeing an anomaly of the data, I disabled auto trading prior to the market open.

When the market opened, I saw the system gave a short signal that I believe was due largely to the influence of the wrong data of the prior day. But gradually, it turned out to be a good signal. By the close of trading when the system signaled to closeout the trade, it was a 10% profit. Although I understand that it should not be my expected profit, I was feeling a little upset for not taking the trade.

Then the next day when I started the software, the data was corrected. With the corrected data, the system showed a trade on the past day of actually a 4% loss. I felt a little relieved.

Kim Zussman writes:

This is where the mistress speaks to us. In between the rationally testable segments; where the discretion of experience, discipline, and morality are challenged every day.

Jan

23

Charm, from Kim Zussman

January 23, 2013 | 1 Comment

 "Charm" (decay of option sensitivity to underlying over time) seems an apt model for the decline in male sex drive with age, and the attendant increased attention to youth. Further calculations are required to examine the effects of being in the money, and time-related sensitivity to volatility.

Charm or delta decay, measures the instantaneous rate of change of delta over the passage of time. Charm has also been called DdeltaDtime. Charm can be an important Greek to measure/monitor when delta-hedging a position over a weekend. Charm is a second-order derivative of the option value, once to price and once to the passage of time. It is also then the derivative of theta with respect to the underlying's price.

Jan

11

 An astronomer was profiled in the media, ca ~2000. Not for his science, but for the fact that he held onto a position in MSFT stock for ~10X (100X, etc).

He didn't sell after 20% gain. Or 50%. Or 100%. He just irrationally (per nascent behavioral finance) held. Intuition, like in Carl Sagan's "Contact", rather than explicit knowledge of the company's business prospects, valuation, or moving average. Dumb stubborn luck.

MSFT hasn't done much since then, so whether he's still holding or sold out, no matter (because it wasn't AMD).

The astronomer is a standard-bearer for those in the empirical vacuum tempted to sell after a double, or down on their luck and doubling down.

Jan

2

Looking at SPY reversal patterns (2007-present): If two consecutive trading days were each up >1%, and they were preceded by a drop of at least 1%, the next 2-day return was negative (NS):

One-Sample T: DUUXX

Test of mu = 0 vs not = 0

Variable   N   Mean     StDev   SE Mean  95% CI             T
DUUXX   18  -0.0097    0.025  0.0058  (-0.022, 0.002)  -1.64

Variable      P
DUUXX   0.119

Jan

2

The difficulty of getting back in once you have sold in stocks is underlined vis a vis the buy and hold strategy, as well as the fate of short selling, as well as timing— by the fast 50 point move in stocks today.

Gary Rogan writes: 

It seems like generally speaking one should either trade, as in being in and out "often" or buy and hold. Buying and holding except for periodically being out or short seems to be what Victor is addressing, and I have always been suspicious of "market timing". All it takes is getting it wrong once, and you are in a hole that's expanding for a long time.

I'm still curious how Victor was so sure there would be a deal.

Anonymous writes: 

What was the effective date of the STOCK Act to ban congressional insider trading, I wonder. As a staffer, one could have slapped the emini around harder the Khan brothers squash ball.

Victor Niederhoffer replies: 

Let us hope that the profits from such activity were sufficient to assuage any such desires for a few days.

Russ Herrold writes:

The dance is a re-run and in prior seasons, the cliff is avoided. Sitcom writers can re-cycle plots endlessly.

Kim Zussman writes: 

It's the binary conundrum of markets:

Buy the rumor / sell the news (or buy the news)
Buy and hold (or sell and sit)
You can't time the market (but some can)
Stocks beat bonds (except for the last decade)
Printing presses lead to disaster (which may not come in our lifetime)

The President of the Old Speculator's Club writes in:

I heard a Congressman speak recently and have to admit it was an enlightening experience. Traditionally, members display a certain amount of restraint when speaking of colleagues with whom they find grievous fault. In a refreshing departure from good manners, this gentleman took the gloves off and bluntly stated that a goodly number of his fellow representatives are less than bright. The word "clown" came up several times and "stupid" might have been slipped in.

Although he artfully avoided specifying individuals or party, I couldn't help but believe that he, like many in the "beltway", had come to the same conclusion: the arrival of the Tea Party contingent has been nothing short of a national disaster.

Unsurprisingly, the congressman's public and scathing view is shared by the current establishment elite. (It's dangerous to out there and speak your mind if what you say is out of step with the conventional wisdom.) His case is provided with added cover by a host of recently published and similarly themed books ("It's Even Worse Than It Looks", Mann, "Do Not Ask What Good We Do", Draper, "Beyond Outrage", Reich, and "The Party is Over", Lofgren).

However, the "fiscal cliff" isn't a maiden making her debut. We've had two relatively recent encounters with her; so her charms, though formidable, are familiar. Her appearances in '91 and '95 were just as awesome and, as expected, so compelling that one of the parties bit into the proffered apple. Unfortunately, the fruit, which is bitter and often fatal, is the produce of the tree of Folly. On this most recent visit, though, she is confronted by a group so naive and simple that her blandishments have gone unrequited.

In any event, it's apparent that the respect (whether real or faked) House members used to show each other, at least in public, has been thrown over for a newer, more aggressive, in-your-face approach. Long gone are the clever and informed debates which provided a rich mix of facts, history, and truth. It seems important to figure out why this has developed and if, in fact, a functioning government is still possible.

If one studies what the House has been in the past and what it has evolved into, it's impossible to overlook that this body has lost, or given up, much of it's power and authority. The growth of the executive branch (the Imperial Presidency) is one factor. Back in '96 the congress and the president worked long and hard to create the first welfare reform package. Contrary to forecast of terrible consequences, the new programs worked well.

Yet, in one day, an Executive Order by the current president re-established the old, failed programs. Another assumed power has been the declaration of war, and the most recent threat: unilaterally raising the ceiling on the debt.

While the Executive Order has been increasingly utilized to usurp powers constitutionally granted to the House (and Senate), the greatest loss of power has been though Congress' voluntary abandonment of authority to "regulatory agencies."

Figuring that some issues were just to tough, complex, or time consuming, the country has had foisted upon itself the EPA, FDA, TSA, USDA (with 20 sub-agencies within it), the Dept.of Commerce (with 17 sub-agencies), Dept. of Defense (with 32 sub-agencies) and the list goes on and on. Each agency is staffed by unelected individuals, many with their own agendas, who dictate new regulations that possess the force of law. It's understandable that so much work has to be delegated, but to give it to agencies that are unanswerable to the body that created them is inexcusable.

Then, of course, there is "party discipline." Sam Rayburn of Texas, Speaker of the House for many, many years, gave each incoming freshman representative of his party one piece of advice: "If you want to get along, go along." And they did. Those that didn't faced many difficulties: in committee assignments, in getting their legislation to the floor, in receiving party re-election funds, and they'd be high on the list of targets should redistricting become an issue.

Unfortunately, this approach worked, and worked well. As a result, many constituents found that the views they wished their representatives to promote in D.C., took a back seat to the views favored by the party leaders - many of them from different parts of the country with substantially different interests and goals. The "house of the people" became a house held hostage. Matters reached a new low in representative government when the other party adopted the same process.

Then 2080 rolled around and enough citizens, aggravated at the apparent unresponsiveness of their representatives, threw them out and ushered in the Tea Party. A delicate balance has been disturbed and the Dysfunctional Couple, used to newcomers adjusting to them, failed to realize that these clowns - these yahoos, actually believed in what they'd declared. Whether they win or lose, prevail or fail, their chances for another re-election are small. But for a brief period they have served as reminders that doing the people's business is serious business and that a promise made is a debt unpaid.

For a brief period this collection of vagabonds has added a dose of virility to a confederacy of eunuchs.

As to the President's actions in the recent negotiations, he did nothing, offered nothing…he arrogantly summoned everyone back to D.C. Most came back assuming he had a proposition - he didn't - even CNBC's John Harwood was a little taken aback at the presumptuous gesture. Some time back I suggested I was all for giving this guy everything he asked for - and then letting him perform as he has suggested he would. He has received almost everything; now it's time to lead. This from a guy who, in his short term in the Illinois senate, voted "present" on over half the bills that went through. He is structurally averse to taking a position - preferring, instead, to demonize his opponents.

So, first time at bat, he (and his faithful followers), are hand-wringing over what roadblocks the GOP will/might place before a debt ceiling deadline is reached. It's time he quit talking and started doing.
 

Nov

29

 Shouldn't dividend paying stocks consider reducing or eliminating dividends, and instead use free cash flow for share repurchases? Assuming long term cap gains tax will be less than tax on dividends.

Gary Rogan writes:

They have to consider that many of their holders are sub-250K and many hold in tax-shielded retirement accounts. "Widows and orphans" still rely on dividends to some degree, so there is probably some sort of a Laffer-like curve where the post-tax income total return averaged over all the holders is optimized by a particular dividend policy.

Mr. Krisrock writes:

You can't turn on a financial news program without hearing about special dividends. Companies are also rewarding employees with 15% dividends as a year end bonus. Even better is issuing debt, which is tax deductible and buying back stock when ITS is not at a market peak?

This will likely happen sometime next year…not now. Most liberal Californians haven't figured out how Obama has tactically created the seeds for a republican internal war in 2014. Boehner has made sure his entire house leadership is comprised of supporters, and he can cut a deal that enrages the tea party whom he despises. Now tell me who defends personal property rights, when there is a rebellion among republicans. Obama can get back the house in 2014 simply allowing the brain dead rep establishment to self destruct. They are really that dumb…and he is really smart …he won re-election no matter how he did it.

It would be a waste of corporate cash to buy stocks here and now and the more special dividends from companies like Home Depot, the more we can confirm the worst is coming.

Jim Sogi writes:

Isn't the threat of dividend tax a good way to shake out accumulated cash held by corporations? Wouldn't a better way be to get rid of the dividend tax? Equities would go through the roof.

Nov

27

We are looking at the Vanguard study that mentions Shiller favorably and it's obviously flawed. The overlap, part whole correlations, and selected starting and ending points, as well as the intrinsic illogic of a 10 year horizon forecasting well but not a 1 year which means that the previous 9 years were much more predictive than the last year, or that the last 5 years are correlated differently from the prior 5 years, comes to mind. But of course, the lack of degrees of freedom with 10 year data with all the overlap, to say nothing of the historical data that Shiller uses, which is retrospective and not reported at the time. But of course one hasn't read it yet, and they purposely make their methodology opaque wherein one could have found the real problems with it.

Kim Zussman writes: 

It would seem that in the face of most long-term historical market conclusions the Japanese stock market must be considered an outlier; in terms upward drift as well as P/E.

Alex Castaldo adds:

The study we are talking about can be found here [20 page pdf].  The problem I see is this.  They evaluate forecasts over a 1 year horizon and over a 10 year horizon.  The one year procedure makes sense to me: You make a forecast, you wait one year to see how it turns out and then you make another forecast. The R**2 is a measure the quality of the forecast, or more precisely it is the percentage of the variance of returns explained by the forecast. The R**2's for one year are small, as one would expect, and nothing to get excited about.  But what is the meaning of R**2 in the 10 year case ? You make a forecast in 1990, invest until 2000 and the go back (how? with a time reversal machine?) to 1991 and make a forecast for 2001? I am not sure the procedure is meaningful from an investment point of view.  And statistically the return for 1991-2001 is going to be very similar to the return for 1990-2000; so if you forecast the latter to some small extent, you will probably forecast the former as well. It seems to me there is a kind of double counting or artificial boosting of the R**2 going on.

When the predicted variable has overlap it is standard to use the Hansen-Hodrick t-statistic which attempts to compensate for the correlation introduced by the overlap.  But because the study only gives an R**2, and not the Hansen-Hodrick t, we don't get any adjustment for overlap.

I am sure that the 10 year R**2 are not comparable to the 1 year R**2, they are apples and oranges. Someone suggested to me that it may still be valid to compare the 10 year R**2 to each other, as a relative measure of forecasting power.  I don't know if that is true or not.

Nov

27

A post purporting to show that buy and hold investing does not work has appeared on our list. It is reprehensible propaganda and total mumbo. They do not take account of the distribution of returns to investing over long periods that have been enumerated by the Dimson group and Fisher and Lorie. It is sad to see this on our site. The arguments against buy and hold seem to be that the professors found that short term investing didn't work so they erroneously concluded that long term investing must be the alternative. Shiller is mentioned and cited with approval.

Alston Mabry writes: 

To explore this issue numerically, I took the monthly data for SPY (1993-present) and compared some simple fixed systems. In each system the investor is getting $1000 per month to invest. If during that month, the SPY falls a set % below the highest price set during a specific lookback period (the 3, 6, 12, 18, 24 or 36 months previous to the current month), then the investor buys SPY with all his current cash (fractional shares allowed). If the SPY does not hit the target buy point this month, then the $1000 is added to cash. Once the investor buys SPY shares, he holds them until the present.

For example, let's say the drop % is 10%, and the lookback period is 12 months. In May of year X, we look at the high for SPY from May, year X-1, thru April, year X, and find that it is 70. We're looking for a 10% drop, so our target price would be 63. If we hit it, then spend all available cash to buy SPY @ 63. Otherwise we add $1000 to cash.

Each combination of % drop and lookback period is a separate fixed system.

Over the time period studied, if the investor just socks away the cash and never buys a share (and earns no interest), he winds up with $239,000. On the other hand, if he never keeps cash but instead buys as much SPY each month as he can for $1000, then he winds up with over $446,000, which amount I use as the buy-and-hold benchmark.

If the investor uses the fixed system described, he winds up with some other amount. The table of results shows how each combination of % drop and lookback period compared to the benchmark $446,000, expressed as a decimal, e.g., 0.78 would that particular combination produced (0.78 * 446000 ) dollars.

Results in this table
.

The best system was { 57% drop, 18+ month lookback }, or just to wait from 1993 until March 2009 to buy in. Of course, it's hard to know that 57% ex ante. The next best system was { 7% drop, 3 month lookback } coming in at 0.99.

This study is just food for thought. It leaves out options for investing cash while not in the market. And it sticks with fixed %'s without exploring using standard deviation of realized volatility as a measure. So, there are other ways to play with it.

Charles Pennington comments: 

Thank you — that is a remarkable "nail-in-the-coffin" result.

Nothing beat buy-and-hold except for the ones with the freakish 57% threshold, and it won by a tiny margin, and it must have been dominated by a few rare events–57% declines–and therefore must have a lot of statistical uncertainty..

That's very surprising and very convincing.

(Now some wise-guy is going to ask what happens if you wait until the market is UP x% over the past N months rather than down!)

Kim Zussman writes: 

Here are the mean monthly returns of SPY (93-present) for all months, months after last month was down, and months after last month was up (compared to mean of zero):

 One-Sample T: ALL mo, aft DN mo, aft UP mo

Test of mu = 0 vs not = 0

Variable      N      Mean     StDev   SE Mean  95% CI            T
ALL mo     237  0.0073  0.0437  0.0028  ( 0.0017, 0.0129)  2.58
aft DN mo   90   0.0050  0.0515  0.0054  (-0.0057, 0.0158)  0.92
aft UP mo  146  0.0083  0.0380  0.0031  ( 0.0021, 0.0145)  2.65

 The means of all months and months after up months were significantly different from zero; months after down months were not.

Comparing months after down vs months after up, the difference is N.S.:

Two-sample T for aft DN mo vs aft UP mo

                  N    Mean   StDev  SE Mean
aft DN mo   90  0.0050  0.0515   0.0054   T=-0.53
aft UP mo  146  0.0084  0.0381   0.0032

Bill Rafter writes: 

A few years ago I published a short piece illustrating research on Buy & Hold. It contrasted a perfect knowledge B&H with a variation using less-than-perfect knowledge using more frequent turnover. Here's the method, which can easily be replicated:

Pick a period (say a year) and give yourself perfect look-ahead bias, akin to having the newspaper one year in the future. Identify those stocks (say 100) that perform best over that period, and simulate buying them. Over that year you cannot do better. That's your benchmark.

Then over that same period do the following: Buy those same 100 stocks, but sell them half-way thru the period. Replace them at the 6-month mark with the 100 stocks perfectly forecast over the next 12 months. Again sell them after holding them for just half the period. Thus the return from the stocks that you have owned and rotated are the result of less-than-perfect knowledge. Compare that return to the benchmark.

Do this every day to eliminate start-date bias, and then average all returns. The less-than-perfect knowledge results far exceeded the perfect-knowledge B&H. Actually they blew them away in every time frame. It's really obvious when you do this with monthly and quarterly periods as you have so many of them.

The funny thing about this is the barrage of hate mail that I received from dedicated B&H investment advisors, who somehow felt their future livelihoods were threatened.

If anyone wants that old article, send me a message off the list. We called it "Cassandra" after someone with perfect knowledge that was scorned.

Anton Johnson writes in: 

Here is a link to BR's excellent study "Cassandra", as it lives on in cyberspace.

Nov

26

Here is a common explanation of the small-stock January effect (should it still exist) is tax-loss selling: Late year dumping of losing stocks resulting in an "over-sold" condition.

From a tax-strategy standpoint, the 2012/2013 transition is currently the most uncertain in many years. Unlike most years capital losses may be more valuable to push to the future (assuming capital gains tax rates jump in 2013). In addition, some of 2012's biggest losers are not small cap and are widely held.

Nov

18

2012 presidential election voting data by state was obtained from this source.

States were analyzed according to income ratio of top 5% to bottom 20% using this data.

Regressing the ratio (top 5%/bottom fifth) vs. fraction voting for Obama did not uncover a significant correlation:

Regression Analysis: 5%/bot fifth versus Obama

The regression equation is
5%/bot fifth = 10.5 + 3.11 Obama

Predictor    Coef  SE Coef     T      P
Constant   10.496    1.507 6.97 0.000
Obama       3.111    2.992  1.04  0.304

S = 2.50077   R-Sq = 2.2%   R-Sq(adj) = 0.2%

Based on this one cannot conclude that Obama's election results were correlated with income inequality. (NS also regressing vs % voting for Romney) How does this compare to state's racial demographics?

State racial demographic data was obtained from the 2000 census; extracting the ratio of those identifying as "non-hispanic/latino white" to total population (% white).

Using this data, regressed fraction voting for Obama vs % white by state:

Regression Analysis: Obama_1 versus % white

The regression equation is
Obama_1 = 0.740 - 0.334 % white

Predictor      Coef  SE Coef      T      P
Constant    0.73967  0.07075  10.45  0.000
% white    -0.33382  0.09241  -3.61  0.001

S = 0.106100   R-Sq = 21.0%   R-Sq(adj) = 19.4%

In terms of state populations, there was a significant negative correlation between % voting for Obama and % white. A similar opposite) positive correlation was found for % voting for Romney (not shown).


 

Nov

7

Going back to 1984, checked SP500 returns for the two day interval including presidential election day, and the following 3 day interval returns:

One-Sample T: 2D prior, 3D after

Test of mu = 0 vs not = 0

Variable N    Mean   StDev   SE Mean     95% CI             T      P
2D prior  7   0.0105  0.0145  0.0054  (-0.0029, 0.0239)   1.91  0.104
3D after  7  -0.0162  0.0372  0.0140  (-0.0507, 0.0181)  -1.16  0.292

N.S. (low N), but a trend toward reversal.  Here is the regression:

The regression equation is
3D after = - 0.0025 - 1.31 2D prior

Predictor     Coef  SE Coef      T      P
Constant   -0.0025  0.0168  -0.15  0.889
2D prior    -1.3125   0.9868  -1.33  0.241

S = 0.0350644   R-Sq = 26.1%   R-Sq(adj) = 11.4%

>>Still N.S., but negatively correlated.

Buying rumors and selling news?

Date 2D prior 3D after
11/4/2008  0.038 -0.074
11/2/2004  0.000  0.031
11/7/2000  0.004 -0.046
11/5/1996  0.015  0.023
11/3/1992  0.003 -0.006
11/8/1988 -0.004 -0.026
11/6/1984  0.018 -0.016

Nov

6

 Many have seen the paper by academics (from Utah!) attempting to explain the observation of empirical intelligence in Ashkenazi Jews. [Cochran, Hardy, Harpending 2005].

Synopsis: Jews of eastern Europe were excluded from mainstream society and gathered in Shtetls. In these villages, exceptionally intelligent boys studied Torah — and the most talented were skilled at debating meaning between themselves and with the elders. The most intelligent grew up to become religious scholars, who in these societies became wealthy — and the most desirable for marriage to village nubiles.

Unlike many Christian religions, young Jewish religious scholars were expected to reproduce in quantity. Thus conserving and proliferating genes for memory and reasoning, and possibly explaining disproportionate representation among pre-political Nobelists.

It is also possible that the successful among the tribes in Pogromal Russia also favored reproductive survival for the wily in coping with an oppressive state bureaucracy.

One could posit that such selection pressure could explain a measure of Jewish affinity for the heavy-handed state, including an instinct that this environment is rich with opportunities for equivocating, lawyering, and fertile profit.

Mick Tierney writes: 

 I'm somewhat familiar with the study you refer to, Kim, as well as similar conclusions reached by Charles Murray. But what interested me most about your post was this: "…young Jewish religious scholars were expected to reproduce in quantity." It caught my attention because of a battle that flared up back in June between "Commentary" and "Forward" - both, apparently, Jewish journals with significant influence. Their dispute turns on issues with which various Christian sects are familiar.

The below excerpts (and the entire article) seems to suggest that there might, in fact, be an "affinity for the heavy-handed state" among some of the faithful, but certainly not all. (I understand that there while there're differences between the Ashkenazi and the Haredim, both groups place a heavy emphasis on education.):


"In a city like New York where 74 percent of all Jewish school-age children are Orthodox, there is little question the traditional dominance of secular and liberal Jews is not likely to persist in the long run.

"That this would upset liberals is understandable. But that ought not to excuse the willingness of the editorial page of the Forward when discussing the Orthodox community to engage in the sort of language it would never excuse were such words directed at non-Jews."

"And that is what has apparently goaded the Forward into publishing a rant whose only real purpose is to stigmatize Orthodox Jews as an expanding horde of lazy welfare cheats who ought to be denied assistance as they out-reproduce more responsible liberal Jews."

"…it is one thing to express concerns about the future of that community, it is quite another to write in a manner that speaks of the rising Orthodox birth rate as if we would all be better off if those children were never born.

"…when a critique of the welfare state crosses over into prejudice against specific groups or language that resonates with bias that sounds more like eugenics than political analysis, a line has been crossed."

If it is true that being fruitful has been a successful mechanism for maintaining intellectual superiority (and it's hard to argue with the current "facts on the table") then the current NY contentions could have serious long-term consequences.

Nov

1

The question arises, "who can you trust as you get along in life" and "how can you teach your kids or your wife to take care of their financial lives when you are gone" and "how many spouses and family have been victimized when the person that controls considerable wealth is seduced by a much younger and more sexual personage with the intention of relieving him and the family of their wealth"?

an anonymous commenter writes in: 

 My friend recommended The Sociopath Next Door a few days ago. Here is a great quote:

"Maybe you are someone who craves money and power, and though you have no vestige of conscience, you do have a magnificent IQ. You have the driving nature and the intellectual capacity to pursue tremendous wealth and influence, and you are in no way moved by the nagging voice of conscience that prevents other people from doing everything and anything they have to do to succeed. You choose business, politics, the law, banking, or international development, or any of a broad array of other power professions, and you pursue your career with a cold passion that tolerates none of the usual moral or legal incumbrances. When it is expedient, you doctor the accounting and shred the evidence, you stab your employees and your clients (or your constituency) in the back, marry for money, tell lethal premeditated lies to people who trust you, attempt to ruin colleagues who are powerful or eloquent, and simply steamroll over groups who are dependent and voiceless. And all of this you do with the exquisite freedom that results from having no conscience whatsoever. You become unimaginably, unassailably, and maybe even globally successful. Why not? With your big brain, and no conscience to rein in your schemes, you can do anything at all."

Ken's book suggests 1 in 25 have the personality type. Sociopath's seem to be an overweight in the business sphere. And Sociopath's organizations echo their personality traits. Thus identifying them would seem to be essential. Unfortunately, there's the chicken and egg issue: by the time you have foreknowledge, it's often too late.

The only ready indicators I've felt: a general feeling that somethings not quite right when you meet them; something about the eyes that is a bit vacant (but as distinct from meeting an introvert).

But I do not claim any success in this measure.

I think the Rockefeller approach of cheating your own sons perhaps has sense. Similarly, I think you need to meet some truly ruthless people to get a sense of them. You might seemingly want to protect children from these sorts of experiences, but perhaps it ultimately costs more later? Unfortunately, ruthless people are not always in ready supply until you are on the battlefield, so to speak.

Jeff Watson writes:

The sociopaths in the S&P pit in the late 80's were legendary. Any
time I would get a trade down, even my own firm's broker stole from me.
He was busted for it in 1989.

Kim Zussman writes: 

We trust friends and family based on incomplete information, or empirically based on a sample of trials from which we conclude trust or not. This is true because we can never get into minds of others to understand their true motives and intentions (and even if we could, their motives may be indecipherable as they are invisible to themselves).

Thus it is logical, when presented with unexpected criminal evidence, to question the original basis of friendship or kinship.

Put another way, when should countervailing evidence out-weigh personal connection?

Oct

22

 I can't begin to express my disapproval of letting a son go round putting people in choke holds, and kidding them about their lives. I can't begin to think of a worse thing to do to people, and worse training for a kid. All fathers should put a violent stop to such activities at the first signs of it. I have had people put choke holds on me, and the feeling of helplessness and having death in the hands of a joker is one of the most terrible feelings that one can have. It can lead to all sorts of dire consequences and thank the good one that my friend who mentioned something about this to me is still healthy after their encounters and amusing contretemps in it.

Ralph Vince writes:

I agree that no one (of any age) should go around doing that, and a fortiori, young people must be taught to make sure not to let people come up behind them, to track them in their head, and to have a sense of the whereabouts in the plane surrounding them of all who are about. It's too easy to become preoccupied in thought (or conversation) and lose sense of where the pieces are on the chessboard.

That being said, I think having enemies expedites education. I can only speak for myself, but I live in the middle ages, and wouldn't think of leaving home without a cup and two discrete weapons. A gentle man should look like a gentleman, and above all, never, ever let anyone come up behind them for any reason. Similarly, one should be very careful when coming up behind someone else, to speak to them and them know. 

Kim Zussman writes:

Funny no one looked up the actual risks to "choking out".

However this fits with the ubiquitous meme on dailyspec, "we as parents who have lived longer (but aren't necessarily successful / self actualized / or understand fully what we are doing here) will instruct you".

Or, that you should study certain music, sports, chess, religion, etc, in order to have a better life (fit in, reproduce, instruct, etc).

This was apparent this afternoon observing various bird species. The local crows call to each other in a way they all accept. Most likely the calls are reassuring: "we are crows and we got it right!". Also there is a lot of Mexican sage growing here, which attracts legions of hummingbirds. They twit twit continuously, zipping about, arguing over this or that mate but at the same time saying "we are hummingbirds and WE got it right".

New to our neighborhood is the black-hooded parakeet - a non-native parrot released into the wild but living and reproducing happily here. They fly in a tight noisy cluster - from one neighbor's Mexican palm to another's pine. Somehow these two trees are go-to places for the parrots, as they squawk and argue about tabloidesque mating rights.

What does this have to do with Reese Witherspoon putting her Ojai house on the market ?

This:

"Libbey Ranch provides a serene setting to be with her family, and looms large in her approach to parenting. "It reminds me of growing up in Tennessee, where we spent all day outside," she says. "I wanted my children to have that experience, to get muddy and hang out with the animals."

Indeed, Witherspoon has turned Libbey Ranch into a menagerie. A Friesian horse and a chestnut pony share the paddock. There are donkeys, goats, pigs, chickens, and four whimsically named dogs: Hope, Nashville, Coco Chanel, and Hank Williams. Neff fashioned animal silhouettes that are perched on wooden fences around the property. "

An iconic actress teaching that the fond remembrances of her childhood should be impressed on her own children for their own good. But now married to a man who is not these children's father, and expecting his. Evidently the ranch has to go.

But Ojai is not just about Hollywood. In fact other mothers duked it out there Friday on one of my mountain biking trails:

"A 50-year-old woman was walking her three dogs Friday on a road just north of the Ojai city limits and adjacent to Los Padres National Forest when she apparently surprised a California black bear and a cub. The bear, described as cinnamon brown in color, was estimated to weigh 250 pounds and was with a cub that appeared to weigh about 50 pounds, the department said.


The bears ran across the road ahead of the woman, but then the larger one came back to her and scratched her wrist, leaving a 1- to 2-inch wound that was not life-threatening, officials said. The attacking bear began to leave, and the woman turned her back it. But the animal returned and charged the woman, knocking her down an embankment. In addition to the earlier wound, the woman received at least several 6-inch abrasions that appeared to be from a claw, the department said."

Oct

1

 What are the common errors, the improprieties, the lack of attention to proper mores, the p's and q of trading that cause so much havoc and could be rectified with a proper formal approach? Here are a few that cost one fortunes over time.

1. Placing a limit order in and then leaving the screen and not canceling the limit when you wouldn't want it to be filled later or some news might come out and get you elected when the real prices is a fortune worse for you

2. Not getting up or being in front of screen at the time when you're supposed to trade.

3. Taking a phone call from an agitating personage, be it romantic or the service or whatever that gets you so discombobulated that you go on tilt.

4. Talking to people during the trading day when you need to watch the ticks to put your order in.

5. Not having in front of you what the market did on the corresponding day of the week or month or hour so that you're trading for a repeat of some hopeful exuberant event which never happens twice when you want it to happen.

6. Any thoughts or actual romance during the trading day. It will make you too enervated or too ready to pull the trigger depending on what the outcome was.

7. Leaving for lunch during the day or having a heavy lunch.

8. Kibbitsing from people in the office who have noticed something that should be brought to your attention.

9. Any procedures that violate the rules of the British Navy where only a 6 inch plank separated you from disaster like in our field.

10. Trying to get even when you have a loss by increasing your size and risk.

11. Not having adequate capital to meet any margin calls that mite occur during the day, thereby allowing your broker to close out your position at a stop while he takes the opposite side. What others do you come up with?

Jeff Watson writes: 

I don't know if it is an error or a character flaw, but freezing will create mayhem with your bottom line.

Alston Mabry comments:

"Do Individual Investors Learn from Their Mistakes?"

Steffen Meyer, Goethe University Frankfurt– Department of Finance Maximilian Koestner, Goethe University Frankfurt - Department of Finance Andreas Hackethal, Goethe University Frankfurt - Department of Finance

August 2, 2012

Abstract:

Based on recent empirical evidence which suggests that as investors gain experience, their investment performance improves, we hypothesize that the specific mechanism through which experience translates to better investment returns is closely related to learning from investment mistakes. To test our hypotheses, we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover, suggesting that investors learn from overconfidence. We conclude that compared to other investment mistakes, it is relatively easy for individuals to identify and avoid costs related to excessive trading activity. When correlating experience with portfolio returns, we find that as investors gain experience, their portfolio returns improve. A comparison of returns before and after accounting for transaction costs reveals that this effect is indeed related to learning from overconfidence.

Kim Zussman writes: 

Trading a market, vehicle, or timescale that is a poor fit for your personality, temperament, and utility, exacerbated by self-deceptive difficulties in determining this.

George Coyle writes: 

Speculation by definition requires some amount of loss otherwise the game is fixed. However, I believe loss can be broken down into avoidable loss and unavoidable loss. Unavoidable loss is, well, unavoidable. But in my personal experience (and based on pretty much all speculative loss I have seen or read about) all avoidable speculative loss is traced back to some core elements/violations: not being disciplined (many interpretations), getting emotional and all of the associated errors and mistakes that brings, sizing positions too big so that regardless of odds you eventually have to reach ruin, not being consistent in your approach (the switches), not managing your risk adequately either via position sizing or stop losses, finally you have to be patient for the right pitch whatever that may be for you. 

Jason Ruspini writes: 

A similar distraction comes from making public market calls.

Jim Sogi writes: 

The Sumo wrestlers' trainers in Japan are conscientious about avoiding mental strife in their fighters since it affects their performance. Sometimes when other life issues intrude, like getting up on the wrong side of the bed, it is better to refrain from entering a large position. You're off balance. How many times have I thought to myself, "I wished I had just stayed in bed this morning"?

William Weaver writes:

Mistakes I'm working on:

-execution error
-having too much size too early — the first entry is usually the worst
-not being able to add size when appropriate — need to add to winners; understanding when to retrade and why — why did the trade fail, was it me or the trade?
-not taking every trade
-need to adjust orders when stale
-not touching orders when not stale
-not getting excited about trades
-not holding until appropriate exits, especially winners — disposition
-not accepting the risk. Must accept the risk.

When we fear, we fail. But we cannot be courageous without risking overconfidence because it leads to recklessness (at least I cannot). So how to not fear and not be courageous at the same time? One of the best traders I know is indifferent to any trade, yet he is excited by his job. He also has (and shoots for) only 40% winners but simultaneously is profitable on a daily basis (and expects to be). These were contraditions to me 8 months ago, now they are just fuzzy in my mind and I understand them but cannot explain them.

Sep

17

Monthly 30Y fixed mortgage rates are published by Freddie Mac, 1971-present: http://www.freddiemac.com/pmms/pmms30.htm

This data was used to calculate mean 30Y mortgage rates by year, 1971-2011. Prof Shiller's quarterly real US house price data was also used to calculate mean yearly real house price, 1971-2011.

These data were then analyzed with regression; first regressing this year's change in real house price vs this year's change in 30Y mortgage rate:

The regression equation is
chg HP = 0.00393 + 0.0108 chg 30Y

Predictor      Coef   SE Coef       T      P
Constant    0.00393  0.009442  0.42  0.679
chg 30Y     0.01080   0.09513  0.11  0.910

S = 0.0595077   R-Sq = 0.0%   R-Sq(adj) = 0.0%

There was no correlation between this year's change in real house price vs this year's change in 30Y mortgage rate.

Is there a correlation with a lagged regression? This year's change in real house price was regressed against last year's change in 30Y mortgage rate:

Regression Analysis: chg HP L1 versus chg 30Y L1
 

The regression equation is
chg HP L1 = 0.00281 - 0.127 chg 30Y L1

Predictor        Coef      SE Coef       T      P
Constant       0.00281   0.00945   0.30  0.768
chg 30Y L1  -0.12724   0.09436  -1.35  0.186

S = 0.0588827   R-Sq = 4.7%   R-Sq(adj) = 2.1%

Not significant, but as one might expect if last year's mortgage rates dropped, this year's house prices increased slightly (see scatter plot).

Evidently there is a weak effect of mortgage rates on real house prices

Just for fun:

The Zombies- Time of the Season [video]

The Zombies- She's Not There[video]

Aug

15

 The Perseid Meteor Shower occurred this past Saturday. The Earth passed through the tail of a comet. The meteors were slated to shoot from the constellation Perseus which appeared on the low northeast horizon in the evening. Lying in my cot wrapped in a -30 down sleeping bag in subfreezing temperatures at the 12000 foot level of Mauna Kea in Hawaii, the iPad Stargazer app pointed the constellations. It's always fun to learn new constellations. Cygnus is above Cassiopaea in the Milky Way which in turn is above Perseus and rise in order as the evening passes. We saw a fair number of meteors, but honestly it was so cold, I couldn't even stick my face out far enough to see much of the sky.

The constellations are patterns the mind makes out of random patterns of stars in the sky, yet for centuries they have been used to help navigate and orient lost travelers, tell time, seasons. It's an effective method.

Since charts of random sequences display patterns, I wonder if charts of markets, some of which are not random, properly analyzed and quantified, could be used for navigation and orientation purposes in the market. For so many the visual chart is more meaningful, more easy to understand and digest than tables, number series or verbal input.

Kim Zussman comments: 

Allow me to share some of my thoughts on star gazing.

A telescope is not useful for observing a meteor shower. You need dark skies (mountains or deserts away from city lights), a lawn chair or sleeping bag, a meteor shower, and your eyes.

The radiant constellation (Perseus, Leo, etc) isn't important as it is just the general center from which meteor streaks radiate.

Meteor "showers" are often disappointing as the frequency at peak is usually less than one per minute.

If you go to the trouble of traveling to a dark site on a clear night, in between meteors it is great fun to explore the milky way (our galaxy) with binoculars. 7 X 50 is good for this (7 power / 50mm aperture) because it has enough light gathering power to resolve thousands of individual stars with low enough magnification for hand-held mounting (larger binoculars need tripods).

The fun part is realizing how old the light from these stars is, and the likelihood of planets with life out there.
 

Aug

8

The Gini  ratio is a commonly used measure of income inequality. Historical GINI data by year is available here.

Higher GINI ratio is greater inequality, and has been widely discussed GINI has risen 1948-2010. This data was used to calculate year-to-year change in GINI, and yearly rate of change was partitioned by presidential party: Democrat (1) and Republican (2). Mean GINI yearly rate of change for the two presidential political parties was compared:

Two-Sample T-Test and CI: yr change GINI, D(1) VS R(2)

Two-sample T for yr change GINI

D(1)
VS
R(2)  N    Mean   StDev  SE Mean
1     27  0.0012  0.0206   0.0040   T=-0.58
2     36  0.0038  0.0135   0.0023

The mean yearly rate of change in GINI for both parties was positive (income inequality increasing). Though during Republican administrations the rate increased about three times faster than during Democrats, the difference was not significant (there is no statistical difference in the rate of increase in GINI).

The attached plots yearly change in GINI vs year. One notes the dispersion in yearly GINI change was much higher pre-1980. A possible explanation for this would be changes in the US central bank's approach to the business cycle ("the great moderation")

 

David Lilienfeld writes: 

I have a different take. Prior to 1980, it looks like there is a pretty clear positive slope, whereas after that the line is pretty flat. That strikes me as counter-intuitive.

Ron Schoenberg writes: 

I would like to see an analysis based on wealth rather than income which I believe would show a significantly greater inequality. Also, the data referred to below apparently doesn't include capital gains. I believe the results are understating true inequality. 

Rocky Humbert wonders:

And how does Ron propose to apportion the so-called wealthy people's share of Federal, State and Local debt? Of the trillions of unfunded liabilities through out the public sector?) Does he propose to allocate it based on "wealth" or per capita? And if he apportions it per capita, how does it deal with the fact that per household debt cannot possibly be serviced by per household income.

It's all reminiscent to the way that a couple going through a contentious divorce to do it: The wife says: "I'll keep the house." Husband: "Ok."Wife: "And I'll keep the dog." Husband: "Ok." Wife: "But you take the debt." Husband: "But, but…."

Aug

6

A math approach to cycles in human history:

"the researchers found that two trends dominate the data on political instability. The first, which they call the secular cycle, extends over two to three centuries. It starts with a relatively egalitarian society, in which supply and demand for labour roughly balance out. In time, the population grows, labour supply outstrips demand, elites form and the living standards of the poorest fall. At a certain point, the society becomes top-heavy with elites, who start fighting for power. Political instability ensues and leads to collapse, and the cycle begins again.


Superimposed on that secular trend, the researchers observe a shorter cycle that spans 50 years — roughly two generations. Turchin calls this the fathers-and-sons cycle: the father responds violently to a perceived social injustice; the son lives with the miserable legacy of the resulting conflict and abstains; the third generation begins again. Turchin likens this cycle to a forest fire that ignites and burns out, until a sufficient amount of underbrush accumulates and the cycle recommences."

Jul

22

The recent paper from BofA/Merrill Lynch on long term returns had several equity market charts which cast doubt on inevitable long-term drift. Given what happened in WWII the charts are as expected in Japan and Germany, but look at France and UK (Picture Guide to Financial Markets Since 1800). [Ed.: sorry, link no longer works].

There are many decade flat to down periods (in USD).

One keeps returning to the question of whether the long-term updrift of US stock market would have occurred had we not been on the winning side of two world wars, one not hot war, and of course the resulting transformation to the first world leader.

Jul

8

 "A Faster Fourier Transformation" :

In January, four MIT researchers showed off a replacement for one of the most important algorithms in computer science. Dina Katabi, Haitham Hassanieh, Piotr Indyk, and Eric Price have created a faster way to perform the Fourier transform, a mathematical technique for processing streams of data that underlies the operation of things such as digital medical imaging, Wi-Fi routers, and 4G cellular networks.

The principle of the Fourier transform, which dates back to the 19th century, is that any signal, such as a sound recording, can be represented as the sum of a collection of sine and cosine waves with different frequencies and amplitudes. This collection of waves can then be manipulated with relative ease—for example, allowing a recording to be compressed or noise to be suppressed. In the mid-1960s, a computer-friendly algorithm called the fast Fourier transform (FFT) was developed. Anyone who's marveled at the tiny size of an MP3 file compared with the same recording in an uncompressed form has seen the power of the FFT at work.

With the new algorithm, called the sparse Fourier transform (SFT), streams of data can be processed 10 to 100 times faster than was possible with the FFT. The speedup can occur because the information we care about most has a great deal of structure: music is not random noise. These meaningful signals typically have only a fraction of the possible values that a signal could take; the technical term for this is that the information is "sparse." Because the SFT algorithm isn't intended to work with all possible streams of data, it can take certain shortcuts not otherwise available. In theory, an algorithm that can handle only sparse signals is much more limited than the FFT. But "sparsity is everywhere," points out coinventor Katabi, a professor of electrical engineering and computer science. "It's in nature; it's in video signals; it's in audio signals."

A faster transform means that less computer power is required to process a given amount of information—a boon to energy-conscious mobile multimedia devices such as smart phones. Or with the same amount of power, engineers can contemplate doing things that the computing demands of the original FFT made impractical. For example, Internet backbones and routers today can actually read or process only a tiny trickle of the river of bits they pass between them. The SFT could allow researchers to study the flow of this traffic in much greater detail as bits shoot by billions of times a second.

Jun

11

This last week the SP was up about 3.8%, following the prior week which was down about -3%. Using SPY, looked for consecutive calendar weeks with the first week down more than -2% ("DN wk"), and the next week up more than 2% ("UP wk"); then checked the return for the third week ("NXT wk"):

One-Sample T: DN wk, UP wk, NXT wk

Test of mu = 0 vs not = 0

Variable   N     Mean   StDev   SE Mean    95% CI              T
DN wk     37  -0.0462  0.0337  0.0055  (-0.0574, -0.0349)  -8.34
UP wk     37   0.0481  0.0260  0.0042  ( 0.0395,  0.0568)  11.26
NXT wk    37  -0.0021  0.0276  0.0045  (-0.0112,  0.0070)  -0.47

>>NXT week was down slightly, N.S.

 Bivariate regression suggested the size of DN wk was an important predictor (smaller DN wk resulting in higher NXT wk). Here are the results if -0.05 < Dn wk < -0.02 :

One-Sample T: DN wk_1, UP wk_1, NXT wk_1

Test of mu = 0 vs not = 0

Variable     N     Mean   StDev SE Mean       95% CI               T
DN wk_1   25  -0.0296  0.0082  0.0016  (-0.0330, -0.0262)  -17.95
UP wk_1   25   0.0397  0.0166  0.0033  ( 0.0328,  0.0466)   11.94
NXT wk_1  25   0.0005  0.0251  0.0050  (-0.0097,  0.0109)    0.12

>>Now NXT weeks were about flat, N.S.

Jun

5

 Paul Zak has authored a series of papers showing that oxytocin, a hormone released when you're hugging can make people more generous. He can inject people with it, and make them more generous, and find that those with more oxytocin are more generous. He finds that hugging releases oxytocins and encourages hugging in the work place, and follows this practice in the day and fray. The studies seem to be very biased and inconclusive. What is your view of this chicanery or unusual ant like behavior?

Kim Zussman writes: 

Volatility is a collective hug.

Daniel Grossman writes: 

It probably generates more of that hormone if you have sex with everyone you want to be generous with.

Laurel Kenner writes: 

When the Chair and I visited NYU to give a presentation several years ago, the president approached. He started to give Vic a bear hug. Vic stopped him. "You don't need to bother — I've lost all my money." The president looked him over carefully and then said, "I'll hug you anyway."

We later learned that such presidential hugs are often distributed to potential donors to NYU. It is of course immeasurable how much this technique has contributed to the rapid expansion of NYU's campus under his reign, and the question of whether oxytocin is involved is one for the biochemists. I merely note the president's name — Sexton — and speculate in innocent wonderment whether particularly well-endowed dowagers come in for particularly vivacious oxytocin production.

The Chair further speculates that since he had in fact not at that time lost all his money, that oxytocin may have predictive qualities.

Leo Jia adds: 

It has been widely debated that the Chinese rich are not generous at all. One strong evidence is that the philanthropic dinner meeting with the Chinese rich hosted by Gates and Buffett received little response. So, the very tradition that Chinese don't hug plays a big role. It was a pity that Gates and Buffett didn't give them big hugs at the meeting.

Jun

4

 Glory

By Dark Gable

How much glory
Should a glory seeker seek
If a glory seeker
Seeks to seek glory

Thank you.  Thank you very much.

Jun

4

 I'm reading Trading as a Business by Charlie Wright. Pretty good book profiling the evolution from discretionary trader to systematic trader. One of those books where I found myself laughing at having been down the paths. More trend following oriented but I think it is a pretty good synopsis of the systematic world and he covers some bases that added value in terms of elements to consider in one's trading (or at least mine). Decent set of checklists.

Do systematically inclined speculators recommend similar books (besides Victor Niederhoffer's and Larry Williams books).

Also, Tradestation seems to do most anything a trader would want in terms of trend following testing. I have never used it though.

Thoughts?

George Parkanyi writes:

The only flaw I find with systems is that they immediately stop working as soon as you try to use them. I think people need to do more research on fading systems.

Christopher Tucker writes: 

Where's the "like" button on the Speclist?

Steve Ellison adds: 

Yes, even systems I developed myself stop working when I try to use them because of data mining bias. Even if there legitimately is an edge, some component of the good backtesting performance is better-than-average luck. 

Leo Jia writes: 

The word "enlightened discretionary" is very appealing. The reason for it, I guess, is because of the word "enlightened" more than the word "discretionary". Everyone hopes to be enlightened in someway. Being enlightened seems to be a spiritual consummation. But I guess that is not the first and real reason why people are after being enlightened. The real reason is that it is mystic and mostly unattainable. This coincides with a human nature of always craving for what they don't have, which is among the reasons why most people are persistently unhappy.

I feel preferring discretion to system is quite illogical. Aren't whatever rules one uses as a discretion by nature a system? It perhaps is not explicitly sketched out, but it by all means is a system of rules that resides in one's head. Couldn't that be phrased and then programmed? I agree some are not very easy. But are they really impossible?

Gary Phillips writes: 

I've been doing this long enough to instinctively know what works and what doesn't. I only need to look at my P&L for empirical confirmation. If in doubt I just try to see the market for what it is and not what it appears to be. One needs to understand market structure, liquidity, and price action and develop a framework for analyzing the market, somewhere between bottom-up & top-down lies the sweet spot. This allows you to see the market in the proper context and provides you with a compass, which will keep you from feeling lost and will show you the way.

Craig Mee writes: 

Aren't ?

Hi Leo, you probably could say "whatever rules one uses as a discretion by nature is a system", but a system may not have the ability to load up once the move kicks (obviously it can be programmed) but at times the opportunity may appear intuitive, and  a trader can do that on relatively short notice, whilst keeping initial risk limited.

Interesting, Gary, the issue with systems seems to be at times data mining against price action and structure which gives strength of understanding. The HFT may work on massive turnover, low commissions and effectively front running, and unless you have those edges then it appears difficult to succeed from a data mining basis (and relatively scary trading something that you don't effectively understand from a logical point of view). However classifying a markets structure, and working off 3-4 premises no more, (as I believe more would allow any edge to be diluted across a range of options), and the ability to leverage once on a move, appears to be something you can work with. This is purely from a hands on execution basis, no doubt the pure programmers can weigh in.

I remember speaking to a guy who professionally programs for others… (admittedly a lot of retail), and we were talking about what are the laws in place for him to not front run me after developing a system I gave him…and he was like "mate, to be honest (probably insinuating "dont flatter yourself") 97% don't make a dime." That was certainly probably expected I suppose, but to hear it in technicolour was confronting and I was surprised he said as much.

Gary Phillips writes: 

I really don't believe that discretionary trading today, is any harder than it used to be. The emotional aspects, and risk management, have essentially remained the same. Methodology is different, because algorithmic driven HFTrading has forced intra-day traders to change from momentum chasers to mean reversion traders. And as you stated, there are countless global/macro concerns as a result of the financial crisis and continued global easing. So, it does demand a broader universe of knowledge, and revamped techniques and benchmarks, but it still boils down to identifying what is truly driving price and how it is being driven. 

I guess this is what gives you the elusive *edge*. But, as we used to say the *edge* can sometimes be the *ledge.* That being said, trading doesn't have to be about being right or wrong the market, or predicting where the market is headed in the next moment, hour, day or week. Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results.

 

Kim Zussman writes: 

"Trading can be nothing more than a probabilistic exercise, and a trade nothing more than a statistical data point - the next event in a series of events governed by the statistical random distribution of results."

One would suggest that trading is a waste of time if your historical or expected mean are random.

May

30

 Here is a poem I wrote in the style of Gertrude Stein from the perspective of a heart implant patient:

Do I need an implant? Do I really need it? Really need it? What else can I do? Is there something else I can do? You can do? Can I go without it? Without one? One or two? Three for the price of two? What will happen if I do? If I do? And if I don't? What will happen? What will happen in my life? What will happen to my wife? Will we never live in strife? If I do?

When you do how will it feel? Will it hurt? Will I hurt? Will I end with a red shirt? Will my mouth hurt like your back? Will your bones stay in a stack? Will my drivey sex a lack? Can something happen and go wrong? Will I go missing or write a song? Might we start short but end up long?

Tell me now the total cost. What will gain and what gets lost? Each and every piece and part. Throw them in and note your chart! How much will insurance cover? Bill the rest to my old mother.

I think I'll schedule my appointment. (Over and over to your bifointment) In between get more opinions. From sleek Iranians who aren't your minions. They'll tell me this will save my heart. Round and round a healing art.

Mar

20

 Dr. John Warren, nephew of Joseph Warren who died at Bunker Hill, was Surgeon General and Eminence Grise at Harvard as only an authoritarian Harvard professor can be. Wells, a dentist came to him in 1840 and said he had invented a painless way of doing surgery. It didn't work and Dr. Warren let the students in a cry of "bah humbug". The rest of the story is described in a book, The Century of the Surgeon. They did it again in 1846 and it worked. Dr. Warren started crying, "Gentlemen, this is no humbug". His whole life had been devoted to debunking such plain people and procedures as Dr. Wells. Another Dr. committed suicide knowing his whole life work had been wrong on the subject. I believe Wells died penniless of course.  Perhaps some day, I will be present at a demonstration of the joys and virtues of charting. It will work and I will start crying and say, "Gentlemen, this is no humbug" and will die penniless.

Kim Zussman writes: 

Besides typical faults of practicing dentistry and attending Harvard Med School in pursuit of romance, Morton was also illiberal (for trying to profit from ether anesthetic). From wiki:


William Thomas Green Morton (August 9, 1819 – July 15, 1868) was an American dentist who first publicly demonstrated the use of inhaled ether as a surgical anesthetic in 1846. The promotion of his questionable claim to have been the discoverer of anesthesia became an obsession for the rest of his life.

Feb

14

DJIA realized 20 day volatility using close-close daily returns of DJIA since 1928-present. I calculated every 20 trading days  the stdev of the prior 20 days return (non-overlapping). The current level of 0.004945 (about 1/2% per day, equivalent to 7.85% per year) is low but not that unusual in the series — ranking between the 14th and 15th percentile.

The attached graph of 20D stdev over the period shows many periods of persistent low volatility of much longer duration than the present.

But on the other hand perhaps painful memories are more durable than pleasant ones.

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